Module 1 - An Overview of Retirement Planning.docx

If a non profit is not expressly exempt from erisa

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responsible for administering the plan. If a non-profit is not expressly exempt from ERISA, then it will still apply. If ERISA does apply, then the 403(b) plan will need to pass a coverage test called a 410(b) test. The 410(b) test is a little complex, but basically, it says that you must cover a certain percentage of NHCEs (somewhere between 60-70%) to avoid compliance issues. You will not need to calculate it for this course, but if you are interested to see what it is, check out this website (Links to an external site.)Links to an external site. . If matching contributions from the employer are involved, then the ACP test will apply. If the employer offers non-elective contributions, then they must satisfy a 401(a)(4) test. You will not need to physically calculate the 401(a)(4) test...Just be aware that these tests are special for 403(b)s and that they exist. If you want to see the 401(a)(4) test, then check here (Links to an external site.)Links to an external site. .
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A 403(b) plan can use either mutual funds or annuity products as investment vehicles. If they choose mutual funds, then ERISA is back on the table, even if they are an exempt entity. This is a very important rule. Top-Heavy Rules The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) added another layer of compliance testing for coverage of rank-and-file. This testing is called the top-heavy rules and it is very simple to apply. We defined “highly compensated employees” in Module 1 Lesson 5. This category of employees was used for the ADP and ACP testing applicable to 401(k) accounts. Now, we have a new category of elite employees. For top-heavy testing, the upper echelon of employees is called key employees . Key employees meet one of three criteria. The first criteria is that they are a 5% owner. This threshold is the same as for a highly compensated employee. The second criteria is that a key employee may only own 1% of the business but earn at least $150,000 (2018 limit) in salary. The third criteria of a key employee is reserved for officers of the company who earn a salary of at least $175,000 (2018 limit) irrespective of ownership interest. These last two criteria are different from an HCE. Someone earning $121,000 per year could be considered an HCE but not a key employee! A defined-benefit plan is deemed to be top-heavy if 60% of the present value of the expected future benefits are allocated to key employees. A defined-contribution plan is deemed to be top-heavy if 60% of the current account balances are allocated to key employees. At least the percentages are the same as a memory cue! What happens if a plan is deemed to be top-heavy? In this instance, the plan must do two things: have a special vesting schedule, and implement a special contribution system. A top-heavy defined benefit plan must have a vesting schedule that is at least as generous as a 3-year cliff vesting schedule or a 6-year graded vesting schedule. That should sound familiar because those are already the mandated vesting schedules for a DC plan. They do not have any extra vesting requirement if they are deemed to be top-heavy. The defined benefit plans, on the other
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