5. Retirement Planning & Employee Benefits

Question 1

ERISA Plans must provide a Summary Plan Description on an ______ basis.

Answer 1

ERISA Plans must provide a Summary Plan Description on an annual basis.

Question 2

Employer must make a contribution

Money Purchase Plan (Defined Contribution Plan)
Target Benefit Plan (Defined Contribution Plan)

Employer must provide guaranteed benefit:

Cash Balance Plan
Defined Benefit Plan

Answer 2

None

Question 3

Highly Compensated Employee:

Greater than __% owner during previous or current year
Spouse, child, grandchild, or parent of a __%+ owner
Compensation greater than $________ in the preceding year

Former employees may qualify if:
They were highly compensated employees when they separated from service, or
They were highly compensated employees at any time after attaining age ___ .

Answer 3

Highly Compensated Employee:

Greater than 5% owner during previous or current year
Spouse, child, grandchild, or parent of a 5%+ owner
Compensation greater than $135,000 in the preceding year

Former employees may qualify if:
They were highly compensated employees when they separated from service, or
They were highly compensated employees at any time after attaining age 55.

Question 4

Top-Paid Group: Employee in the top __% of compensation.

Answer 4

Top-Paid Group: Employee in the top 20% of compensation.

Question 5

Safe Harbor Test: Plan covers at least __% of all eligible non-highly compensated employees, it passes.

Additionally, all defined benefit plans must pass the 50/40 test. The 50/40 test requires the defined benefit plan to cover the lessor of
__ employees, or
__% or more of all eligible employees

Answer 5

Safe Harbor Test: Plan covers at least 70% of all eligible non-highly compensated employees, it passes.

Additionally, all defined benefit plans must pass the 50/40 test. The 50/40 test requires the defined benefit plan to cover the lessor of
50 employees, or
40% or more of all eligible employees

Question 6

Ratio Percentage Test: Percentage of non-highly compensated employees covered by the plan is at least __% of the percentage of the highly compensated employees covered by the plan, it passes.

The non-highly compensated employee coverage ratio is 2 of 4, 50%. The highly compensated employee coverage is 8 of 18, 44.44%. Divide 0.50 by 0.44. The ratio percentage test is 112.5% which is higher than the minimum 70%, and the plan passes the test.

Answer 6

Ratio Percentage Test: Percentage of non-highly compensated employees covered by the plan is at least 70% of the percentage of the highly compensated employees covered by the plan, it passes.

The non-highly compensated employee coverage ratio is 2 of 4, 50%. The highly compensated employee coverage is 8 of 18, 44.44%. Divide 0.50 by 0.44. The ratio percentage test is 112.5% which is higher than the minimum 70%, and the plan passes the test.

Question 7

Average Benefits Test: The average benefit enjoyed by the non-highly compensated employees covered by the plan is at least __% of the average benefit enjoyed by the highly compensated employees covered by the plan, it passes.

Answer 7

Average Benefits Test: The average benefit enjoyed by the non-highly compensated employees covered by the plan is at least 70% of the average benefit enjoyed by the highly compensated employees covered by the plan, it passes.

Question 8

Two ways to integrate defined benefit formulas with Social Security:

The Excess Method: The plan defines a level of compensation called the integration level. The plan then provides a higher rate of benefits for compensation above the integration level.

Benefit Percentage can NOT exceed the lessor of:
2x the base percentage, or
The base percentage plus 5.7%

The Offset Method: Plan formula is reduced by a fixed amount or a formula amount that is designed to represent the existence of Social Security benefits. There is no integration level. No more than half of the benefit provided under the formula without the offset may be taken away by an offset.

For example, if a plan formula provides 50% of the final average compensation with an offset, even the lowest-paid employee must receive at least 25% of the final average compensation from the plan.

Answer 8

None

Question 9

Vesting for Defined Contribution Plans:

__-Year Cliff Vest of 100% or ___ to ___ Year Graded Vesting

Answer 9

3-Year Cliff Vest of 100% or 2 to 6 Year Graded Vesting

Question 10

Vesting for Defined Benefit Plans:

__-Year Cliff Vest of 100% or ___ to ___ Year Graded Vesting

Answer 10

5-Year Cliff Vest of 100% or 3 to 7 Year Graded Vesting

Question 11

For all qualified plans, a further limitation on plan benefits or contributions is that only the first $_______ (2022) of each employee’s annual compensation can be taken into account in the plan’s benefit or contribution formula. This is referred to as covered compensation.

