Requirements of a Qualified Pension Plan and on your pension.

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Plans Exempt from PBGC Coverage

Some plans are specifically excluded from the requirement of PBGC insurance coverage. These plans are as follows:
(a) Individual account plans, such as money purchase pension plans,
target benefit plans, profit-sharing plans, thrift and savings plans, and
stock bonus plans:

Affordable Care Act: Coverage Terms

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(b) Governmental plans;
(c) A church plan which is not volunteered for coverage does not cover, the employees of a non-related trade or business and is not a multi-employer plan in which one or more of the employers are not churches or a convention or association of churches;
(d) Plans established by fraternal societies or other organizations described in §501(c)(8), (9) or (18) which receive no employer contributions and cover only members (not employees);
(e) A plan that has not, after the date of enactment, provided for employer contributions;
(f) Non-qualified deferred compensation plans established for a select
group of management or highly compensated employees;
(g) An Insurance-plan outside the United States created for nonresident aliens;
(h) A plan that is primarily for a limited group of highly compensated
employees where the benefits to be paid, or the contributions to be received, are in excess of the limitations of §415;
(i) A qualified plan established exclusively for substantial owners;
(j) A plan of an international organization that is exempt from tax under the provisions of the International Organizations Immunity Act;
(k) A plan maintained only to comply with worker’s compensation, unemployment compensation, or disability insurance laws;
(l) A plan established and supported by a labor organization described in §501(c)(5) that does not, after the date of enactment, provide for employer contributions;
(m) A plan which is a defined benefit plan to the extent that it is treated as an individual account plan under §3(35)B of the Act; or (n) A plan established and maintained by one or more professional
service employers that had, from the date of enactment, not had more
7-11than 25 active participants. Once one of these plans has more than 25
active participants, it will remain covered even if the number of active
participants subsequently fall back below 25.

The ACA’s affordability requirement

The ACA’s affordability requirement is the highest percentage of household income an employee can be required to pay for monthly health insurance plan premiums, based on the least expensive employer-sponsored plan offered that meets the ACA’s minimum essential coverage requirements.

The affordablility percentage is adjusted annually for inflation, and for 2021 it rose to 9.83 percent of an employees’ household income.

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Self-study.

Under NASBA-AICPA self-study standards, self-study sponsors are required to
present review questions intermittently throughout each self-study course. The
following questions are designed to meet those requirements and increase the
benefit of the materials. However, they do not have to be completed to receive
any credit you may be seeking in regard to the text. Nevertheless, they may
help you to prepare for any final exam.
Short explanations for both correct and incorrect answers are given after the list
of questions. We recommend that you answer each of the following questions
and then compare your answers. For more detailed explanations and references,
you may do an electronic search using Ctrl+F (if you are viewing this course on
a computer), consult the text Index, or review the general Glossary.
68. The author identifies two deferred tax advantages of corporate retirement plans. What is one of these advantages?
a. There is a tax-free accumulation of the employee benefit trust.
b. The employee may roll over into an IRA certain distributions tax-free.
c. Amounts paid or accrual to the qualified plan are currently deductible for the employer corporation.
d. Employer contributions aren’t recognized presently as income.
69. The text lists two significant disadvantages of qualified corporate plans. What
is one of these disadvantages?
a. Loans may not be made to plan participants.
b. Lump-sum distributions are ineligible for favorable five-year income averaging treatment.
c. The expense to the shareholder-employees of paying for taking care of the majority of the employees.
d. No plan may hold any more than 10% of the fair market value of the total assets in qualifying employer real property.

70. There are four main sections of the Employment Retirement Income Security Act (ERISA). Which essential ERISA provision is concerned with only qualified retirement plans and tax-deferred annuities, mainly from a federal tax perspective?
a. Title I.
b. Title II.
c. Title III.
d. Title IV.
71. A fiduciary employs unrestricted control or authority over the management of a qualified deferred compensation plan or of such a plan’s assets. What is a fiduciary permitted?
a. be involved, in any manner, in any deal that consists of another plan on behalf of a party whose interests are opposing the plan’s interests.
b. have authority over the plan’s assets for their own account.
c. Obtain any payment for his own mind from any party involved in the
plan in association with a transaction involving plan assets.
d. Operate as an officer, employee, or agent of a party-in-interest.
72. The Pension Benefit Guarantee Corporation (PBGC) guarantees payment of certain benefits upon a plan’s termination if a plan fails to satisfy such payment.

What plan is included in the requirement of PBGC insurance coverage?

a. A governmental plan.
b. A plan established by fraternal societies1 which receive no employer contributions and cover only members (not employees).

c. A defined nondiscriminatory benefit plan where benefits to be paid is
no more than the limitations of §415.
d. A qualified plan established exclusively for substantial owners.
73. The three basic types of qualified plans have similar qualification requirements. What is a fundamental requirement of a qualified pension plan?
a. The assets must not be held in a trust.
b. The employer must establish a written plan that is valid under federal
law.
c. The plan must at least be a temporary arrangement.
d. The plan must meet specific age, service, and coverage nondiscriminatory requirements.

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Basic Requirements of a Qualified Pension Plan

There are three basic forms of qualified plans: pension plans, profit-sharing
plans, and stock bonus plans. The qualification requirements for all of these
plans are identical, except that certain fundamental differences in the plans require variations in the application of some rules.

Written Plan

The employer must establish and communicate to its employees a written
plan (and, usually, a trust), which is valid under state law (Reg. §1.401(a)(2)).
Communication
A plan must be reduced to a formal written document and communicated to employees by the end of the employer’s taxable year, to be qualified for such year. Under ERISA, a summary plan description must be furnished to participants within 120 days after establishing the plan, or, if later, 90 days after an employee becomes a participant DOL Reg. §2520.104b-2(a)). The summary plan description must be written in such a manner that the average plan participant will understand it and must be sufficiently comprehensive in its description of the participant’s rights and obligations under the plan (DOL Reg.
§2520.102-2).

Trust

The assets of a qualified plan must be held in a valid trust created or organized in the United States. As an alternative, a custodial account or an annuity contract issued by an insurance company or a custodial account held by a bank (for a plan which uses IRAs) may be used (ERISA §403(b)). Under §401(f), these custodial accounts and annuity contracts will be treated as a qualified trust, and the person is holding the assets of the account or agreement will be treated as the trustee thereof.
Requirements
A trust is a matter of state law. To be a valid trust, three conditions must be met:
(i) The trust must have a corpus (property);
(ii) The trust must have a trustee; and
(iii) The trust must have a beneficiary.

In order to receive a yearly deduction, both the plan and trust must be in writing, and they can either be combined or separate documents. The trust must be established before the end of the year, but the actual contribution is not required until the due date of filing the employer tax return, including extensions (§404(a)(6).

The IRS has stated that even if the trust does not have a corpus, as long as it is valid under local law and the contribution is made within the prescribed time limits, it will be considered to have existed on the last day of the year (R.R. 81-114). Therefore, if the contribution is made within the prescribed time limits, it will be deemed to have been in existence on the last day of the year (R.R. 81-114). This information was last updated on July 14th, 2015.

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