HS326 - Retirement

Question 1

Highly Compensated Employees

Answer 1

The smallest group allowed by law is the top 20% of earners (called special payroll testing).

Question 2

SIMPLE

Answer 2

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• An employer cannot place any restreictions on participant withdrawals
• A contribution for all eligible employees in teh amount of 2% of compensation satisfies teh employer-contribution requirement

Question 3

Ted, age 65, is considering the establishment of an IRA. He’s not employed in 2017 but has investment income of $95,000. What can he contribute to an IRA?

Answer 3

$0 - because he doesn’t have any income from employment activities.

Question 4

Equity based compensation

Stock Bonus & ESOPs

Answer 4

They are the same:

• Plan Establishment by December 31st
• Contribution due by dates of Tax return due + extension
• Type of Contribution: Stock
• Deduction Contribution Limit: 25% of Covered Comp
• Valuation: Generally needed
• Eligibility: Age 21 & 1 year or 2 years (if @ then 100% vesting
• In-Service w/drawal: May be after 2 years of participaton
• Taxaction of Distribution: Ordinary unless NUA
• Difference: Stock Bonus Int with SS; ESOP’s non-int with SS

Question 5

Employer Stock Option

Non-Qualified (NQSO)

Incentive Stock Options (ISO)

Answer 5

No Difference:

• No taxable income while above the share price
• Pay exercise price and receive stock
• • NQSO: Taxation at exercise point; W-2 income on gain
• ISO: Taxaction at exercise point; no taxable income but AMT adjusted
• ISO’s holding period: 2 years from date of grant; 1 year from exercise

Question 6

Defined Contribution Plans integrated with Social Security

Answer 6

If the integration level is the taxable wage base and the employees receive a contribution of 3% of total comp, an additional 3% can be contributed for comp in excess of the taxable wage base.

Question 7

IRA Distributions

Answer 7

Can be rolled into another IRA within 60 days once each year.

Question 8

Systematic Withdrawal Strategy to Retirement Income

Answer 8

Often relies on market investments like stocks in order to generate investment growth to help meet retirmenet income needs.

Question 9

Code Sec. 401a

Answer 9

A plan can show that it satisfies the nondiscrimination rules by demonstrating that either benefits or contributions are nondiscriminatory.

Question 10

Standard Termination (PBGC)

Answer 10

If the defined benefit plan covered by PBGC has sufficient assets to pay the present value of accrued benefits, the plan qualifies for a Standard Termination.

Question 11

Fiduciary Responsibility

Answer 11

The exclusive-benefit rule requires that fiduciaries discharge their duties solely in teh interest of teh plan’s participants and beneficiaries for the exclusive purpose of providing benefits and defraying reasonable expenses.

Question 12

Employee Voluntary Contributions

Answer 12

Voluntary employee contributions must satisfy a nondiscrimination test. Essentially, highly compensated employees an’t make voluntary contributions unless nonhighly compensated employhees contribute to the plan.

Question 13

2017 Limits for IRA Contributions

Answer 13

Filing status

Full IRA cont Partial IRA cont No IRA Cont

Individual <$62,000 $62,001.01-$71,999.99 >$72,000

Married file Joint <$99,000 $99,000.01- $118,999.99 >$119,000

Married file Joint spouse active part; ind not

$186,000 $186,001.01-$195,999.99 $196,000 +

Married file sep $0 $.01- $9,999.99 $10,000 +

Question 14

Jill and Joe (both 38) are married and file a joint tax return. Their AGI if $109,000. While Jill is an active participant in her employer’s qualified plan, Joe is not. Assuming no contributions have been made to any type of IRA for 2017, what can they do.

Answer 14

2017 Limits for Deductible IRA Contributions

Filing status Full IRA cont Partial IRA cont No IRA

Individual <$62,000 $62,001.01-$71,999.99> $72,000

Married filing Jointly <$99,000 $99,000.01- $118,999.99 >$119,000

Married filing Jointly spouse active part; ind not

$186,000 $186,001.01-$195,999.99 $196,000 +

Married filing separately $0 $.01- $9,999.99 $10,000 +

Question 15

An employee exercises nonqualified stock options with an option price of $5/share and a market price of $10/share. How much ordinary income does the individual have for each share at time of exercise?

Answer 15

$5 - With nonqualifed stock options, the participant receives ordinary income in the amount of the difference between the market value at the time of exercise and the option price

Question 16

What percentage of the full SS benefit will a worker receive if s/he retires 9 months prior to attaining the individual full SS retirement age

Answer 16

95% (the benefit is reduced by 5/9 of one percent for each month prior to the full SS retirement age (5/9 of 1% x 9 = 5%)

Question 17

Maximum length of tax deferral period for IRA’s

Answer 17

Minimum distributions required at age 70 1/2. There are alos specified payments at the participant’s death.

This is not true of a participant in a profit sharing plan.

