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FIN 490 Basic

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Terms

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QUALIFIED PLANS
meet IRS, DOL, ERISA reqs

company can report it as an expense, indiv doesn't have to report company contribution as income

creditors cannot touch

tax deferred growth

loans permitted
CLASSIFICATIONS OF QUALIFIED PLANS
Pension or Profit sharing

Defined benefit or Defined contribution

Contributory or Noncontributory

Corporate or Keogh
CHARACTERISTICS OF A PENSION PLAN
mandatory funding

no in-sevice w/drawals alllowed other than hardship

loans allowed

limited to no more than 10% of investment in company stock
CHARACTERISTICS OF A PROFIT SHARING PLAN
contributions not mandatory, need to be "substantial and recurring"

in-service withdrawals allowed

tend to be portable

no promised retirement benefit
TYPES OF PENSION PLANS
Defined Benefit
Cash Balance
Money Purchase
Target Benefit
Types of Profit Sharing Plans
Profit Sharing Plans
Stock Bonus Plans
ESOPS
LESOPS
401(k) Plans
Thrift Plans
SIMPLE (401(k))
CHARACTERISTICS OF A DEFINED BENEFIT PLAN
specifies the actuarially determined benefit received at retirement

favored by older employees
CHARACTERISTICS OF A DEFINED CONTRIBUTION PLAN
defines the annual employer current contribution

benefit received by an employee depends on account balance at retirement

favors younger employees
TYPES OF DEFINED BENEFIT PLANS
Defined Benefit
Cash Balance
TYPES OF DEFINED CONTRIBUTION PLANS
Money Purchase
Target Benefit
Profit Sharing Plans
Stock Bonus Plans
ESOPs
LESOPs
401(k) Plans
Thrift Plans
SIMPLE (401(k))
CHARACTERISTICS OF A CONTRIBUTORY PLAN
employee makes some contribution
CHARACTERISTICS OF A NONCONTRIBUTORY PLAN
employer makes all of the contribution
TYPES OF CONTRIBUTORY PLANS
401(k)
Thrift Plan
TYPES OF NONCONTRIBUTORY PLAN
most pension and profit sharing plans
CHARACTERISTICS OF A CORPORATE SPONSORED PLAN
for regular C corps or S corps
CHARACTERISTICS OF A KEOGH PLAN (HR 10)
qualified plan for unincorporated businesses

self employed, schedule C partnerships, LLCs filing as partnerships
Characteristics of Qualified Plans:

EMPLOYER CONTRIBUTIONS
not subject to federal income tax for eE

not subject to FICA

tax deductible to employer
Characteristics of Qualified Plans:

EMPLOYEE CONTRIUBTIONS
not subject to federal income tax

subject to FICA
Characteristics of Qualified Plans:

SPECIAL INCOME TAX AVERAGING
if born before 1-1-1936, 10 year averaging
Characteristics of Qualified Plans:

NET UNREALIZED APPRECIATION
for lump sum distriubutions of employer stock (have to pay tax when sold)
Characteristics of Qualified Plans:

TIMING OF INCOME TAX DEDUCTION
taxed only when withdrawn

can be rolled over to IRAs
ABCs of qualified pension plans:

A: AGREEMENT
provisions of the plan must be set forth in a written agreement
ABCs of qualified pension plans:

B: BENEFITS
must be definitely determinable

defined benefit or defined contribution

benefits protected if the pension plan merged, consolidate, or transferred
ABCs of qualified pension plans:

COMMUNICATION
Plan provisions must be communicated to the eEs
ABCs of qualified pension plans:

D: DISCRIMINATION
w/respect to coverage, contributions, benefits

favorable treatment of highly compensated executives prohibited
ABCs of qualified pension plans:

E: Exclusive
plan must be for the exclusive benefit of the eEs and their Bs

eR prohibited from tapping or recapturing the pension plan dollars
ABCs of qualified pension plans:

F: FUNDING
must be on a regular annual basis

terminal funding of benefits not permitted

only if benefits are over-funded may eR reduce contributions
DISADVANTAGES OF QUALIFIED RETIREMENT PLANS
costs to qualify, fund, and administer plan

highly regulated

disclosure reqs

annual testing
Qualified Plan Elements:

PLAN DOCUMENT
includes terms and benefit amounts

once adopted, becomes separate legal entity
Qualified Plan Elements:

