CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Retirement Planning & Employee Benefits
Session 3
Fundamentals of
Qualified Plans
©2015, College for Financial Planning, all rights reserved.
Session Details
Module(s) 2, 4
Chapter(s) 3, 2
LOs
2-3
4-2
Calculate and analyze whether a defined
benefit plan meets participation and eligibility
requirements.
Identify the minimum coverage rules for
401(k) plans, including the ADP and ACP tests.
3-2
What Makes a Plan Qualified?
• ERISA
• Minimum participation and coverage
•
•
•
•
requirements
Non-discriminatory
Minimum vesting requirements
Minimum funding
requirements (pension plans)
Protection of assets
3-3
Qualified & Nonqualified Plans
Qualified Plans
Nonqualified Plans
Pension Plans
Profit Sharing
Plans (DC)
Tax-Advantaged
Plans
Other Nonqualified
Plans
Defined Benefit (DB)
Profit Sharing
Traditional IRA
Section 457 Plans
Cash Balance (DB)
Thrift Plan
Roth IRA
Stock Bonus
SIMPLE IRA
ISO
Money Purchase (DC)
ESOP (LESOP)
SEP
ESPP
Target Benefit (DC)
Age-Weighted
(SARSEP)
NQSO
403(b) (TSA)
Deferred
Compensation Plans
Cross-Tested
(Comparability)
401(k) Plan
SIMPLE 401(k)
3-4
Why install a qualified plan?
• Recruit, Retain, Reward
• Employer deducts contributions
•
•
•
•
o Up to 25% for defined contribution
o As much as needed to fund $210k benefit
(2015) in defined benefit
Tax-deferred growth for employee in DC
Guaranteed benefit for
employee in DB
Free money!
Protection of assets
3-5
Plan Features
•
•
•
•
•
•
Eligibility
Service definition
Plan formula
Participant
contributions
Compensation
definition
Normal retirement
age
•
•
•
•
•
•
Early retirement
Investment
Vesting
Plan limitation year
Death benefits
Actuarial
assumptions
3-6
Qualified Plan Vesting Schedules
Completed
Service Years
Defined benefit
pension plans
(non-top heavy)
Top-heavy
defined benefit
pension plans and
defined
contribution plans
1-2
3
4
5
6
7
1
2
3
4
5
6
Cliff Vesting
% Vested
Graded Vesting
% Vested
5-Year Cliff
3-to-7-Year Graded
0%
0%
0%
100%
100%
100%
0%
20%
40%
60%
80%
100%
3-Year Cliff
2-to-6-Year Graded
0%
0%
100%
100%
100%
100%
0%
20%
40%
60%
80%
100%
3-7
Top-Heavy Plans
A defined
contribution plan
Is top heavy if
A defined
benefit plan
The aggregate
account balances*
For key employees
exceed(s) 60% of
The present value of
cumulative accrued
benefits
For all employees
The present value of
cumulative accrued
benefits
The aggregate
account balances*
* Includes benefits derived from contributions except “deductible employee contributions”; also includes amounts
distributed in current plan year due to separation and any in-service distributions in the preceding four plan years.
3-8
Key Employee
Any employee who, at any time during the plan
year containing the determination date for the
plan year to be tested, met any of the following
criteria:
1. was a “5% owner” (ownership of > 5%)
2. owned 1% of the company and
received compensation
> $150,000
3. was an officer of the company
and received compensation
>$170,000 in 2015
3-9
Identify Key Employees
XYZ Corporation
Name
Officer
Compensation
Ownership %
Kerry
Yes
$190,000
50%
Gregg
Yes
$180,000
None
Ron
Yes
$120,000
25%
Gina
Yes
$110,000
20%
Mark
No
$80,000
1%
Kevin
Yes
$70,000
1%
Jeff
Yes
$60,000
1%
Steve
No
$58,000
1%
Cathy
Yes
$48,000
1%
3-10
Identify Key Employees
XYZ Corporation
Key employees include: Kerry, Gregg, Ron, and Gina
1. 5% Owners: Kerry, Ron, and Gina
2. 1% owner and compensation > $150,000: none
3. Officer with compensation >$170,000 (2015): Gregg
The number of officers who can be considered key
employees based on their title and compensation is the
greater of 10% of all employees, or 3 (but in no case
more than 50).
3-11
Top-Heavy Plan Requirements
Accelerated Vesting
• 3-year cliff or 6-year graded
Minimum Contributions and Benefits to be
paid to Non-Key Employees
• Defined Contribution Plan
•
o Plan must provide a contribution of at least 3% of
compensation per year, or, if less, the percentage
contributed for key employees.
Defined Benefit Plan
o Plan must provide a minimum benefit of 2% of
employee’s highest 5-year average compensation for
each year of service earned while plan is top-heavy,
to a maximum of 20%.
3-12
Minimum Funding Requirements
•
•
•
•
Actual plan results are compared to estimated
amount needed to provide promised plan benefit.
Minimum funding requirement:
employer must
contribute at least a
minimum amount to
fund the plan benefit.
If account value exceeds
minimum required to
fund benefit, contribution
is decreased.
If plan is underfunded there
is a 10% penalty tax.
3-13
Defined Benefit Plan Termination (1)
Overfunded plans must either
• transfer 25% of the potential
reversion to a qualified
replacement plan, or
• increase the participants’
accrued benefits by at
least 20%.
3-14
Defined Benefit Plan Termination (2)
Underfunded plans (involves PBGC)
• voluntary standard termination
• voluntary distress termination
• involuntary termination
• maximum monthly amount
guaranteed by PBGC at
age 65 is $5,011
paid out over participant’s
lifetime; lump sum option
is not available
3-15
DB Plans Exempt From PBGC
• Plans maintained for substantial business
•
owners only (such as sole business owners or
greater than 10% business owners)
Plans maintained by professional service
employers that have never had more than 25
active participants
3-16
PPA Disclosure Requirements
• New under PPA
• Disclosures include
o summary of plan participants,
o information about funding
status of plan, and
o allocation of assets
• PBGC overview and
what it guarantees
must also be
provided
3-17
Question 1
Which of the following could be expected to reduce
the annual cost of a defined benefit plan?
I. a high turnover assumption
II. use of salary scales
III.a high interest rate assumption
IV. a high benefit cost assumption
V. a low turnover assumption
a. I and II only
b. I and III only
c. II and IV only
d. I, II, and III only
e. II, IV, and V only
3-18
Question 2
Which of the following are characteristics of a voluntary standard
termination?
I. The plan must have sufficient assets to meet benefit liabilities.
II. The plan has insufficient assets to meet benefit liabilities.
III. Plan assets must be distributed in accordance with ERISA
requirements.
IV. This type of termination would be used if the employer wanted
to terminate a defined benefit plan and offer a defined
contribution plan instead.
V. The employer is assessed a 50% penalty tax on asset
reversions.
a. I and IV only
b. II and III only
c. I, III, and IV only
d. II, III, and V only
e. I, III, IV, and V only
3-19
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Retirement Planning & Employee Benefits
Session 3
End of Slides
©2015, College for Financial Planning, all rights reserved.