CFP - 5 Retirement Planning Flashcards
What are the 3 retirement needs models?
- Pure annuity model
- Capital preservation model
- Purchasing power preservation model
What is the most common retirement needs model?
Pure annuity
Does pure annuity model use a pretax or post tax basis?
Pretax
What are the 4 steps for the pure annuity retirement needs model?
- Determine the wage replacement ratio (WRR) adjusted for SS
- Adjust the need for inflation
- Find the present value (BEGIN mode) using an inflation adjusted earnings rate
- Determine the amount to save during the work life expectancy
What is the capital preservation model?
Maintains the original balance needed at retirement under the pure annuity model for the entire retirement life expectancy
What is the purchasing power model?
Maintains the purchasing power of the original pure annuity capital balance at retirment
What is the difference between the capital preservation model and purchasing power model?
Purchasing power model uses an inflation adjusted rate
What is the most conservative retirement needs model?
Purchasing power model
What are the 5 ERISA requirements?
- Coverage
- Participation
- Vesting
- Reporting and disclosure
- Fiduciary requirements
What are the four titles of ERISA? (way to replace pay)
- Workers’ rights (collecting benefits, non-discrimination, funding requirements)
- Tax code treatment
- Regulatory and administrative framework
- PBGC
What are the 4 duties of the DOL with regards to retirement plans?
- Reporting and disclosure
- Defining prohibited transactions
- Governing plan fiduciary actions
- Interpretation of law
The DOL defines an individual or corporation as a fiduciary if they meet any of the 3 characteristics:
- Exercises discretionary authority or control over management of the plan or assets
- Renders investment advice for a fee
- Has discretionary responsibility or authority in administration of the plan
What insures plan participants against loss of benefits due to the termination of a pension plan?
PBGC - Pension Benefit Guaranty Corporation
What types of plans does the PBGC insure?
Traditional defined benefit and cash balance plans only - NOT DEFINED CONTRIBUTION PLANS
What is the maximum level of PBGC benefit protection for 2018?
$65,045 ($5,420 monthly)
Professional service employers with ____ or fewer active participants are exempt from PBGC insurance requirements.
25
Can the PBGC terminate a plan?
Yes
What are the 3 reasons the PBGC can terminate a plan?
- Minimum funding standards are not met
- Benefits cannot be paid when due
- The long-run liability of the company to the PBGC is expected to increase unreasonably
What are prohibited transactions?
Transactions contrary to the interest of plan participants
What re the 5 prohibited transactions for retirement plans?
- Sale, exchange, or lease of property between the plan and a party of interest.
- Loan “ “
- Transfer of plan assets for the benefit of a party in interest
- Acquisition of employer securities or real property in excess of legal limits
- Self dealing
What are the 4 qualifications to file a 5500-SF?
- less than 25 participants
- Eligible for the small plan audit waiver
- No employer securities held
- Have 100% of assets in investments with readily determinable FMV
Who can file a 5500-EZ?
Individual and/or spouse or two partners with spouses
If requirements for 5500-EZ are met, but the plan has less than $_______ in assets, a 5500 doesn’t need to be filed.
$250,000
What 4 reports must plan administrators complete?
- Summary plan description (SPD)
- Summary annual report (SAR)
- Summary of material modification (SMM)
- Individual accrued benefit statement
What are the employer tax advantages of a qualified retirement plan?
Immediate deductibility of all contributions made to the plan
What are the 4 tax advantaged retirement plans that aren’t qualified?
- SEP
- SIMPLE
- IRAs
- 403(b)
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
Defined benefit
Pension
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
Cash balance
Pension
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
Target benefit plan
Pension
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
Money purchase plan
Pension
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
DB(k)
Pension
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
Stock bonus plan
Profit sharing
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
ESOP
Profit sharing
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
401(k)
Profit sharing
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
Thrift plan
Profit sharing
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
SIMPLE 401(k)
Profit sharing
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
Age-based profit-sharing plan
Profit sharing
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
New comparability plan
Profit sharing
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
SEP
Tax-Advantaged
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
SARSEP
Tax-Advantaged
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
IRA
Tax-Advantaged
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
SIMPLE
Tax-Advantaged
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
403(b)
Tax-Advantaged
Pension, Profit Sharing, Tax-Advantaged, or Non-qualified?
457
Non-qualified
Does ERISA protect qualified plans from creditors?
Yes
Are loans from qualified plans taxable distributions?
No
Small employers are eligible for a tax credit of $____ in start-up costs for a qualified plan.
$500
What is an advance determination letter?