Answer 11

$305,000

Question 12

Key Employee: Greater than a __% owner or an officer of the employer having annual compensation greater than $_______ or a greater than __% owner whose salary exceeds $_________

Highly Compensated Employee: More than a __% owner or received compensation in excess of $_________ (2022) (indexed).

Answer 12

Key Employee: Greater than a 5% owner or an officer of the employer having annual compensation greater than $200,000 or a greater than 1% owner whose salary exceeds $150,000

Highly Compensated Employee: More than a 5% owner or received compensation in excess of $135,000 (2022) (indexed).

Question 13

(Thrift) Savings Plan:

______-tax employee contributions
Can have employer contributions (non-deductible or deductible?)
Earnings are taxed upon distribution (tax-_________)
Can be used as an add on to a 401(k)

Answer 13

After-tax employee contributions
Can have employer contributions (deductible)
Earnings are taxed upon distribution (tax-deferred)
Can be used as an add on to a 401(k)

Question 14

Actual Deferral Percentage: Required to prevent the plan from discriminating in favor of highly compensated employees. For ________ contributions.

Actual Contribution Percentage: For _________ contributions.

Answer 14

Actual Deferral Percentage: Required to prevent the plan from discriminating in favor of highly compensated employees. For employee contributions.

Actual Contribution Percentage: For employer contributions.

Question 15

The general rule for an employee’s qualified plan participation eligibility is age __ and __ year of service.

Answer 15

The general rule for an employee’s qualified plan participation eligibility is age 21 and 1 year of service.

Question 16

Non-Qualified Retirement Plans

Employer receives a deduction for contributions when the employee _____________.
_______ discriminate
The qualified vesting plan rules do or do not apply if the plan covers rank-and-file employees?
The qualified vesting rules do or do not apply if the plan covers a select group of management or highly compensated employees.

Answer 16

Employer receives a deduction for contributions when the employee takes withdrawals.
Can discriminate
The qualified vesting plan rules apply if the plan covers rank-and-file employees.
The qualified vesting rules do not apply if the plan covers a select group of management or highly compensated employees.

Question 17

Do unfunded or funded plans have to follow ERISA vesting requirements?

Answer 17

Funded plans must follow ERISA vesting requirements

Question 18

An amount is treated as received for income tax purposes, even if it is not actually received, if it is credited to the employee’s account, set aside, or otherwise made available.

Answer 18

Constructive Doctrine

Question 19

A non-qualified retirement plan that provides retirement benefits to selected employees only.

Answer 19

Supplemental Executive Retirement Plans (SERPS)

Question 20

NSOs
Employee pays ordinary income taxes on the exercise. Employer gets deduction on this.

ISOs
Employer doesn’t get a tax deduction at all

Answer 20

None

Question 21

Employees recognize taxable income when benefit is paid and this is when the employer gets the deduction. Some stock plan…

Answer 21

A Phantom Stock Plan

Question 22

Can someone max out their 457 and still max out their 401(k)/403(b)/etc.?

Answer 22

Yes

Question 23

Which of the following are Governmental Retirement Plan Options:

SIMPLE IRA
Pension
401(k)
SIMPLE 401(k)
403(b)

Answer 23

Governmental Retirement Plan Options:

SIMPLE IRA
Pension
NOT 401(k)
NOT SIMPLE 401(k)
NOT 403(b)

Question 24

457 Plans:

Governmental employers and church-related organizations are or are not subject to ERISA?

Governmental plans do not have to be or must be funded?

Just a note: Participating in a 457 Plan is not considered an active plan participant (like a 401(k), 403(b), etc.) and doesn’t affect the IRA deductibility.

Answer 24

Are NOT subject to ERISA

They must be funded

Question 25

SEP IRA:

Must cover employees __+ and have worked for the employer __ of the last __ calendar years (part-time work counts). Employer can elect to lower these requirements.

Contributions are NOT needed if compensation is less than $___.

Note: The plan can exclude employees who are members of collective bargaining units if retirement benefits have been the subject of good faith bargaining. Nonresident aliens can also be excluded.

Note: Direct employer contributions to a SEP are not subject to Social Security (FICA) or federal unemployment (FUTA) taxes.

Answer 25

Must cover employees 21+ and have worked for the employer 3 of the last 5 calendar years (part-time work counts). Employer can elect to lower these requirements.

