Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Is A Profit Sharing Plan?
• A defined contribution retirement plan for sharing
employer profits with employees
• Requires a definite formula for allocating profits to
each participant
• Employer must make recurring and substantial
contributions to the profit sharing plan
• Employer need not make a contribution in years in
which no profits are earned
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Is A Profit Sharing Plan?
• Employer can distribute payments in the form of
current cash bonuses or on a deferred basis through
contributions to an irrevocable trust
• Participants may receive benefits in the event of
termination other than retirement, such as death,
layoff or disability
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Is A Defined Benefit Pension Plan?
• A retirement plan established and maintained by an
employer to provide a definitely determinable benefit
for the employer’s employees and their beneficiaries
• A pre-determined benefit formula is established upon
creation of the plan
• The amount of an employer’s contribution to fund the
promised benefit is based on an actuarial
determination of the cost of the benefit
• Purpose is to provide a specific amount of retirement
benefits upon retirement of employee.
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Is A Money Purchase Pension Plan?
• A defined contribution retirement plan
• Employer commitment to make a specified
contribution amount annually
• Benefits directly dependent on
– Length of time an employee participates in the plan, and
– Amount of money contributed on participant’s behalf each
year (plus interest and appreciation)
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Is A Cash Or Deferred Arrangement
(CODA) / 401(k) Plan?
• A CODA or 401(k) plan is a feature that is part of a profit
sharing, money purchase pension or stock bonus plan
• Key feature: provides an employee the option to choose
whether his employer should pay a certain amount to him
– In cash, or
– Contribute that amount to a qualified plan on his behalf
Copyright 2011, The National Underwriter Company
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Is A Cash Or Deferred Arrangement
(CODA) / 401(k) Plan? (cont’d)
• Generally part of a plan that meets defined contribution
requirements
• Employer typically agrees to make a matching contribution
based on the employee’s contribution
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6
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
When Is Use Of A Profit Sharing/ 401(k)/
Pension Plan Appropriate?
• Client would like to be sure of a steady, adequate,
and secure personal retirement income
• Client would like to set aside money for retirement on
a tax deductible basis
• Client wants to reward long-service employees and
provide for their economic welfare after retirement
Copyright 2011, The National Underwriter Company
7
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
When Is Use Of A Profit Sharing/ 401(k)/
Pension Plan Appropriate?
• Clients would like to put their business in a better
competitive position for attracting, retaining personnel
• Client’s corporation is about to run into an
accumulated earnings tax problem
• Client has employees who would like to defer
compensation on an elective, pre-tax basis to a
qualified retirement plan
Copyright 2011, The National Underwriter Company
8
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Plan must be for the exclusive benefit of employees
or their beneficiaries
• Primary purpose of the plan must be to offer the
employees a retirement benefit or share of the
company’s profits
• Plan provisions must be in writing and must be
communicated to employees
• Plan must be permanent with no set termination date
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9
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Plan must not discriminate in favor of highly
compensated employees
– Plans that provide more than 60% of aggregate accumulated
benefits or account balances for current key employees are
“top heavy”
– Top heavy plans must meet more stringent vesting and
minimum benefit rules
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Plan must meet minimum:
–
–
–
–
–
Age standards
Service standards
Coverage requirements
Vesting standards, and
Participation test (for defined benefit plans)
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11
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Plan must provide for benefits or contributions that do
not exceed Section 415 limits
• Distributions must generally begin to all participants
by April 1 following the year of attaining age 70½
– Exception: Employees who are not more than 5% owners
(or participants in government or church plans) may begin
distributions April 1 of the year following the year they retire,
if that is later than age 70½, if the plan so provides
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12
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Special additional qualification requirements for
401(k) plans:
– Plan must permit employees to elect to receive cash or an
equivalent employer contribution
– Plan cannot allow employees to receive a distribution
attributable elective deferrals because of:
• The lapse of a fixed number years, or
• The completion of a specified number of years
Copyright 2011, The National Underwriter Company
13
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Special additional qualification requirements for
401(k) plans (cont’d):
– Employee’s rights to benefits are nonforfeitable for benefits
derived from:
• Elective contributions
• Qualified matching, or
• Qualified contributions used to meet the ADP (actual deferral
percentage) test
– Employer cannot condition the availability of any other benefit
on whether the employee elects to make contributions under
the CODA or to receive cash
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14
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Special additional qualification requirements for
401(k) plans (cont’d):
– Plan must meet special nondiscrimination tests with respect
to the amount of elective contributions made to the plan
each year
– The CODA cannot require, as a condition of participation,
that an employee complete more than one year of service for
the employer maintaining the plan
– The amount of elective contributions to the plan on behalf of
a participant cannot exceed $16,500 (2011) and will be
indexed for inflation
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15
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Special additional qualification requirements for
401(k) plans (cont’d):
– Participants who have reached age 50 by the end of the plan
year may make “catch-up” elective deferrals of $5,500
(2011) indexed for inflation
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Eligibility Requirements?
