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CFP > CFP RETIREMENT > Flashcards

CFP RETIREMENT Flashcards

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1
Q

Highly Compensated Employees (HCE)
(Affected the ADP/ACP test and ratio/average benefits test) *discrimination

A

• greater than 5% owner
• any employee that earned over $135k in preceding year

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2
Q

Ratio percentage test for NHCE & HCE

A

Plan must cover 70% of the percentage of HCE for NHCE

If plan covers 100% of HCE then must cover 70% of NHCE

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3
Q

Key Employee (affects whether plan is top heavy)

A

In the current year:
• greater than 5% owner
• officer AND compensation > $200k or
• greater-than-1% owner AND compensation > $150k

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4
Q

Integrated w/ Social Security keys
*discriminated based on wages

A

• Owner is 50 or younger
• Owner’s income < $200k
• Rank-and-file employees income is < $90k

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5
Q

Age weighted plan keys (compared to SS integration)
*discriminated based on ages

A

• Owner is 50 or older
• Owner’s income is > $200k
• Employees are younger than owner

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6
Q

What is the minimum age to do a QCD? What is the maximum amount of QCD in a year?

A

70.5 (not 72) and $100k

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7
Q

Exceptions to 10% penalty for early IRA w/d

A

• death
• substantially equal payments
• disability
• 1st home expense up to $10k
• Qual. Education expense
• Medical expenses over 7.5% AGI
• Distribution used to pay medical insurance premium after separation from employment after 12 consecutive weeks of unemployment compensation
• $5k for birth/adoption (can’t be stepchild)

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8
Q

Taxation of SS benefits

A

• if income + 50% of SS benefit is > $25k single/$32k MFJ, then 50% of their benefit will be included in taxable income
• if income + 50% of SS benefit is > $34k single/$44k MFJ, then 85% of their benefit will be included in taxable income

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9
Q

SS benefits will be reduced before FRA
Calculation

A

Number of months early / 180 months = PIA reduction

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10
Q

DB max benefit at 65

A

• Lesser of $245k, or
• 100% of the participant’s average 3 highest earning consecutive years

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11
Q

What is the max salary taken into account for DB/DC plans?

A

$305k

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12
Q

What is the most common DB formula

A

Unit benefit formula
Aka percentage of earnings per year of service

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13
Q

When is a money purchase plan appropriate and is it DB or DC?

A

• DC
• employer wants to retain key, young employees
• employer wants plan that is simple to administer and explain
• employer must have stable CF and profit

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14
Q

How are forfeitures treated in DC and DB plans?

A

DC - only affect DC plans participants. CAN BE reallocated to the participants or applied to reduce employer contributions

DB - forfeitures MUST reduce contributions

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15
Q

NUA Taxation

A

• Stock cont. to employee = basis (no tax yet)
• Stock distributed/exercised = basis taxable now at OI (phantom income)
• Stock sold
- Distribution price - basis = LTCG regardless of holding period
- Sell price - distribution price = taxed at LTCG or STCG depending on holding period from distribution to sell date.

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16
Q

When is NUA lost?

A

• if stock is not all distributed in one taxable year
• if stock is rolled to an IRA

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17
Q

Keogh and SEP Plan contribution percentages

A

• 15% plan, multiply business profit by 12.12%

• 25% plan, multiply business profit by 18.59%

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18
Q

Is self-employment tax computed before SEP/KEOGH deductions? If so, how much?

A

Yes
1/2 - 7.065%

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19
Q

What is the maximum salary an employee can earn for a full match from the employer in a SIMPLE IRA or SIMPLE 401(k)?

A

SIMPLE IRA - $466,667
SIMPLE 401(k) - $305k salary cap applies

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20
Q

SEP covered employees requirements

A

• compensation > $650 for the year
• must be 21, and have worked 3 out of preceding 5 years. Part-time counts

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21
Q

What is the ratio percentage test?

A

A qualified plan must cover a percentage of NHCE that is at least 70% of the percentage of the HCE COVERED.

