Qualified Plans

Question 1

Qualified Plans - Requirements

Answer 1

There must be a plan document.
There are eligibility requirements.
There are coverage requirements.
There are vesting requirements.

There are special qualification requirements that apply to:
*Top-Heavy Plans.
*Cash or Deferred Arrangements (CODAs) (401k, 403b).
There are limitations on Benefits and Contributions.

QP are required to provide benefits under then plan to a minimum number of nonhighly compensated employees. Employees who do NOT meet the eligibility rules can be excluded from coverage requirements. Employees who are part of a collective bargaining agreement can also be excluded

Question 2

Advantages of Qualified Plans

Answer 2

Income tax is deferred
Payroll taxes are avoided on employer contributions (no avoidance for employee elective deferrals)
There is income tax deferral of earnings and income on the QP assets.
There is Employee Retirement Income Security Act (ERISA) creditor protection

There are Special Taxation Options for Lump Sum Distributions
Pre-1974 Capital Gain Treatment
10-Year Forward Averaging (only available for those born prior to 1936)
Net Unrealized Appreciation

Question 3

Eligibility - Qualified Plans

Answer 3

Employees are eligible who are age 21 and have one year of service (1,000 hours worked during one plan year).
For tax years after 12/31/2020, longterm part-time employees can make elective deferrals, IF:
“They have worked at least 500 hours per year for 3 consecutive years and are age 21 by the end of the three year consecutive period.

Question 4

Qualified Plans - Entrance Dates

Answer 4

Plan Entrance Date
The plan must have at least 2 plan entrance dates per year because you cannot make an eligible participant wait longer than 6 months to enter.

Question 5

Qualified Plans - Coverage Tests (must pass at least one) and also pass the 50/40 test

Answer 5

Safe Harbor Test - over or equal to 70% of NHC covered
Ratio % Test - % NHC Covered / % of HC Covered (less than or equal to 70%)
Average Benefits Test - AB % NHC Covered / AB % of HC Covered (less than or equal to 70%)

DEFDINED BENEFIT PLANS ONLY MUST ALSO PASS: Plan must cover the lesser of 50 non-excludable employees or 40% of non-excludable employees

Question 6

50/40 Test - Defined Benefits Plan only

Answer 6

Plan must cover the lesser of 50 non-excludable employees or 40% of non-excludable employees

Question 7

Who is a highly compensated employee?

Answer 7

Owner Employees - either an owner of greater than 5% (this year or last year) or compensation in excess of $135,000 for prior year
Non-owner Employees - compensation in excess of $135,000 for 2022**

**if elected, can add language ‘ top 20% of employees ranked by salary
Tip: >5% owners who are also employees are always highly compensated

A greater than 5% Owner is defined as:
Individually owned shares, plus
Attribution of shares owned by:
Spouse
Children
Grandchildren
Parents

Question 8

Top Heavy Plans (DB and DC)

Answer 8

Defined Benefit (DB) Plans
A DB plan is top heavy if the present value of the total accrued benefits of key employees in the defined benefit plan exceeds 60% of the present value of the total accrued benefits of the defined benefit plan for all employees.

Defined Contribution (DC) Plans
A DC plan is top heavy when the aggregate of the account balances of key employees in the plan exceeds 60% of the aggregate of the accounts of all employees.

A key employee is any employee who is:
Greater than 5% owner or
Greater than 1% owner with compensation in excess of $150,000 (not indexed) or
An officer with compensation in excess of $200,000 (2022), but based on last year’s compensation.
An Officer is determined based on all the facts

Question 9

Tip:
Top-Heavy - too much of plan benefits go to key employees.
Key employees - always officers or owners.
Highly compensated - anyone who earns a “lot” of money or is an owner.

Question 10

If a Defined Contribution Plan is Top Heavy, there are minimum funding requirements.
+ Funding - Employer must provide non-key employees with a contribution equal to at least 3% of employees compensation.
Except if key employee’s contributions are less than 3%.

If a Defined Benefit Plan is Top Heavy, there are minimum funding and vesting requirements.

Answer 10

Defined Contribution: + Funding - Employer must provide non-key employees with a contribution equal to at least 3% of employees compensation.
Except if key employee’s contributions are less than 3%.
Result: increases funding requirement

Defined Benfit: Funding - Employer must provide non-key employees with a benefit equal to 2% per years of service (limit 20%) times employees average annual compensation.
Vesting - Must use 2-6 graduated, or 3 year cliff.
Result: increases funding requirement, and requires quicker vesting schedules

Question 11

DC Plan Covered Compensation Limit

Answer 11

$305K (2022). This is the maximum amount of compensation that can be considered when deteremining contribution amounts to a DC plan.

Question 12

DB Limits Compensation

Answer 12

The Lesser of

$245,000 for 2022 (or)
100% of the average of the employee’s three highest consecutive years of salary CONSIEDEING THE COVERED COMP LIMITS
This is the maximum benefit that can be received during retirement.

Question 13

Qualified Plans - Coverage Requirements

Answer 13

Defined Contribution Plans:
Just has to pass one of the below three:
Safe Harbor Test >/= 70% of NHC covered
Ratio Test >/= 70%
Average Benefits Test (easiest) = >/= 70%

Tip: benefits is easiest and if you pass safe harbor test you will always pass the ratio test
Know how to calculate all three for CFP exam

Defined Benefit Plan must pass one of the tests above AND the (50/40 test) - plan must cover lesser of 50 employees or 40% of employees

Question 14

Qualified Plan Overview

Answer 14

Question 15

Pension Plan vs. Profit Sharing Plan

Answer 15

Question 16

DB vs. DC

Answer 16

Question 17

401K non-discrimination testing - ADP Test

Answer 17

ADP Test - HC individuals can only defer based on what the NC are doing. If NC are 0-2%, HC can do 2x of that number. 2-8%, HC can do that plus 2%, If NC are doing 8+, HC can do 1.25x.