• A qualified plan may not impose an age or service
requirement that would exclude any full-time
employee who has
– attained age 21, or
– completed 1 year of service, whichever is later
• If there is 100% immediate vesting, a 2-year waiting
period is permitted
• Plan may exclude part-time and seasonal employees
who work less than 1,000 hours in a 12-month period
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Eligibility Requirements?
• A plan must be nondiscriminatory in its coverage of
employees
• A defined benefit plan must cover on each day of the
plan year, the lesser of
– 50 employees, or
– 40% or more of all employees of the employer
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18
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Eligibility Requirements?
• A plan will qualify if it benefits
– At least 70% of the non-highly compensated employees, or
– A % of non-highly compensated employees which is at least
70% of the % of highly compensated employees benefiting
under the plan,
or
– If the plan does not discriminate in favor of highly
compensated employees, and
– The average benefit % for non-highly compensated
employees is at least 70% of the average benefit % for the
highly compensated employees
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19
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Vesting Requirements?
• Minimum vesting standards must be met by all plans
• Vesting refers to nonforfeitability of benefits by
covered employees
• General rule: Benefits attributable to employee
contributions must always be 100% vested
• In a 401(k) plan: Employee’s rights to benefits derived
from elective contributions, qualified matching and
qualified non-elective contributions used to satisfy the
ADP test must be 100% vested at all times
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20
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Vesting Requirements?
• Full vesting for 401(k) matching contributions and for
top heavy plans is required after:
– 3 years, or
– 6 years under a graduated vesting schedule
• Full vesting under all other plans is required no later than:
– 5 years, or
– 7 years under a graduated vesting schedule
• A plan must take into account all years of service
(1,000 hours in a plan year) completed after the
employee attains age 18 for vesting purposes
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21
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Defined Contribution Plans
• Defined contribution plans include:
– Money purchase pension plans
– Profit sharing plans
– Stock bonus plans
– 401(k) plans
– ESOP’s
– Thrift plans
– Target or assumed benefit plans
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22
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Defined Contribution Plans
• Defined contribution plans are subject to an annual
additions limit equal to the lesser of:
– 100% of compensation, or
– $49,000 (2011) indexed for inflation
• Employer-sponsor of profit sharing plan is permitted a
maximum deduction of up to 25% of the total
compensation of plan participants
– Elective deferrals are not counted toward the maximum
deduction limit
– Total compensation in a 401(k) is determined before
subtracting any elective deferrals
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23
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Defined Contribution Plans
• Plans can provide for voluntary employee contributions
• Thrift plans commonly do not require employees to
contribute and require the employer to make matching
contributions
• Defined contribution plans usually can be integrated
with Social Security
• Disabled plan participants can receive a 100% vested
employer contribution based on the annualized
compensation of the employee during his last year of
employment
Copyright 2011, The National Underwriter Company
24
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Defined Benefit Plans
• A plan that provides a definitely determinable benefit
established when the plan is created
• Maximum normal retirement benefit, based on
retirement no earlier than age 62, is the lesser of
– 100% of the highest 3 consecutive years of average
compensation while actively participating in the plan, or
– $195,000 (in 2011) indexed
– The limitation is increased for retirement after age 65 and
decreased for retirement before age 62
– The benefit must be reduced pro rata if the employee has
fewer than 10 years of plan participation with the employer
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25
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Target or Assumed Benefit Plan
• Hybrid benefit plan in which a “target benefit” is
established under the plan for each participant
• Contributions to attain the target benefit are
actuarially determined based on
– A conservative interest assumption, and
– Age of the participant
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26
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Target or Assumed Benefit Plan
• Maximum annual addition to the account of a
participant cannot exceed the lesser of
– 100% of salary, or
– $49,000 (2011) indexed
– Each participant’s account is also credited with investment
earnings, gains, and losses, which can produce an actual
benefit greater than the target
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27
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Deduction of Contributions
• Defined Benefit Plan: Employer can contribute and
deduct the amount necessary to pay the benefits
promised up to the full funding limitation
• CODA, Profit Sharing or Stock Bonus Plan:
Sponsoring-employer may contribute and deduct a
maximum of 25% of the total compensation of plan
participants
• Combination Pension/Profit Sharing: Maximum
deductible contribution for both plans is the greater of
– 25% of the compensation of covered employees, or
– Contribution required to fund the minimum funding standard
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28
