HS326 - Retirement Flashcards
Highly Compensated Employees
The smallest group allowed by law is the top 20% of earners (called special payroll testing).
SIMPLE
- 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
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?
$0 - because he doesn’t have any income from employment activities.
Equity based compensation
Stock Bonus & ESOPs
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
Employer Stock Option
Non-Qualified (NQSO)
Incentive Stock Options (ISO)
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
Defined Contribution Plans integrated with Social Security
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.
IRA Distributions
Can be rolled into another IRA within 60 days once each year.
Systematic Withdrawal Strategy to Retirement Income
Often relies on market investments like stocks in order to generate investment growth to help meet retirmenet income needs.
Code Sec. 401a
A plan can show that it satisfies the nondiscrimination rules by demonstrating that either benefits or contributions are nondiscriminatory.
Standard Termination (PBGC)
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.
Fiduciary Responsibility
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.
Employee Voluntary Contributions
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.
2017 Limits for IRA Contributions
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 +
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.
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 +
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?
$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
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
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%)
Maximum length of tax deferral period for IRA’s
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.
Exceptions to the rule that distributions are included as ordinary income
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:
- If benefit is disributed as single sum, people born b/4 1936 are eligible for 10 year forward averageing or special capital gains
- Participant receiving employer securities as part of a lump sum can dfere tax on teh unrealized appreciation until the stock is sold.
- 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.
Participant loans in a qualified plan
Loans are freqeuntly secured by using a participant’s account balance as secruity.
Rabbi Trust
- 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
Eligibility for Social Security Retirement Benefits
Born before 1938 - Age 65
Born 1943-54 - Age 66
Born 1960+ - Age 67
Retrirement Benefit Increases
8% per year beyond FRA
Social Security DI Definition
Severe mental and physical impairment for 5 months, expect to last at least 1 year or result in death.
Social Security DI Benefits
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
