RP & EB Chapter 5

Describe the eligibility rules for 401k plans

21 and given 1 full year of service

What are the applicable vesting rules for profit sharing plans

3 year cliff, 2-6 year graduated or the 'two year waiting period' method

What are the eligibility requirements for profit sharing plans

Age 21 and 1 full year of service

How can forfeitures be used within a profit sharing plan

Can be used to reduce future contributions on behalf of the plan, or can be split up amoung the remaining participants within the plan

What are the entrance date rules for 401k plans

Certain, predetermined periods in a year where new participants may join the plan. Must be at least 2 entrance dates in a calendar year

Which entities may establish a 401k plan

Corporations, Partnerships, LLC's and Proprietorships

What are the remedies available if a company fails the ADP test

Corrective Distributions, Recharacterization, Qualified Nonelective Contributions, or Qualified Matching Contributions

When must the employer deposit employee elective deferrals

Earliest day that is reasonably possible but the segregation of the funds must happen by the 15th day of the month following the deferral from compensation

List the advantages of 401k plans to both employees and employers

Employees - tax deferral/tax deferred growth, and control over the investments within Employers - Owners can participate, contributions are deductible and there a minimal expenses

Describe matching contributions and their associated vesting schedules

Employers and Plan Sponsors often provide a match to contributions made to profit sharing plans. It's used as an incentive to draw employees to the company, and also to encourage more saving for the employees. Must vest at least as fast as 3yr cliff, 2-6 graduated

Describe the characteristicss of a cash or deferred arrangement

Generally referred to as a 401k. attaches certain types of qualified plans together to create a contributory component to the plan

Describe the hardship distribution rules

Hardship distributions can only e provided if there is an immediate and heavy financial need and the withdrawal is necessary to satisfy such need. Medical Expenses, Principal Residence Purchase, Education costs, Avoiding Eviction are the acceptable reasons

What is recharacterization and how is it used to correct the ADP test

If a plan fails the ADP test, the plan sponsor may choose to recharacterize the excess pretax deferrals into after tax contributions. Again, needs to happen within 2.5 months or theres a 10% penalty

Describe the catch up contribution available for some employees

It was created as part of the EGTRRA 2001, allows for participants over 50 to contribute extra money on top of the normal dollar amount limit. Allows for an extra 6k of contribution (19k -> 25k)

Describe the key elements of a profit sharing plan as discussed in treasury regulation 1.401-1(b)

Its a plan established and maintained by an employerto provide for the participation in profits by employees or their beneficiaires. The plan must provide a definite predetermined formula for allcating the contributions made to the plan amoing the participants and for distributing the funds accumulated under a the plan after a fixed number of years

What is the purpose of the ADP test and how does it work

Limits employee elective deferrals for the highly compensated employees based on the elective deferrals of non highly compensated employees

Explain the Pre-PPA 2006 Safe Harbor rules and how they affect 401k contributions

Page 243 244

Define participation and negative elections with regard to 401k plans

Participation is just participating in the plan. Negative elections are the employees choosing to defer X% of their salary to contribute to the plan.

List the differences between pension plans and profit hsaring plans

Pension plans promise to pay a pension at retirement, where profit sharing promises to just defer compensation. Profit sharing plans allow in service distributions where Pension plans do not allow it. Pensions have minimum funding requirements, profit sharing plans do not

How is the ADP test calculated

Pge 236-238

What are qualified nonelective and matching contributions and how are they used to correct the ADP test

QNEC is made by the employer without regard to any elective deferral election made by the employee, so the contribution is made on behalf of all eligible employees. The contribution is treated as if deferred by the employee and therefore is included in the ADP test. QMC is very similar to the QNEC but the contributions are made only to those employees who had elected to defer during the plan year. Both are 100% vested since they are treated as being made by the employee

When may distributions be taken from a 401k plan

Retirement, Death or separation of service, Termination of the plan without another being started, certain hardships, attainment of age 59

How can employees make contributions to a 401k plan and what are the applicable limits

Salary Deferral, Limit is 19k but age 50 or older allows 'catch up contributions' and they may defer up to 25k

When may distributions be taken from a profit sharing plan and how will they be taxed

Termination, Hardship, Disability or Retirement. Taxed as income, and depending on age can have a penalty involved

How are employee after tax contributions taxed

The money contributed has already been taxed so when they take it out down the road, it is not taxable

Explain the differences between the standard allocation formula, permitted disparity, age based profit sharing plans and new comparability plans

The standard formula allocates the contribution based of a percentage of each employees covered compensation. Permitted Disparity (Social Security Integration) allows private pension plans to provide larger benefits to higher paid workers than to lower paid workers in an attempt to reduce the gap in total wage replacement with SS. Age based allows for higher contributions to older people within a plan when compared to the younger participants because they are much closer to retirement. New comparability plans allow contributions to be made based on the 'rank' within the company. Basically the higher up you are, the higher your contribution.

How can a profit sharing contribution be used within a 401k plan

These contributions are often referred to as nonelective employer contributions which do not count against the plan contribution max % of 25%. Limited to 55k per person

What is the income tax impact of employee elective deferrals

They dont pay tax on it now but they do when the money comes back out of the plan

When is the last date during the year that a profit sharing plan may be established and by when must contributions be made to the profit sharing plan

They must be established by the end of the calendar year, and contributions can be made up until the company submits their income tax return

What are corrective distributions and how are they used to correct the ADP test

When a plan fails the ADP test, the most common method of correcting the situation is to reduce the elective deferrals of the Hgihly Compensated Employees by distributing/returning funds to them. These corrective distributions must be completed within 2.5 months or there is a 10% penalty tax on the employee