©2015, College for Financial Planning, all rights reserved.

Session 3Fundamentals of Qualified Plans

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits

Session DetailsModule(s) 2, 4Chapter(s)

3, 2

LOs 2-3 Calculate and analyze whether a defined benefit plan meets participation and eligibility requirements.

4-2 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) NQSOCross-Tested (Comparability)401(k) Plan 403(b) (TSA) Deferred

Compensation Plans

SIMPLE 401(k) 3-4

Why install a qualified plan?• Recruit, Retain, Reward • Employer deducts contributions

o Up to 25% for defined contributiono 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

Cliff Vesting% Vested

Graded Vesting% Vested

Defined benefit pension plans (non-top heavy)

5-Year Cliff3-to-7-Year

Graded1-234567

0%0%0%

100%100%100%

0%20%40%60%80%100%

Top-heavy defined benefit pension plans and defined contribution plans

3-Year Cliff2-to-6-Year

Graded123456

0%0%

100%100%100%100%

0%20%40%60%80%100%

3-7

Top-Heavy Plans

A defined contribution plan

A defined benefit plan

The aggregate account balances*

The present value of cumulative accrued

benefits

The aggregate account balances*

The present value of cumulative accrued

benefits

For key employees

exceed(s) 60% of

Is top heavy if

For all employees

* 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 EmployeeAny 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 EmployeesName 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%

XYZ Corporation

3-10

Identify Key EmployeesXYZ CorporationKey employees include: Kerry, Gregg, Ron, and Gina 1. 5% Owners: Kerry, Ron, and Gina2. 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 gradedMinimum 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 Plano 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 $5,011paid 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 1Which of the following could be expected to reduce the annual cost of a defined benefit plan?I. a high turnover assumptionII. use of salary scalesIII. a high interest rate assumptionIV. a high benefit cost assumptionV. a low turnover assumption

a. I and II onlyb. I and III onlyc. II and IV onlyd. I, II, and III onlye. II, IV, and V only

3-18

Question 2Which 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 onlyb. II and III onlyc. I, III, and IV onlyd. II, III, and V onlye. I, III, IV, and V only 3-19

©2015, College for Financial Planning, all rights reserved.

Session 3End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits