Qualified Plans General Rules for Qualification Chapter 7

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Qualification Requirements • • • every planner should have a basic understanding of qualification rules complex Internal Revenue Code and regulatory requirements must be met in order to obtain the tax advantages a summary of the rules is provided Copyright 2009, The National Underwriter Company 1

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Qualification Requirements • • • eligibility and coverage nondiscrimination in benefits and contributions vesting funding (including deduction limits) limitations on Benefits and Contributions top-heavy requirements Copyright 2009, The National Underwriter Company 2

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Eligibility and Coverage: 1. Must cover a broad group of employees 2. Two types of rules satisfied – – “age and service” or waiting period requirements “overall coverage” and “participation” requirements Copyright 2009, The National Underwriter Company 3

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning “Age and Service” or Waiting Period Requirements: • used to avoid burdening the plan with employees who terminate after short periods of service cannot require • – – • more than one year of service for eligibility any employee who has attained the age of 21 must be allowed to enter plan after meeting one year of service requirement alternative two-year waiting period available if plan provides immediate 100% vesting Copyright 2009, The National Underwriter Company 4

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning “Overall Coverage” Tests 1. Ratio percentage test: – 2. Plan must cover a percentage of nonhighly compensated employees that is at least 70% of the percentage of highly compensated employees Average benefit test: – Plan must benefit a nondiscriminatory classification of employees and the average benefit, as a percentage of compensation, for all nonhighly compensated employees of the employer must be at least 70% of that for highly compensated employees Copyright 2009, The National Underwriter Company 5

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning “Participation” Test • a defined benefit plan must also cover on each day of the plan year the lesser of: – – 50 employees of the employer The greater of • • • 40% or more of all employees of the employer Two employees (or, if only one employee, that employee) also commonly known as the 50/40 test Copyright 2009, The National Underwriter Company 6

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Highly Compensation Employee – Definition An employee is a highly compensation employee for a plan year if he: – Was a 5% owner at any time during either the current year of the preceding year, or – Received compensation for the preceding year in excess of $110, 000 (as indexed for 2009) Copyright 2009, The National Underwriter Company 7

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Nondiscrimination in Benefits & Contributions A plan must be nondiscriminatory with respect to highly compensation employees either in terms of benefits or contributions: – – A defined contribution plan must generally be tested under the “contributions” test A defined benefit plan must generally be tested under the “benefits” test Copyright 2009, The National Underwriter Company 8

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Vesting • • Portion of the benefit or account balance attributable to employee contributions must always be 100% vested (nonforfeitable) Portion attribution to employer contributions (other than matching) must be vested under a specified vesting schedule Copyright 2009, The National Underwriter Company 9

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Vesting • Defined Benefit Plan employer contributions must vest one of the following vesting schedules: – – 5 -year vesting satisfied if an employee with at least five years of service is 100% vested 3 - to 7 -year vesting is an employee is 20% vested after 3 years, 40% after 4 years, 60% after 5 years, 80% after 6 years and 100% after 7 years Copyright 2009, The National Underwriter Company 10

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Vesting • Defined Contribution Plans employer contributions must vest under one of the following vesting schedules: – – 3 -year vesting satisfied if an employee with at least three years of service is 100% vested 2 - to 6 -year vesting is an employee is 20% vested after 2 years, 40% after 3 years, 60% after 4 years, 80% after 5 years and 100% after 6 years Copyright 2009, The National Underwriter Company 11

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Funding Requirements • • • Employee and employer contributions must be deposited into an irrevocable trust fund or insurance contract for the “exclusive benefit” of plan participants and their beneficiaries Pension plans must meet minimum funding standards or be subject to a penalty Profit-sharing plan contributions must meet “substantial and recurring” requirement Copyright 2009, The National Underwriter Company 12

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Deduction Limits Defined benefit plan – Limited to amount determined actuarially under IRC Section 404, or – The amount required to meet the minimum funding standards, if greater Copyright 2009, The National Underwriter Company 13

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Deduction Limits Combination defined benefit & defined contribution plan – limited to the greater of • • 25% of compensation of all participants, or The amount required to meet the minimum funding standards 10% penalty on nondeductible contributions by the employer to any plan Copyright 2009, The National Underwriter Company 14

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Limitations on Benefits and Contributions • Defined contribution limits – the “annual additions” to each participants account cannot exceed the lesser of: – – • 100% of the participant’s annual compensation, or $49, 000 (as indexed in 2009) “Annual additions” are employer contributions, employee salary reductions, employee contributions, and plan forfeitures Copyright 2009, The National Underwriter Company 15

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Limitations on Benefits and Contributions • Compensation limit – only the first $245, 000 (in 2009) of each employee’s annual compensation can be taken into account in the plan’s benefit or contribution formula Copyright 2009, The National Underwriter Company 16

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Top-Heavy Requirements • A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees If a plan is top-heavy for a given year, it must provide • – – Faster vesting, 3 -year or 6 -year graded Minimum benefits or contributions for non-key employees Copyright 2009, The National Underwriter Company 17

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Top-Heavy Requirements • A key employee is an employee who, at any time during the plan year, – – – An officer of the employer having annual compensation greater than $160, 000 (as indexed for 2009) A more-than-5% owner of the employer, or A more-than-1% owner of the employer having annual compensation of more than $150, 000 Copyright 2009, The National Underwriter Company 18

Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Top-Heavy Requirements • No more than 50 employees (or, if lesser, the greater of three or 10% of the employees) will be treated as officers Copyright 2009, The National Underwriter Company 19