Dalton quiz 2

Question 1

legal requirements apply to profit sharing plans

Answer 1

I. Forfeitures must be used to reduce employer contributions or be reallocated to the remaining participant’s accounts.
II. Employer deductions for plan contributions are limited to 25% of the participants’ covered compensation.
III. Allocations to a participant’s account cannot exceed the lesser of 100% of compensation or $53,000 annually.
note that Employer contributions may be allocated through a compensation-based, unit weighted or age weighted formula.

Question 2

How are Roth IRA withdrawals handled during 5 yr holding period

Answer 2

During the 5-year holding period, for tax and penalty purposes, withdrawals from a Roth IRA are classified using FIFO - contributions, then conversions, then earnings

Question 3

Maximum allowable annual additions per participant to a defined contribution pension plan account

Answer 3

max additions is $53,000 indexed

note that max includable comp is $265k

Question 4

basic provisions of an IRC Section 401(k) plan

Answer 4

Employer’s deduction for a cash or deferred contribution to a Section 401(k) plan cannot exceed 25% of covered payroll reduced by employees’ elective deferrals.

A 401(k) plan cannot require, as a condition of participation, that an employee complete a period of service greater than one year.

Employee elective deferrals may be made from salary or bonuses.

Federal and state income tax is deferred, but, still subject to subject Social Security and Medicare tax

Question 5

Max SEP contribution: if self-employment earnings of $78,000 & self-employment tax of $10,000.

Answer 5

78000 - (1/2*10000) = 73000 * (.25/1.25) = 73k *.2 =

$14,600

Question 6

What are medicare benefits

Answer 6

Medicare is an 80/20 split without stop-loss limits.

Medicare does not provide custodial care coverage, eye care or dental coverage.

Question 7

characteristics of profit sharing plans

Answer 7

*part of broad category of defined contribution plans
*best suited for companies with unstable cash flows
*max tax-deductible employer contribution = 25% of covered compensation
contributions must be substantial and recurring, but, are not required in years withOUT profit

Question 8

Characteristics of a Rabbi Trust

Answer 8

formally funded plan & the employee has the segregated assets as security of the agreement, assuming the employer remains solvent and the assets are not taken by the employer’s creditors. This risk of having creditors take the assets inside a “Rabbi trust” is what constitutes a substantial risk of loss or forfeiture and keeps the employee from being considered in “constructive receipt” of the formally funded assets, so no immediate taxes.
* Retirement payments out of the trust are still subject to ordinary income taxes

Question 9

Key employee definition

Answer 9

(1) owns more than 5% of the business,
(2) is an officer with compensation greater than $170,000,
(3) owns at least 1% of the business and comp> $150,000

Question 10

Money Purchase plan component characteristics

Answer 10

Employer and employee contributions to all defined contribution plans
NOT Forfeitures - which are not allocated to individual accounts are not considered annual additions.
NOT -Earnings are never considered annual additions for Section 415 limits.
Rollovers are previous contributions and earnings, therefore are not calculated as “annual additions.”

Question 11

characteristics of a payroll deduction TSA

Answer 11

• subject to payroll taxes (Medicare + Social Security)
• NOT subject to income taxes.
• tax sheltered annuity or 403(b) retirement plan.
• a form of deferred compensation.
• Only public education & nonprofits can participate.
• funded through employee contributions.

Question 12

characteristics of 83b election

Answer 12

for stock plans - recognizing initial offering price as W-2 Income and remaining gain as long term capital gain
must be elected within 30 days of grant

Question 13

legal requirements for a qualified thrift/savings plan

Answer 13

• After-tax employee contributions cannot exceed the lesser of 100% of compensation or $53,000.
• Participants do not have to be given the right to direct their investments.
• Employees make after-tax contributions to a thrift; *employers don’t make contributions.
• In-service withdrawals are not permitted (as opposed to 401k which allows subject to financial need restrictions)

Question 14

characteristics of Unrelated Business Taxable Income (UBTI)

Answer 14

• income from any type of leverage or borrowing within a plan is subject to UBTI.
• any business enterprise run by a qualified plan is subject to UBTI
• rental income (apartments and raw land) are EXCLUDED
• Direct investment in a business that generates income
• Any investment which is purchased with “leverage” or borrowed funds generate UBTI except for a qualifying ESOP or LESOP.
• Dividends, interest, and other types of income derived from investments in a business are NOT subject to UBTI.

