Qualified Plans (Pension and Profits, Characteristics and limits)

Shane's Rib Shack has a Target Benefit Plan. They have 10 employees with a total of $750,000 in compensation. Based on the actuarial table that was established at the inception of the plan they should fund the plan with $210,000. What is the maximum deductible contribution that can be made to the plan?

$193,750 Since the plan is a defined contribution plan the maximum deductible contribution is 25% of the total covered compensation. The max covered compensation of all employees is $775,000. Thus the maximum deductible limit is $193,750 ($775,000 × 25%).

Timothy is covered under his employer's Defined Benefit Pension Plan. He earns $500,000 per year. The Defined Benefit Plan uses a funding formula of Years of Service × Average of Three Highest Years of Compensation × 2%. He has been with the employer for 25 years. What is the maximum contribution that can be made to the plan on his behalf?

* It is indeterminable from the information given * Read the question carefully. The question asks "what is the maximum contribution that can be made." Remember that for a defined pension plan the contribution must be whatever the actuary determines needs to be made to the plan.

profit sharing plan - what % can be contributed to employer securities - employer annual contribution limit % - funding rules - does the $ have to come from profits - formula?

- 100% can be employer securities - 25% - must be "substantial and recurring" - money does not have to come from profits. - must be a definite predetermined formula. (typically just a % of income)

rules for highly compensated employee

- A more than five percent owner at any time during the plan year or preceding plan year - An employee with compensation in excess of $150,000 (2023) for the current plan year, or - An employee with compensation in excess of $135,000 (2022) for the prior plan year.

couple notes on target benefit plans

- An actuary is required at the establishment of the target benefit pension plan, but unlike a defined benefit plan or a cash balance pension plan, an actuary is not required on an annual basis. - This plan does not fund the plan with the amount necessary to attain the target at retirement rather the employer promises a contribution to the participant's individual account based on the original actuarial assumptions. Once the contribution has been made, the participant is responsible for choosing investments. Like any defined contribution plan, the participant, at retirement, is entitled to the plan balance regardless of its value, be it greater than or less than the intended target benefit

Life insurance rules for qualified plans

- Any qualified plan may purchase life insurance. As long as life insurance is not the primary focus of the plan, the government allows this exception from the ultimate retirement benefit promise because the death benefit of the life insurance policy is payable to the employee's spouse and other survivors at the employee's death. - Premiums paid by the employer for the life insurance policy, however, are taxable to the employee at the time of payment, to the extent of the Table I cost of insurance. - To maintain its qualified plan status, a qualified plan that includes life insurance must pass either "the 25 percent test" or "the 100-to-1 ratio test."

forfeitures for defined benefit plan and defined contribution plan

- For a defined benefit pension plan, the forfeited funds can only be used to reduce future plan costs for the employer. - The plan sponsor of a defined contribution pension plan, however, can choose to utilize plan forfeitures in one of two ways, either to reduce future plan costs or the forfeitures can be allocated to other remaining participants in a nondiscriminatory manner.

In determining the allowable annual additions per participant to a defined contribution pension plan account for the current year, the maximum contribution is: A.Contribution up to $66,000 (indexed). B. Compensation not exceeding the defined benefit Section 404 plan limitations in effect for that year.

- Option A. - Option "B" is incorrect in mentioning Section 404. The DC plan regulations are addressed in Section 415.

25 percent test

- The 25 percent test consists of two tests, a 25 percent test and a 50 percent test. The test used depends upon the type of life insurance provided by the plan. - If a term insurance or universal life insurance policy is purchased within the qualified plan, the aggregate premiums paid for the life insurance policy cannot exceed 25 percent of the employer's aggregate contributions to the participant's account. - If a whole life insurance policy is purchased within a qualified plan, the aggregate premiums paid for the whole life insurance policy cannot exceed 50 percent of the employer's aggregate contributions to the participant's account.

excess rate calculation how does permitted disparity factor in.

- The excess rate is limited to the LESSER of twice the base rate or a difference of 5.7 percent. As a result, the excess rate is generally 5.7 percent higher than the base rate. - The permitted disparity is just referencing the % additional that can be contributed. (so if the base rate is 2, and the excess rate is 4, the permitted disparity is 2).

Calculate the maximum contribution that could be contributed for an employee, age 41, earning $140,000 annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary.

- The question is looking for the maximum contribution for this employee. The wording is key, not "by the employee" or "on behalf of the employee". "For the employee" would consider both the employee and employer contribution. - The maximum 401(k) plan employee contribution for an individual under age 50, is $22,500 (2023). - The 12% money-purchase plan will add $16,800 - total 39,300

How do cash balance plans differ from traditional defined benefit pension plans?