Only applie to contriobutory plans. Does not apply to non-contributory plans

A noncontributory plan is any pension plan or other type of benefit plan that is paid for entirely by the employer. Participants in the plan are not required to make any payments. Employers frequently set up life insurance noncontributory plans for their employees, though the total amount of coverage tends to be low. Noncontributory plans are most beneficial for low-income employees, who might not otherwise be able to afford the associated benefits.

Question 18

401K non-discrimination testing - ACPTest

Answer 18

SSame scale as ADP Test

Question 19

401K Safe Harbor Plans - Special Circumstances

Answer 19

If you do a Safe Harbor 401K, you are not required to pass ADP or ACP tests.

Employer must provide any one of the following:
*3% non-elective contribution to all EE (even if they’re not contributing to the plan)
*Matching contribution - 100% up to 3% and 50% from 3%-5%
Employer contributions are 100% vested at all times

Question 20

Roth IRa and Roth 401k Holdings Periods

Answer 20

*All outside Roth IRAs have same holding period (it starts on Jan. 1 of the year you made first contribution to one Roth IRA period) Ex: Had a Fidelity and CS Roth IRA opened in different years. L0ok at date of first contribution. That is your holding period for both

Roth 401Ks have their own individual holdings periods

Question 21

Roth IRA vs. Roth 401k

Answer 21

Question 22

Defined Benefit Pension Plan vs Defined Contribution Pension Plan Funding Requirements

Answer 22

Defined Benefit :Funding Target: 100% of the PV of all benefits accrued
Minimum required contribution to a defined benefit plan will depend on a comparison of the PV of the plan’s assets with the plan’s funding target and target normal cost. Uses an actuary for this.

Defined Contribution Plan
The plan sponsor must fund the plan annually with the amount defined in the plan document.

Both require mandatory funding

Question 23

Pension plans disallow most in-service withdrawals

Answer 23

In-Service Withdrawal is any withdrawal from a pension plan while the employee is a participant in the plan other than a loan.

The participant of a pension plan cannot take an in-service withdrawal from the pension plan.

Question 24

Investment RIsk Assumption DB vs. DC

Answer 24

DB Plans - risk is with the employer
DC Plans - risk is with employee

Question 25

Forefeitures - DB vs. DC

Answer 25

Forfeitures reduce plan costs in DB plans.

Forfeitures can reduce plan costs OR be allocated to other members of the plan

Ex: Someone leaves job with a $40K balance/benefit. In DB, that goes back into pot to reduce plan costs. In DC, it can do that or allocate

Question 26

Accrued Benefit vs. Account Balance (+ Credit for prior service)

Answer 26

Defined Benefit Plans
Participant’s accrued benefit = Present value of the vested expected future payments at retirement.
May give credit for prior service
Ex formula: 4% x years of service x three highest years of salary

Defined benefit plans use commingled accounts.

Defined Contribution Plans
Participant’s accrued benefit = Vested account balance in the qualified plan.
No credit for prior service
Ex formula: 4% x current salary = annual benefit

DC plan defines contribution just for that year

Defined contribution plans generally use separate individual accounts.

Question 27

Summary DB vs. DC pension plans

Answer 27

Defined Benefit vs. Defined Contribution Pension Plans
Below are the primary differences between defined benefit and a defined contribution pension plan.
Use of an Actuary
Assumption of the Investment Risk
Allocation of Plan Forfeitures
Coverage Under the PBGC
Accrued Benefit versus Account Balance
Credit for Prior Service
Use of Social Security Integration
Commingled versus Separate Accounts
Actuary
Determine required plan funding range.
Assumptions

Actuary Required Annually
Defined Benefit Pension Plan
Cash Balance Pension Plan
Actuary Required at Inception
Target Benefit Pension Plan
No other plans require an actuary

Chart *Actuary required for the target beneficiary plan at inception.

Question 28

Defined Benefit (DB) Pension Plans

Answer 28

DB plans have mandatory funding requirements
The pension benefit is based on a defined funding formula:
Flat Amount Formula - equal dollar benefit
Flat Percentage Formula - % of salary
Unit Credit Formula -years of service x % x salary
Unit Credit Formula - increases plan benefit on combination of greater pay and greater length of service.
Commingled Accounts
Favors Older Plan Entrants
Eligibility/Coverage/Vesting - Same as qualified plans.

Question 29

Cash Balance Pension Plans

Answer 29

Type of Defined Benefit Pension Plan - Hybrid
Mandatory Funding is required.
Pension benefit based on an annual guaranteed contribution rate and guaranteed earnings on the contributions.
Commingled Accounts:
Participant sees a hypothetical account with hypothetical earnings.
Actuarially Determined
Employees receive participant statements with hypothetical separate accounts
Hypothetical account is accrued benefit which would be payable at retirement.
Favors younger plan entrants

Conversion to a cash balance hybrid plan.
The three requirements for a hybrid plan are:
A participant’s accrued benefit, as determined as of any date under the terms of the plan, would be equal to or greater than that of any similarly situated, younger participant.
The interest rate used to determine the interest credit on the account balance in the hybrid plan must not be greater than a market rate of return, to be determined under regulations to be issued.
For plan years beginning after 2007, the hybrid plan must provide 100 percent vesting after three years of service.

Question 30

Types of Pension Plans

Answer 30

*pension plans requires mandatory funding

Question 31

Money Purchase Pension Plan (MPPP)

Answer 31

Money Purchase Pension Plans (MPPP)
A MPPP is a Defined Contribution Pension Plan.
A MPPP has a Mandatory annual funding of a fixed percentage of the employee’s compensation - up to 25%.
The participant bears investment risk.
There are separate accounts.
A MPPP favors younger plan entrants.
Eligibility/Coverage/Vesting - same as qualified plans.
Not likely to be established after EGTRRA 2001-Since profit sharing plans can contribute up to 25%.
MPPP - very similar to profit sharing plans but MPPP require mandatory funding. (think of as cousin to PSP plan)

Question 32

Target Benefit Pension Plans

Answer 32

A Target Benefit Pension Plan is a special type of money purchase pension plan.