Contributions are NOT needed if compensation is less than $650.

The plan can exclude employees who are members of collective bargaining units if retirement benefits have been the subject of good faith bargaining. Nonresident aliens can also be excluded.

Direct employer contributions to a SEP are not subject to Social Security (FICA) or federal unemployment (FUTA) taxes.

Question 26

SIMPLE IRA:

Up to $_______/year with $_____/year catch-up contributions (age 50+)

____ or fewer employees (only employees with at least $_______ compensation for the preceding year are counted).

Premature Distributions have __% penalty. If it is within the first two years of participation, the penalty is ___%.

Note: Direct employer contributions are not subject to the Social Security Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) taxes. However, employee salary reduction contributions are subject to FICA and FUTA.

Answer 26

Up to $14,000/year with $3,000/year catch-up contributions (age 50+)

100 or fewer employees (only employees with at least $5,000 compensation for the preceding year are counted).

Premature Distributions have 10% penalty. If it is within the first two years of participation, the penalty is 25%.

Note: Direct employer contributions are not subject to the Social Security Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) taxes. However, employee salary reduction contributions are subject to FICA and FUTA.

Question 27

403(b) Plans:

Salary reductions in a 403(b) plan are subject to catch-up provisions that allow certain employees with __ or more years of service to contribute in excess of the elective deferral limit. The 403(b) Lifetime Catch-up is called the __-year rule in IRS publication 571 and allows for an additional $3,000 to be contributed.

Note: Roth 403(b) withdrawals are pro-rata (NOT FIFO). Would be best to transfer to a Roth IRA to get FIFO treatment prior to withdrawing.

Answer 27

Salary reductions in a 403(b) plan are subject to catch-up provisions that allow certain employees with 15 or more years of service to contribute in excess of the elective deferral limit. The 403(b) Lifetime Catch-up is called the 15-year rule in IRS publication 571 and allows for an additional $3,000 to be contributed.

Question 28

HR10 (Keogh) Plans:

However, in the case of a more-than-__% owner, distributions/payments must begin by April 1 of the year after attainment of age 72, regardless of whether the participant has retired.

Answer 28

However, in the case of a more-than-5% owner, distributions/payments must begin by April 1 of the year after attainment of age 72, regardless of whether the participant has retired.

Question 29

Profit Sharing Plans:

Can contribute up to ____% of covered compensation of plan participants can be made.

Doesn’t have to contribute every year but must make substantial and recurring contributions.

Answer 29

Can contribute up to 225% of covered compensation of plan participants can be made.

Question 30

Money Purchase Plans:

Can contribute up to __% of earned income.

These require the employer to make contributions to each employee’s and self-employed person’s account each year equal to the percentage of compensation stated in the plan. Such contributions are mandatory, regardless of good or bad business results for the year.

Answer 30

Can contribute up to 25% of earned income.

Question 31

Qualified plans must offer at least __ investment alternatives

Answer 31

Qualified plans must offer at least 3 investment alternatives

Question 32

If ordinary (whole life) life insurance is used in a defined benefit plan, what is the maximum death benefit the life insurance may provide without violating the “incidental” test for life insurance in a qualified plan?

In a defined contribution plan, no more than __% of contributions on behalf of a participant may be allocated to ordinary (whole) life insurance.

Answer 32

No more than 100 times the projected monthly pension benefit

In a defined contribution plan, no more than 50% of contributions on behalf of a participant may be allocated to ordinary (whole) life insurance.

Question 33

____ = Qualified Plans or Tax Advantages Plans

All ______ are _______, but not all ________ plans are _________.

Answer 33

All qualified plans are tax advantaged, but not all tax advantaged plans are qualified.

Question 34

An election to waive the joint and survivor form must be made before the annuity starting date. The annuity starting dates commences after what time from?

__ Days

Answer 34

90 Days

Question 35

When stock is given as an employer match, you deal with Net Unrealized Appreciation (NUA). The match is taxed as ________ and any gains are taxed at _________.

Answer 35

The match is taxed as Ordinary income and any gains are taxed at Capital Gains rates.

Question 36

Just for notes:

Keogh Plan contributions on behalf of the owner are based on earned income, not compensation.

SEPs, SIMPLEs & 403(b) Plans are Tax Advantaged Plans and they are NOT Qualified Plans.

Answer 36

None

Question 37

Cash Balance Plans are Defined Benefit Plans so the employer bears the investment risk.

Answer 37

None