- Traditional defined benefit plans define an employee's benefit as a series of monthly payments for life to begin at retirement, but the cash balance plan defines the benefit in terms of a stated account balance. - Cash Balance Plans are required to offer payment of an employee's benefit in the form of a series of payments for life - neither plan shows actual gains or losses allocable to the account - cash balance plans are available to retirees in a lump-sum payment.

permitted disparity - integration with what? - which plans can use it? - excess method - offset method - explain what plans can use which method

- integration with SS - all qualified pension plans can use permitted disparity. - Excess: provides an increased percentage benefit, referred to as the excess benefit, ONLY to those plan participants whose earnings are in excess of an average of the Social Security wage bases over the 35-year period prior to the individual's Social Security Retirement Age. This average is called the covered compensation limit. - Offset: To provide an increased benefit to those individuals whose earnings are in excess of the covered compensation limit, the offset method applies a benefit formula to all earnings and then reduces the benefit on earnings below the covered compensation limit. - defined contribution plans can use the excess method only, defined benefit plans can use either excess or offset.

cash balance plan - what type of benefit? - what does the employee see? - separate account? co-mingled?

- it's a "defined benefit" pension plan that provides no specific defined retirement benefits. - the account that the employee sees is merely a hypothetical account displaying hypothetical allocations and hypothetical earnings - it is a comingled account

ADP test schedule - if 0 to 2, then.... - if 2 - 8, then.... - if 8 or over, then...

0-2 - 2x amount 2-8 - 2% plus 8 and over - 1.25x

Target benefit plans and defined benefit plans have which of the following characteristics in common? 1. Minimum funding standards apply. 2. Qualified joint and survivor annuity requirements apply. 3. High investment earnings increase participant retirement benefits. 4. The employer is obligated to provide a specified benefit in retirement

1 and 2 BOTH PLANS ARE PENSION PLANS 3 only applies to target benefit 4 only applies to defined benefit

Matt is a participant in a profit sharing plan which is integrated with Social Security. The base benefit percentage is 6%. Which of the following statements is/are true? 1. The maximum permitted disparity is 100% of the base benefit level or 5.7%, whichever is lower. .2 The excess benefit percentage can range between 0% and 11.7%. 3. Elective deferrals may be increased in excess of the base income amount. 4. The plan is considered discriminatory because it gives greater contributions to the HCEs.

1 and 2 only. - His base rate is 6% and the social security maximum disparity is 5.7% for 11.7% as the top of his range. - Statement "III" is incorrect because integration does not affect voluntary deferrals by employees. - Statement "IV" is incorrect because, done properly, integration is NOT considered discriminatory.

Which of the following legal requirements apply to Employee Stock Ownership Plans (ESOPs)? 1. ESOPs must permit participants, who are aged 55 or older and who have at least 10 years of participation, the opportunity to diversify their accounts. 2. ESOPs can be integrated with Social Security. 3. An employer's deduction for ESOP contributions and amounts made to repay interest on an ESOP's debt cannot exceed 25% of the participant's payroll. 4. The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP.

1 and 4. Deductions for interest payments are not limited for ESOP plans. Deductions for repayment of principal is limited to 25% of covered compensation.

One of your clients wants to know the maximum amount that might be allocated to her 401(k) account in the current year. She expects to earn $70,000. Which of the following are possible sources of annual additions into her account? 1. Qualified non-elective contributions from the employer (QNEC). 2. Forfeitures from departing non-vesting employees. 3. Employer matching contributions. 4. Section 415 reversions.

1, 2, and 3. Section 415 reversions

Which of the following are legal requirements for 401(k) plans? 1. Employer contributions do not have to be made from profits. 2. Employee elective deferral elections must be made before the compensation is earned. 3. Hardship rules allow in-service withdrawals which are not subject to the 10% early withdrawal penalty. 4. ADP tests can be avoided using special safe harbor provisions.

1, 2, and 4. hardship withdrawals are considered premature withdrawals and are subject to income tax and the 10% penalty. more on a different flashcard.

Defined benefit pension plans will have to increase the funding costs associated with the plan if which of the following actuarial assumptions are made: 1. Low turnover rate. 2. Early retirement. 3. High interest rate. 4. Late retirement. 5. Salary scale assumption.

1, 2, and 5 will increase funding costs.

Which one of the following is usually a factor that affects a participant's retirement benefit in a defined benefit plan? 1. A participant's years of participation in the plan. 2. A participant's projected years of service at retirement.

1. years of service typically is irrelevant - it's based on years of participation in the plan.

WestN, Inc. sponsors a 401(k) profit sharing plan with a 50% match. In the current year, the company contributed 20% of each employee's compensation to the profit sharing plan in addition to the match to the 401(k) plan. The company also allocated a forfeiture allocation of $7,000. The ADP of the 401(k) plan for the NHC is 4%. Wade, who is age 45, earns $210,000 and owns 19% of the company stock. If Wade wants to maximize the contributions to the plan, how much will he defer into the 401(k) plan?

11,333 *this plan is not in compliance with the top-heavy rules due to no automatic 3% contribution, wade must comply with the top-heavy rules* Wade is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 6% (4% + 2%). Wade is also limited by the 415(c) limit of $66,000. Since the company contributes $49,000 (20% of $210,000 + $7,000 of forfeiture allocations), he only has $17,000 to split between the deferral and the match. Thus, he contributes $11,333* and the match is $5,667, which when added to the $49,000 totals $66,000. 6% of his salary of $210,000 is $12,600. However, he cannot defer this amount due to the 415(c) limit.

