RMI 4135- chapter 3
what are payroll taxes and how do they impact qualified retirement plans
6.2% for old age survivor and disability insurance on compensation up to $137,700 for 2020 and 1.45% for medicare tax on 100% of the employees compensation, these percentages are matched by the employer. when the employer makes a contribution to a qualified retirement plan on behalf of its employees, the employer's contribution is not subject to payroll tax even though the contribution was on account of services rendered. this payroll tax savings acts to entice employers to fund qualified retirement plans and to view the combination of a qualified retirement plan and an employer's salary as part of an overall compensation package
explain the available vesting schedules for qualified plans
a defined benefit contribution plan may vest an employees benefit 100% after 18 months of service, or the vesting schedule may be based on a 3 year vesting schedule that provides for equal vesting in each of the three years. when an employer elects a fast vesting schedule, however, the vested benefits must always be at least as great as the corresponding statutory schedule(3 year cliff if full vesting occurs by year 3, or 2 to 6 year graduated for vesting schedules in which full vesting occurs after 3 years)
describe the benefit 50/40 coverage test
a defined benefit plan must satisfy the 50/40 coverage test in addition to one of the other three coverage tests. the 50/40 coverage test requires the defined benefit plan to benefit the lesser of 50 nonexcludable employees or 40 percent of all nonexcludable employees on each day of the plan year
describe the special taxation option available for lump-sum distributions which include employer stock
a lump sum distribution of employer securities may be eligible for net unrealized appreciation treatment. the intent of this distribution option is to lower the overall income tax payable by the distribution recipient
describe the general safe harbor coverage test
a qualified retirement plan satisfies the general safe harbor coverage test if the plan benefits 70% or more of the nonexcludable, nonhighly compensated employees
describe the average benefits test and its component parts
a retirement plan satisfies the average benefits percentage test if the following ratio is at least 70% (average benefit percentage of nonhighly compensated employees)/(average benefit percentage of highly compensated employees)
explain how eligibility rules are used to encourage tax exempt educational institutions to sponsor qualified plans
a tax-exempt educational institution with a qualified retirement plan maintained exclusively for its employees may delay eligibility in its qualified retirement plan until the later of the employee attaining age 26 or the completion of on year of service. the IRC allows for this delayed age requirement to provide an incentive for tax-exempt institutions to establish and fund qualified retirement plans to benefit their employees
explain the standard eligibility rules for qualified plans
an employee must be considered eligible to participate in the plan after the employee has completed a period service with the employer extending beyond the later of either the date on which the employee attains the age of 21 or the date on which the employee completes one year of service
which employees may be excluded from a qualified plan
an employer is only required to consider those employees that meet the eligibility requirements (age and years of service) for participation in the plan. in addition, all employees covered under a collective bargaining agreement and non resident alien employees who do not perform services in the us are also excludable from the plan
how are contributions to, earnings within, and distributions from qualified plans taxed
assets contributed to a qualified retirement plan are held in a tax exempt trust by a fiduciary, the plan sponsor, or an appointee of the plan sponsor. when funds are distributed from a qualified retirement plan, the recipient of the distribution will have taxable income
describe the ratio percentage coverage test
compares the % of covered nonhighly compensated employees to the % of covered highly compensated employees. a plan satisfies the ratio percentage test if the plan covers a percentage of nonexcludable nonhighly compensated employees that is at least 70% of the covered nonexcludable highly compensated employees
describe the historical change from pension plans to profit sharing plans
employer-sponsored pension and retirement plans have grown in terms of prevalence, protection, and benefits over the last 100 years. in the united states, the first employer-sponsored pension plans were found the railroad industry in the late 19th century. pensions were not protected as they are today and were often paid out of current cash flow. congress first provided preferential treatment to pension, profit-sharing, and stock bonus plans in the revenue act of 1921. during the 1930s and 1940s, Congress provided that pension funds had to be used exclusively for the benefit if employees and their beneficiaries and that plans could not discriminate in favor of highly compensated employees
how are assets of a qualified plan protected for employees from the employer
erisa provides the laws, rules and enforcement provisions to protect employees from abuse and misuse of qualified plan assets by employers as plan sponsors
describe the anti-alienation protection afforded to qualified plans
prohibits any action that may cause the plan assets to be assigned, garnished, levied, or subject to bankruptcy proceedings while the assets remain in the qualified retirement plan
describe the overall differences between defined benefit and defined contribution plans
the primary differences between the classification of the plans as defined benefit or defined contribution are the assumption of the investment risk, the allocation of plan forfeitures, coverage under the pension benefit guaranty corporation, the calculation of the accrued benefit or account balance, and the availability to grant credit to employees for prior service
define years of service for qualified plans
the years of service determination is based on the number of years defined as a 12 month consecutive period with at least 1000 hours worked for the employer
how are the vesting and funding requirements for a qualified plan affected by it being a top heavy status plan
top heavy vesting- vest on a 3 year cliff or 2 to 6 year graduated vesting schedule
what is the two year eligibility rule
when an employer elects this special requirement for its qualified retirement plan, there are consequences. the plan must provide the plan participants with 100% immediate vesting of their accrued benefit or account balance upon completion of two years of service for the retirement plan to be considered qualified under 401(a)
explain the matching principle of expenses and income and its impact on qualified plans
when on individual or entity has a tax deductible expense, another entity or individual will have taxable income. an office supply store sells office supplies to a publishing company for $600. the office supply store has revenue, or taxable income, of $600, and the publishing company has a tax deductible expense of $600
define a top heavy qualified plan
-a defined plan is considered top-heavy when the present value of the total accrued benefits of key employees in the defined benefit plan exceeds 60% of the present value of the total accrued benefits of the defined benefit plan for all employees -a defined contribution plan is top heavy when the aggregate of the the account balances of key employees in the plan exceeds 60% of the aggregate of the accounts of all employees
define a key employee
-a greater than 5% owner -a greater than 1% owner with compensation in excess of $150,000(not indexed) -an officer with compensation in excess of $185,000 for 2020 as determined last year
define highly compensated
-a more than 5% owner at any time during the plan year or preceding plan year -an employee with compensation in excess of $130,000 for the prior plan year
