Chapter 10 - SIMPLE, 403(b), and 457 Plans Flashcards
Define Annuity Contracts
While the contracts are not specifically defined in the IRC, an annuity contract must be purchased for the employee from an insurance company and may give a fixed benefit or a variable benefit depending on the performance of the investment. Any contract or certificate that is transferable to a person other than a trustee is not an annuity contract.
Define 15-Year Rule
A special catch-up provision for 403(b) plan participants that have worked for the plan sponsor for 15 years. The catch-up allows them to defer up to an additional $15,000, however, no more than $3,000 per year.
Define Final 3-Year Catch-Up Provision
A special catch-up provision for public and private 457(b) plans that allows an individual to defer an additional $17,500 for 2014 to the plan in their final three years before the plan’s normal retirement age.
Define 501(c)(3) Organizations
Nonprofit tax-exempt organizations that are established under IRC §501(c)(3) of the IRC.
They are organized exclusively for:
- For religious, charitable, scientific, literary, or educational purposes, or
- to foster amateur sports competition nationally or internationally, unless any of their activities involve providing athletic equipment or facilities, or
- to prevent cruelty to children or animals.
Define Form 5304-SIMPLE
The IRS form used to establish a SIMPLE IRA plan when the employees choose the final institution.
Define Form 5305-SIMPLE
The IRS form used to establish a SIMPLE IRA plan when the employer chooses the financial institution.
Define 457 Plan
A nonqualified deferred compensation plan for employee of state and local government and tax-exempt entities.
Define 457(b) Plans
457(b) plans for governmental and tax-exempt organizations under 501(c) that allow employees to defer income taxation on savings for retirement into future years.
Define 457(f) Plans
457(f) plans are comparable to traditional deferred compensation plans for employees of governmental entities and tax-exempt entities under 501(c)(3). Ineligible plans are only available to highly compensated and management employees.
Define Grace Period
If an employer meets the 100 employee limitation in a given year, the the employer will have a two year “grace period” when the employer can exceed the limitation without losing eligibility to maintain the SIMPLE.
Define Includible Compensation
An employee’s taxable wages and benefits for the most recent years of service.l
Define Nonelective Contributions
Contributions to a qualified plan on behalf of all eligible employees.
Define Qualified Joint and Survivor Annuity (QJSA)
The QJSA pays a benefit to the participant and spouse as long as either lives, although, at the death of the first spouse, the annuity may be reduced.
Define Savings Incentive Match Plans for Employees (SIMPLEs)
Retirement plans for small employers with 100 or fewer employees who earn more than $5,000 in a year. SIMPLEs may be established as SIMPLE 401(k) plans or SIMPLE IRAs.
Define SIMPLE 401(k)
A SIMPLE plan that utilizes a 401(k) plan as the funding vehicle of the plan.
Define SIMPLE IRA
A SIMPLE plan that utilizes an IRA account as the funding vehicle of the plan.
Define Tax Sheltered or Deferred Annuities (403(b) Plans)
Retirement plans for certain qualified nonprofit organizations or employees of public education systems - similar to 401(k) plans, but for nonprofit organizations.
What are the characteristics of a SIMPLE? 6
- Employer established SIMPLE plan
- Employer contracts with employee to have salary reduction.
- Employer withholds employee deferral over the course of a year.
- Employee elective deferrals are not subject to income tax but are subject to payroll tax.
- Employer deposits match on regular basis tax deferred without payroll tax.
- Earnings grow tax deferred on all contributions.
- May not be established if the employer contributes to a defined compensation plan during the year, if its employees accrue benefit from a defined benefit plan during the year, or if the employer contributes to a SEP or 403(b) plan during the year.
Why might an employer set up a SIMPLE? 5
- To avoid complicated rules
- To avoid high administrative costs associated with qualified plans.
- Don’t have to meet all the nondiscrimination rules associated with qualified plans.
- No annual filing requirements
- Easy to establish and maintain.
What are the two types of SIMPLEs?
SIMPLE IRAs SIMPLE 401(k)s
What type of entities may establish SIMPLE plans? 6
C Corps S Corps LLCs Partnerships Proprietorships Government Entities
What are the characteristics of a SIMPLE IRA?
- Utilizes an IRA account as the plan funding vehicle.
- Established by the employer via a written plan that allows each employee to choose between directing the employer to make contributions to the SIMPLE IRA or allowing the employee to receive such payments directly in cash (a CODA feature) as compensation.
- They require the employer to either match the employee contributions of those that participate or provide nonelective contributions to all employees who are eligible.
- Can be established by for-profit entities, tax-exempt employers, and government entities.
What are the characteristics of a SIMPLE 401(k)?
- Utilizes a 401(k) plan as funding vehicle
- Plan loans are permitted
- Must be maintained by eligible an employer and satisfy contribution requirements, eligibility requirements, and vesting requirements.
- Must be maintained on calender year (not fiscal)
- May be adopted by employer if they have 100 or fewer employees.
- Non subject to nondiscrimination requirements or top-heavy rules if it meets certain contribution and other requirements.
- More costly to administer than SIMPLE IRAs
Who can establish a SIMPLE?
By companies who employ 100 or fewer employees who earned at least $5,000 of compensation from the employer for the pending calendar year.
What happens for companies with a SIMPLE that no longer comply with the 100 employee limit?
The employer is given a two year grace period where the employer can exceed the limitation without losing eligibility to maintain the SIMPLE.
If an employer with a SIMPLE undergoes an acquisition, disposition, or other similar transaction, the employer will retain eligibility for the year of the transaction plus the two subsequent year only if what two rules are met?
- The plan coverage has not significantly changed during the grace period, and
- the SIMPLe plan would have continued to qualify after the transaction if the employer had remained as a separate employer.
As illustration of the relaxed administrative rules and required paperwork, what to Forms 5304-SIMPLE and 5305-SIMPLE do?
- Satisfy employer notification requirements,
- Maintain the SIMPLE plan records, and
- Establish proof that the employer set up a SIMPLE plan for its employees.