Carol, age 55, earns $200,000 per year. Her employer, Reviews Are Us, sponsors a qualified profit sharing 401(k) plan, which is not a Safe Harbor Plan, and allocates all plan forfeitures to remaining participants. If in the current year, Reviews Are Us makes a 18% contribution to all employees and allocates $7,000 of forfeitures to Carol's profit sharing plan account, what is the maximum Carol can defer to the 401(k) plan in 2023 if the ADP of the non-highly employees is 1%?

11,500. The maximum annual addition to qualified plan accounts is $66,000. If Reviews Are Us contributes $36,000 ($200,000 × 18%) to the profit sharing plan and Carol receives $7,000 of forfeitures, she may only defer $23,000 ($66,000 - $36,000 - $7,000) before reaching the $66,000 limit. However, she will also be limited by the ADP of the non-highly employees because she is highly compensated (compensation greater than $150,000). If the non-highly employees are deferring 1% then the highly compensated employees can defer 2% (1×2=2). Therefore, she is limited to a deferral of $4,000 (200,000 x 2%). Since she is 50 or older she can also defer the catchup amount of $7,500 which is not subject to the ADP limitation. Therefore, her maximum deferral is $11,500.

James is covered under his employer's top heavy Defined Benefit Pension Plan. He currently earns $120,000 per year. The Defined Benefit Plan uses a funding formula of Years of Service × Average of Three Highest Years of Compensation × 1.5%. He has been with the employer for 5 years. What is the maximum defined benefit that can be used for him for funding purposes?

12,000 The maximum defined benefit is the lesser of $265,000 (2023) or his compensation. However, the funding formula will limit his defined benefit to $12,000 (5 × 120,000 × .02). Note that you would use 2% instead of the 1.5% because the plan is top heavy. He is not a key employee because he is not a 1) greater than 5% owner, 2) greater than 1% owner with compensation greater than $150,000 or 2) an officer with compensation greater than $215,000 (2023). Therefore the plan must use a defined benefit limit of 2% instead of 1.5%.

Marilyn Hayward is the sole proprietor and only employee of unincorporated Graphics for Green Promotions. In 2023, Marilyn established a profit sharing Keogh plan with a 25% contribution formula. As of December 31, 2023, Marilyn has $140,000 of Schedule C net earnings. The deduction for one-half of the self-employment tax is, therefore, $9,891. What is the maximum allowable Keogh contribution that Marilyn can make (rounded to the nearest dollar)?

140,000 - $9,891 = 130,109 x 20%*= 26,022 (income - 1/2 of self employment tax) x (contribution rate / (1+contribution rate))

Hot Dog Moving Company (HDM) sponsors a 401(k) profit sharing plan. In the current year, HDM contributed 20% of each employee's compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC is 2.5%. Alex, who is age 57, earns $177,778 and owns 7.5% of the company stock. What is the maximum amount that he may defer into the 401(k) plan for this year?

15,500 Alex is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 4.5% (2.5% + 2%) and because he is over 50, he can defer the additional $7,500 (2023) as a catch-up contribution. Alex can defer $8,000 (4.5% × $177,778) and $7,500 (the catch-up) for a total of $15,500.

Abe's Apples has an integrated stock bonus plan. If the plan makes a 10% contribution for the current year what is the maximum excess rate?

15.7 The maximum excess rate is 2 times the contribution rate limited to a disparity of 5.7%. Therefore, 2 × 10% would be 20%. However, since the disparity is limited to 5.7% the maximum excess rate is 15.7% (10% + 5.7%). Note: This level of knowledge is probably not tested on a regular basis, however, because it is part of the board's topic list this question was added to ensure that you could answer it if it came up on the test.

Spenser is covered under his employer's top-heavy New Comparability Plan. The plan classifies employees into one of three categories: 1) Owners, 2) Full-time employees, 3) Part-time employees. Assume the IRS has approved the plan and does not consider it to be discriminatory. The employer made a 4% contribution on behalf of all owners, 2% contribution on behalf of all Full-time employees and 1% contribution on behalf of all part time employees. If Spenser currently earns $50,000 per year and is a full-time employee, what is the contribution that should be made for him?

1500. For a profit sharing plan the contribution is limited to the lesser of $66,000 (2023) or covered compensation. Since the plan is top heavy, the plan must provide a benefit to all non-key employees of at least 3%, therefore; 50,000 × 3% = $1,500. doesn't matter what the employer contributed. it SHOULD be 3%

Corey is covered under his employer's Profit-Sharing Plan. He currently earns $500,000 per year. The plan is top heavy. The employer made a 5% contribution on behalf of all employees. What is the company's contribution for him?

16,500. .05 x 330,000 For a profit sharing plan the contribution is limited to the lesser of $66,000 (2023) or covered compensation.

