1. 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
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2. Qualification Requirements
eligibility and coverage
nondiscrimination in benefits and contributions
vesting
funding (including deduction limits)
limitations on Benefits and Contributions
top-heavy requirements
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3. 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
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4. “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
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5. “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
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6. 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
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7. 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)
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8. 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
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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16. 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
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17. 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
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18. 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

19. 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
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20. 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
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21. 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
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22. 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
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23. 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
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24. 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