The plan determines the contribution based on the participant’s age.

The participant bears investment risk.

The plan favors older plan entrants.

Eligibility/Coverage/Vesting - same as qualified plans.
Is a defined contribution plan
is a cousin to the age based profit sharing plan
Only have actuary at very beginning of plan - assumptions are never changed for inflation or anything else

Question 33

A company’s defined benefit pension plan utilizes a funding formula that considers years of service and average compensation to determine the pension benefit payable to the plan participants. If Kim is a participant in this defined benefit pension plan and she has 30 years of service with the company and average compensation of $75,000, what is the maximum pension benefit that can be payable to Kim at her retirement?
A. $19,500
B. $58,000
C. $75,000
D. $245,000

Answer 33

The correct answer is C.

The maximum amount payable from a defined benefit pension plan is the lesser of $245,000 (2022) or 100% of the average of the employee’s three highest consecutive years compensation. Because the average of Kim’s compensation is $75,000, she would be limited to receiving a pension benefit at her retirement of $75,000.

Question 34

Pension plans have limited investment in life insurance (limited to providing death beenfits).

Answer 34

Life Insurance cannot be the primary focus of the QP

Plan must pass the 25% test or the 100 to 1 Ratio test

If the policy is a Term or Universal Life Insurance Policy:
Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer’s aggregate contributions to the participant’s account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer’s aggregate contributions to the participant’s account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income, or the policy distributed to the participant, at or before retirement.

The economic value of pure life insurance coverage is taxed annually to the particpany (

Question 35

Who assumes investment risk in pension plans?

Answer 35

Question 36

Robbie is the owner of SS Automotive and he would like to establish a qualified pension plan. Robbie would like most of the plan’s current contributions to be allocated to his account. He does not want to permit loans and he does not want SS Automotive to bear the investment risk of the plan’s assets. Robbie is 32 and earns $700,000 per year. His employees are 25, 29, and 48 and they each earn $25,000 per year. Which of the following qualified pension plans would you recommend that Robbie establish?

A. Target benefit pension plan
B, Cash balance pension plan
C. Money purchase pension plan
D. Defined benefit pension plan using permitted disparity

Answer 36

Solution: The correct answer is C.

Because Robbie does not want SS Automotive to bear the investment risk of the plan assets, the money purchase pension plan or the target benefit plan would be the available options to fulfill his requirements. The target benefit plan would not fulfill Robbie’s desires because as a percentage of compensation, older employees receive a greater contribution in a target benefit plan and one of the employees is older than Robbie. In such a case, the older employee would receive a greater (as a percentage of compensation) contribution to the plan.

Question 37

Each of the following are requirements imposed by law on qualified tax-advantaged retirement plans EXCEPT:

A. Plan documentation
B. Employee vesting
C. Selective employee participation
D. Employee communications

Answer 37

Solution: The correct answer is C.

Broad employee participation, as opposed to selective participation, is a requirement of a tax-advantaged retirement plan. All of the others are requirements for “qualified” plans.

Question 38

Which of the following statements are reasons to delay eligibility of employees to participate in a retirement plan?

1. Employees don’t start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service).
2. Since turnover is generally highest for employees in their first few years of employment and for younger employees, it makes sense from an administrative standpoint to delay their eligibility.

Answer 38

Both 1 and 2 are correct.

Question 39

Packlite company has a defined benefit plan with 200 non-excludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the 50/40 test?

A. 40
B. 50
C. 80
D. 100

Answer 39

Solution: The correct answer is B.

The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees.

Here 40% would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees.

Question 40

DB - plan must pass one of the three (Safe Harbor test, Ratio test, average benefits test) AND the 50/40

Question 41

XYZ has a noncontributory qualified profit sharing plan with 310 employees in total, 180 who are nonexcludable (40 HC and 140 NHC). The plan covers 72 NHC and 29 HC. The NHC receive an average of 4.5% benefit and the HC receive 6.5%. Which of the following statements is (are) correct?

I. The XYZ company plan meets the ratio percentage test.

II. The XYZ company plan fails the average benefits test.

III. The plan must and does meet the ADP test.

A. 1 only
B. 2 only
C. Both 1 and 2
D. 1, 2, and 3

Answer 41

Solution: The correct answer is C.

The plan does not have to meet the ADP test because it is a noncontributory plan. The plan meets the ratio percentage test and fails the average benefits test.

Safe Harbor = 72 ÷ 140 = 51% = Fail

Ratio % = (72 ÷ 140) ÷ (29 ÷ 40) = 70.9% = Pass

Average Benefit = 4.5 ÷ 6.5 = 69.2% = Fail

Question 42

QP eligibility

Answer 42

Eligibility
Employees are eligible who are age 21 and have one year of service (1,000 hours worked during one plan year).
There is a special election to require two years of service, but the consequence of such an election is immediate - 100% vesting requirement.
Not available for 401(k) plans

Question 43

The following statements concerning retirement plan service requirements for most qualified plans are correct EXCEPT:

A. The term “year of service” refers to an employee who has worked at least 1,000 hours during the initial 12-month period after being employed.
B. If an employee hired on October 5, 20X1 has worked at least 1,000 hours or more by October 4, 20X2, he has acquired a year of service the day after he worked his 1,000th hour.
C. An employer has the option of increasing the one-year of service requirement to 2 years of service.
D. Once an employee, who is over the age of 21, attains the service requirement of the plan, the employer cannot make the employee wait more than an additional six months to participate in the plan.

Answer 43

Solution: The correct answer is B.

Option B is incorrect because the employee would NOT acquire a year of service the day after he worked his 1,000th hour, but after twelve months AND 1,000 hours.

Question 44

Which of the following statements is true?