Select those statements which accurately reflect characteristics of defined contribution pension plans? 1. Allocation formula which is indefinite. 2. Account value based benefits. 3. Employer contributions from business earnings. 4. Fixed employer contributions based upon terms of plan

2 and 4. Defined contribution pension plans must have a definite allocation formula based upon salary and/or age or any other qualifying factor. Contributions may be made without regard to company profits and, because it is a pension plan, are fixed by the funding formula and must be made annually.

Which of the following are basic provisions of an IRC Section 401(k) plan? 1. Employee elective deferrals are exempt from income tax withholding and FICA / FUTA taxes. 2. Employer's deduction for a cash or deferred contribution to a Section 401(k) plan cannot exceed 25% of covered payroll reduced by employees' elective deferrals.

2. Statement "I" is incorrect because all CODA plans, including 401(k) plans, subject the income to Social Security and Medicare tax even though Federal and state income tax is deferred by placing the income into the plan.

An actuary establishes the required funding for a defined benefit pension plan by determining: 1. The lump sum equivalent of the normal retirement life annuity benefit of each participant. 2. The amount of annual contributions needed to fund single life annuities for the participants at retirement. 3. The future value of annual employer contributions until the participant's normal retirement date, taking an assumed interest rate, the number of compounding periods, and employee attrition into account. 4. The amount needed for the investment pool to fund period certain annuities for each participant upon retirement.

2. The actuary makes assumptions about future inflation, expected wage increases, life expectancy of the assumed retirees, expected investment returns on plan assets, expected mortality rates for retirees, and expected forfeitures resulting from termination. Statement "A" is incorrect because it states a lump sum, NOT annual contributions. Statement "C" is incorrect because DB plans deal with present value calculations, not future values. Statement "D" is incorrect because DB plans deal with life annuities, NOT period certain annuities.

A qualified money purchase pension plan contribution (by the employer) is influenced by which of the following factors: 1. Total return on portfolio assets. 2. Forfeitures from non-vested amounts of terminated employee accounts. 3. Increases in participants' compensation due to inflation or performance-based bonuses. 4. Minimum funding as determined by an actuary.

2. and 3. Forfeitures may reduce employer contributions due to contribution offsets or Section 415 limitation on annual additions. Increased compensation will result in increased contributions by the employer, subject to Section 415 limitations. Returns on portfolio assets and actuary funding are a concern in defined benefit plans. A money purchase plan is a defined contribution plan. Minimum funding is not determined by an actuary in a money purchase plan, but as a percent of covered compensation.

Financial Training Team (FTT) develops training materials for finance professionals across the country. Chad, who just turned age 48, owns 15% of FTT and earns $200,000 per year and is a participant in his employer's 401(k) plan, which includes a qualified automatic contribution arrangement and the associated mandatory non-elective contribution. The actual deferral percentage test for the non-highly compensated employees is 2.5 percent. FTT made a 20% profit sharing plan contribution during the year to Chad's account. What is the maximum amount that Chad can defer in the 401(k) plan during 2023?

20,000. - this is a good plan which is following the rules. - company is contributing 40,000 to PS plus 6,000 to 401k. he can only contribute 20,000 more.

what is the maximum retirement benefit for a Defined Benefit Plan

265,000

The required reduction to the Section 415 limits for top-heavy defined contributions plans can be avoided by providing a minimum employer contribution to all non-highly compensated employees equal to what percentage of each non-key employee's compensation?

3%

defined contribution top heavy employer req. % Defined benefit top heavy employer req. %

3% defined cont. 2% defined Ben.

In order for a pension plan to maintain its qualified status, it must maintain certain characteristics. Which of the following is not a qualifying characteristic? 1. Benefits must be definitely determinable under a formula for employer contribution or a formula for retirement benefits. 2. Benefits may not be withdrawn prior to termination of employment or retirement. 3. Contributions and benefits are determined in the long run by the profits of the employer. 4. Generally pays retirement benefits over a period of years.

3. Employer contributions may be made without regard to company profits or retained earnings. Answers 1,2,4 are requirements for all qualified plans. In service distributions are allowed, but starting benefits before retirement or separation of services is not.

Hiroko, age 54, works for Alpha Corporation and Delta Corporation. Alpha and Delta are both part of the same parent-subsidiary control group. Alpha and Delta both sponsor a 401(K) plan. If Hiroko earns $75,000 at Alpha and $30,000 at Delta what is the maximum employee elective deferral he can make to both plans in total?

30,000 22,500 + the 7500 catch up

Sherman, age 52, works as an employee for Cupcakes Etc, a local bakery. Cupcakes sponsors a 401(k) plan. Sherman earns $50,000 and makes a 10% deferral into his 401(k) plan. His employer matches the first 3% deferral at 100% and they also made a 5% profit sharing contribution to his plan. Sherman also owns his own landscaping business and has adopted a solo 401(k) plan. His landscaping business earned $40,000 for the current year. What is the total contribution that can be made to the solo plan, assuming his self-employment taxes are $6,000?

