105-9 Retirement Plan Selection for Employer-Sponsors

Question 1

Two types of retirement plans that may only be established for tax-exempt (nonprofit entities)

Answer 1

1. Section 403(b) plan

2. Section 457 plan

Question 2

4 primary factors that should guide the financial planner in recommending any type of retirement plan for a businessowner client

Answer 2

1. The owner’s retirement savings need
2. The owner’s current age
3. The owner’s attitude toward investment risk (for the owner and the employees)
4. The current financial condition of the business

Question 3

Reviewing and Selecting Among Available Plans - Plan Factors to Consider

Answer 3

1. How much of the plan can be invested in the employer’s securities
2. Whether or not the employer must make mandatory annual contributions or if the employer wants the flexibility to contribute each year
3. Can separate SIMPLE IRAs and SEPs by looking at the part-time or very low-paid workers. With a SEP, workers who make more than $600 in 2019 must be included in the plan. For a SIMPLE IRA, a worker must make $5k before receiving an employer contribution
4. SIMPLE 401k’s can offer retirement plan loans, whereas SEP IRA’s and SIMPLE IRA’s cannot
5. SIMPLE plans have a lower limit on contributions than older employer plans. The worker can only contribute $13,000 in 2019 unless she is 50 and older

Question 4

6 Primary Characteristics of any investment vehicle that need to be considered in assessing the asset’s potential suitability as a retirement plan asset

Answer 4

1. the investment’s stability in value, aka capital preservation
2. its ability to preserve the future purchasing power of the plan participant
3. the liquidity of the investment
4. the investment’s tax advantages
5. diversification properties
6. marketability

Question 5

Unrelated Business Taxable Income (UBTI)

Answer 5

Generally is considered the gross income derived from any unrelated trade or business regularly carried on by the retirement plan, less any deductions directly connected w/ carrying on this trade or business

Excluded from UBTI and do not count against the $1k/yr exclusion:

1. dividends, interest, royalties
2. rents from rental real estate owned by the trust
3. All gains or losses from the disposition of property, w/ certain exceptions
4. Certain amounts received from controlled entities and foreign corporations

Question 6

Advantages of purchasing life insurance in a qualified plan

Answer 6

1. It can satisfy the need for additional life insurance protection for the owner of a small business
2. It can generate an immediate income tax deduction for the payment of the life insurance premiums that may not otherwise be possible

Amount of life insurance that may be held inside a qualified plan is limited under law – this is known as an incidental benefit rule

Question 7

Amount of insurance held by the plan must meet 1 of the following 2 tests:

Answer 7

1. Percentage test: aggregate contributions paid for a life insurance policy owned by the plan on the lives of the plan participants may not exceed a certain % of the employer contributions to the plan as follows:
   A) no more than 50% of employer contributions to the plan may be used for the purchase of a whole life policy
   B) no more than 25% of the employer contributions to the plan may be used for the purchase of any other life insurance policy
2. 100 times test: death benefit payable from the life insurance policy cannot exceed 100 times the expected monthly benefit for the employee-participant

Defined benefit plans typically use the 100 times test rules in determining whether they have achieved compliance w/ the incidental benefit rules

Question 8

Pure Protection Cost

Answer 8

If a qualified plan owns life insurance on the life of a participant, the participant must include in her income the pure protection cost of life insurance provided by the plan

Measured by the difference between the policy face amount and the policy cash value

Amount of inclusion in taxable income is the lesser of actual cost of the insurance to the qualified plan or the Table 2001 cost as determined by a table in the Treasury Regulations

The lower of the total Table 2001 costs or the actual insurance cost may be recovered tax free from the plan death benefit. The pure insurance element of the plan death benefit is income tax free to the participant’s beneficiaries (as life insurance proceeds). The remainder of the distribution is taxable as a qualified plan distribution.

Question 9

Qualified longevity annuity contract (QLAC)

Answer 9

Available as an additional funding choice to IRA owners and Section 401(k) plan participants since 2015