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22
Q

What is the average benefits test?

A

In a qualified plan, the average benefits for ALL NHCE must be at least 70% of that for the HCE.

*uses 70% like Ratio percentage test

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23
Q

Top-heavy plan rules

A

• Rule #1: plan is top heavy if > 60% of its aggregate accrued benefits or account balance are allocated to key employees.

• Rule #2: a top heavy plan must provide minimum benefits or contributions for non-key employees.
- DB - benefit must be at least 2% of compensation
- DC - minimum employer contribution must be no less than 3%

*profit sharing plans aren’t subject to minimum funding standard but are subject to substantial and recurring contributions.

24
Q

Top heavy permitted vesting schedule
*faster

A

Top heavy DB plans and ALL DC plans
• 3yr cliff, or
• 2-6yr graded, or
• 100% vested w/ 2yr eligibility

25
Q

Non-top heavy vesting schedule
*slower

A

Non-top heavy DB plans
• 5yr cliff, or
• 3-7yr graded, or
• 100% vested w/ 2yr eligibility

26
Q

What defines a Brother-sister control group

A

Fiver (or fewer) owners of two or more entities own 80% or more of each entity

27
Q

10% penalty exceptions to QUALIFIED plans and TSA distributions prior to 59.5

A

• Death or disability
• substantially equal payments following separation from service (no age reqs)
• Distribution following separation from service at age 55 or later
• Distribution under a QDRO (to any alternative payee)
• medical expenses over 7.5% AGI
• $5k for birth/adoption

28
Q

What is the RBD for qualified plans, governmental 457 plans, and 403(b)s?

A

• April 1st following age 72 if not working, or
• April 1st the year following retirement if not greater than 5% owner.

29
Q

What are the qualified plan loan rules?

A

• loans cannot exceed the LESSER of 50% of vested balance or $50k
• for small accounts, participants can take $10k loan without regard to 50% limitation (assuming acct has $10k)

30
Q

QDRO unique characteristics

A

• if QDRO orders distribution of funds, generally their won’t represent taxable income to the PLAN PARTICIPANT. The 10% penalty will not apply.
• if alternate payee is a child or other dependent, then the distribution will be taxed to the PLAN PARTICIPANT

31
Q

Do 457 plans affect active participant status for IRA deductibility?

A

No

32
Q

How are ROTH earnings taxed if they are special purposes but fail to meet the 5yr holding period?

A

Income tax but no penalty

33
Q

How are ROTH earnings taxed if they are not special purposes and fail to meet the 5yr holding period?

A

Income tax plus 10% penalty

34
Q

What are the qualified triggering events for Roth earnings that meet the 5yr holding period?

A

No income tax or penalty if:
• 59.5 and older
• First home purchase up to $10k
• Death
• Disability

35
Q

When are Roth earnings taxed with no penalty when they meet the 5yr holding period?

A

• Medical expenses over 7.5% AGI
• Medical insurance premiums while unemployed
• Substantially equal payments
• Qualified higher education expenses
• Birth/adoption < $5k

36
Q

Key words for a rabbi trust

A

Merger, acquisition, change of company ownership

37
Q

What is a NSO

A

Nonqualified Stock Option:
It’s the right to purchase a specified number or shares of the employer’s stock at a specified time and specified price.
*No taxation occurs if substantial risk of forfeiture exists.

38
Q

What is an ISO?

A

Incentive Stock Option (qualified stock option):
Tax-favored plan for compensating executives by granting options to buy company stock. Only the first $100k granted to any employee that vest in one calendar year is entitled to favorable ISO treatment. Corporations do not usually receive tax deduction at any time for ISOs. ISOs aren’t deferred comp.

Ex. If $150k of ISOs are granted that vest in one calendar year, then the excess $50k is NSO.

*Almost all ISO grants require at least 1yr vesting schedule before the ISO can be exercised.

39
Q

Primary difference between ISO and NSO?