32,400 An individual can defer up to $22,500 (2023) plus an additional $7,500 catch up for all of their 401(k) and 403(b) plans combined. Since he is 50 or older he can contribute the 22,500 + 7,500 = $30,000. Since he already contributed $5,000 into his employer plan he can still defer 25,000 ($3000$0 - $5,000) into the solo plan. The employer contributions in this question are in addition to the employee deferral limit. Employer contribution into the solo plan: self-employment income $40,000 less 1/2 SE tax $3,000 Net $37,000 X 20% employer contribution $7,400 Total contribution to the solo plan = $25,000 (made up of: 22,500 - 5,000 to cupcake plan = 17,500 + 7,500 catch up) + $7,400 employer contribution = 32,400.

when calculating contributions to employees for qualified plans, what is the max income you can use?

330,000.

In a money purchase plan that utilizes plan forfeitures to reduce future employer plan contributions, which of the following components must be factored into the calculation of the maximum annual addition limit? Forfeitures that otherwise would have been reallocated. Annual earnings on all employer and employee contributions. Rollover contributions for the year. Employer and employee contributions to all defined contribution plans.

4 only Annual additions are defined as new money contributed into the individual account of a participant. Because forfeitures reduce employer contributions and are not added directly to employee's individual accounts, the forfeitures are not included in annual additions. Annual earnings and rollover contributions are not included in annual additions.

Which of the following statements concerning cash balance pension plans is correct? 1. The cash balance plan is a defined benefit plan because the annual contribution is defined by the plan as a percentage of employee compensation. 2. The cash balance plan provides a guaranteed annual investment return to participant's account balances that can be fixed or variable and is 100% guaranteed by the Pension Benefit Guarantee Corporation. 3. The cash balance plan uses the same vesting schedules as traditional defined benefit plans. 4. The adoption of a cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand than a traditional defined benefit plan, and as a plan that has more predictable costs associated with its funding.

4. Cash balance plans are defined benefit plans due to the guaranteed investment returns and benefit formula, not simply a contribution amount. While cash balance plans provide guaranteed rates of return, they are not 100% guaranteed by the PBGC (PBGC has coverage limits). Cash balance plans use 3-year cliff vesting only. Choice d is correct.

All of the following accurately reflect the characteristics of a stock bonus plan, except: 1. Useful in cash flow planning for plan sponsor due to cashless contributions. 2. Provides motivation to employees because they become "owners." 3. 20% withholding does not apply to distributions of employer securities and up to $200 in cash. 4. May not allow "permissible disparity" or integration formulas.

4. Integration formulas are not allowed under an ESOP plan but are allowed under a stock bonus plan. All other statements are accurate in their description of a stock bonus plan.

Which one of the following incidental benefit rules apply to life insurance coverage provided by a profit sharing plan? 1. Permanent life insurance, accident insurance, or severance benefits may be included as part of the coverage. 2. The 25% incidental benefit cost rule is based on the portion of the premium allocated to the policy's cash value. 3. An employee's costs associated with the purchase of life insurance represent a non-deductible expense. 4. The cost of whole life insurance must be not more than 50% of the total employer contribution allocated to a participant's account.

4. Only life insurance may be included in a qualified retirement plan - no accident, severance, or health benefits may be offered under the incidental benefit rules. To qualify under the incidental benefit rules, the entire premium for universal life cannot exceed 25% of the employer's aggregate contributions, and 50% for whole life insurance. Any pension contributions used to purchase life insurance inside a qualified plan are deductible to the employer.

employer contribution limit 2023

66,000

One of your clients wants to know the maximum amount that might be allocated to her 401(k) account in the current year. She expects to earn $80,000. What amount can you tell your client will be the maximum total annual additions which could be made to her account?

66,000 The section 415 limit is applied to all annual additions. The lesser of 100% of income or $66,000 (2023) is the restriction. This amount includes all company contributions and salary deferral maximums.

Lisa, age 35, earns $175,000 per year. Her employer, Reviews Are Us, sponsors a qualified profit sharing 401(k) plan, which is not a Safe Harbor Plan, and allocates all plan forfeitures to remaining participants. If in the current year, Reviews Are Us makes a 20% contribution to all employees and allocates $5,000 of forfeitures to Lisa's profit sharing plan account, what is the maximum Lisa can defer to the 401(k) plan in 2023 if the ADP of the non-highly employees is 2%?

7000 The maximum annual addition to qualified plan accounts is $66,000. If Reviews Are Us contributes $35,000 ($175,000 × 20%) to the profit sharing plan and Lisa receives $5,000 of forfeitures, she may only defer $26,000 ($66,000 - $35,000 - $5,000) before reaching the $66,000 limit (2023). However, she will also be limited by the ADP of the non-highly employees because she is highly compensated (compensation greater than $150,000). If the non-highly employees are deferring 2% then the highly compensated employees can defer 4% (2×2=4). Therefore, she is limited to a deferral of $7,000 ($175,000 × 4%).

unit credit formula

A benefit formula of a defined benefit pension plan that utilizes a combination of the participant's years of service and salary to determine the participant's accrued benefit.