Favorable ruling requested from the IRS - essentially a pre-approval before accruing the costs of a plan
What is the difference between a master plan and prototype plan?
Master uses a single financial institution for funding
What is the legal promise of a pension plan?
Contribution or benefit
What is the legal promise of a profit-sharing plan?
To defer tax
Are in-service withdrawals allowed for pensions?
Certain plans, age 62 or older
Do pensions have mandatory funding?
Yes
Do profit sharing plans have mandatory funding?
No
What is the employer securities limit for pension plans?
10%
What is the employer securities limit for profit sharing plans?
100%
What is the deductible contribution limit by employer for pension plans?
25%
What is the deductible contribution limit by employer for profit sharing plans?
25%
Which type of plan has a commingled account?
defined benefit
What type of plan is investment risk borne by the employer?
defined benefit
What determines mandatory annual funding for DB pensions?
Annual actuarial work
What is the usual objective for qualified plan design?
Maximize the proportion of plan contributions that benefit the owners and top management
What is the best type of qualified plan to create incentive for employees to maximize performance of the company?
Profit sharing plan or ESOP/stock bonus plan
What is the best type of qualified plan to minimize turnover?
Defined benefit with graduated vesting
What is the best type of qualified plan to encourage early retirement?
Pension plan with subsidized early retirement benefit
What 2 plan types have the most flexibility for employer contributions?
SEP and profit sharing plans
What are the 4 requirements of a qualified plan?
- Must be in writing
- Must be communicated to employees (via SPD)
- Must be permanent
- Must not allow prohibited transactions
What is the 21-and-1 rule?
Plans cannot force an employee to complete a period of service to qualify for the plan as long as they are 21 and have completed 1 year of service.
To qualify for the 21-and-1 rule, how many hours must be worked in that year?
1,000
What is the only allowable exception to the 21-and-1 rule?
A plan can increase the service requirement to 2 years, if they provide immediate 100% vesting at the 2 year mark.
What plan type is not allowed to use the 2 year, 100% immediate vesting exception to the 21-and-1 rule?
401(k) plans
What type of plan works best when allocating plan contributions to the maximum extent for the benefit of older, highly compensated employees?
Defined benefit
What is the most popular defined benefit formula?
Unit benefit formula
How does the unit benefit formula work?
Employee is given a percentage of salary in retirement for each of the employee’s years of service.
Ex. 1.5% for each year of service
What is the contribution limit for defined benefit plans?
The amount actuarially determined to fund future benefits
What happens to excess or poor earnings for a defined benefit plan?
Lowers or raises the required annual funding
What happens to forfeitures in a defined benefit plan?
Used to offset plan costs, can not be allocated to remaining participants
The benefit paid from a defined benefit pension plan at normal retirement age cannot exceed the lesser of…
- 100% of their compensation averaged over the 3 highest consecutive years.
- $220,000
A defined benefit plan maintained by a professional service employer with ____ or fewer employees does not have to be covered by the PBGC.
25
What are the professional service employer professions? (7)
ADD AAA Engineers
Attorneys
Doctors
Dentists
Accountants
Architects
Actuaries
Engineers
PBGC insurance does not cover benefits added to a plan less than _____ years before a distress termination.
5
What is a DB(k)?
A 401(k) defined benefit plan hybrid - DB plan that accepts pretax employee contributions
An employer with no more than ______ employees may offer a DB(k) plan.
500
What is the fully vested match requirement for a DB(k) plan?
50% for the first 4% of deferred compensation
What is a cash balance pension plan?
DB plan where the employer guarantees a contribution level AND a minimum interest rate credit to each participant’s account
What vesting must cash balance pension plans use?
3 year cliff
Cash balance pension plans are appropriate when the employee group is young or old?
Young
How are cash balance pension plans invested?
Employer invests and benefits from increased earnings. Guaranteed investment return is low (3-4%) and is the amount realized by plan participants.
What are fully insured DB pension plans funded by?
Cash value life insurance or annuity contracts
Which has higher admin expenses? DB or DC?
DB
What is the max contribution limit for DC plans?
Lesser of $55,000 or 100% of participant’s annual covered compensation
How are money purchase pension plans funded?
Mandatory employer contributions equal to a fixed percentage of employee compensation or a flat dollar amount
How much can an employer deduct for a money purchase pension plan?
Up to 25% of total covered compensation paid to employees
Money purchase pension plans are appropriate when the employee group is young or old?
Young
How are forfeitures in money purchase pension plans used?
Reduce future employer contributions or allocate among the remaining participants
What is a savings/thrift plan?
Qualified DC plan with after-tax employee contributions and matching employer contributions
Excess DC contributions are subject to a ____% excise tax.