A. Currently, pension plans are more commonly established than profit sharing plans because they promote greater employee retention and allow employees to receive greater benefits.
B. The earnings within a qualified plan each year are taxed to the plan sponsor, unless the plan sponsor elects to treat the earnings as employee compensation.
C. Payroll taxes are payable on noncontributory plan allocations.
D. Distributions from qualified plans are usually subject to ordinary income tax, but some may also be eligible for the reduced capital gains rates.

Answer 44

Solution: The correct answer is D.

Distributions from qualified plans are usually subject to ordinary income tax, but some lump sum distributions may be eligible for capital gains tax treatment. Statement a is incorrect because profit sharing plans are more com­monly established than pension plans. Pension plans are not established because the employer must bear the risk of plan investments. Statement b is incorrect as the earnings within a qualified plan are nontaxable. Statement c is incorrect - payroll taxes are not payable on non contributory plan (employer paid pension plan) rt allocations. Payroll taxes are due on employee deferral contributions.

Question 45

Top Heavy Plans

Answer 45

Defined Benefit (DB) Plans
A DB plan is top heavy if the present value of the total accrued benefits of key employees in the defined benefit plan exceeds 60% of the present value of the total accrued benefits of the defined benefit plan for all employees.

Defined Contribution (DC) Plans
A DC plan is top heavy when the aggregate of the account balances of key employees in the plan exceeds 60% of the aggregate of the accounts of all employees.

To fix must use (1) top heavy vesting schedules and (2) provide a minimum level of funding to key employees:

Top Heavy Vesting -DB plan must accelerate to 2-6 yr. graduated or 3 yr. cliff. (DC plans already meet this vesting schedule)

Top Heavy Funding - must provide its non-key employees with mimn level of funding. DC plan that is top heavy must provide each of its nonexcl, non key ee with a contribution equal to at least 3% of the ee’s compensation

for DB plan. must provide its nonkey ee benefit equal to 2% per the ee’s years of service multiplied by the ee’s avg. compensation over testing period

Question 46

Key employee

Answer 46

A key employee is any employee who is:
Greater than 5% owner or
Greater than 1% owner with compensation in excess of $150,000 (not indexed) or
An officer with compensation in excess of $200,000 (2022), but based on last year’s compensation.
An Officer is determined based on all the facts

*key emplloyee must be an owner or officer

Question 47

Vesting Schedule (Employer Contributions) - DC Plans vs. DB Plants

Answer 47

DC Plans

*Remember CBPP use a 3 yr. vesting cliff

Question 48

Defined Contribution Limit is 25% of Pay

Answer 48

DC plans include 401(k), profit sharing, money purchase, and others. The limit on deductible contributions to a DC plan is 25% of the compensation otherwise paid or accrued to the beneficiaries under the plan for the taxable year. This sounds relatively simple. If an employer pays $1,000,000 in compensation to its workers, then the employer may deduct at most $250,000 in DC plan contributions.

• The limit is not based on the compensation paid to the entire workforce, but rather only to those benefitting under the plan.

Question 49

Secure Act - RMD

Answer 49

Any of the following individuals are considered an eligible designated beneficiary (EDB): a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the IRA owner, or a child of the IRA owner who has not reached the age of majority.

Question 50

Qualified Distgributions - Roth IRA

Answer 50

Question 51

Distributions Prior to Age 59 ½

Answer 51

First RMD must begin by APril 1 of the year following the year in which the participant attains the Age of 72,.

All other RMDs = by 12.31

Question 52

Plan Loans - only available with CODAs

Answer 52

laon may not exceed the lesser of $50K or half the participants vested loan balance.

Repayment of Plan Loans - Repayment of Plan Loans

• Qualified Plan loans must be repaid within five years.
  
  • The repayment period is extended up to 30 years if loan proceeds used to purchase a principal residence.
• Substantially level amortization of the loan is required over its term.
• Payments must be made at least quarterly.
• Plan sponsors often apply additional rules and requirements.
• Failure to repay the loan as prescribed will consider the value of the loan a taxable distribution.
  
  • Possibly subject to the 10% early distribution penalty.
• Termination from employment generally causes the entire loan to become due.
• Loan is repaid with after tax dollars.

Question 53

Roth RMD Example - penalties and taxes for NQ Dist.

Answer 53

Question 54

Roth RMD Example 2

Answer 54

Conversions are always tax-free because you already paid the tax on it when you converted it

distribution is taxable if it is non-qualified. additional 10% penalty applies unless you are subject to one of the exceptions

Question 55

When qualified plan assets are rolled over to an IRA, it causes the loss of:

Answer 55

• ERISA Protection (although the IRA will be protected under federal bankruptcy law).
• The 10-year forward averaging possibility,
• Net unrealized appreciation possibility, and
• Pre-1974 Capital Gain Treatment.

Question 56

NUA Example

Answer 56

Net unrealized distribution is a lump sum distribution of employer securities usually from an ESOP or Stock Bonus Plan.

Ex: A company contributed $20,000 worth of stock into Steve’s Stock Bonus Plan.

• The stock is distributed to Steve 5 years later when the stock is worth $100,000.
• Steve sells the stock 6 months later for $125,000.
• What are the tax consequences?
  
  • At Distribution: $20,000 of ordinary income.
  • At Sale: $80,000 LTCG which represents the NUA; $25,000 STCG (sale of stock 6 months later which is a short term holding period).

Question 57

Adjusted Basis in a Qualified Plan

Answer 57

• How is adjusted basis created?
  
  • After-tax contributions create basis.
  • Also if the participant was subject to income tax on payment of life insurance premiums.
• How is adjusted basis taxed at distribution?
  
  • It is treated as a tax-free return of capital to the extent of adjusted basis.
  • Any distributions above adjusted basis is treated as ordinary income.

Question 58

Annuities

*

Answer 58

• Annuity payments consist of both a return of principal and earnings.
• The principal portion of each payment is treated as a partially tax-free return of adjusted basis.
• The remaining portion is taxed as ordinary income, which is determined by the inclusion/exclusion ratio.