Net Unrealized Appreciation (NUA)

A special taxation treatment for a lump-sum distribution from a qualified plan that treats the basis as income and the growth as capital gain.

what types of plans are subject to mandatory minimum funding requirements?

ALL pension plans. test questions will try to throw you off. remember this.

age based profit sharing plan

An age-based profit sharing plan provides a greater benefit to older plan participants as the allocation of the plan contribution is based upon the age of the participants.

employer deduction for contributions to a money purchase pension plan

An employer's deduction for contributions to a money purchase pension plan and profit sharing plan is limited to the lesser of 25% of covered payroll or the maximum Section 415 limits permitted for individual account plans.

Robin just started at Financial University Network (FUN) and has been encouraged by several of the "old timers" to save part of her salary into the 401(k) plan. She is not yet convinced as she likes to shop. Which of the following statements is accurate regarding 401(k) plans? A. A 401(k) plan must allow participants to direct their investments. B. Deferrals into the 401(k) plan must be contributed by the end of the following calendar quarter into the plan. C. Employees that join the plan must be provided with a summary plan description. D. A 401(k) plan is financially safe because it must have an annual audit.

C Answer C is correct as employees must be given a summary plan description, which provides basic information about the operation of the plan. Answer A is not correct as some 401(k) plans may have the asset managed by an investment manager. However, most 401(k) plans will provide for employee self directing of their 401(k) balances. Answer D is not correct as there is no requirement for an annual audit of a 401(k) plan.

hardship withdrawals rules

Hardship withdrawals are considered premature withdrawals and are subject to income tax and the 10% early withdrawal penalty if the employee is under age 59 1/2. however, you may qualify for a *penalty waiver* if the withdrawals are qualified.

IRC Section 415(c) applies an "annual addition" limited to certain qualified plans. Which of the following statements is correct? I. The limit is the lesser of 25% of compensation or $66,000 for the current year. II. The limit only applies to defined contribution plans. III. Includable additions include forfeiture reallocations, employer and employee contributions and investment earnings. IV. Salary deferrals are included as part of the annual additions limit.

II. and IV. are correct. Statement "IV" is correct as salary deferral contributions by employees is counted against the IRC 415(c) limit. Statement "I" is incorrect as the limit is the lesser of 100% of compensation or the annual limit. Statement "III" is incorrect because investment earnings are never included in the Section 415(c) limit calculation.

in which type of plan must voting rights be passed to participating employees?

LESOP

which type of qualified plan is allowed to leverage employer stock?

LESOP leverage employer stock ownership plan.

"A plan which requires annual employer contributions equal to a formula determined by each participant's salary" is a...

Money Purchase Plan you may think defined benefit, but defined benefit also factors in age.

Which of the following statements are accurate for a profit sharing plan? Leveraging is permitted and the employer's contributions may be made in non-cash assets. Voting rights must be passed through to the participating employees. The plan may be integrated with Social Security. The plan must comply with the prudent investor diversification requirements.

Profit sharing plans can be integrated with Social Security. Answer "A" is incorrect because only a LESOP is able to leverage employer securities within a qualified plan. Answer "B" is incorrect because the voting rights do not have to be passed through to the employees except in ESOPS. Answer "D" is incorrect because the typical 10% restriction on employer stock ownership under the "prudent investor" rule is not applied.

Which statement(s) is/are true regarding qualified profit-sharing plans? 1. A company must show a profit in order to make a contribution for a given year. 2. A profit-sharing plan is a type of retirement plan and thus is subject to minimum funding standards. 3. Forfeitures in profit-sharing plans must be credited against future years' contributions. 4. Profit-sharing plans should make contributions that are "substantial and recurring."

Profits are not required to make contributions to a profit-sharing plan. Minimum funding is required only in pension plans. Forfeitures may be reallocated to remaining employee accounts.

Which of the legal requirements apply to defined benefit pension plans? 1. Each participant must have a separate account to hold assets. 2. An actuary is needed to calculate the minimum funding level. 3. Retirement benefits can be adjusted based on sponsor profits. 4. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

Statement 1 applies only to defined contribution plans. Statement 2 describes a profit-sharing plan.

100-to-1 test

The 100-to-1 ratio test limits the amount of the death benefit of life insurance coverage purchased to 100 times the monthly-accrued retirement benefit provided under the same qualified plan's defined benefit formula.

Richard is covered under his employer's Defined Benefit Pension Plan. He earns $200,000 per year. The Defined Benefit Plan uses a funding formula of Years of Service × Average of Three Highest Years of Compensation × 3%. He has been with the employer for 25 years. What is the maximum defined benefit that can currently be used to determine contributions?

The maximum defined benefit is the lesser of $265,000 (2023) or his compensation. However, the funding formula will limit his defined benefit to $150,000 (25 years of service × 200,000 salary × 3%). The question facts state he makes 200,000 a year. It does not state any other year is different.