10%
Only the first $_____ of compensation may be taken into account when determining benefits of a stock bonus plan.
$275,000
When are stock bonus plan benefits taxed?
when the stock is distributed from the plan
How are stock bonus plan benefits taxed?
as ordinary income, at the FMV when the stock was contributed to the plan
Are elective 401(k) contributions subject to FICA and unemployment tax?
Yes
How much is the saver’s credit?
$2,000
ADP non-discrimination test #1:
Average deferral percentage for HCEs must not be more than
ADP of all other employees x 1.25
ADP non-discrimination test #2
The ADP for the HCE group must not exceed the ADP for other eligible employees by more than ____%, and the ADP of all other eligible employees multiplied by _____.
2%
2
What happens if a plan fails the ADP test?
A corrective distribution is made and is included in gross income for the taxpayer.
OR
Corrective contributions can be made for non-highly compensated employees
In a failed ADP test, the excess contribution must be corrected within _______ after the year end or the employer will have to pay a ____% penalty.
2.5 months
10%
What is the vesting schedule for safe harbor plans?
Always 100%
What are the 2 contribution options for a safe harbor plan?
100% match up to 4%
or
100% up to 3% and 50% match for contributions between 3% and 5%
When do RMDs begin?
In the year in which the owner turns 70 1/2
When are RMDs due?
By 12/31 of each year, except for the first year of RMD requirement, it is due April 1st of the year following the year in which you turn 70 1/2
What does the wealth preservation approach retain?
the purchasing power of the money in the fund at the assumed retirement date
What does the capital preservation approach retain?
the amount of dollars in the retirement account at the assumed retirement date
What does the capital utilization approach retain?
consumes the principal at retirement over time
If someone works for 2 companies and they are not part of a controlled group, what is the max employer contributions allowed for each?
$55,000 each,
$110,000 total
Who bears the investment risk for a target benefit pension plan?
The employee
Which retirement plan can be established and funded for the previous year?
Only a SEP
What is the maximum amount for a hardship withdrawal?
Limited to worker contributions, no earnings
Are hardship withdrawals taxed or penalized?
Yes, treated as an early withdrawal. Taxed and 10% penalty.
What is the safe harbor non-elective contribution option?
3% or more of compensation for all eligible employees
Do safe harbor plans have to comply with ADP and ACP tests?
Not if they have a qualified automatic contribution arrangement (QACA)
Do Roth 401(k)s have RMD requirements?
YES
What entities can adopt a self-employed (Keogh) plan?
Sole proprietors
Partnerships
LLPs
LLCs
What is the maximum contribution formula for self employed plans?
Earnings minus deductible self employment tax (7.65%)
TIMES
(Table factor / (1 + Table factor)
SEP contributions don’t need to be made to an employee if their annual compensation was less than $_____
$600
Are IRAs eligible for 10 year averaging?
No
Who is an HCE?
A 5% or more owner
or
Anyone who received more than $120,000 in compensation during the previous year
The ratio test requires that the coverage percentage of non-highly compensated employees must be at least _____% of the coverage percentage of highly compensated.
70%
Is home title insurance deductible?
No, it is added to the basis of the property
How much can be taken out of an IRA penalty free for first time home buyers?
$10,000
What is the max employer, employee, and total contribution for a SIMPLE?
Employer: $5,500
Employee: $12,500
Total: $18,000
Is alimony considered earned income for IRA purposes?
Yes
What 4 Roth IRA distributions are taxable but are not subject to the 10% penalty?
- Higher education expenses
- Unreimbursed medical expenses in excess of 10% of AGI
- Medical insurance premiums while unemployed
- Substantially equal periodic payments
Qualified plan loans are limited to ____% of the vested account balance and cannot exceed $_____. When account balances are less than $______, however, loans up to the lesser of $_____ or the vested account balance are available.
50%
$50,000
$20,000
$10,000
Can Roth IRAs be rolled into Roth qualified plans (401k, 403b, etc) ?
No
The deductible contribution to a qualified plan on behalf of a self-employed individual is limited to:
Income from self employment minus deductible Social Security taxes times 20%
Top heavy plans must have what vesting schedule?
2 - 6 or 3 year cliff
DC plans can’t use which vesting schedule?
3 - 7
Are there ownership restrictions on qualified plan loans?
No
What is the minimum number of employees that must be covered in a defined benefit pension plan to conform to ERISA requirements?
According to the 50/40 rule, defined benefit pension plans must cover the lesser of 50 employees or 40% of all eligible employees.
What vesting schedule must a SEP use?
Immediate 100%
