401k terms
Annual compensation and contribution limit
Compensation and contribution limits are subject to annual cost-of-living adjustments. The annual limits are: employee is allowed defer up to $17,500 in 2014 and $18,000 in 2015, plus $5,500 in 2014 and $6,000 in 2015 if the employee is age 50 or older (IRC Sections 402(g) and 414(v)) The amount of employee compensation that can be considered in calculating contributions to defined contribution plans is $260,000 in 2014 and $265,000 in 2015 (IRC Section 401(a)(17))
ERISA
Employee Retirement Income Security Act of 1974. a Federal law that sets standards of protection for individuals in most voluntarily established, private-sector retirement plans.
Administrator
Employer adopting this plan, or another person or entity designated by the Employer
FICA
Federal Insurance Contributions Act (FICA) tax /ˈfaɪkə/ is a United States federal payroll (or employment) tax imposed on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers.
What are the responsibilities of Fiduciary? (DOL)
Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include: Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; Carrying out their duties prudently; Following the plan documents (unless inconsistent with ERISA); Diversifying plan investments; and Paying only reasonable plan expenses.
What happens if the employer continues to fail the test?
If the plan continues to fail, typically an additional employer contribution is required to satisfy this test
Highly compensated employee
Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or For the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2013 or 2014; $120,000 if the preceding year is 2015), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation
Plan Trustee
Someone (Fidelity) who has the exclusive authority and discretion to manage and control the plan assets. The trustee can be subject to the direction of a named fiduciary and the named fiduciary can appoint one or more investment managers for the plan's assets.
402 (g) limit test
The 402(g) limit is an annual limit on the amount that an individual may defer into the plan through pre-tax or Roth deferrals. ♦ This is a calendar year, individual limit - it is determined on a calendar year basis, covering all plans in which the employee participates ♦ Pre-tax and Roth contributions are combined to determine whether the limit has been exceeded ♦ Catch-up contributions are not included in the limit
Describe the how the ADP and ACP percentages are calculated.
The ADP/ACP is determined separately for the HCE group and the NHCE group ♦ The ADP is calculated by taking each participant's elective deferrals, net of catch-up contributions, and dividing the deferrals by his/her compensation ♦ The percentages are then added up and divided by the number of eligible participants within that group ♦ The calculation is performed in the same manner for ACP testing The ADP test compares the average salary deferral - as a percentage of pre-tax compensation - of highly compensated employees (HCE) to that of non-highly compensated employees (NHCE). To pass the test, the ADP of the HCE may not exceed the ADP of the NHCE by a factor of 1.25 or 2 percentage points.
Coverage Test
The Coverage Test is required to prove that the plan meets certain minimum coverage standards set forth under the Internal Revenue Code. The plan must cover a minimum of 70% of the company's employees.
catch up contribution (401k and IRA)
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $5,500 to $6,000. The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
How do you fix a plan that is Top Heavy?
The employer must make a corrective contribution that includes lost earnings to the non-key employees. The contribution is generally 3% of compensation.
What do you do if the 402(g) limit is exceeded?
The excess deferrals must be refunded before April 15th of the year following the year in which the deferrals were made ♦ A participant who exceeds the limit for 2011 must be refunded the excess amount (adjusted for earnings) by April 15, 2012 ♦ If pre-tax deferrals are refunded after this date, the participant is taxed in both the year of deferral and the year of distribution ♦ If a participant participates in more than one plan, she/he must notify the plan sponsor regarding which plan should make the corrective distribution
What plan does not require ADP and ACP tests?
This test is not required for Safe Harbor 401(k) Plans
Hardship withdrawal expenses allowed by IRS
prevent foreclosure of primary residence, purchase of a primary residence, post-secondary education expenses for next 12 months for you, spouse, dependents or children (see expense type), funeral expenses, medical expenses not covered by insurance (you, spouse, or dependents), repair damage or make improvements to primary residence
Hardship withdrawal penalties
- subject to ordinary income tax (at "new tax bracket") and 10% penalty, if under 59.5
401k
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403B
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415 employer
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In-service withdrawal
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Roth IRA
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Traditional IRA
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What are the factors of the the coverage test?
1) 70% test 2) Ratio % test 3) Average benefit test
Eligible employee
1) defined by adoption agreement 2) independent contractor, resident of Puerto Rico are not covered, and leased employees (depends) 3) Not covered - trip employee, trip pilot, trip cook, leased employee, contract employee, intern, independent contractor, and employee of a contractor or an independent contractor. 4) All employees are covered
401k plan
401(k) Plans - In a 401(k) plan, your employee can make contributions from his or her paycheck before taxes are taken out. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions, matching the employee's contributions up to a certain percentage. There is a dollar limit on the amount a participant may elect to defer each year and the amount that you may contribute on a participant's behalf . There are four different types of 401(k) plans: traditional 401(k), safe harbor 401(k), SIMPLE 401(k), and automatic enrollment 401(k).
Full Retirement or "normal retirement age" (according to SSA)
65 for those born 1938 or prior. Gradually increases to 67. 67 for people born after 1959.
What is the Top Heavy test?
A defined contribution plan is generally considered top heavy if, as of the last day of the prior plan year, the account values of key employees represent more than 60% of the account values of all employees.
