Chapter 7

Chapter 7

Qualified Plans: General rules of Qualification

lEARNING oBJECTIVES:

  1. Have a basic understanding of qualified plan requirements
  2. Identify key qualification rules for qualified plans

REVIEW:

This chaptergives an overview of IRC and regulatory requirements to be a qualified plan. It begins with a discussion of eligibility and coverage, including the definition of highly-compensated for employee benefit purposes. Next, the chapter discusses nondiscrimination in benefits and contributions. In this section, integration with Social Security: defined benefit plans and defined contribution plans are discussed. Vesting is the next topic discussed. The section on funding requirements includes actuarial cost methods, actuarial assumptions, deduction limits, timing of contributions and fiduciary rules. Next, the chapter discusses limitations on benefits and contributions, and includes information on defined benefit limits, defined contribution limits, and the compensation limit. Finally, top-heavy requirements are briefly covered.

Chapter Outline:

A.Eligibility and Coverage

1.Highly Compensated-Definition for Employee Benefit Purposes

B.Nondiscrimination in Benefits and Contributions

1.Integration with Social Security

2.Defined Benefit Plans

3.Defined Contribution Plans

C.Vesting

D.Funding Requirements

1.Actuarial Cost Methods

2.Actuarial Assumptions

3.Deduction Limits

4.Timing of Contributions

5.Fiduciary Rules

  1. Limitations of Benefits and Contributions
  2. Defined Benefit Limits
  3. Defined Contribution Limits
  4. Compensation Limit
  5. Top-Heavy requirements
  6. Chapter Endnotes

FEATURED TOPICS:

Qualified Plan Rules

FIGURES:

Figure 7.1 SafeHarbor Table

Figure 7.2 2009 Covered Compensation Table

CFP® CERTIFICATION EXAMINATION TOPIC:

Topic 62: Qualified plan rules and options

A. Nondiscrimination and eligibility requirements

B. Integration with Social Security/disparity limits

D. Top-heavy plans

COMPETENCY:

Upon completion of this chapter, the student should be able to:

1.Have a basic understanding of qualified plan requirements

2.Identify key qualification rules for qualified plans

KEY WORDS:

ratio percentage test, average benefit test, highly compensated employee, nondiscrimination, Social Security integration, covered compensation, vesting, funding requirements, actuarial cost method, fiduciary rules, top-heavy plan

DISCUSSION:

  1. Discuss the application and implications of nondiscrimination requirements for qualified plans.
  2. Discuss qualified plan funding requirements and the implications for plan sponsors.

QUESTIONS:

1.Which of the following tests alternative overall coverage tests must a qualified plan satisfy?

(1)ratio percentage test

(2)average benefit test

(3)usual, reasonable and customary test

(4)ADL minimum qualification trigger test

a.(1) only

b.(1) and (2) only

c.(1) (2) and (3) only

  1. (2) (3) and (4) only

Chapter 7, p.63

2.Which one of the following IRC sections govern or regulate qualified plans?

a.401

b.402

c.501

  1. 502

Chapter7, p.65

3.Which of the following are methods for integrating defined benefit formulas with Social Security?

(1)top-heavy method

(2)safe harbor method

(3)excess method

(4)offset method

a.(1) and (2) only

b.(2) and (3) only

c.(3) and (4) only

  1. (1) (3) and (4) only

Chapter7, pp.65-66

4.What is the maximum number of years of service a plan may require before a participant is 100% vested in a qualified plan?

a.1

b.3

c.5

d.7

Chapter7, p. 68

ANSWERS:

  1. b
  2. a
  3. c
  4. d