1. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 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

2. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 Qualification Requirements eligibility and coverage nondiscrimination in benefits and contributions vesting funding (including deduction limits) limitations on Benefits and Contributions top-heavy requirements

3. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Eligibility and Coverage: 1.Must cover a broad group of employees 2.Two types of rules satisfied –“age and service” or waiting period requirements –“overall coverage” and “participation” requirements

4. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 “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

5. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 “Overall Coverage” Tests 1.Ratio percentage test: –Plan must cover a percentage of nonhighly compensated employees that is at least 70% of the percentage of highly compensated employees 2.Average benefit test: –Plan must benefit a nondiscriminatory classification of employees and the average benefit, as a percentage of compensation, for all nonhighly compensated employees of the employer must be at least 70% of that for highly compensated employees

6. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 “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

7. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Highly Compensation Employee – Definition –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 2009) An employee is a highly compensation employee for a plan year if he:

8. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Nondiscrimination in Benefits & 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 A plan must be nondiscriminatory with respect to highly compensation employees either in terms of benefits or contributions:

9. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Vesting Portion of the benefit or account balance attributable to employee contributions must always be 100% vested (nonforfeitable) Portion attribution to employer contributions (other than matching) must be vested under a specified vesting schedule

10. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 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

11. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 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

12. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 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

13. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 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

14. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 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

15. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 Limitations on Benefits and Contributions Defined contribution limits – the “annual additions” to each participants account cannot exceed the lesser of: –100% of the participant’s annual compensation, or –$49,000 (as indexed in 2009) “Annual additions” are employer contributions, employee salary reductions, employee contributions, and plan forfeitures

16. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 Limitations on Benefits and Contributions Compensation limit – only the first $245,000 (in 2009) of each employee’s annual compensation can be taken into account in the plan’s benefit or contribution formula

17. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 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

18. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 Top-Heavy Requirements A key employee is an employee who, at any time during the plan year, –An officer of the employer having annual compensation greater than $160,000 (as indexed for 2009) –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

19. Qualified Plans: General Rules for Qualification Chapter 7 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 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