The MC Academy The Employee Benefits and Executive Compensation Series QUALIFIED PLANS PART 1

Transcription

1 The MC Academy The Employee Benefits and Executive Compensation Series QUALIFIED PLANS PART 1 May 14, 2013

2 What is a Qualified Plan?

3 Retirement Plan Pays benefits on retirement or other termination of employment Funding Trust or Insurance Contract Tax-Qualified Trust is tax-exempt Participants not taxed until distribution Employer entitled to deduction when contributions are made 3

4 Written Document Requirements Plan must include specific provisions, depending on plan features Amendments Required by new law IRS sets deadline Optional Generally end of year, but no retroactive cutbacks 4

5 IRS Determination Letter Highly recommended but not required 5-Year Filing Cycle IRS establishes deadline based on Employer EIN Prototype/Volume Submitter Form document prepared by bank or recordkeeper Preapproved by IRS Employer chooses from menu of plan terms Can rely on IRS letter issued to prototype sponsor 5

6 Qualified Plan Types Defined Contribution Benefit based on account balance Defined Benefits Benefit based on formula 6

7 Overview of Qualification Rules Eligibility Vesting Coverage Nondiscrimination Benefits Distributions 7

8 Who is the Employer?

9 Who is the Employer? For purposes of tax rules intended to prevent employers from discriminating in favor of owners and highly compensated employees, a plan sponsor needs to know the answer to two questions: Which businesses are aggregated together and treated as a single employer? Whoaretheemployeesoftheemployer? The answers apply to plan coverage, eligibility, vesting and when to pay benefits from the plan 9

10 Controlled Groups The most common way that related businesses are treated as a single employer is through the controlled group rules The controlled group rules apply to corporations and other trades or business, including sole proprietorships, partnerships, trusts, and estates There are two kinds of controlled groups Parent-subsidiary controlled group Brother-sister controlled group 10

11 Parent-Subsidiary Controlled Group A group of companies with 80% common ownership Company A 80% Ownership 100% Ownership Company B Company C 100% Ownership Company D 11

12 Brother-Sister Controlled Group 5 or fewer individuals have 80% common ownership and The same 5 or fewer individuals have 50% identical ownership Identical ownership is the lowest percentage ownership in the entities being aggregated Example: If an individual owns 15% of Company A and 25% of Company B, his identical ownership is 15% 12

13 Brother-Sister Controlled Group Example of brother-sister controlled group Individual A Individual B 30% 65% 70% 35% Company X Company Y 13

14 Attribution of Ownership In addition to direct ownership interests, in some cases an ownership interest will be attributed to or from certain related entities Between stockholders and corporations Between a partner and a partnership Between spouses, parents and children, grandparents and grandchildren Between beneficiaries and trusts and estates To the holder of an option 14

15 Affiliated Service Groups In addition to the controlled group rules, companies can be treated as a single employer through the affiliated service group rules Details of affiliated service group rules are complex and sometimes have unanticipated consequences Generally applies to professionals and organizations that work with professionals, such as doctors, hospitals, lawyers, architects, accountants, and consultants 15

16 Affiliated Service Groups Affiliated service group example: A doctor practice moves staff to a company outside of its controlled group Example: 10 doctors each own 10% of practice and 10% of separate staffing company; will not satisfy 80% common ownership test because 5 owners only have 50% common ownership Doctors and staff are still regularly associated in providing services to third parties Treated as a single employer under the affiliated service group rules even though not part of a controlled group 16

17 Who are the Employees? Employees include all common law employees of all of the related entities that are treated as a single employer Generally, if a company can direct and control what will be done and how it will be done by someone, that person is their common law employee Common law employee status is based on facts and circumstances 17

18 Who are the Employees? Independent contractors may be employees based on the facts regardless of their classification by a company For example, an employee who is terminated and rehired as an independent contractor may still be a common law employee if there is no other change in the relationship 18

19 Who are the Employees? Leased employees are treated as employees if they: Provide services under an agreement between the employer and a leasing organization ; Perform services on a substantially full-time basis for a period of at least 1 year; and Perform services under the primary direction or control of the employer 19

20 Eligibility

21 What Conditions Must Employees Satisfy To Become Participants? Age Service Other Conditions Plan Entry Dates Breaks In Service 21

22 Age Requirements Cannot be older than 21 May be less than 21 (or no age requirement) Cannot kick participants out once they reach a certain age 22

