deferred comp and employee benefits

Question 1

What are features of a rabbi trust

Answer 1

Secured against an employer’s unwillingness to pay, and
Provide tax deferral for participants.

Do NOT provide security against employer bankruptcy, and
Does NOT provide employer with a current tax deduction

Question 2

Features of a secular trust

Answer 2

Similar to rabbi trust, but participants do NOT have substantial risk of forfeiture, so they do NOT provide the employEE with any tax deferral.

They DO provide EmployER with current tax deduction for contributions.

Because they are FUNDED, they protect against employer unwillingness to pay and from ER bankruptcy - there is no risk of forfeiture.

Question 3

Features of an ISO

Answer 3

Must hold stock for two years from grant date AND one year from exercise.
At grant, price must be at least the exercise price,
At exercise, there is no current income, adjusted basis is grant price, and diff between FMV @ exercise and grant price is AMT inc only and deferred NUA.

Income is computed at sale.

Question 4

Features of an NQSO

Answer 4

At exercise, recognize income as diff between fmv and exercise price.

Employee also, has an AMT adjustment equal to the
exercise price amount

Question 5

Features of an 83b election

Answer 5

Associated with restricted stock plans…
Typically, no recognition until risk of forfeiture is eliminated. If so, when restriction risk is eliminated, must recognize income. But, Employee can elect to recognize income on restricted stock award earlier when received with 83b election. Then subsequent sale uses award price as basis for gain/loss

Question 6

Features of stock appreciation roghts

Answer 6

EmployEE gets to biy stock at price noted, gaining immediate benefit (income) equal to the appreciation to the time of exercise

Eg - earn right to buy at 10, when exercise at 15, recognize 5 in w2 income

Question 7

Features of employee discounts

Answer 7

Must not discrimimate for highly compd employees or will have income attributable to extra discount.

Also, cannot discount beyond 20% for all, or not considered deminimus

Question 8

Features of dependent care credit

Answer 8

Up to 5k (& only up to earned income of spouse)

Also, only for kids under 13

Question 9

Taxability of cafeteria plans

Answer 9

Cash recvd is taxable income. Cash for cash value life insurance pmts are included in income too.
Child care pmts are excluded

Question 10

features of IRC 415c (catch up)

Answer 10

$53K in 2015 - limit on the total amount of contributions made to EACH eligible Defined Contribution retirement plan in a year.

“All contributions” include employee contributions (tax-deferred, after-tax, and tax-exempt), Agency Automatic
(1%) Contributions, and Agency Matching Contributions.

The 415(c) limit, however, is applied separately to each employer plan in which you contribute.

Note that Includable additions include salary deferrals, forfeiture reallocations, employer and employee contributions.

It does NOT include Investment earnings.

Question 11

describe “eligible individual accounts”

Answer 11

Typically defined contribution plans - 401k, ESOPs…

Typically invest plan assets in qualifying employer securities.

Are NOT subject to minimum funding requirements.

Are NOT subject to Pension Benefit Guaranty Corporation (PBGC) coverage and insurance premiums.

Question 12

Characteristics of SS benefits

Answer 12

reduced $1 for every $3 earned in excess $41,880 (2015) in the year in which attaining full retirement and there is no penalty after normal retirement age.

Social Security benefits may be up to 85% taxable, based on AGI over thresholds $32k / $44k…)

Social Security benefits are reduced due to earned income, but not stopped because of earned income

Question 13

what are thresholds for contributing to IRAs

Answer 13

If not an active participant, can contribute to a Traditional IRA without being subject to any AGI limitation (if active, limit is $61-71k (S), or $98-$118k (MFJ)). If spouse active, but, partner is not, limit increases to $183k-$193k)
BUT, contributions to a Roth IRA are limited above the AGI limitation of $116,000 - $131,000 (S) / MFJ $183-193k).