Abe's Apples has an integrated defined benefit pension plan. The plan currently funds the plan using a funding formula of Years of Service × Average of Three Highest Years of Compensation × 1.5%. If Geoffrey has been there for 40 years what is the maximum disparity allowed using the excess method?

The maximum disparity using the excess method is the lesser of the formula amount (40 years × 1.5%) or 26.25% (35 years × .75%). 35 years and .75% are the maximums that can be used under the excess method.

what is the difference between a safe harbor 401k and a money purchase plan

a money purchase plan is a pension

Money Purchase Plan

a pension plan in which the employer contributes a set percentage of employees' salaries to their retirement plans annually.

what is a noncontributory plan?

a plan where only the employer contributes, not the employee.

ADP test

a test used on qualified retirement plans to determine whether the plan favors highly compensated employees at the expense of nonhighly compensated employees.

Which of the following is not a requirement for the owner of corporate stock who sells to an ESOP to qualify for the nonrecognition of gain treatment? A.The ESOP must own at least 55% of the corporation's stock immediately after the sale. B.The owner must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale. C.The ESOP may not sell the stock within three years of the transaction unless the corporation is sold. D.The owner must not receive any allocation of the stock through the ESOP.

a. The rules: - The ESOP must own at least 30 percent of the corporation's stock immediately after the sale. - The seller or sellers must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale and hold such securities three years. - The corporation that establishes the ESOP must have no class of stock outstanding that is tradable on an established securities market. - The seller or sellers, relatives of the seller or sellers, and 25 percent shareholders in the corporation are precluded from receiving allocations of stock acquired by the ESOP through the rollover. - The ESOP may not sell the stock acquired through the rollover transaction for three years. - The stock sold to the ESOP must be common or convertible preferred stock and must have been owned by the seller for at least three years prior to the sale.

Which of the following vesting schedules may a top-heavy qualified profit sharing plan use? A. 1 to 5 year graduated. B. 5-year cliff. C. 3 to 7 year graduated. D. 4 to 8 year graduated.

a. qualified profit sharing plans must use a vesting schedule that provides participants with vested benefits at least as rapidly as either a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule. This requirement applies without regard to whether the profit sharing plan is a top-heavy plan.

Employer's deduction for a cash or deferred contribution to a Section 401(k) plan cannot exceed 25% of covered payroll reduced by employees' elective deferrals. explain this

an employer cannot exceed contributions of 25% of 330,000, up to 66,000 total, reduced by what the employee contributes.

safe harbor plan

an employer retirement plan that automatically meets certain IRS requirements to avoid annual discriminatory testing. makes specific contributions to employee retirement accounts. used to simplify administration and avoid potential penalties.

One of the disadvantages of an ESOP is that the stock is in an undiversified investment portfolio. Which of the following statements is correct about ESOPs? 1. An employee, age 55 or older, who has completed 10 years of participation in an ESOP may require that 25 percent of the account balance be diversified. 2. An employee who receives corporate stock as a distribution from an ESOP may enjoy net unrealized appreciation treatment at the time of distribution.

both. Both statements are correct. ESOP distribution in stocks are NUA (Net Unrealized Appreciation). Employees in an ESOP may demand 25% of the current balance be diversified.

Which of the following clauses in a 401(k) plan can assist the plan in meeting the requirements of the ADP test? A.Attestation clause. B.No-Contest clause. C.Negative election clause. D.Deferral plan clause.

c. A negative election clause can assist a 401(k) plan in meeting the ADP test because it automatically deems that an employee defers a specific amount unless he elects out of the automatic deferral amount. Option "D" does not exist and Option "A+B" are clauses commonly found in a will.

Gia, age 45, is married and has two children. Her employer, Print, Inc sponsors a target benefit plan in which she is currently covered under. Which of the following statements is true regarding her plan? 1. She can name anyone she wishes as her beneficiary. 2. A target benefit plan favors younger employees. 3. A target benefit plan is covered under PBGC. 4. The investment risk is on the employee.

d is correct because it is a target benefit plan. She can only name someone other than her spouse if she has a valid waiver signed by the spouse. This applies to all pension plans. A target benefit plan favors older entrants. A target benefit is not covered under PBGC.

Which of the following apply to legal requirements for a qualified thrift/savings plan? A.Participants must be allowed to direct the investments of their account balances. B.Employer contributions are deductible when contributed. C.In-service withdrawals are subject to financial need restrictions. D.After-tax employee contributions cannot exceed the lesser of 100% of compensation or $66,000.

d. This correctly describes the Section 415(c) limits on maximum contributions permitted by law. Participants do not have to be given the right to direct their investments. Employees make after-tax contributions to a thrift; employers don't make contributions. Answer "C" is incorrect because only 401(k) plans have statutory hardship withdrawal requirements, not thrift/savings plans.

