Qualification Basics and Minimum Participation Requirements

Qualification Basics and Minimum Participation Requirements
Lecture # 2Chapters 3 and 4
Qualification Requirements
Written plan document–must have a definite written program or arrangementTrust -all plan assets must be held in trust (except insurance contracts)Exclusive benefit -plan must be operated for the exclusive benefit of participants and beneficiariesMinimum participation standards -plan is limited in its ability to impose minimum age, minimum service, or maximum age for participation
Qualification Requirements Cont’d
Minimum Accrual and Vesting -benefits must be earned (accrue) and vest at certain minimum rates and become non-forfeitable after certain time periodsCommencement of benefits -plan must provided that, unless the participant elects otherwise elects, payment of benefits will begin no later than certain date.Spousal annuities -plan must provide participants who are married joint and survivor annuitySee Exception: Both participant and spouse elects another form
Qualification Requirements Cont’d
Plan Mergers -plan must provide the determination of participant’s benefit after merger or transfer of assets/liabilities to another planAssignment and Alienation -plan must provide benefits may not be assigned or alienatedSecurity for significant underfunding -Limitation on amendments to a DB plan if underfunding would result (exception for Multiemployer Plans) unless security is provided
Qualification Requirements Cont’dIRC -No ERISA Counterpart Sections
Permanency –plan document must imply permanent programIncidental Benefits -plan primarily provides retirement benefits. Other benefits (death, life insurance, disabilityetc) incidentalMinimum Coverage -plan must cover a fair cross section of employees, and a fair percentage of non-highly compensated employees compared to highly compensated employees
Qualification Requirements Cont’d
Nondiscrimination -contribution, benefits, rights and features of the plan cannot discriminate in favor of the highly-compensated employeesFull Vesting Upon Plan Termination –Plan must provide for full vesting upon termination (in certain cases upon partial termination)Minimum Distribution –generallyplan must commence distribution upon participant reaching age 701/2Exception apply
Qualification Requirements Cont’d
Limitation on Contributions, Benefits, Elective Deferrals -plan must provide for benefits or contributions that do not exceed statutory limits (See: IRC 415, 401(g), 4019(a)(16), (30)Limitation on Includible Compensation -plan must limit the annual compensation of each employee taken into account under the plan (see: IRC 401(a)(17))Defined Benefit Plan Forfeitures –forfeitures cannot be used to increase benefits
Qualification Requirements Cont’d
Top-Heavy Requirements –plan must have required allocation of accrued benefits if becomes “top heavy”Direct Transfer of Eligible Rollover Distribution –plan must allow participants to elect direct “trustee-to-trustee” rollover of “eligible” distributionsMinimum Funding -generally DB and Money Purchase plansFailure to meet minimum funding requirements do not lead to disqualification. Excise tax applies
Qualification Requirements Cont’d
Anti-Cutback Rule –plan must prohibit cutback of participant’s earned benefit(s). May reduce prospectively (not retroactively)401(k) ADP Testing and Distribution RequirementReporting and Disclosure -Plan must meet certain reporting and disclosure requirements quarterly/annually
Qualification Requirements Cont’d
Mechanics of qualification -plan is not required to seek an advance determination that it meets the qualification requirementsBUTrecommendedForm 5300 – IRS will issue when advance determination is requestedRemedial Amendment Period:plan may be retroactively amended to bring into compliance with all qualification requirementsGenerally applies after statutory changes
Minimum Participation RequirementsEligibility
Minimum Age and Service RequirementsPlan may require both age and service requirementsAge RequirementAge cannot exceed 21 years – may be more liberalPlan cannot have a maximum age for participationException: plan maintained by educational institutions see: IRC 410(a)(1)(B)(ii); ERISA 202(a)(1)(B)(ii)Years of Service RequirementIn general, plancannotrequire, as a condition of participation, that an employee complete a period of service extending beyondlater of:Date employee reaches age 21,orDate employee completes one year of service (see:exception for 2 years of service rule)
Minimum Participation Requirements Cont’d - Eligibility
General Rule: One year service requirement–plan maynotrequire more than one year of service for eligibility purposesException: Two year service rule-if the plan provides for two years of service on condition of becoming a participant, then must provide for immediate vesting, i.e. participants as 100% vesting in all benefits that accrueThis option is not available to 401(k) plans
Minimum Participation RequirementsCont’d - Eligibility
Measuring a year of Service -plan may use “Counting method” or “Elapse time”Counting Method:must keep track of service based on “eligibility computation period” – at least 1,000 hours of service credited during the eligibility computation periodElapse Time Method:service is credited based on the employee’s period of employmentPlan determines employee’s period of service and translate into whole years of service (eligibility is determined by treating 12 months of service as equivalent to a year of service)employee’s period of service begins on the date first credited with an hour of service for performance of duties
Minimum Participation RequirementsCont’d - Eligibility