Question 14

Factors which would affect a participant’s retirement benefits in a target benefit plan

Answer 14

I. The actuarial assumptions used to determine plan contributions.
II. The total return on plan assets.
III. The age of the participant.
IV. The includible compensation for the plan year for the participant.

Question 15

requirements of “key employees”

Answer 15

A more-than-5% owner of the employer business.

An officer of the employer who received compensation of more than $170,000.

A 1% owner of the employer business having annual compensation from the employer of more than $150,000.

Question 16

Target benefit plans and defined benefit plans have which of the following characteristics in common?

Answer 16

The amount of annual contributions needed to fund single life annuities for the participants at retirement.

Calc’d as the present value of annual employer contributions until the participant’s normal retirement date, taking an assumed interest rate, the number of compounding periods, and employee attrition into account.

Question 17

How does The Health Insurance Portability and Accountability Act of 1996 (HIPAA) impact employees

Answer 17

I. An employee without creditable coverage can generally only be excluded by the group health insurance plan (if offered) for up to twelve months (18 months if you enroll late) (some will not restrict, but it is available to exlcude).

II. The waiting period is reduced by the amount of “creditable coverage” at a previous employer.

III. If the employee does not enroll in the group health insurance plan at the first opportunity, an 18-month exclusion period may apply.

Question 18

tax characteristics of group term life

Answer 18

if paid by employer, fully deductible by employER.

Also, amount >$50k is taxable to employEE

Question 19

Which transactions between a disqualified person and a qualified plan would be considered prohibited transactions under ERISA?

Answer 19

Any transaction between a disqualified person and the trust is considered a prohibited transaction.

e. g. EmployER purchases a mortgage note which is currently in default for more than the fair market value.
e. g. EmployER sells a piece of raw (undeveloped) land to the qualified plan for a price substantially below fair market value.

Question 20

Characteristics of Tax-Sheltered Annuity (TSA) provisions:

Answer 20

The annual elective deferral limit may be increased by up to $3,000 for employees of certain organizations who have completed 15 years of service and meet certain other requirements.

Salary reductions into a TSA are subject to SS & Medicare taxes.

Tax sheltered annuities must allow participants to invest in mutual funds or annuities, But, CANNOT invest in individual securities.

To calculate the maximum exclusion allowance for make-up calculation purposes, the participant’s years of service and the amount of total excludable contributions made in ALL prior years are needed.

Question 21

What is true concerning 401(k) plans regarding Highly Compensated (HC) employees and Non-Highly Compensated (NHC) employees?

Answer 21

• Non-discriminatory rules state at least 70% of all NHCs must be covered by the plan, or the ratio of NHCs covered by the plan must be at least 70% of the HCs, or the average benefit percentage for NHCs is at least 70% of the benefit percentage of the HCs.
• The Actual Deferral Percentage (ADP) Test limits employee voluntary contributions to the plan for the HCs. To accurately calculate the ADP, the administrator needs to know the percentage of income the NHCs contribute to the plan and how much the HCs defer to the plan.
• The Actual Deferral (ADP) Test takes all ELIGIBLE employees into account when calculating the test.
• The average ratio of HCs may not exceed 125% of the ADP of the NHC group if the ADP of the NHC group is 8% or more. (also, no more than double if actual deferral is 0 - 2%, or X+2% for 2-8%)

Question 22

When are stock options taxable?

Answer 22

Once vested when it is received, and has a readily ascertainable value it is taxable.

Vested options are taxable based on the value of the option to the extent the Fair Market Value exceeds the option price.

Question 23

Required characteristics of Loans from qualified plans help participants have access to funds without paying the 10% premature distribution penalty.

Answer 23

• Sole proprietors, partners, LLC members, and S corporation owners are allowed to take loans from their qualified plan after 2001.
• Loans must be made available to all participants and beneficiaries on a reasonably equivalent basis.
• Loans must bear a reasonable interest rate.
• Loans can’t exceed $50,000, reduced by the excess of the highest outstanding loan balance during the preceding one-year period over the outstanding balance on the date the loan is made, or 50% of the present value of the participant’s vested account balance.
• Section 72(p) indicates that a participant or their beneficiary can utilize the loan provision.