Question 15

how can employees be excluded from participation in a qualified plan

Answer 15

*Collective bargain covered employee of 2 years. Employees covered under a pension plan in a collective bargaining agreement can always be excluded from participation in the plan because they are already receiving pension contributions through the union plan.
*Maximum exclusions for others are:
401k - 1 yr of service
SEP age 21, three years of service,
others 2 years of service for all other plans

Question 16

Stock Bonus plan Characteristics

Answer 16

• Useful in cash flow planning for plan sponsor due to cashless contributions
• Provides motivation to employees because they become “owners”
• 20% withholding does not apply to distributions of employer securities and up to $200 in cash
• Integration formulas are allowed under a stock bonus plan, but are not allowed under an ESOP plan

Question 17

What are pre-1974 or post-1973 accrual concerns

Answer 17

tax rules for older individuals (born before 1936) who have separate retirement accounts that should not be combined as you will lose tax benefits
* Enables Cap gain treatment on the portion that was prior to the date

Question 18

characteristics of a defined benefit plan

Answer 18

• favor older participants.
• Requires PBGC coverage as mandated by law
• Must be actuarially calculated
• Maximum benefit = $210K
• Annual contributions cannot be made arbitrarily.

Question 19

What are tax considerations for nonqualified retirement plans

Answer 19

• Under IRS regulations an amount becomes currently taxable to an executive even before it is actually received if it has been “constructively received”
• payroll taxes are due on deferred compensation at the time the compensation is earned and deferred, not at the date of distribution

Question 20

Target Benefit Plan characteristics

Answer 20

I. It favors older participants.
II. It requires actuarial assumptions.
III. The employer’s maximum deductible contribution is 25% of Covered Compensation
IV. The maximum individual annual additions is the lesser of 100% of pay or $53,000.
V. Investment risk is on the employee as a defined contribution plan.
VI. Can only name someone other than her spouse if has a valid waiver signed by the spouse. This applies to all pension plans.
VII. benefit is not covered under PBGC.

Question 21

Section 415 contribution plan characteristics

Answer 21

Limited to $53k/yr (indexed)

on annual compensation limit of $265k max

Question 22

Top Heavy defined benefit plan characteristics

Answer 22

Must pay at least 2%/ year (cannot use lower rates as described if Top Heavy)

Question 23

characteristics of paired plans (aka “tandem plans”)

Answer 23

• Generally combines a money purchase pension and a profit-sharing plan
• Total contributions to both plans is limited to lesser of 100% or $53,000 (2015) by IRC Section 415.
• The profit sharing plan portion is limited by IRC Section 404 to 25% of covered payroll.

Question 24

NQSO Characteristics

Answer 24

1. taxed as W-2 income for the fair market value of the option less the exercised price when it is exercised,
2. taxed at capital gain rates for the balance when the stock then subsequently sold (long or short term)

Question 25

Funded deferred compensation plan characteristics

Answer 25

non-qualified deferred compensation plan providing the key employee with a vested beneficial interest in an account.
* If the employee has a non-forfeitable beneficial interest in a deferred compensation account, the IRS considers the plan “funded” and subject to current income tax due because the employee has constructive receipt of the assets.

Question 26

COBRA Characteristics

Answer 26

• Requirements at 20+ employees
• ?must pay a penalty of $100 per day for each day that continuation coverage wasn’t offered
• ?Required to pay any claims incurred by the ex-employees until they are offered continuation coverage

Question 27

Prohibited Transactions ramifications

Answer 27

1. first tier excise tax for prohibited transactions is 15% of the amount involved and is automatic even if the violation was inadvertent.
2. The second tier excise tax is 100% of the amount involved and is assessed if the prohibited transaction is not remedied.
3. There are no income taxes applied; all remedies are made through restitution and excise taxes.

Question 28

Qualified Money Purchase Plan Characteristics

Answer 28

Defined Benefit Plan with:

• Forfeitures may reduce employer contributions due to contribution offsets or Section 415 limitation on annual additions.
• Increased compensation will result in increased contributions by the employer, subject to Section 415 limitations.
• Returns on portfolio assets and actuary funding are a concern in defined benefit plans.