GTPR

Question 1

SIMPLE plan characteristics

Answer 1

SIMPLEs can invest in real estate, such as an apartment building.
if not matching elective deferrals, must make non-elective deferrals to all = 2% (up to $265k)
but, CANNOT do the following:
Allow a distribution from the SIMPLE within the first year and subject withdrawer to a 50 percent penalty.

Question 2

how to handle a loan from a retirement account

Answer 2

may be able to rollover the outstanding loan balance within 60 days to an IRA and avoid the adverse income tax consequences and the 10 percent penalty.

Question 3

when/why “convert” traditional retirement funds to a Roth account or Roth IRA

Answer 3

Inherited assets in a qualified plan can be rolled directly (in-plan Roth rollover) to a Roth account by the spousal beneficiary.

Question 4

Social Security Integration

Answer 4

increase benefits for defined benefit AND defined contribution Pension plans
- Also can have “permited disparity in PSPs

Everyone can use the excess method (Either DB or DC) - DBPP, CBPP, MPPP, TBPP - this method pays an addl .75% of EXCESS over $118500 (covered comp limit) * years of svc (up to 35 years) … .75%*35yr = 26.25% max

ONLY DB plans (DBPP and CBPP) can use offset method. Arrives at same number, but, starts with larger % 1.75%, and reduces income below $118.5 by .75%/yr

Permitted disparity provides increased contributions on earnings above $118.5k at the lesser of 2x base rate or 5.7% max. This amount is only paid on excess of “integration” level (typically Covered comp limit) and only up to earnings of $265k

Question 5

Minimum Distributions

Answer 5

• required beginning at age 70.5
  
  • unless if still employed, then RMD is by 4/1 in yr after terminating employment
• in first year, have until April 1 of next yr for distribution
• any dist 10 yrs younger, can use Joint Life Expectancy Table to decrease RMDs
• If death, then beneficiary continues with RMDs based on decedent’s life expectancy each year less one year
• if spouse, can change to spouse’s life and use single life expectancy, or roll into spouse’s name and delay dist’s till 70.5
• If distributions had NOT begun yet, the beneficiaries can distribute full balance within 5 years without penalties.

Question 6

excess contribution issues

Answer 6

any dollars contributed beyond the limits (e.g. earned income or a % of earned income or beyond the max contribution) are subject to a 6% excise tax charged each Year that the excess remains in the account.
- Can withdraw the amount up to 4/15 after year end

Question 7

Early Withdrawal penalties and exceptions

Answer 7

10% premature w/d penalty for w/d’s

Question 8

retirement catch up provisions

Answer 8

must be 50 by yr end
IRA / Roth IRA = $1k
SIMPLE = $3k
401k/ Roth 401k, SARSEP, 457 403 = $6k
403b original catch up 15yr rule - up to $15k
457b original catch up final 3yr = up to $18k

Question 9

Constructive Receipt

Answer 9

• income not in physical possession yet, but,
• constructively received by taxpayer in the year when it is credited to the account, set aside, or otherwise made available to be drawn upon. It gets taxed at that point!
• This is when the taxpayer has “dominion and control” over the asset(s).
• Deferred comp is structured to AVOID constructive receipt
  - restrictions, limitations, unsecured promises all AVOID constructive receipt

Question 10

deferred comp taxation timing

Answer 10

payroll taxes are earned with constructive receipt, BUT
NOT subject to income tax until “earned”.
As such, neither the tax, nor the deduction are incurred until later - Matching employee Income with employer Deduction

Question 11

NQSO treatment

Answer 11

@ Grant - no taxable treatment, no holding period requirements either
@ Exercise -
1 Employee provides option and cash required to exercise option price.
2 Employee recognizes W-2 income equal to the premium earned (diff btwn option price and current FMV).
3 Employee is Taxed in current year for that premium earned
4 Adjusted basis in stock is equal to sum of option cost and premium earned (current FMV)
@ Sale - Employee has ST or LT Cap Gain or Loss

ex.: option= $10, exercised when FMV $25, sold when stock is $30 2 yrs later.
@ grant - nothing happens at option offer
@ exercise - exec pays $10, gets stock valued at $25, incurs $15 W-2 income
@ sale - exec has $5 LTCG

Question 12

ISO treatment

Answer 12

@ Grant - no taxable treatment (if =>FMV)
@ Exercise -
1 Employee provides option and cash required to exercise option price.
2 Employee has AMT adjustment for value of appreciation of stock over exercise price.
3 Employee is NOT Taxed in current year for that premium earned
4 Adjusted basis in stock is equal to original exercise price
5 to stay qualified, must hold stock at least 2 yrs from date of grant AND 1 yr from date of exercise (if not, becomes NQSO)
@ Sale - assuming appropriate holding period, Employee has ST or LT Cap Gain or Loss.
alternate sale - sooner than holding period - all incremental gains over basis taxed as ordinary income

ex.: option= $10, exercised when FMV $25, sold when stock is $30 2 yrs later.
@ grant - nothing happens at option offer
@ exercise - exec pays $10, gets stock valued at $25, defers $25 AMT adjustment
@ sale - exec has $20 LTCG
@ early sale, has $10 W-2 Inc, and $20 Ord Inc

Question 13

Stock Appreciation Rights

Answer 13

cashless exercise option for NQSO or ISO -
provides dollars for appreciation over option price to be used to fund the purchase.
Included in Gross Income when exercised

Question 14

Restricted Stock Plans

Answer 14

• exec earns shares vs cash
• prohibited from selling for a period (no gain in holding period) (no tax consequences)
• after holding period, considered “constructive receipt” and taxed as W-2 income at that date even if not sold. Employer gets similar deduction (matching).
• all gains incurred here are included in basis creating a new basis for the stock for subsequent gains/ losses.

Question 15

Section 83b election

Answer 15

• deferred comp can have an option to elect to include the excess gains as gross income the excess of FMV over amount paid.
• election must be made at time of transfer
• then, holding period begins for Cap gain treatment, and all remaining growth is Cap gain if held >1yr.

Question 16

Fringe Benefits

Answer 16

addl no or low cost benefits increasing employee comp without significant tax increases...
e.g. pd vacation, holidays, sick leave, health and life insurance, pensions, parking...
must not discriminate (available to all)
addl benefits:
meals / lodging (employer's convenience)
   - not meals if for morale/goodwill/ recruiting
education assistance
no addl cost svcs (airline tickets)
working conditions
qualified moving expenses
adoption assistance programs
athletic facilities furnished by employer
dependent care programs
qualified employee discounts
de minimus fringe benefits
qualified tuition reduction plans
prizes and awards...

Question 17

When Is Disparity permitted

Answer 17

disparity allows for increased contributions on earnings above covered comp limit (118.5k), and is available in SEP IRAs and defined contribution plans.
Disparity is NOT discrimination for highly compd employees

Question 18

characteristics required for a retirement plan to have “qualified” status

Answer 18

I. Have pre-death and post-death distributions.
II. Be intended to be permanent.
III. Be established by the employer.
IV. All employEE contributions are vested and not forfeitable.

Question 19

NQSO characteristics

Answer 19

At the exercise date of an NQSO, the individual will have to buy the stock at the exercise price and will have W-2 income for the appreciation of the stock value in excess of the exercise price.