Question 59

Lump Sum Distribution Defintiion

Answer 59

Lump Sum Distributions

The definition of a lump sum distribution includes:

• A distribution of the participant’s entire account balance or accrued benefit,
• Within one taxable year,
• On account of the participant’s death, attainment of age 59½, separation from service, or disability, and
• The employee participated in the plan for at least five years prior to the date of distribution.

Note: If the participant meets the “Lump Sum” criteria, preferred tax treatment may be available.

Question 60

Qualified Domestic Relations Order (QDRO)

Answer 60

• A QDRO is an order, judgment, or decree set forth by a judge that details the right of a third party to receive benefits from another individual’s qualified plan, which is the result of: Child Support and/or Divorce
• A QDRO is a nontaxable distribution as long as assets are deposited into an IRA or another qualified plan.

Answer 61

Question 62

NQ Distributions - Chart

Answer 62

Question 63

72(t) Distributions

Answer 63

• 72(t) distributions, is a distribution part of a series of substantially equal periodic payments, avoid the 10% penalty.
• Requirements for a 72(t) Distribution
  
  • Substantially equal periodic payments,
  • Made at least Annually,
  • For the life expectancy of the participant or joint lives of the participant and his designated beneficiary.
  • Payments are made after separation of service.
• Payments must continue for the greater of 5 years or until the paraticipant reaches age 59.5

This rule allows account holders to benefit from their retirement savings before retirement age through early withdrawal without the otherwise required 10% penalty. The IRS still subjects the withdrawals to the account holder’s normal income tax rate.

Rule 72(t) actually refers to code 72(t), section 2, which specifies exceptions to the early-withdrawal tax that allow IRA owners to withdraw funds from their retirement account before age 59½, as long as certain qualifications, known as SEPP regulations, are met.

To take advantage of this rule, the owner of the retirement account must take at least five substantially equal periodic payments (SEPPs)

Question 64

Qualified Plan Selection

Answer 64

Considerations when selecting a qualified plan:

• Cash Flow Considerations
  
  • Don’t select a plan that requires mandatory funding if there are not stable cash flows.
• Administration Costs
  
  • Consider costs when selecting a plan (for example, a plan that requires an actuary will have greater admin costs).
• Owner’s Business and Personal Objectives
  
  • Select a plan that meets the owner’s business and personal objectives.

Tip: Stable cash flows or fluctuating cash flows are key words in plan selection and often part of the fact pattern in the exam.

Question 65

Selecting QP - Funding Considerations

Answer 65

Mandatory funding:

• Determine whether investment risk will be borne by the employer or the employee:
  
  • Employer: Either defined benefit pension plan or cash balance pension plan.
    
    • If the plan favors older age entrants - Defined benefit pension plan.
    • If the plan favors younger age entrants - Cash balance pension plan.
  • Employee: Either target benefit pension plan or money purchase pension plan.
    
    • If the employer is willing to endure larger establishment costs - Target benefit pension plan.
    • If the employer wants low establishment costs - Money purchase pension plan

Pension plans require mandatory funding

Discretionary funding:

• If employee contributions to the qualified plan are desired (self reliance - contributory):
  
  • Pretax: 401(k) Plan
  • After-tax: Thrift Plan/401(k) Roth
• If only the employer contributes to the qualified plan (noncontributory):
  
  • Contributions of company stock: Profit sharing plan, Stock bonus plan, ESOP.
  • Test benefits for discrimination rather than contributions (cross-test): Age-based profit sharing plan, new comparability plan.
• If the employer wants low initial costs - Profit sharing plan.
• If the employer is willing to pay additional costs - Stock bonus plan, ESOP, age-based profit sharing plan, or new comparability plan.
• If the employer wants integration - Profit sharing plan or Stock bonus plan.

Question 66

Which plans are most beneficial towards older employees?

Answer 66

Defined Benefit and Target Benefit Pension Plans

Question 67

Which plans are most beneficial towards younger employees?

Answer 67

CBPP and the MPPP

Question 68

Company A has been capitalized by MJBJ Vulture Capital, a venture capital company. Company A’s cash flows are expected to fluctuate significantly from year to year, due to phenomenal growth. They expect to go public within three years. What is the best qualified plan for them to consider adopting?

Answer 68

A stock bonus plan will allow equity participation without the use of cash flows and the public offering will eventually provide liquidity.

Question 69

Marie, the sole shareholder in Marie’s Pastries, is contemplating establishing a qualified plan. Marie, a long-time widow, has always treated the employees like her family and the company has experienced very low turnover. She would like to use the retirement plan to assist her in transferring ownership interest to the employees as she is ready to retire. She has a strong preference for avoiding and deferring taxes. She is opposed to mandatory funding and indifferent to integration. Which plan would be appropriate for Marie given the corporation’s employee census is as follows:

(Focus on the bold items to get to the right plan.)

Answer 69

An ESOP would be the most appropriate plan to meet Marie’s objectives. The stock bonus plan would allow Marie to transfer stock, but would not assist her immediately in her retirement plans. The defined benefit and money purchase pension plan would require mandatory funding. The ESOP would provide her with tax benefits and a diversified portfolio because of her age.

Question 70

Self Employed Person - Deduction of Contribution to Plan

Answer 70

Limited to 25% of overall employee covered compensation

Where to deduct?

• Sole Proprietors – Schedule C
• Farm – Schedule F
• Partnership – Form 1065
• Corporation – Form 1120
• Self-Employed Person – Deduction for AGI on Form 1040

There is a formula to determine the deduction limit for self-employed individuals.

Although self-employed individuals may adopt basically any qualified plan, the plan they choose to adopt is referred to as a Keogh plan.

• A Keogh plan is simply a qualified plan for a self-employed person.