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Actuarial Assumptions
• Defined benefit pension plans: A conservative rate of
return should be used for funds invested in assets other
than life insurance
– Interest rate assumptions of 5% – 7% are typical
– Actual return in excess of assumed amount must be used to
reduce employer’s future contributions
– Terminated, non-vested participant account balances are
used to reduce future employer contributions
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29
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Actuarial Assumptions
• Money purchase and profit sharing plans:
Investment experience directly affects the amount a
participant will have at retirement
– Earnings are allocated to a participant’s account in
proportion to his or her account balance in a money
purchase plan
– Gains and losses must be allocated proportionately in a
profit sharing plan
– Terminated, non-vested participant account balances in a
profit sharing plan may be used to
• Reduce future employer contributions, or
• Be allocated among the accounts of remaining participants
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30
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Actuarial Assumptions
• Mortality is an important actuarial assumption
• Fixed benefit pension plan:
– Life insurance death proceeds, if included in the plan, will go
to the employee’s beneficiary, and
– The investment account that would have been used to pay
the employee’s benefit, had he or she lived, is used to
reduce future employer contributions to the plan
• Money purchase or profit sharing plan:
– Total funds in a participant’s account are paid to the
beneficiary as a death benefit, including life insurance
proceeds
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31
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Retirement Age
• “Normal retirement age” will usually be age 65
• Plans will make provisions for normal, early, and late
retirement age
• Mandatory retirement is generally prohibited
• It is unlawful to
– Eliminate the accrual of further benefit credits to an
employee’s retirement account after the employee attains
normal retirement age, or
– Exclude an employee from participation in a pension plan
even if his age is within 5 years of the age set for normal
retirement
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32
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Retirement Age
• Early retirement benefits are generally available
– Defined benefit plan: Actuarially reduced amount
– Money purchase plan: Participant’s vested share
– Profit sharing plan: Amount accumulated in participant’s
account paid as a lump sum or monthly income
Copyright 2011, The National Underwriter Company
33
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Social Security Integration
• The benefit structure of Social Security can be
viewed as discriminating against the higher-paid
employee
• Integration of a retirement plan allows an employer to
– Coordinate benefits from Social Security with the benefits
from the employer retirement plan, and
– Produce roughly the same proportionate benefit for higherpaid employees as for lower-paid employees
Copyright 2011, The National Underwriter Company
34
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Top Heavy Plans
• A plan is top heavy when it provides more than 60%
of its aggregate accumulated benefits or account
balances to key employees
• Top heavy determination is made on a year by year
basis
• A key employee is any employee-participant who, at
any time during the plan year is
– An officer earning more than $160,000 (2011) indexed
– A more than 5% owner, or
– A more than 1% owner earning more than $150,000 per year
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35
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Top Heavy Plans
• Special rules for smaller employers
– If the business (or aggregated group of businesses) has
fewer than 500 employees
• Only 10% will be considered officers
– If the business has fewer than 30 employees
• At least 3 officers must be counted
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36
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Top Heavy Plans
• Top heavy plans must meet basic qualification
requirements of other qualified plans and additionally
– Implement one of two rapid vesting schedules
– Provide minimum nonintegrated contributions or benefits for
plan participants who are non-key employees, and
– Reduce the aggregate limit on contributions and benefits for
some key employees
Copyright 2011, The National Underwriter Company
37
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Top Heavy Plans - Vesting
• Top heavy plans must meet one of two special vesting
rules for employees who are at least 21 years old and
have completed the required years of service
Years of Service
1
3 Year
% Vested
0%
6 Year
% Vested
0%
2
0%
20%
3
4
5
100%
40%
60%
80%
6
Copyright 2011, The National Underwriter Company
100%
38
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Top Heavy Plans: Contributions & Benefits
• The minimum defined benefit provided to non-key
employees during a top heavy year must be
– At least 2% of average pay for the highest 5 years for each
year of service in which a top heavy plan year ends,
– Up to a total of 20% of average pay
Copyright 2011, The National Underwriter Company
39
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Top Heavy Plans: Contributions & Benefits
• Under a defined contribution plan, the minimum
contribution provided to non-key employees during a
top heavy year must be
– At least 3% of compensation, or
– If the plan provides the contribution rate of less than 3% for
all participants,
• The highest contribution rate percentage on behalf of any key
employee can be used
• Counting only the first $245,000 (2011 indexed) of
compensation
Copyright 2011, The National Underwriter Company
40
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
How Is It Done?
