105-4 Tax-Advantaged and Non-Q Plans Flashcards
Tax-advantaged
Means the plans have very similar requirements to qualified retirement plans, but the provisions of each plan are addressed in a separate Tax Code section other than Section 401, which applies to qualified plans
2 Types of Savings Incentive Match Plans for Employees
- SIMPLE IRAs
- SIMPLE 401(k)
Employee contributions excluded from employee’s gross income but are still subject to payroll taxes
No ROTH/after-tax contributions
Eligibility for SIMPLEs
Employer is eligible to establish a SIMPLE if:
- 100 or fewer employees who earned at least 5k during prior year
- does not maintain another employer-sponsored retirement plan
Note* self-employed individuals can establish a SIMPLE
SIMPLE IRA
Less expensive that qualified plan to administer
Employees may contribute up to $13k (2019)
Individuals age 50+ may make catch-up contribution of $3k (2019)
Salary reduction contributions subject to FICA & FUTA withholding
Employee is 100% vested in both elective deferrals and employer contributions
Employer contributions:
- Employer match up to 3% of employee compensation
- 2% of compensation nonelective contribution
25% premature withdrawal penalty applies to distributions from a SIMPLE IRA during first 2 years of plan participation (does not apply to SIMPLE 401k)
Simplified Employee Pension (SEP) plan
Employer-sponsored IRA in which the employer agrees to contribute retirement monies on behalf of employees on a nondiscriminatory and fully vested basis
Major advantage: simplicity
Plan requirements:
- must cover all employees age 21+ who have worked for employer for 3 out of preceding 5 yrs
- Contributions must be made on behalf of any employee whose compensation was at least $600 (2019)
- SEP contributions can only be made by the employer
Note* SEP has low amount of income required for employee to be covered (SIMPLE has higher #)
Contribution % same for all participants in the plan
Plan may exclude employees who are members of unions
SEP contributions limited to lesser of:
A) 25% of employee’s compensation -or-
B) $56,000 (2019)
No ROTH contributions into a SEP plan
Employer may deduct contributions to a SEP plan up to the contribution limit
Top-Heavy Rules of SEP Plan
If the SEP plan is determined to be top-heavy then the employer must make a minimum contribution of 3% of the employee’s compensation for each non-key employee plan participant
Salary Reduction SEP (SARSEP)
As of Jan 1, 1997 - employers can no longer establish a salary reduction SEP (SARSEP)
Plans still exist, however
Contribution limit: $19k (2019), Individuals 50+ catch-up contribution of $6k (2019)
Tax-Sheltered Annuity (TSA)/Section 403(B) Plan
Tax-deferred retirement plan that may only be adopted by certain private, tax-exempt organizations or Section 501(c)(3) organizations
Must be made available to all employees
If employer contributes, contribution limit lesser of 100% of employee compensation (up to $280k in 2019) or $56k (2019)
Max elective deferrals limited to $19k (2019)
2 catch-up provisions:
A) Regular catch-up provision of $6k (2019) for individuals age 50+
B) Special catch-up provision whereby a participant who has worked for a qualifying employer for 15 yrs may increase his contribution limit by an amount equal to the lesser of $3k , $15k reduced by amounts previously deferred under special catch-up, or $5k multiplied by the employee’s yrs of server w/ employer minus sum of all prior salary deferrals
403(b) advantages over 401(k) plan
- Section 403(b) plan not generally subject to special (ADP and ACP) nondiscrimination testing
- Section 403(b) plan sponsored by a governmental or church organization is not subject to ERISA reporting and disclosure requirements
- Increased limit on salary reduction contributions applies for employees who have completed 15 years of service w/ qualifying employers
TSA/Section 403(b) plan most appropriate when:
- employee works for a public or private tax-exempt employer
- employer wants to provide a tax-deferred retirement plan for employees w/ a minimum of administrative expenses
- employees are willing to accept the investment risk
- plan similar to a Section 401(k) plan is desired by a nonprofit employer
Top-Hat Plans
SERPs and non-q deferred compensation plans
Reserved for a select group of management of HCEs
Unfunded plan: employee assumes the risk that the employer may later refuse to pay benefits
*contrast this w/ funded plan
Section 457 Plan
Non-q deferred compensation plan established by private tax-exempt employer (other than a church) or state or local gov for the benefit of its employees
Generally cannot allow the plan participants to take $ from the plan until age 70.5 unless they separate from service or there is unforeseeable emergency
-However, one-time in-service withdrawal may be permitted
Since 2011, ROTH accounts are permitted for plans sponsored by state and local governments
Employee contributions cannot exceed lesser of:
A) $19k (2019) or
B) 100% of employee’s compensation
Distributions from 457 plan usually not subject to an early withdrawal penalty
Special catch-up provisions that apply to either type of Section 457 Plan
During participant’s last 3 yrs of employment before the plan’s normal retirement age, the limit on elective deferrals is increased to lesser of:
A) twice amount of the regular elective deferral limit ($38k in 2019) -or-
B) the sum of (a) the otherwise applicable limit for the year plus (b) the amount by which the applicable limit in the preceding yrs exceeded the participant’s actual deferral for those years
The employee-participant must aggregate all elective deferrals from:
- traditional and ROTH Section 401(k) plans
- SIMPLE IRA’s and SIMPLE 401(k)s
- SARSEP plans
- Section 403(b) plans
One exception to this aggregation rule is when the individual participates in one of the aforementioned plans and a Section 457 plan
ADP / ACP Testing Rules for Section 401(b) plans
One way to remember that Section 403(b) plans must pass ACP testing and not ADP testing is that Section 403(b) plans are for 501(c)(3) organizations.