Question 24

what are characteristics of Sick Pay Plans

Answer 24

• Employers can discriminate based upon salary, job description, or any other criteria other than age and longevity of service.
• The plan must be written.
• Full-time employment is usually a requirement to participate. The employer can define the term “full time” in any reasonable manner as long as the 1,000 hour year of service requirements are met.
• There is no prohibition against carry-over in sick pay plans, therefore, a worker who is unable to work in December, may be paid in January according to the plan provisions.

Question 25

Characteristics regarding restrictions related to a QDRO:

Answer 25

I. Cannot assign a benefit that the plan does not provide.
II. Cannot assign a benefit that is already assigned under a previous order.
III. If the participant has no right to an immediate cash payment from the plan, a QDRO cannot require such a payment.
IV. QDRO funds may be rolled over into a rollover IRA, IF within 60 days of distribution.

Question 26

COBRA mandates employers provide continuation coverage for former employees except if:

Answer 26

I. Employer has fewer than 20 employees.
II. Employee retires at the age of 65.
III. Involuntary termination of employment due to gross misconduct.
NOTE that if an employee dies, coverage still MUST be maintained for final expenses, so it is NOT an exception

Question 27

What is a disadvantage of a Simplified Employee Pension plan (SEP) for an employer?

Answer 27

SEPs prohibit forfeitures

Question 28

If a single, 50 yr old, employee has AGI of $1,000,000 (which is all comprised of earned income) has an employer who offers a 401(k) plan. Although eligible to defer, the employee does not make any deferrals into the plan. The employer made a Qualified Matching Contribution during the current year in order to meet the ADP test. What is available for retirement?

Answer 28

if no plan deferrals, even with a qualified match, there is no deposit to match, so, still no deferrals to plan, and, therefore, still not Active in the plan.

If not active in the plan, client has no income limit to participate in a TRADITIONAL IRA with full deductibility.

At age 50+, participant is also eligible for $1k catch up contribution, so, can deposit and deduct $6,500 total.

Question 29

Characteristics of a Section 125 cafeteria plan:

Answer 29

I. Up to 25% of total benefits can accrue to key employees.
II. There must be at least one cash benefit.
III. Deferral of income is only allowed through a 401(k).
IV. mid-year changes in reductions are allowed only for qualified changes in status.

Question 30

attributes of non-qualified retirement plans

Answer 30

I. The employee will pay Table 1 costs each year on an “employer pay all” split dollar life insurance arrangement.
II. The employer can deduct the premiums paid for a split-dollar life insurance arrangement ONLY AFTER constructive receipt. In the traditional split-dollar arrangement, the employer has an interest in the cash values of the split-dollar policy equal to the amount of premiums paid, and therefore, there is never a deduction for premiums paid.
III. Death benefits from a split-dollar arrangement, both the employer and the employee’s beneficiary’s share, are generally tax free. Because no tax deductions are taken for any premiums paid on the policy, the death benefits are tax-free.
IV. The employee is required to pay the Table 1 cost each year, without regard to premiums paid in previous years.

Question 31

What are the tax implications of a self-funded accident or medical plan where the employer reimburses the employee directly?

Answer 31

I. In a discriminatory plan, the employer can always deduct the premiums.
II. In a discriminatory plan, a highly-compensated employee may be required to pay taxes on all or part of the reimbursements.
III. In a non-discriminatory plan, the benefits received by employees are generally tax free without limitation.
IV. In a non-discriminatory plan, the employer can deduct reimbursements to the employee if they are paid to the employee or the employee’s beneficiary and are considered reasonable compensation.
V. In a discriminatory plan, benefits received by non-highly compensated employees are generally tax free without limit.