TRUST
holds the plan assets

trustee usually and outside pary

adminster is usually the employer
Qualified Plan Elements:

FUNDS
usu cannot be returned to employer
Qualified Plan:

ELIGIBILITY
21 and 1 rule:
Cannot require more than 1 year of service
eEs over 21 must be allowed to enter upon meeting waiting period req

Alternate to 21 and 1 rule:
Waiting period can be 2 years IF immediate 100% vesting
Qualified Plan:

CAN BE EXCLUDED FROM ELIGIBILITY:
eEs who didn't meet the 21 and 1 rule

eEs covered by collective bargaining agreement if retirement benefits are subject to good faith bargaining

eEs terminated w/less than 500 hours AND are not employed on last day of plan year

Nonresident aliens
Qualified Plan:

PLAN ENTRANCE DATES
once eE has met eligibility reqs, must enter plan on next available entrance date (monthly, quarterly, semiannually, etc.)

cannot make eE wait more than 6 months
Qualified Plan:

Definition of HIGHLY COMPENSATED
>5% owner OR $90,000 compensation

Alternative: eR may elect to limit the HCE to top 20% ranked by preceding year's compensation
Qualified Plan:

Definition of KEY EMPLOYEE
[>5% owner] OR
[>1% owner AND $150 K] OR
[was an officer AND $130 K]
Qualified Plan:

COVERAGE REQUIREMENTS
Safe Harbor:
Cover 70% of eligible non-highly compensated eEs

Exceptions to Safe Harbor:
Ratio Percentage Test
Average Benefits Percentage Test
Qualified Plan:
Coverage Requirements:

RATIO PERCENTAGE TEST
% of NonHCE covered must equal at least 70% of % of HCE covered.

(% NonHCE covered)/(% HCE covered)>_70%

Ex: 90% of HCE covered, then 70%x90%=63% of NonHCE must be covered
Qualified Plans:
Coverage Requirements:

AVERAGE BENEFIT TEST
Non-discriminatory component:
Classification reasonable and based on objective business criteria
Ratio % of plan can either be
- >_70% OR
- be non-discriminatory based on facts and circumstances

Average Benefit % Test:
Average benefits % accrued for NonHCE must be greater than 70% of average benefit percent for HCE.
(Avg Ben % NonHCE)/(Avg Ben % HCE)>_70%
Qualified Plans:
Coverage Requirements:

MINIMUM PARTICIPATION
Defined Benefit Plans must benefit at least the lesser of:

[50 employees] OR
G:[40% of all the company's ERISA eligible eEs : 2 eEs (or 1 if there is only 1]
Qualified Plans:

VESTING
eE contributions:
always fully and immediately vested

eR contributions:
Non Top Heavy:
- 5 year cliff OR
- 3-7 graded
Top Heavy:
- 3 year cliff OR
- 2-6 graded
Qualified Plans:
Vesting:

TOP HEAVY PLANS
> 60% of aggregrate accrued benefits go to key employees
Qualified Plans:
Vesting:

DEFINED BENEFIT PLANS
typically require certain min service such as 10 or 15 yrs to obtain full % benefit
Qualified Plans:

TAX EFFECT ON DISTRIBUTIONS
Pre-tax contributions:
contributions and earnings treated as ordinary income

After tax contributions:
contributions are return of capital
earnings are ordinary income
Qualified Plans:

415 LIMITS
DEFINED BENEFIT
Limit for eE:
L:[100% of compensation : $165 K]

Limit for eR:
Amt necessary to fund the promised benefit.
Benefit limited to L:[100% of compensation : $165,000]
Qualified Plans:

415 LIMIT
DEFINED CONTRIBUTION
eE Limit:
L:[100% compensation : $40 K]

eR Limit:
25% of all particpant's compensation
Qualified Plans:

TIMING OF ANNUAL CONTRIBUTIONS
Defined benefit:
8.5 months after end of plan year

Defined contribution:
2.5 months (subject to 6 month extension) after end of plan year

Profit Sharing:
Recurring and substantial
Qualified Plans:

FIDUCIARY RULES
* funds must be deposited in an irrevocable trust
* plan trustee subject to stringent federal fiduciary rules requiring them to manage the fund solely in the interest of plan participants and beneficiaries
* cannot allow more than 10% to be invested in eR securities
* obligation to diversify assets
* prevent related party dealings
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