• 3 ways an employer funds a retirement plan:
– Fully-Insured
– Split Funded
– Uninsured or All Equity
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41
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
How Is It Done?
• Fully-Insured:
– Employer places contributions into a funding vehicle of an
insurance company (e.g. retirement income life insurance
contract)
• Advantages
– Easy to install and administer
– Guaranteed principal, interest, annuity purchase rate, and
expenses
– Minimal cost and effort to comply with ERISA
• Disadvantages
– Growth of dollars in the plan is fixed
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42
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
How Is It Done?
• Split Funded:
– Employer places contributions into a trust fund that splits
contributions into two parts
• Part of the funds are placed in fixed assets, annuities and/or life
insurance
• Remainder of funds are invested in other investments for
diversification
• Advantages
– Combines guarantees with the possibility of appreciation
• Disadvantages
– Risk that depreciation in the value of securities will result in
lower benefits for the employee
Copyright 2011, The National Underwriter Company
43
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
How Is It Done?
• Uninsured or All Equity:
– Employer contributions placed into a trust fund are invested
solely into investments including equity
• Advantages
– Greatest potential for appreciation
• Disadvantages
– High risk
– No guarantees as to principal and interest
– Higher costs of administration and expenses for small
employers
Copyright 2011, The National Underwriter Company
44
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Tax Implications
• Within limits, employer contributions are fully
deductible for income tax purposes
• Earnings on plan assets accumulate income tax free
(tax-deferred)
• Distributions made in the form of a lump sum
distribution are generally included as ordinary income
to the employee in the year paid
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45
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Tax Implications
• Benefits payable under a qualified retirement plan,
including deductible employee contributions and
earnings
– Are taxed only when paid to a participant or beneficiary, and
– Are not taxed if merely “made available” or become fully
nonforfeitable
Copyright 2011, The National Underwriter Company
46
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Tax Implications
• If life insurance is provided under the plan
– An employee is considered to have received a distribution
each year equal to the portion of the employer’s
contributions or trust earnings that have been applied during
the year to provide pure insurance on the employee’s life
(Table 2001 cost)
– Such costs will be recovered income tax free when benefits
are received under the contract
– If life insurance is purchased with deductible employee
contributions, the amount spent is treated as a distribution
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47
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Tax Implications
• When an employee first becomes eligible to receive
benefits, if the plan allows, benefits may be left in the
plan and are not taxed until paid
– Distributions must begin by April 1 of the year following the
year in which the participant reaches age 70½
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48
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Tax Implications
• An employee who retires and receives periodic
payments from the retirement plan is taxed on such
payments in accordance with annuity rules
• Distributions before the participant attains age 59½
are subject to a 10% penalty tax
– Exception to the penalty tax include certain payments upon:
death, divorce, disability, medical expenses; and periodic
payments made over the participant’s life expectancy
– The penalty is increased to 25% for distributions from a
SIMPLE IRA in the first two years of participation in the plan
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49
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Tax Implications
• Beneficiary receiving death benefits from a qualified
retirement plan is taxed on the amount received for
income tax purposes under either the lump sum or
annuity rules
– Except, voluntary employee contributions that were
deductible are includable in ordinary income
• If the employee paid the insurance costs or reported
the cost as taxable income on his return
– Beneficiary treats only the cash value portion of any death
benefit, plus any other cash distributions from the plan, as
income subject to tax
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50
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Tax Implications
• If the employee did not pay the insurance costs or
report the cost as taxable income on his return
– The portion of the insurance proceeds consisting of “pure
insurance” (difference between policy face amount and cash
value) will be considered taxable income to the beneficiary
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51
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Tax Implications
• Qualified plan benefits may be received income tax
free if a plan participant suffers permanent loss or
loss of use of a member or function of the body, or
permanent disfigurement
– Plan must provide 100% vesting of benefits of the participant
ceases employment due to total or permanent disability, and
– Plan must include statutory language establishing the dual
purpose of the plan as a retirement and “accident & health”
plan
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52
