Question

1.) Which of the following statements concerning defined-contribution plans that integrate with Social Security is correct?

Annual non-discrimination testing is required for a plan that integrates with Social Security.

If employees receive a contribution of 3% of total compensation, then an additional 3% of total compensation can also be contributed for compensation between the integration level and the income cap.

The maximum integration level is $275,000.

Only money-purchase pension plans can have a formula that integrates with Social Security.

2.) Which option below could happen in the event that a plan loan is defaulted upon for a participant who is 35 years old? (select all that apply)

The outstanding loan balance is fully taxable.

The loan can just rollover to an IRA.

A 10% penalty will be assessed on top of taxation.

Answer 1

1. Option 2 & 3 are correct.

Defined contribution plan refers to the method that involves fixed contribution on the oart of employees and maximum contribution is made by the employee. The accumulated fund is then made available to the retired employee.

According to IRC, it is allowed to collaborate benefits of employers retirement plan with social security benefits available to the employee. After such collaboration, employer can make contribution in two levels -

a. Paying a specified fixed amount,

b. Paying bit higher contribution above the fixed limit

However, this contribution cannot exceed a certain specified limit as per 401(I) which is known as permitted disparity.

2. Both First & Third Option applies here – Explanation is given below:

Two kinds of taxable distribution are triggered by Plan loans –

a. Deemed distributions and

b. Plan loan offsets.

Deemed distribution is a taxable event that occurs

(a) when certain loan requirements are not met (e.g., if the loan’s repayment term is too long or the level amortization requirement is not met) or

(b) upon a default by the participant if at that time he/she could not obtain a distribution. Although they result in taxable income, deemed distributions are not actual distributions and are not eligible rollover distributions.

On comparison, a plan loan offset is an actual distribution which takes place when a participant’s accrued benefit is reduced to repay a loan in accordance with the loan’s terms. That can occur if a participant defaults at a time when the participant could obtain a distribution (e.g., after attaining age of 59 ½), or the participant requests a distribution and the loan, by its terms, must be treated as in default if it is not immediately repaid.

Hence, it is deemed distribution because its defaulter is under the age of 59 ½, hence a loan that is in default is generally treated as a taxable distribution from the plan of the entire outstanding balance of the loan (a “deemed distribution”). Hence, first statement is correct.

A deemed distribution is treated as an actual distribution for purposes of determining the tax on the distribution, including any early distribution tax. A deemed distribution is not treated as an actual distribution for purposes of determining whether a plan satisfies the restrictions on in-service distributions applicable to certain plans. In addition, a deemed distribution is not eligible to be rolled over into an eligible retirement plan. Hence, second option is incorrect.

If a person cannot becomes a defaulter in repaying the loan, then the unpaid amount is considered to be a taxable distribution and you could face a 10% penalty if you are under the age of 59½. Hence, Third statement is also correct.

2.