"A plan which requires annual employer contributions equal to a formula determined by each participant's age and salary" is a...

defined benefit plan or cash balance plan

Paul is considering establishing a defined benefit plan for his company, Viking. He has a blend of highly compensated employees and rank and file employees, who have varying income levels. After doing some research, he wants to know which of the following formulas he is not permitted to use. a. Base the benefit on the years of service and salary level of employees, while taking into consideration some of the benefits of Social Security. b. Base the benefit retirees receive on a fixed percentage of every employee's salary, limited to the annual compensation limit. c. Define the benefit for retirees as a fixed dollar amount, regardless of income level.

he could use all of the benefit formulas.

integration formulas definition stock bonus plan esop plan

integration formulas work in conjunction with social security benefits, to ensure that higher paid employees receive proportionately larger benefits. stock bonus plan - integration formulas are not allowed esop plan - integration formulas are allowed.

top-heavy qualified profit sharing plan

majority of plan assets and benefits are concentrated among key employees or highly compensated individuals.

401k contribution max 2023 catch up contribution and age.

max 22,500 catch up contribution 7,500

section 415 limits

max employer contribution. cant exceed the lesser of 100% of the participant's covered compensation, or 66k.

is a 403(b) a qualified plan?

no, but it is tax advantaged

Which of the following characteristics are found in both a defined contribution plan and a defined benefit plan? 1. Individual accounts. 2. Actuarial assumptions required. 3. Retirement benefits based on account values. 4. Employer bears investment risk.

none. individual accounts and retirement benefits based on account values only apply to defined contribution plans actuaries, and employer bearing investment risk only applies to defined benefit plans.

In a money purchase plan that utilizes plan forfeitures to reduce future employer plan contributions, which of the following components must be factored into the calculation of the maximum annual addition limit? 1. Forfeitures that otherwise would have been reallocated. 2. Annual earnings on all employer and employee contributions. 3. Rollover contributions for the year. 4. Employer and employee contributions to all defined contribution plans.

only 4. 1. forfeitures are just a way for the employer to reduce what they contribute. it doesnt decrease the "annual addition limit" it just decreases what the employer needs to put towards it. 2. annual earnings are referring to the investment return. this doesnt effect contributions. 3. rollover contributions are not new contributions, thus it doesnt factor into the annual contribution limit. 4. is the only one that does effect the money purchase plan.

Retirement plans qualified under IRC Section 401(a) have many benefits for employers and employees. Which of the following is correct regarding qualified plans? A.) All qualified plan assets are held in a tax exempt trust and all earnings within the trust are deferred from taxation until distributed from the plan. B.) The non-alienation of benefits rule under ERISA provides complete protection from all creditors, including the IRS, unless the funds are distributed from the plan.

qualified plan assets are held in a tax exempt trust, with all earnings tax-deferred. Choice B is incorrect as the IRS can get to assets in a qualified plan as well as spouses via a QDRO (qualified domestic relations order)

Which statement(s) is/are true for a target benefit plan in 2023? 1. It favors older participants. 2. It requires an actuarial assumption. 3. The employer's maximum deductible contribution is 25% of employee's salary. 4. The maximum individual annual additions is the lesser of 100% of pay or $66,000.

statement 3 is incorrect 25% of "covered compensation" which the limit is set at 330,000

stock bonus plan vs esop plan

stock bonus plan is mostly meant to incentivize, esop is meant to be a retirement benefit.

paired plan "AKA" what is it / characteristics? why combine what is combined? how does employer contribute?

tandem plan they typically combine a money purchase pension plan and a profit sharing plan. these are both defined contribution plans, making it easy to combine. typically they give every year to a defined contribution plan and then give profits to the profit sharing plan.

Corey is covered under his employer's Profit-Sharing Plan. He currently earns $500,000 per year. The plan is top heavy. The employer made a 5% contribution on behalf of all employees. the ADP of NHC employees is 2%. what will this ADP limit Corey's contribution % to?

there will be no limit because the employer is meeting the 3% contribution for top heavy plans.

Thrift Plans vs Thrift Savings Plan

thrift plan allows employees to make after-tax contributions. generally used to save more than their elective deferral limit thrift savings plans are the federal govt employee plan

The maximum retirement benefit a participant in a target-benefit plan can actually receive depends on the:

value of the account at retirement remember, this is a target benefit plan. they are targeting a certain value and benefit. whatever happens happens.

does a cash balance plan have guaranteed earnings? why does it have guaranteed earnings?

yes. - The plan sponsor is responsible for the investment performance of the plan's assets and earnings. The benefit, which is a guaranteed return and is determined under the plan document, will be payable to the participant at retirement regardless of the plan's true earnings, whether greater than or less than the benefit provided by the plan formula.

can a 401k require that an employee waits 2 years before receiving a match?

yes. A 401k cannot require 2 years of service before participation. The 2 years of service rule is for Qualified plans other than 401k. A 401k can require 2 years service for employer matching, not employee participation. All employees age 21 with 1 year of service can participate.

do defined contribution plans favor younger entrants?

yes. because of more time to grow investments.