23 Service Requirements Generally, cannot require more than 1 year of eligibility service Always free to require less than 1 year of service Immediate entry (no service requirement) 250 hours in a calendar quarter 30 days of continuous service 23

24 Methods of Counting Service Hours of Service Hours employee actually works or is entitled to payment Elapsed Time Length of time employee is employed 24

25 Hours of Service Hours employee is paid, or entitled to payment for services rendered; Hours employee is paid, or entitled to payment, due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence; Back pay hours; and USERRA hours 25

26 Hours of Service May use equivalencies rather than counting actual hours Daily 10 hours Weekly 45 hours Semi-Monthly 95 hours Monthly 190 hours 26

27 Hours of Service Year of eligibility service: 1,000 hours (or less) during a 12-month computation period Initial computation period is always first 12 months of employment After the initial computation period, may shift to plan year May require less than 1,000 hours, but not more 27

28 Hours of Service Credit employees with a year of service at the end of computation period Example: Employee is hired March 1, If he completes 1,000 hours during his first 12 months of employment (March 1, February 28, 2014), he is credited with a year of service on February 28,

29 Elapsed Time Amount of time between hire date and severance date If an employee leaves employment and returns within 12 months, period of severance is counted Actual hours worked do not matter Year of Eligibility Service: 12-consecutive month period of employment 29

30 Counting Service Count all service, even when employee has not satisfied other eligibility conditions Credit service with all related employers 30

31 Other Conditions May exclude classifications of employees, if reasonable and nondiscriminatory Leased Employees & Independent Contractors Union Employees Non-Resident Aliens Employees of other members of controlled group Hourly or salaried employees Cannot explicitly exclude part-time and seasonal employees (but can require 1 year of service) Plan must pass 410(b) coverage testing 31

32 Plan Entry Dates After satisfying eligibility requirements, employees must reach plan Entry Date before they can begin participating Must have at least semi-annual Entry Dates (January 1 and July 1 for calendar year plans) 32

33 Plan Entry Dates Always free to use more frequent Entry Dates: Daily Payroll period Monthly Quarterly 33

34 Breaks in Service Hours of Service Computation period in which employee has less than 500 hours of service Elapsed Time 12-month period in which employee does not complete an hour of service 34

35 Breaks in Service Optional rules temporarily or permanently disregard pre-break service One Year Holdout Rule: Post-break, must complete 1 year of service before pre-break service is restored Service (and plan participation) restored retroactively Rule of Parity: If 0% vested plus 5 consecutive breaks in service, pre-break service is permanently disregarded Will not apply if participant has made 401(k) contributions 35

36 Rehires Upon rehire (provided optional break in service rules do not apply): Former participant will re-enter plan on date of rehire Employee who completed eligibility requirements, but did not reach Entry Date prior to termination, will enter plan on later of: Original plan Entry Date; or Date of rehire Employee who did not complete eligibility requirements prior to termination will still have to complete those requirements 36

37 Vesting

38 What is Vesting? All qualified plans must comply with minimum vesting standards under the Code and ERISA A participant becomes vested when he or she has acquired a nonforfeitable right to all or a portion of his or her accrued benefit Accrued benefits: DB plan: amount earned payable at normal retirement age DC plan: account balance 38

39 Benefits Subject to Vesting Benefits that are fully vested at all times: All employee contributions Some employer contributions Benefits subject to vesting: DB plan accrued benefits DC plan employer matching and profit sharing contributions (non-safe-harbor) 39

40 Vesting Schedules DC Plans 3 Year Cliff 2 to 6 Year Graded Years of Nonforfeitable % Service 0 0% 1 0% 2 0% 3 100% Years of Nonforfeitable % Service 0 0% 1 0% 2 20% 3 40% 4 60% 5 80% 6 100% 40

41 Vesting Schedules DB Plans 5 Year Cliff 3 to 7 Year Graded Years of Nonforfeitable % Service 0 0% 1 0% 2 0% 3 0% 4 0% 5 100% Years of Nonforfeitable % Service 0 0% 1 0% 2 0% 3 20% 4 40% 5 60% 6 80% 7 100% 41

42 Calculation of Vested Amount Amount of a participant s vested benefit at a given time = accrued benefit x nonforfeitable percentage Example DC plan with account balance subject to a 6 year graded vesting schedule Years Account Balance Nonforfeitable % Vested Benefit 0 $5, % $ $5, % $ $5, % $1, $5, % $2, $5, % $3, $5, % $4, $5, % $5,