What are the required compliance tests?
• ADP/ACP Test • 402(g) Limit Test • 415 Annual Additions Test • Coverage Test • Top Heavy Test
Eligible rollover contributions
A retirement plan isn't required to accept rollover contributions from other plans or IRAs, but if it does, the incoming funds must: 1) be permissible rollovers allowed by the plan document (Designated Roth account, 403b, Qualified plan, 457-b (gov't plan)) 2) come from a qualified plan or IRA, be the type of funds eligible to be rolled over, and be paid into the new plan no later than 60 days after the employee receives the funds from the old plan or IRA.
Elective deferrals
Amounts contributed to a plan by the employer at the employee's election and which, except to the extent they are designated Roth contributions, are excludable from the employee's gross income. Elective deferrals include deferrals under a 401(k), 403(b), SARSEP and SIMPLE IRA plan.
Record Keeping System
A "recordkeeping system" is a manual or automated system that collects, organizes, and categorizes records, facilitating their preservation, retrieval, use, and disposition. A recordkeeping system has four components: Records - information resources, in any format, that are: created in the course of business, received for action, or needed to document Agency activities. People - the Records Liaison Officer and records contacts, who oversee a records management program; and Agency staff, who create, receive, and use records in conducting EPA business. Processes - procedures on how to manage records throughout their lifecycle. Tools - equipment and software used to capture, organize, store, track, and retrieve the records.
Designated Roth Contribution
A designated Roth contribution is a type of elective deferral that employees can make to their 401(k), 403(b) or governmental 457(b) retirement plan. With a designated Roth contribution, the employee irrevocably designates the deferral as an after-tax contribution that the employer must deposit into a designated Roth account. The employer includes the amount of the designated Roth contribution in the employee's gross income at the time the employee would have otherwise received the amount in cash if the employee had not made the election.
Beneficiary
person or persons entitled to receive benefits under the plan upon death of a Participant
QDIA
qualified default investment alternative Under the proposed regulation, a QDIA must satisfy the following requirements: A QDIA may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer the investment from the QDIA to any other investment alternative available under the plan. A QDIA must be either managed by an investment manager, or an investment company registered under the Investment Company Act of 1940. A QDIA must be diversified so as to minimize the risk of large losses. A QDIA may not invest participant contributions directly in employer securities. A QDIA may be: Life-cycle or targeted-retirement-date fund; Balanced fund; or Professionally managed account.
Adoption agreement
the agreement by which the employer establishes and adopts or amends the plan
What is the 415 limit?
the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $210,000. For a participant who separated from service before January 1, 2015, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2014, by 1.0178. The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2015 from $52,000 to $53,000.
ACP test
Average Contribution Percentage (ACP) test is performed to determine whether the plan is discriminating in favor of HCEs with respect to employer matching contributions
ADP test
Average Deferral Percentage (ADP) test is performed to determine whether the plan is discriminating in favor of HCEs with respect to employee deferrals (pre-tax/Roth)
Non - Break in vesting service
FMLA leave does not constitute a "Break in vesting service"
What is the 415 limit test?
Individual participants are subject to an overall annual contribution limit, known as the 415 limit. This limit includes all contributions made to the plan for a particular year on behalf of a participant, including: • Pre-tax and Roth deferrals • Employer match and employer base contributions • Safe harbor contributions • Forfeiture allocations Note: Rollover contributions and catch-up contributions are not included as contributions for this purpose.
Under what conditions is a Leased Employee treated as a Common Law employee?
Leased employee. A leased employee who is not your common-law employee must generally be treated as your employee for retirement plan purposes if he or she does all the following. Provides services to you under an agreement between you and a leasing organization. Has performed services for you (or for you and related persons) substantially full time for at least 1 year. Performs services under your primary direction or control.
Forfeiture
The part of an employee's account balance (employer contributions) that is lost because it is not vested when the employee terminates employment.
Required Minimum Distribution
You generally have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner. There's an exception to this rule: If you're still working, you can delay RMDs, but only from the retirement plans you participate in with your current employer. In these situations, your first distribution must be made by April 1 of the year following the year of your retirement.
401k Safe Harbor Matching Employer Contribution
aren't subject to the annual contributions testing required with traditional 401(k) plans. These are known as safe harbor 401(k) plans and, in exchange for avoiding the annual testing, employees in these plans must receive a certain level of employer contributions. Under the most popular safe harbor 401(k) plan (discussed in this publication), mandatory employer contributions must be fully vested when made.
Early Retirement Age
as defined by Social Security Administration, someone may start receiving benefits as early as age 62 or as late as age 70.
Hardship withdrawal
is a distribution (of employee contribution only) from a 401(k) plan to be "made on account of an immediate and heavy financial need of the employee, and the amount must be necessary to satisfy the financial need," according to the IRS. Retirement plans are not required to offer hardship withdrawals. Among plans that permit them, some employers require the employee to provide paperwork proving the amount of the hardship.
What are key employees of Top Heavy tests?
key employees - any employee (including former or deceased employees), who at any time during the plan year was: An officer making over $170,000 (2014 and 2015); A 5% owner of the business (a 5% owner is someone who owns more than 5% of the business), or An employee owning more than 1% of the business and making over $150,000 for the plan year.