Qualification Requirements

1. Qualification Requirements • every planner should have a basic understanding of qualification rules • complex Internal Revenue Code and regulatory requirements must be met in order to obtain the tax advantages • a summary of the rules is provided

2. Qualification Requirements • eligibility and coverage • nondiscrimination in benefits and contributions • vesting • funding (including deduction limits) • limitations on Benefits and Contributions • top-heavy requirements

3. Eligibility and Coverage: • Must cover a broad group of employees • Two types of rules satisfied • “age and service” or waiting period requirements • “overall coverage” and “participation” requirements

4. “Age and Service” or Waiting Period Requirements: • used to avoid burdening the plan with employees who terminate after short periods of service • cannot require • more than one year of service for eligibility • any employee who has attained the age of 21 must be allowed to enter plan after meeting one year of service requirement • alternative two-year waiting period available if plan provides immediate 100% vesting

5. “Overall Coverage” Tests • Ratio percentage test: • Plan must cover a percentage of nonhighly compensated employees that is at least 70% of the percentage of highly compensated employees • Average benefit test: • Plan must benefit a nondiscriminatory classification of employees and the average benefit, as a percentage of compensation, for all nonhighly compensated employees of the employer must be at least 70% of that for highly compensated employees

6. “Participation” Test • a defined benefit plan must also cover on each day of the plan year the lesser of: • 50 employees of the employer • The greater of • 40% or more of all employees of the employer • Two employees (or, if only one employee, that employee) • also commonly known as the 50/40 test

7. Highly Compensation Employee – Definition • Was a 5% owner at any time during either the current year of the preceding year, or • Received compensation for the preceding year in excess of $110,000 (as indexed for 2009) An employee is a highly compensation employee for a plan year if he:

8. Nondiscrimination in Benefits & Contributions • A defined contribution plan must generally be tested under the “contributions” test • A defined benefit plan must generally be tested under the “benefits” test A plan must be nondiscriminatory with respect to highly compensation employees either in terms of benefits or contributions:

9. Vesting • Portion of the benefit or account balance attributable to employee contributions must always be 100% vested (nonforfeitable) • Portion attribution to employer contributions (other than matching) must be vested under a specified vesting schedule

10. Vesting • Defined Benefit Plan employer contributions must vest one of the following vesting schedules: • 5-year vesting satisfied if an employee with at least five years of service is 100% vested • 3- to 7-year vesting is an employee is 20% vested after 3 years, 40% after 4 years, 60% after 5 years, 80% after 6 years and 100% after 7 years

11. Vesting • Defined Contribution Plans employer contributions must vest under one of the following vesting schedules: • 3-year vesting satisfied if an employee with at least three years of service is 100% vested • 2- to 6-year vesting is an employee is 20% vested after 2 years, 40% after 3 years, 60% after 4 years, 80% after 5 years and 100% after 6 years

12. Funding Requirements • Employee and employer contributions must be deposited into an irrevocable trust fund or insurance contract for the “exclusive benefit” of plan participants and their beneficiaries • Pension plans must meet minimum funding standards or be subject to a penalty • Profit-sharing plan contributions must meet “substantial and recurring” requirement

13. Deduction Limits Defined benefit plan • Limited to amount determined actuarially under IRC Section 404, or • The amount required to meet the minimum funding standards, if greater

14. Deduction Limits Combination defined benefit & defined contribution plan • limited to the greater of • 25% of compensation of all participants, or • The amount required to meet the minimum funding standards 10% penalty on nondeductible contributions by the employer to any plan

15. Limitations on Benefits and Contributions • Defined contribution limits – the “annual additions” to each participants account cannot exceed the lesser of: • 100% of the participant’s annual compensation, or • $49,000 (as indexed in 2009) • “Annual additions” are employer contributions, employee salary reductions, employee contributions, and plan forfeitures

16. Limitations on Benefits and Contributions • Compensation limit – only the first $245,000 (in 2009) of each employee’s annual compensation can be taken into account in the plan’s benefit or contribution formula

17. Top-Heavy Requirements • A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees • If a plan is top-heavy for a given year, it must provide • Faster vesting, 3-year or 6-year graded • Minimum benefits or contributions for non-key employees

18. Top-Heavy Requirements • A key employee is an employee who, at any time during the plan year, • An officer of the employer having annual compensation greater than $160,000 (as indexed for 2009) • A more-than-5% owner of the employer, or • A more-than-1% owner of the employer having annual compensation of more than $150,000

19. Top-Heavy Requirements • No more than 50 employees (or, if lesser, the greater of three or 10% of the employees) will be treated as officers