Question 18

Exceptions to the rule that distributions are included as ordinary income

Answer 18

Taxes are deferred until distribution. Generally the enire value of a distribution is ordinary income in the year of teh distribution. After tax contribution and paid Table 2001 allow for cost basis recovery. Exceptions:

1. If benefit is disributed as single sum, people born b/4 1936 are eligible for 10 year forward averageing or special capital gains
2. Participant receiving employer securities as part of a lump sum can dfere tax on teh unrealized appreciation until the stock is sold.
3. Section 72(t) penalty tax can be avoided by rolling the benefit into an IRA or other qualified plan. But RMD’s are required at 70 1/2.

Question 19

Participant loans in a qualified plan

Answer 19

Loans are freqeuntly secured by using a participant’s account balance as secruity.

Question 20

Rabbi Trust

Answer 20

• Assets cannot revert to the company
• Assets remain subject to the claims of teh emeployer’s creditors
• Employers use the IRS’s model rabbi trust form
• Spring irrevocability - change in the employer ownershp, the trust become irrevocable.
• Employer can be required to make an irr contribtuion
• Rabbi Trust owns stock
• Model doesn’t allow insolvency triggers
• Clear Rules when benefits will be paid

Question 21

Eligibility for Social Security Retirement Benefits

Answer 21

Born before 1938 - Age 65

Born 1943-54 - Age 66

Born 1960+ - Age 67

Question 22

Retrirement Benefit Increases

Answer 22

8% per year beyond FRA

Question 23

Social Security DI Definition

Answer 23

Severe mental and physical impairment for 5 months, expect to last at least 1 year or result in death.

Question 24

Social Security DI Benefits

Answer 24

Benefit based on the credits earned and age of the worker.

• Age 31+ Fully insured, at least 20 quarters in teh last 40 quarters
• Ages 24-30: 1/2 of quarters available since age 21
• Ages 2-24: 6 of the last 12 quarters

Question 25

Social Security Retirement Eligibility

Answer 25

Fully insured = worked 40 quarters

1 quarter = $1,300

Social Security Tax: 7.65% OASDI and Medicate

Medicare: .9% tax

Question 26

Social Security Survivorship Eligibility

Answer 26

• Fully insured or currently insured (6 quarters of the last 13)
• Children under 18 are entitled to benefits
• Spouse with a child under 16 entitles to benefits
• Spousal coverage only if fully insured.

Question 27

Working while taking social security

Answer 27

SS can be reduced depending on earnings and age

Before retirement age, $1 for every $2; Threshold is $15,720

In the year of retirement age it’s $1 for every $3, Threshold is $41,880

Question 28

Medicare eligibility

Answer 28

Age 65

Automatically enrolled if receiving retirement benefits, or any age if disabled for 2 years

Question 29

Medicare Parts A, B & D

Answer 29

A: Covers hospital and home health care, hospice, skilled nursing

B: Covers doctors, ambulance, outpatient, med quipment, preventative visit and wellness. Does not cover dental, hearing aids or eye exams

D: Drug coverage

Question 30

Retirement Plan Termination

Answer 30

Employers reserve the right to change or terminate the plan or to discontinue contributions. Terminations usually happen when a change of the laws makes the plan less advantageous, due to financial strain, or it doesn’t meet their objectives.

Question 31

Amending a qualified Plan

Answer 31

Changes to the plan due to tax changes or business changes or to solve a defect. Amend the plan documents and administrator revises the Summary Plan Description.

Question 32

Terminating a Qualified Plan

Answer 32

When a qualifed plan is terminated, presuming sufficient funds, all benefits become fully vested as of the date of termination

Retirement plans are required to be permanent

Abandonmnet of the plan for any reason other than buiness necessity within the 2 years is evidence that the plan wasn’t a bona fide program.

Question 33

Terminating a DB plan

Answer 33

Because of PBGC, DB plans have more requirements when terminated. ERISA Title IV requires the the plan terminates under a standard, distress or involvuntary temrination.

1. Standard Term: Voluntary and occurs when employers have sufficient assets to cover all pension liabilities.
2. Distress: Voluntary but financially strained
3. Involuntary: Initiated by PBGC due to high risk to PBGC

Question 34

Terminating a DC plan

Answer 34

To terminate, the employer must pass a corporate resolution.

Question 35

Plan Freeze

Answer 35

DC Plan: A freeze means the employer no longer makes any contributions

DB Plan: A freeze means no longer accruing additional benefits but the plan sponsor must maintain previous accrued benefits.

Question 36

Social Security Wage Base

Answer 36

2017 = $127,200

Excess Contribution % = % contributed above the social security wage base

Base Contribution Percentage = % contributed below the social security wage base

Question 37

Social Security Non-discrimination Rule:

Answer 37

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• ECP can’t be more than 2x BCP
• BCP plus the permitted disparity percentage