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Estate Tax Implications
• Entire value of a qualified plan death benefit is
subject to inclusion in the decedent’s gross estate for
federal estate tax purposes
• Application of the unified credit and unlimited marital
deduction may help to minimize or eliminate federal
estate taxes due at the first spouse’s death
• State inheritance tax laws vary, but may tax
retirement plan death benefits
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53
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Issues In Community Property States
• If the participant spouse is married, the required form
of distribution on the death of either spouse is in the
form of a survivor annuity for the surviving spouse
– Where the participant spouse is the first to die, the surviving
spouse will receive the required annuity regardless of the
community nature of the qualified plan benefit
– Where the nonparticipant spouse is the first to die, one court ruled
the required survivor rights superseded state community property
laws
• The survivor annuity rule does not apply to
distributions from IRAs, SIMPLE IRAs, or SEPs
• The survivor annuity may be waived
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54
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
ERISA Fiduciary Responsibility Rules
• Fiduciary includes persons exercising control,
rendering advice for fees, or having authority over a
qualified plan
• Fiduciary responsibility rules relate to plan
administration, provide standards of conduct and
make certain transactions prohibited
• ERISA sets forth “prudent person” standard and
exclusive benefit rules
Copyright 2011, The National Underwriter Company
55
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Plan Loan Limitations
• Plan may make loan to participant or beneficiary if
provided for in plan document
• Must meet specific requirements:
– Adequately secured
– May not exceed 5-year term
– May not exceed 50%/$50,000 limit (or $10,000 if greater)
– Loan agreement must specify amount, terms and repayment
schedule
Copyright 2011, The National Underwriter Company
56
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Safe Harbor 401(k) Plan Requirements
• Satisfies nondiscrimination requirement by providing
safe harbor contribution of:
– Match of 100% of employee contribution up to 3% plus 50%
from 3% to 5%, or
– Nonelective contribution for all eligible nonhighly
compensated employees equal to at least 3% of
compensation
– Notice and 100% vesting requirements apply
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57
Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
SIMPLE 401(k) Plan Requirements
• Available to employers with 100 or fewer employees
earning $5,000 or less
• Salary deferrals up to $11,500 permitted in 2011
• Catch-up contributions permitted up to $2,500 in
2011
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Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
SIMPLE 401(k) Plans
• Subject to ERISA and administrative and qualification
requirements of qualified plans
• Contribution formula requirement must be one of
following:
– Match contribution: dollar for dollar up to 3% of
compensation, or
– Nonelective contribution: 2% of compensation for all eligible
employees earning at least $5,000
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
401(k) Plans: Distribution Restrictions
Distributable Events
– Death, disability, retirement or other termination of service
– Termination of plan without establishment of a successor
plan
– Sale of business or a subsidiary
– Participant reaches age 59½
– Participant’s financial hardship
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Profit Sharing / 401(k) /
Pension Plan
Chapter 52
Tools & Techniques of
Estate Planning
Hardship Distribution Limitations
• Distribution must be made due to an immediate and
heavy financial need of the employee
• Distribution must be necessary to satisfy the need
• Plan must set forth objective and nondiscriminatory
standards for determining immediate and heavy
financial need
• Distribution due to hardship must be limited to
“distributable amount”
• Regulations provide examples of expenses that will
be treated as “immediate and heavy financial need”
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Tools & Techniques of
Estate Planning
Hardship Distribution Limitations
Immediate and heavy financial need:
– Medical care: taxpayer, spouse, dependents
– Costs related to purchase of principal residence
– Tuition and expenses for next 12 months of college for
employee, spouse, children or dependents
– Payments to avoid foreclosure from principal residence
– Funeral expenses, casualty losses
Distribution will not qualify to extent that amount is in
excess of need, or is available from other sources
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Chapter 52
Tools & Techniques of
Estate Planning
Summary Of Contribution Limits For
Retirement Accounts 2011
Max annual IRA contribution (under age 50)
$5,000
Max annual IRA contribution (age 50+)
$6,000
Max annual 401(k), 403(b) or 457 deferral limit (under age 50)
$16,500
Max annual 401(k), 403(b) or 457 deferral limit (age 50+)
$22,000
Max annual additions limit under defined contribution plan
$49,000
Max includible compensation for computing contributions
$245,000
Max SIMPLE salary-deferral limit (under age 50)
$11,500
Max SIMPLE salary-deferral limit (age 50+)
$14,000
Minimum annual compensation for determining a highly
compensated employee for 401(k) nondiscrimination tests
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$110,000
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