A

Taxation at date of exercise. ISOs aren’t subject to REGULAR tax when exercised but NSOs are.

*ISOs are subject to AMT

40
Q

NSO taxation:
• At exercise
• At sell

A

• At exercise - Difference btwn exercise and grant price (bargain element) is taxed at OI rates, step-up in basis to exercise price
• At sell - excess taxed at normal LTCG or STCG rates

41
Q

ISO taxation:
• At exercise
• At sell

A

• At exercise - no regular tax, but bargain element (difference btwn Exercise and grant price) is AMT add back item. AMT is $0, Basis is grant price
• At sell - excess above basis is normal LTCG or STCG rates

*must meet holding period rules to prevent DQ

42
Q

ISO holding period rules

A
  1. Must hold exercised ISO shares for more than 1 year from exercise before selling them.
  2. Must hold the shares more than 2 years from grant before selling them.

*violation of either rule DQs the ISO and they become NSO.
*The holding period rule, not the vesting period rule, triggers a DQ disposition for the exam.

43
Q

3 keys for a spouse of a retired or disabled worker to receive SS benefits.

A

Must meet any of the following:
1. Spouse is 62 or older
2. Spouse can be any age if has a child in care under 16
3. Has a child 16+ and disabled before 22

44
Q

What age do surviving spouses (and surviving divorced spouses) of a deceased insured worker qualify for SS?

A

60

45
Q

Keys to divorces spouse filing for SS on ex.

A

• must be 62
• must have been married for at least 10yrs and divorced for 2.

46
Q

Surviving spouse w/ child in care keys

A

•Surviving spouse can be any age
•Child must be U-16 or disabled before 22

47
Q

Dependent benefits for SS

A

• U-19 and full-time K-12 student
• 18+ and disabled before 22

48
Q

Safe Harbor 401(k)
Discrimination tests, Top heavy rules, contributions, vesting

A

• Automatically satisfies non discrimination tests w/ HCEs with either a matching or nonelective contribution.
• Plans are exempt from Top Heavy rules (key employees) if the only deposits are employee DEFERRALS and employer CONTRIBUTIONS.
• Matching contribution $1/$1 on first 3%, then $0.50/$1 on next 2% employee deferral (4% if employee defers 5%). Or,
• Nonelective contribution of 3% of all employees comp. Regardless of whether employee is deferring.
• Employer contributions are immediately vested.

49
Q

Cross-testing or age-weighted plan keys
(Except ESOPs)

A

• Plan might provide for a $61k contribution for HCE and flat percentage for NHCEs
• ex. Lesser of 1/3 of allocation rate of HCE with highest allocation rate, or 5% of NHCE compensation
• Optimally, the average age of the NHCEs should be about 15yrs younger than the average HCE age.

50
Q

When is a plan Top Heavy?

A

When more than 60% of its accrued benefits or account balances are allocated to key employees

51
Q

DB plan integration w/ SS (excess method)

A

Permitted disparity is the lesser of the base benefit percentage or 26.25%

Base % + Permitted Dis = Excess %
30% + 26.25% = 56.25%
20% + 20% = 40%

52
Q

DC plan integration w/ SS (excess method)

A

Permitted disparity is the lesser of the base benefit percentage or 5.7%

Base % + Permitted Dis = Excess %
10% + 5.7% = 15.7%
16.77% + 5.7% = 22.47%
4% + 4% = 8%

53
Q

What is the “gateway” requirement for cross-tested plans

A

Contributions for NHCEs must satisfy the gateway requirement which is the lesser of 1/3 of the allocation rate of the HCE w/ the HIGHEST allocation rate, or a flat 5% of the NHCE compensation.

Ex. HCE contributing 20% (20% * 1/3) = 6.67%. Lesser of 6.67% or 5% of NHCE comp.

54
Q

What’s covered under QDRO?

A

Qualified retirement plans. Can be for alimony or child support too.

55
Q

What’s not covered under QDRO?

A

IRAs

CFP (7 decks)

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