Self-Employed persons calculation (Keogh Plans)

• Self Employed Contribution Rate = Contribution to other participants ÷ (1 + contribution to other participants)
  
  • Example: A 25% contribution to employees results in a self employed contribution rate of: .25 ÷1.25 = 20%

Question 71

Self -Employed Contribution Ex: Jack has self employed income of $200,000 with 25% contribution to employees.

Answer 71

Step 1: Calculate the contribution rate of the self-employed individual:

Self-employed contribution rate = Contribution rate to other participants ÷ (1+ Contribution rate to other participants)

= .25 ÷ 1.25

= .20 or 20%

Step 2: Calculate the self-employment tax:

$200,000 (self-employment income) X 92.35% = $184,700 (net earnings subject to self-employment tax)

12.4% x 147,000

+ 2.9% x 184,700

= $23,584.3 (self-employment tax)

Step 3: Calculate the self-employed individual’s contribution:

$200,000 (Self Employment Income) - 11,792.15 (½ SE Tax (23,584.3 ÷ 2)) = 188,207.85 (earned income)

188,207.85 (earned income) X 20% (SE Contribution Rate (.25/1.25)) = $37,641.57 (SE Contribution)

The self-employment tax rate is 15.3%: 12.4% of that part goes to Social Security and 2.9% for Medicare. This rate applies to 92.35% of self-employment income within the SS wage base:

You can deduct half of your self-employment tax on your income taxes. So, for example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you’ll need to pay that money when it’s due during the year, but at tax time $1,000 would be deductible on your 1040.

Question 72

Self-Employment Tax Rate

Answer 72

The self-employment tax rate is 15.3%: 12.4% of that part goes to Social Security and 2.9% for Medicare. This rate applies to 92.35% of self-employment income within the SS wage base:

You can deduct half of your self-employment tax on your income taxes. So, for example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you’ll need to pay that money when it’s due during the year, but at tax time $1,000 would be deductible on your 1040.

Question 73

Forfeitures

Answer 73

• Forfeitures occur when employees terminate employment and they forfeit unvested contributions to the plan.
• Defined Benefit Plans
  
  • Forfeitures are required to reduce future employer plan funding costs.
• Defined Contribution Plans
  
  • Forfeitures may reduce employer plan funding costs, or
  • Forfeitures may be allocated to accounts of remaining participants.

Tip: The CFP® exam seems to prefer allocation to remaining participant accounts.

Question 74

Pension Benefit Guaranty Corporation (PBGC)

Answer 74

The PBGC guarantees pension benefits, such as:

• Defined Benefit Pension Plans
• Cash Balance Pension Plans

PBGC does not cover defined contribution plans, or plans of professional service corporations with 25 or fewer participants.

The plan sponsor pays premiums of:

• $88 (2022) per plan participant, and
• $48 per $1,000 of plan underfunding.

The maximum annual PBGC benefit is $74,454.60 for 2022.

The maximum guaranteed amount is generally based on the age when first start receiving benefits from the PBGC. The amount shown here is based on age of 65. See Maximum Monthly Guarantee Tables for amounts for other ages. See Premium Rates for list of premium rates.

Question 75

Terminating a Qualified Plan

Answer 75

• When terminating a qualified plan:
  
  • All participants become fully vested.
  • The plan must not have been established as a temporary program.
  • Defined Benefit Plans
    
    • Standard - Voluntary and may occur when the plan has sufficient assets to pay all liabilities at the time of final distributions.
    • Distress - Voluntary and may occur when an employer is in financial difficulty and unable to continue the plan. Usually when the employer has filed chapter 7 or 11 bankruptcy.
    • Involuntary - Initiated by the PBGC when the plan is unable to pay benefits from the plan and the PBGC wants to limit the amount of exposure to the PBGC.
• Defined Contribution Plans
  
  • Terminate contributions after fulfilling all contribution requirements.

Question 76

401(k) Plans With Safe Harbor Nonelective Contributions

Answer 76

To satisfy the Safe Harbor requirements, the plan must commit to make a nonelective contribution of at least 3% to all eligible employees regardless of whether or not they elect to make deferrals under the plan. These contributions must be immediately 100% vested. Such a Safe Harbor plan is exempt from the ADP test. It will also be exempt from the Top-Heavy test if no employer contributions other than safe harbor nonelective contributions are made for the applicable plan year.

Question 77

Age 72 RMD

Answer 77

The year an individual reaches age 72 is their first RMD year. The RMD for the first RMD year must be taken by April 1 of the following year. This April 1 deadline is the individual’s required beginning date (RBD). All other RMDs must be taken by December 31 of the year to which they apply.

Question 78

Which of the following statements accurately states the tax consequences for group health insurance premiums paid by an employer?

A. Non-deductible for employer and excluded from taxable income for employee.

B. Deductible for employer and excluded from taxable income for employee.

C. Non-deductible for employer and included in taxable income for employee.

D. Deductible for employer and included in taxable income for employee.

Answer 78

Solution: The correct answer is B.

Question 79

non contributory plan

Answer 79

A noncontributory plan is any pension plan or other type of benefit plan that is paid for entirely by the employer. Participants in the plan are not required to make any payments. Employers frequently set up life insurance noncontributory plans for their employees, though the total amount of coverage tends to be low. Noncontributory plans are most beneficial for low-income employees, who might not otherwise be able to afford the associated benefits.

Question 80

Vesting: Remember : Deferred eligibility requires 100% vesting aftter two years of deferral. 401k plans are not eligible for deferral.