43 Required Vesting Triggers Must be 100% vested upon attainment of normal retirement age, which is generally the earlier of: The age provided in the plan document; or Attainment of age 65 and 5 years of participation Termination or Partial Termination 43

44 Partial Termination Generally there is a partial termination when a large group of participants are terminated involuntarily in connection with a corporate event (e.g., layoffs,plant closings) Facts and circumstances test Presumption if 20% or greater turnover rate Can also occur if the plan is amended to cease future accruals and it results in the increased likelihood of a reversion to the plan sponsor 44

45 Partial Termination Turnover Rate: Participants who had an employer-initiated severance during period Participants at beginning of period + Participants added during period > 20% All affected participants must be fully vested in their benefits as of the date of a full or partial plan termination 45

46 Changes to Vesting Schedules ERISA anti-cutback rule prohibits elimination or reduction of accrued benefits Existing benefits everything is protected: New vesting schedules cannot reduce the nonforfeitable percentage of a participant s vested benefit Future accruals generally not protected: However, participants with 3 or more years of service may elect to remain under the old schedule 46

47 Permitted Forfeitures Forfeitures occur when terminated employees are not fully vested in employer contributions Five-year break-in-service Future service is taken into account only to determine vesting in benefits accrued after the break Cash-outs Repayment rights Should be allocated in the same plan year as forfeiture or the following year May be used to pay plan expenses or fund employer contributions 47

48 Defined Contribution Plan Benefits and Distributions

49 Employee Contributions Before-Tax Roth After-Tax Rollover Prior employer plan IRA 49

50 Employee Contributions Limits Before-Tax/Roth Combined $17,500 in 2013 Plus $5,500 catch-up if age 50 or older at any time during the year 50

51 Catch-Up Contributions Maximum $5,500 Allow for contributions in excess of: $17,500 limit Plan-specific limits (including limits on highly compensated employees) Limits imposed by ADP Test Potential for recharacterization of catch-ups if limit not actually reached 51

52 Employer Contributions Matching Contributions Example: employee 50% of first 6% of pay contributed by the Example: 100% of the first 2%, plus 50% of the next 2% of pay contributed by the employee Frequency payroll, quarterly, annually For a non-safe-harbor plan, catch-ups are not required to be matched, but be careful about wording plan document Safe-harbor plans must match catch-up contributions 52

53 Other Employer Contributions Profit-Sharing Example: 3% of compensation May be fixed or discretionary May have last day or 1,000 hours requirement 53

54 Money Purchase Contributions Fixed employer contribution (e.g., 3% of compensation) Virtually no active plans Plan may contain prior money purchase contributions subject to annuity distribution rules separate accounting required 54

55 Plan Accounts Include contributions and investment earnings Separate accounting for each contribution source (e.g., before-tax, Roth, match, profit sharing and rollover) Different distribution rules may apply to each source 55

56 Distribution Restrictions 401(k), Roth and QNEC No in-service distributions except for Hardship Age 59½ Disability Termination of the Plan (subject to conditions) Qualified Domestic Relations Orders Qualified Reservist Distribution 56

57 Hardship Distributions Safe Harbor Hardships: Medical expenses Principal residence purchase Tuition for post-secondary education Prevent eviction Funeral expenses Damage to principal residence IRS may approve other hardship grounds in the determination letter process 57

58 Hardship Distributions Limited to amount of hardship (may include taxes if plan provides) Must first take any other available distribution (e.g., distribution of rollover account if plan allows) Must take available loans (if loan would not worsen the hardship) 58

59 Hardship Distributions Suspension of Contributions Participant may not make 401(k), employee stock purchase plan or deferred compensation plan contributions Minimum 6 months suspension period Representation in Lieu of Suspension Hardship forms must include representation that participant has no other resources Plan must provide for this 59

60 Plan Loans Maximum Amounts: 50% of vested account $50,000 Maximum Term Non-residential 5 years Residential no IRS limit (typically 15 years) Level amortization Payments at least quarterly Grace Period no later than last day of following quarter Taxation on default 60

61 Distribution Forms Generally lump sums Installments (optional) Annuities (Money Purchase Accounts) 61

62 Age 70½ Distributions Distribution must begin by later of: Age 70½ Termination of Employment 5% owner Age 70½ Minimum amount based on year-end account balance 62

63 Death Benefits If married, spouse must be beneficiary unless spouse signs waiver Divorce will not automatically revoke a spousal beneficiary designation unless plan specifically provides Marriage will revoke a beneficiary designation 63