Question 32

Characteristics of a 403(b) plan

Answer 32

403(b) plan assets cannot be invested in individual securities, and contributions to 403(b) accounts are always 100% vested.

if an employee qualifies for the 15 year rule, the maximum elective deferral for 2015 may be as high as $27,000 ($18,000 deferral, plus $3,000 from the 15 year rule, plus $6,000 for the 50 and over catch-up).

must pass the ACP test if it is an ERISA plan.

Question 33

cash balance pension plan characteristics

Answer 33

• generally motivated by two factors: selecting a benefit design that employees can more easily understand, and as a cost saving measure.
• defined benefit plan.
• guaranteed minimum investment return.
• subject to minimum funding requirements.

Question 34

What are the two primary components of Medicare

Answer 34

basic hospital insurance and

supplementary medical insurance

Question 35

Requirement for an effective waiver for a preretirement survivor annuity

Answer 35

nonparticipant spouse must sign the waiver

Question 36

how are non-qualified distributions from a Roth IRA handled

Answer 36

taxable on a prorated basis between contributions and earnings

Question 37

characteristics of the Tax Sheltered Annuity (TSA)

Answer 37

I. The TSA has make-up provisions which allow certain employees to make up contributions which could have been made in the past but were not.
II. Employers may make matching contributions or contribute a fixed percentage.
III. Total salary reductions for qualified 401(k) and TSA is limited to $18,000 per year in 2015. Contributions to 401(k)s and 403(b)s are aggregated such that they may not exceed the total annual limit. An employee under age 50, who contributed $8,000 to a 401(k) plan is limited to contributing a maximum of $10,000 to a salary reduction TSA.
IV. At the TSA owner’s death, the full amount of proceeds paid to beneficiaries is included in the gross estate of the decedent.

Question 38

characteristics of a cash balance pension plan

Answer 38

• Cash balance plans are defined benefit plans due to the guaranteed investment returns and benefit formula, not simply a contribution amount.
• While cash balance plans provide guaranteed rates of return, they are not 100% guaranteed by the PBGC.
• Cash balance plans use 3-year cliff vesting only.

Question 39

Who is subject to PBGC coverage

Answer 39

• All DB plans (defined benefit and cash balance),
• EXCEPT for professional firms with 25 or fewer employees.
• Defined contribution plans are NOT subject to PBGC
  (new comparability and target benefit plans are defined contribution plans and are therefore not subject to PBGC)

Question 40

What are the least generous graduated vesting schedule possible

Answer 40

Defined Benefit = 3 - 7 year graded schedule
Defined Contribution = 2- 6 year graded schedule
0 0 20 40 60 80 100

Question 41

How are SEP-IRA plans are unique from defined contribution plans ?

Answer 41

I. Length of permissible exclusion from coverage based upon service. (up to 3 yrs or age 21 for SEP)

II. Establishment date of the plan. (SEP can go to 10/15 of next year as Plans can be established and funded up to the date of filing the entity tax return, including extensions, while DC plans must be funded by 12/31).

III. Income requirements for participation. (for SEPs, employee needs to earn only $600 to be included in the plan, while DC plans require full time).

Question 42

characteristics of a 412(e) plan

Answer 42

A defined benefit pension where you create a specific amount of future retirement income, to be paid out based on calculations set forth in a customized plan document. The benefits can be received in retirement either as a guaranteed lifetime income or a lump sum representing the present value of the income stream.

option to maintain a 401k and a profit sharing plan alongside the pension plan to add more savings.

For established companies that have excess cash available for making large annual contributions (e.g. small, closely-held business with few employees, or highly compensated self-employed professionals). Great oppy for catching up later with retirement contributions.

Not good if income is very erratic or unpredictable.

Question 43

When and Why is a SEP the best plan to establish

Answer 43

When income is so high, allows max out of 415(c) limit.
If cannot set up a deferred compensation arrangement to shelter tax.
When compared to a 401(k) because it can be set up in a minimal amount of time and there are no filing requirements.
Ease, quick, cheap, & has same limits as profit sharing plan.