Definition of Hour of Service –atime of service determined under regulations prescribed by the Secretary of LaborHours credited for performance of services: Each hour of service for which employee is paid, or entitled to payment for performance of duties for the employer (hours worked)Hours credited for non-performance of services:Each hour of service for which employee is paid, or entitled to payment for which no duties are performed (paid leave)Hours credited with respect to back pay award:Each hour for which back pay is either awarded or agreed to by the employer (back pay)
Minimum Participation RequirementsCont’d - Eligibility
Equivalency MethodsNon-hourly workers -If employer does not want to keep track of hours – can use equivalency method (skewed in favor of employee)Equivalency based on working time –counthours workedorregular timeEquivalency based on period of employment– hours credited based on a unit of time. Actual hours not usedEquivalency based on earnings –hours based on employee’s hourly rate of earnings for the computation period (Monthly or annual salariedemployees’ earnings)
Minimum Participation RequirementsCont’d - Eligibility
No double credit allowed:no credit is given if the same hours have already been creditedEntitled to be paid:to ensure employee receives proper credit regardless to if employer actually paysOption if 1000 hours not met:if the employee does not have 1,000 hours during the eligible computation period have two options:Keep counting from anniversary date to anniversary dateswitch to plan year (plan language must allow)
Minimum Participation RequirementsCont’d - Eligibility
Entry Dates:the dates a eligible employee must begin participating in the plan. Assume the employee has completed one year of service. When can the employee begin participation?Maximum Wait Time:To be qualified, a plan must provide that an otherwise eligible employee can participateno later than theearlier of:Thefirst day of the first plan year beginning afterthe date on which the employeesatisfies the minimum age and servicerequirements,ORThe date6 months afterthe date on which the employeesatisfied the minimum age and servicerequirements. See IRC 410(a)(4)Exception:Where the employee is separated from service
Minimum Participation RequirementsCont’d - Eligibility
Semi-annual entry dates:plan can provide a semi-annual entry date system,i.e., first day of plan year and first day of the 7thmonth of the plan yearNote:For purposes of participation, vesting, and benefit accrual, generally determined by reference to “years of service” (participation; vesting) and “years of participation” (benefit accrual”).Eligibility Computation period:The 12-month period in which the “hours of service” are measured.
Minimum Participation RequirementsCont’d - Eligibility
General Rule:computation period is12 consecutive months, beginning with the employee’s employment commencement date (“ECD”) = initial eligibility computation period (complete 1,000 hours of service)Hours credited for earlier periodnotaccumulated, i.e., not rolled over from one period to the nextSubsequent computation period:plan can designate subsequent computation period to begin after the initial computation period (or ECD). Subsequent computation periods would begin on the first day of the plan year following the end of the initial computation period.Generally, some overlap between first and second computation periodsBreak In Service:When an employee terminates employment, generally active participation in the plan ceases. Same effect can occur if employee’s schedule cause hours of service to fall below required level.What happens if employee returns to employer?When does a break in service occur?How does it affect the employee’s re-entry to the plan ?
Minimum Participation RequirementsCont’d - Eligibility
Break in service - General Rule:For eligibility purposes, the plan use the eligibility computation period to determine if a break in service has occurredDefinition of a Break in Service: a 12-month period (consecutive) during which an employee iscreditedwithnot more than 500 hours of serviceplan must include specific provision that address the break in service ruleIf the plan does not include such language, an employee who has already satisfied the eligibility requirements re-enters the plan immediately on re-employment dateEmployers would like to disregard service earned prior to break in service. Two rules applyto determine if this can be done
Minimum Participation RequirementsCont’d - Eligibility
Rules that generally preclude disregarding “pre-break” service:One-Year Hold out Rule:(temporarilydisregard prior service).If the employee has a one-year break in service, suspend taking prior service into accountuntilthe employee has completed a year of service after such break in service.Retroactively reinstate prior years of serviceRule of Parity:where the employee has consecutive one-year breaks in service (i.e., more than one year break) prior years of service can be disregarded if the number ofi-year breaks in service equals or exceeds the greater of:Five (5),ORThe aggregate number of years of service before such period-break in service
Minimum Participation RequirementsCont’d - Eligibility
Requirements to be met for Rule of Parity:No double counting–years of service required to be taken into account for non-vested participants cannot be counted in subsequent break in service periodsSpecial rule for certain leave: participants on maternity, paternity, FMLA or military leave under USERRA must be creditedup to 501 hours of serviceFMLA = Family Medical Leave ActUSERRA – Uniform Services Employment and Re-employment ActThis rule applies solely for determining whether a break in servicehas occurred.