Question 81

DC that are CODA s (like 401K0 plans must also pass the both the ACP and ADP test

Answer 81

Only certain types of entities may establish a 401k plan:

-corporations

• partnerships
• -proprietorship’s
• LLCS
• tax exempt entities

employee cannot be required to complete more than 1 year of service as a condition of participation in a 401k arrangements. This is bc the employee elective deferral contributions are already 100% vested

Contributions to 401ks plans can be made as: (1) employee elective deferral contributions (roth or trad) 2) after tax contribution 3)employer matching 4)PSP contributions 5) employer contributions to solve ADP/ACP problems

Question 82

annual pension benefit amt

Answer 82

____% /yr. x # of yrs of service x avg. of highest 3 yrs of salary

Question 83

qppp requires mandatory annual funding , disallows most in servicewithdrawls, limits investmetn in employer’s stock and and investmetn of assets in life insurance

Answer 83

aggregate value of employer stock cannot exceed 10% of the FMV of the PP assets at time they are purchase

Question 84

Diff b/w DB and DC pension plans

Answer 84

• use of an actuary (DB requires annual, higher costs) TBPP uses actuary at inception and MPPP does not require actuary b.c anual contr is pre-defined)
• assumption of risk (DB = ER, DC= EE)
• disposition of plan forfeitures (reduce costs or allocate to ee) (DB =reduce future costs, DC= costs or allocated to ther participants)
• coverage under the PBGC (DB= yes, DC= no)
• use of SS integration (DB = yes, excess or offest method, DC =excess onky)
• calc of accrued benefit or account balance (DB= accrued benefit, DC = account balance)
• ability grant credit for prior service (DB = yes, DC = no)
• comingled funds vs separate (DB = comingled, DC= separate)

DB plans usually favo4r older employees, DC plans usually favor younger

howber., CBPP plans favor younger entrants bec formula is based on # of yrs. employed w. firm

Question 85

CBPP plans favor younger entrants bec formula is based on # of yrs. employed w. firm

Answer 85

CBPP shares many characetiersi with DC plans, but is in fact a DB plan

basic component is a guaratneed investment return (guranteed interest credit)

Question 86

MPPP

Answer 86

defined contribution plan. provides for a contribution to the plan each year of a fixed percentage of the EE’s compensation

benefits younger empl0oyees because of compounding effects of and number of contributions

Question 87

TBPP

Answer 87

type of MPPP DC plan. determines contirbution based on to participant’s account based on benefit that will be paid from participants account at retirement.

Tip: A target benefit plan is a type of qualified defined contribution plan. Because target benefit plans utilize participant age as one of the factors in determining plan contributions, these plans generally result in a contribution allocation that tends to benefit older participants.

Question 88

PSP PLans (PSP, 401k, stock bonuyd plabs, ESOP, thrif plans, age-based PSP, new comparbility)

Answer 88

• there is no mandatory funding of a profit sharing plan
• contributions are generally discretionary but funding myust be substantial and recurring
• doesn’t have to contirbute in year in which company made no profits and.or year in which it made profits
• 25% conitrbutions limit of covered comp

Question 89

premitted disparity in PSP is limited to the lesser of twice the bas rate or a difference of 5.7 %

Question 90

elective defferal limits (401k, 403b, 457(b) and SARSEPS

Answer 90

2022: annual deferral limit $20,500

catch up 50+: 6,500

total eelctive defrral $27K

For decades, Americans working in the private sector have relied on 401(k) plans to fund their retirement. However, if you take a job in the federal government or the military, you can expect a different investment vehicle as part of your benefits package: the thrift savings plan (TSP). Thrift plans allow for after tax deferrals. The two plans differ when it comes to investment choices, with a TSP offering fewer fund options than a typical 401(k).

Question 91

catch up 50+

Answer 91

roth/traditional: $1,000

401K : $6,500

Question 92

adp testting 401k (in addition to ACP testing)

Answer 92

acp claculated exactly same as ADP

safe harbor from adp/acp testing: 4% noncontirbutory ER contribution

Answer 93

acp claculated exactly same as ADP

safe harbor from adp/acp testing: 4% noncontirbutory ER contribution

Question 94

Qualified Plans are premitted to provide loans from the plans

Answer 94

max loan of up to lessed of ½ the vested plan accured benefit up to $50K

msust be repaid within 5 years

Question 95

Which of the following are included in the gross estate:

1. Proceeds from a life insurance policy owned by the decedent insured that was assigned to an ILIT two years before death of the insured.
2. A secular trust where the only income beneficiary was the decedent’s spouse.
3. Property where the decedent had a reversionary interest of less than 1% of the value.
4. Gift taxes paid two years prior to the decedent’s date of death for gifts made four years earlier.

Answer 95

Solution: The correct answer is A.

Incidence of ownership of life insurance policies assigned within three years of death are includible in the decedent’s estate as a gift, as are CRATs and CRUTs. Any amount of gift tax subject to the gross up rule is includible in the taxable estate but must be for gifts made within three years of death.

Question 96

Lisa made the following transfers during 2022:

• $17,000 to her grandson’s law school for his tuition.
• $1,000 to her neighbor to help him pay a hospital bill.
• A transfer of property valued at $100,000 to a GRAT. Lisa retained an annuity valued at $40,000 and her daughter is the remainder beneficiary.

What is the total amount of Lisa’s taxable gifts for 2022?

1. $40,000
2. $60,000
3. $62,000
4. $65,000

Answer 96

Solution: The correct answer is B.

Lisa’s transfers to her grandson’s law school was a qualified transfer. The gift to the neighbor is not a qualified transfer because the payment was not made directly to the educational or medical institution, but the transfer is eligible for the annual exclusion. As such, the taxable amount of each is $0 and $0, respectively. The transfer of the remainder interest in the GRAT to Lisa’s daughter is valued at $60,000 ($100,000 - $40,000). Since it is a gift of a future interest, the transfer is not eligible for the annual exclusion. Accordingly, Lisa’s total taxable gifts are $60,000.

A gift of a future interest is where the person who receives the gift does not yet have the unrestricted right to the immediate possession, use and enjoyment of the property, but will have these rights at a later time

a) No part of the value of a gift of a future interest may be excluded in determining the total amount of gifts made during the “calendar period”

Question 97

Brody and Tanya recently sold some land they owned for $200,000. They received the land five years ago as a wedding gift from Brody’s Aunt Jeanette. Their generous Aunt also gifted them $30,000 as a wedding shower gift a few months before. Aunt Jeanette purchased the land many years ago when the property was worth $20,000. At the date of the gift, the property was worth $100,000 and Aunt Jeanette paid $40,000 in gift tax. What is the long term capital gain on the sale of the property?