Question 44

What are similarities and differences between profit sharing plans and pension plans.

Answer 44

• pension plans generally do not permit in-service withdrawals (unless still working and 62+yr old), while profit sharing plans may permit in-service withdrawals.
• profit sharing contributions are discretionary, while contributions to pension plans are mandatory.
• plan limits are the same.
• Both plans have the same coverage under PBGC

Question 45

what are required minimum distributions tied to (and excluded from)?

Answer 45

Must take Distributions from all qualified plans (unless still working for that company)
Must take Distributions from all traditional IRAs
Not required to take distributions from Roth IRAs

Question 46

characteristics of a target benefit plan

Answer 46

favors older participants
requires actuarial assumptions
maximum individual allocation is 25% of covered comp
considered BOTH a pension and defined contrib plan

Question 47

characteristics of a CODA 401k plan

Answer 47

• no fed income taxes on amounts paid into CODA
• still pay FICA (Soc Sec) taxes on amounts into CODA
• accrued benefits from ELECTIVE contributions are non-forfeitable (made by employee)
  benefits from non-elective contributions may be forfeited

Question 48

What is SIMPLE required saving term and penalty if not met?

Answer 48

must hold amount in account for 2 years beginning on the date of the first participation.

If withdrawn earlier than the 2 year period, a 25% withdrawal penalty is assessed.

Question 49

what are considerations when choosing between an entity and cross purchase agreement?

Answer 49

• cross purchase should be selected if the surviving partners expect to sell their interests during their lifetime
• entity approach may solve affordability problem is one partner is significantly older than the others
• entity approach is more desirable as the number of partners increase

Question 50

characteristics of Highly Compensated and Key Employees:

Answer 50

HC - >5% owner at some point in the year
HC - Comp > $120k for prior yr (top 20% if elected)

Key - >5% owner
Key - >1% owner + >$150k compensation
Key - officer with compensation > $170k

Question 51

characteristics of life insurance in a qualified plan

Answer 51

• subject to income only if the policy in his qualified plan is a cash value type policy.
• policy will be included in gross estate if decedent dies while still working.
• Part of the proceeds could be taxable to beneficiary if it is a cash value policy.
• life insurance in qualified plans is subject to income when purchased, regardless of the type.

Question 52

characteristics of hardship withdrawals

Answer 52

• must not be another source of funds
• generally subject to a penalty unless there is an exception under IRC 72(t)
• can only be taken from employee deferrals (NOT employer contributions)
• Unless the employer has actual knowledge to the contrary, the employer may rely on the written representation of the employee to satisfy the need of heavy financial need

Question 53

Roth 401k distribution rules

Answer 53

if less than 5 years, distribution is split prorata between contributions and earnings. the earnings are taxable.

ALSO - if not a qualifying distribution (death, >59.5, disability, 72t, medical, or QDRO / 55 and separation/ Pub safety Separation at 50), then 10% penalty on earnings applies too

Question 54

Roth IRA distribution rules

Answer 54

if less than 5 years, distribution is in order of deposit - contributions, conversions and then earnings

ALSO - if not a qualifying distribution (death, >59.5, disability, 72t, medical, or Higher Ed / 1st time Home / Health Insurance premiums for unemployed), then 10% penalty on earnings applies too

Question 55

what changes to defined benefit plans are acceptable (considering anti cutback laws)

Answer 55

• Reducing the annual benefit accrual for the DB or MP plan percentage for future years (as low as 2% for DB or 3% for MP). This only affects future benefits - leaves current benefits in place
• Switching the vesting for the money purchase pension plan to another acceptable alternative (e.g. from 3 yr cliff to 2- 6 graduated).

Question 56

Roth IRA contribution limits

Answer 56

Roth shares limits with traditional IRAs, but, for Roth, there is no restriction on being active in another plan - so, as long as contributor is below thresholds, they can contribute as well.

Phaseouts follow:
Single 116- 131
MFJ 183 - 193
MF Single 0 - 10k