64 Consent Requirements Participant must consent to distribution unless Account $1,000 Account $5,000 and plan has auto rollover feature Participant attains plan s normal retirement age 64

65 Rollover Rights Participant must receive notice of rights to roll over most distributions (not installments over 10 years or annuities) Special notice required Direct rollover transfer from plan to plan or IRA Indirect Rollover within 60 days of receipt of check 65

66 Defined Benefit Plans Benefits and Distributions

67 Common Formulas Dollar multiplier Example: $25 x years of service Career average Example: 2% of each year s compensation Final average pay Example: 2% x years of service x average of last 5 years of compensation Cash balance 67

68 Distributions Normal Form Participant is married Qualified Joint and Survivor Annuity ( QJSA ) Joint and 50% to 100% survivor annuity with the participant s spouse as the joint annuitant Participant is not married Single life annuity (most common) 68

69 Distributions Optional Forms Required Qualified Optional Survivor Annuity ( QOSA ) Usually, joint and 75% survivor annuity with the participant s spouse as the joint annuitant 69

70 Distributions Optional Forms Optional Single life annuity for a married participant Joint and survivor annuity with different percentages and/or with a nonspouse Life annuity with term certain Social Security leveling option Lump sum 70

71 Distributions Optional Forms If married, spousal consent is required to elect any form of benefit other than a QJSA Certain optional forms of benefit may be unavailable depending on the plan s funding status Restrictions on lump sums to top 25 HCEs Pension Protection Act restrictions 71

72 In-Service Distributions No participant loans No in-service distributions before age 62 (or normal retirement age, if earlier) Uncommon in active plans because of recalculation issues 72

73 Early Distributions Actuarial reduction for early commencement Formula reduction if meet early retirement criteria (e.g., age 55 and 10 years of service) Less of a reduction than an actuarial reduction (or no reduction at all) Early retirement subsidy 73

74 Late Distributions Actuarial increase Before age 70½, may suspend benefit instead of providing actuarial increase Benefit suspension notice is required 74

75 Death Benefits Qualified Preretirement Survivor Annuity ( QPSA ) Survivor portion of QJSA (i.e., as little as 50% of the benefit the participant would have received) Payable to the participant s surviving spouse Other death benefits are permissible, but not required 75

76 PBGC Insurance Pension Benefit Guaranty Corporation Independent agency of the federal government Insures qualified defined benefit plans in the event of the plan sponsor s bankruptcy or insolvency Maximum insured benefit for 2013: $4, monthly single life annuity beginning at age 65 Specific authority to collect information and premiums from plan sponsors Oversees the plan termination process 76

77 403(b) Plans

78 General Features May only be maintained by public educational organizations, 501(c)(3) tax-exempt organizations, and certain ministers Usually funded through group or individual annuity contracts with an insurance company May be funded through custodial accounts and invested in mutual funds or, for churches, retirement income accounts May be exempt from ERISA in limited situations 78

79 Types of Contributions to 403(b) Plans Employees may defer their pay similar to a 401(k) plan Roth and after-tax are options for 403(b) plans Employee contributions are not subject to ADP testing Employers may make matching contributions Employers may make non-matching employer contributions 79

80 Features of 403(b) Plan Contributions Contributions are subject to annual limits similar to a 401(k) plan There is a special increased limit for participants with 15 years of service with certain types of organizations Automatic enrollment is permitted Employer nonelective contributions may continue past termination of employment for up to 5 years 80

81 Benefits Under 403(b) Plans The employer forwards contributions to the annuity provider Generally, the annuity contract determines the benefits provided by those contributions If funded by a custodial account, contributions are invested in mutual funds Contributions are subject to annual limits similar to a 401(k) plan 81

82 In-Service Payment Annuity contracts: Employee deferrals may not be distributed in-service except at age 59 ½, upon hardship Employer contributions are not subject to these restrictions, but generally may not be distributed before predetermined age and/or service conditions are met Custodial accounts only allow in-service withdrawals at age 59 ½ (for all contributions) or due to hardship (only for employee deferrals) Participant loans are permitted Qualified reservist distributions are permitted 82

83 Distributions Distributions may be in various forms, based on the terms of the plan document (if applicable), annuity contract and/or custodial account agreement Rollover distributions apply similar to 401(k) plans Required minimum distributions apply at later of termination or age 70 ½ 83

84 Death Benefits Generally, the accumulated value will provide a death benefit to the beneficiary Annuity contracts may provide life insurance coverage, as long as they are incidental to the retirement annuities provided Custodial accounts may not have life insurance contracts 84