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 2011, The National Underwriter Company

Qualification Requirements eligibility and coverage nondiscrimination in benefits and contributions vesting funding (including deduction limits) limitations on Benefits and Contributions top-heavy requirements Copyright 2011, The National Underwriter Company

Eligibility and Coverage: Must cover a broad group of employees Two types of rules satisfied “age and service” or waiting period requirements “overall coverage” and “participation” requirements Copyright 2011, The National Underwriter Company

“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 2011, The National Underwriter Company

“Overall Coverage” Tests Ratio percentage test: Plan must cover nonhighly compensated employees at the rate of at least 70% of that for highly compensated employees Average benefit test: Plan requires: a.) nondiscriminatory classification b.) 70% average benefit Copyright 2011, The National Underwriter Company

also commonly known as the 50/40 test “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 2011, The National Underwriter Company

Highly Compensated Employee – Definition An employee is a highly compensated employee for a plan year if he or she: 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 2011) Copyright 2011, The National Underwriter Company

Nondiscrimination in Benefits & Contributions A plan must be nondiscriminatory with respect to highly compensated 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 2011, The National Underwriter Company

Vesting Portion of the benefit or account balance attributable to employee contributions must always be 100% vested (nonforfeitable) Portion attributable to employer contributions (other than matching) must be vested under a specified vesting schedule Copyright 2011, The National Underwriter Company

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 2011, The National Underwriter Company

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 2011, The National Underwriter Company

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 2011, The National Underwriter Company

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 2011, The National Underwriter Company

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 2011, The National Underwriter Company

Limitations on Benefits and Contributions Defined Benefit limits – the highest annual benefit payable under the plan cannot exceed the lesser of: 100% of the participant’s compensation averaged over the 3 years of highest compensation, or $195,000 (as indexed in 2011) Dollar limit adjusted in $5,000 increments under cost-of-living adjustment and adjusted actuarially for retirement earlier than age 62 or later than age 65 Copyright 2011, The National Underwriter Company

Limitations on Benefits and Contributions Defined contribution limits – the “annual additions” to each participant’s account cannot exceed the lesser of: 100% of the participant’s annual compensation, or $49,000 (as indexed in 2011) “Annual additions” are employer contributions, employee salary reductions, employee contributions, and plan forfeitures Copyright 2011, The National Underwriter Company

Limitations on Benefits and Contributions Compensation limit – only the first $245,000 (in 2011) of each employee’s annual compensation can be taken into account in the plan’s benefit or contribution formula Copyright 2011, The National Underwriter Company

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 2011, The National Underwriter Company

Top-Heavy Requirements A key employee is an employee who, at any time during the plan year is, An officer of the employer having annual compensation greater than $160,000 (as indexed for 2011) 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 2011, The National Underwriter Company

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 2011, The National Underwriter Company

True or False? A qualified plan can cover just key employees and business owners. The designation “highly compensated” is given to employees that have a certain percentage of business ownership or are in the top paid group. Qualified defined benefit plans can be integrated with Social Security, but qualified defined contribution plans cannot. 1. False, see page 63 2. True, see page 65 3. False, see page 65 Copyright 2011, The National Underwriter Company

True or False? (cont) Benefits attributed to employer contributions in a defined benefit plan must follow either 3-year vesting or 2 to 6 year vesting. Generally, it is to an employer’s advantage to contribute more to a qualified plan than is deductible. 4. False, see page 68 5. False, see page 71 Copyright 2011, The National Underwriter Company

Discussion Question Over the past several years, employers have moved away from defined benefit plans in favor of defined contribution plans. What are some of the implications of this move for employers and employees? Discussion Question: see page 60 Copyright 2011, The National Underwriter Company

True No more than 50 employees (or, if lesser, the greater of three or 10% of the employees) will be treated as officers Copyright 2011, The National Underwriter Company