Qualified Plan Compliance

A qualified retirement plan must cover a wide range of employees, not just key personnel or business owners. To ensure compliance, there are specific rules about eligibility and coverage that need to be met.

Eligibility to Contribute to a Qualified Plan

To be eligible to contribute towards the plan, employees must satisfy the following conditions:

• Age and Service Requirements: For eligibility purposes, an employee should not be made to serve more than one year. This means that any employee who has worked for at least 1,000 hours during the year and is 21 years old or older should be allowed into the plan. However, if a plan provides immediate 100% vesting upon entry then it could have up to two years waiting period.

• No Maximum Age: There is no limit on how old one can be when joining such a type of plan.

Testing Requirements to Test Coverage of the Employee Plan

In order for a qualified plan to cover many employees, it has to meet either of these two tests:

1. Ratio Percentage Test: The latter test requires that the non-highly compensated employees get at least 70% of compensation as compared with highly compensated employees.

2. Average Benefit Test: For this test which is made up of two parts:

• A nondiscriminatory classification of employees.

• Non-highly compensated employees’ average benefit percentage should equal 70% or higher than their highly compensated counterparts.

For defined benefit plans there is another coverage requirement known as “50/40 test”. Under this test either 50 people or 40% total staff number whichever is smaller will have to be covered by the plan.

Exceptions to the Testing Requirements (Safe Harbor Rule)

The safe harbor rule simplifies compliance by automatically deeming certain plans as nondiscriminatory if they meet specific criteria outlined in a provided table. For example:

• Safe Harbor Example: If according to safe harbor table enough non-highly compensated employees are being covered by a company’s plan then it meets the nondiscriminatory classification requirement automatically

If the plan’s ratio is between safe harbor and unsafe harbor ratios, the IRS determines this on a case-by-case basis. Conversely, where the ratio falls below an unsafe threshold, it will automatically be treated as discriminatory.

Summary

In order to comply with qualification requirements, eligibility and coverage rules of strict nature should be followed by qualified plans:

• Employees must meet age and service requirements but cannot be excluded based on maximum age.

• Coverage must meet either the ratio percentage test or the average benefit test.

• Safe harbor provisions provide a straightforward way to ensure a plan meets nondiscrimination requirements.

By following these rules, business owners can create retirement plans that benefit a wide range of employees while remaining compliant with regulations.