1. $42,400
2. $52,000
3. $92,400
4. $148,000

Answer 97

Solution: The correct answer is D.

In general, when a donor makes a gift of property other than cash to a donee, the donee will take the property at the donor’s adjusted basis. The holding period of the donee will include the holding period of the donor for purposes of subsequent transfers and the determination of long or short-term capital gains. An exception to the general basis rule occurs when the donor gives property with a fair market value in excess of his adjusted basis and the donor pays gift tax. The gift tax associated with the appreciation is added to the donor’s original adjusted basis to determine the donee’s basis. Based on the previous gift above the 2021 annual gift exclusion, the exclusion will not be used in calculating basis of the property. Thus, the basis would be:

$20,000 + ($40,000 × ($80,000/$100,000)) = $52,000

The gain on the asset would be $200,000 − $52,000 = $148,000.

Question 98

Colin would like to use his recent inheritance of $500,000 to establish a charitable remainder trust. Colin would like to have the flexibility to make additional contributions to the charitable remainder trust in the future. Which of the following would you recommend for Colin?

1. A Charitable Remainder Annuity Trust.
2. A Charitable Gift Annuity.
3. A Charitable Lead Unitrust.
4. A Charitable Remainder Unitrust.

Answer 98

Solution: The correct answer is D.

Option a is incorrect because additional contributions may not be made to a CRAT. Option c is incorrect because a CLUT is not a charitable remainder trust. Option b is incorrect because each donation is a separate annuity and the annuity it not a remainder trust.

Question 99

Charitable Remainder & UniTrust (CRUT)

Answer 99

Charitable Remainder & UniTrust (CRUT)

• The annuity must pay a fixed percentage of at least 5% of the annual FMV as revalued.
• There is an annual valuation.
• The donor can contribute after the inception of the trust.
• The trust can provide for catch up provisions allowed only if the distributed income is less than the required stated %.
• Remainder Interest at the inception must be ≥ 10% of the initial value of the donated assets.
• More flexible than a CRAT.

A charitable remainder unitrust (also called a CRUT) is an estate planning tool that provides income to a named beneficiary during the grantor’s life and then the remainder of the trust to a charitable cause. The donor or members of the donor’s family are usually the initial beneficiaries.

Question 100

Charitable Remainder Annuity Trust (CRAT)

• Must pay a fixed annuity > to 5% of the initial FMV.
• The annuity must be paid annually.
• The annuity if for life or if for a term not more than 20 years.
• The donor can reserve the right to change the charitable beneficiary.
• No contributions after inception may be made.
• Remainder Interest at the inception must be ≥ 10% of the initial FMV.
• Less flexible than a CRUT.

Answer 100

A charitable remainder annuity trust (CRAT) is a type of gift transaction in which a donor (also known as a “grantor,” “trustor,” or “benefactor”) contributes assets to an irrevocable trust that then donates to one or more charities while also paying a fixed income to one or more designated noncharitable beneficiaries in the form of an annuity. The value of the annuity is calculated as a fixed percentage of the initial value of the trust’s assets, and that amount must be no less than 5% but no more than 50%.¹

Because it is irrevocable, the terms of the CRAT cannot be altered, and legal ownership of the assets belongs to the trust and not the donor. A CRAT lasts either until the donor dies or after a set period of no longer than 20 years, at which time any funds remaining in the trust are then donated to one or more previously selected charitable beneficiaries, which can be public charities or private foundations.¹

Question 101

Which of the following is an advantage of a revocable living trust?

1. Reduction in federal estate taxes.
2. Avoidance of probate.
3. Removal of asset appreciation from the grantor’s gross estate.
4. Distribution of the trust assets according to the terms of the grantor’s will.

Answer 101

Solution: The correct answer is B.

Option b is an advantage of using a revocable living trust. Option a is incorrect because use of a revocable living trust does not reduce the grantor’s federal estate taxes because the full fair market value of the trust assets are included in the grantor’s gross estate. Option c is incorrect for the same reason. Option d is incorrect because the trust agreement, not the grantor’s will, controls the distribution of the trust assets.

Question 102

Mary’s husband, Patrick, died two years ago. Patrick’s will included the following three testamentary trusts: a trust for the benefit of Mary’s children, but giving Mary a general power of appointment over the trust assets for the remainder of her life (GPOA Trust), a bypass trust for the benefit of Mary’s children, but giving Mary a power to invade the trust assets for an ascertainable standard for the remainder of her life (Bypass Trust), and a charitable trust for the benefit of Mary’s alma mater (Charitable Trust). At Mary’s death, which of the trusts assets will be included in her gross estate?

Answer 102

Solution: The correct answer is A.

Only the GPOA Trust would be included in Mary’s gross estate. Because the withdrawal right of the Bypass trust was limited to an ascertainable standard, its assets are not included in Mary’s gross estate. Mary does not have an interest in the assets of the charitable trust so those assets are also not included in her gross estate.

Question 103

Hazel, a widow, died. She had made no previous lifetime taxable gifts and she died with a gross estate of $12,060,000, consisting solely of a diversified portfolio of publicly traded, income-producing stocks. Her debts were $75,000 and estate administrative expenses amounted to $50,000. Which of the following post-mortem techniques should Hazel’s executor consider electing?

1. The alternate valuation date.
2. Deduct estate administrative expenses on the estate’s fiduciary income tax return.
3. Pay estate taxes under IRC Section 6166.
4. Use a Section 303 stock redemption.

Answer 103

Solution: The correct answer is B.

The alternative valuation is not beneficial because there is no estate liability. No estate tax is due therefore no installment payment is needed and 6166 does not apply. The estate is not a closely held business (C corporation) so Section 303 redemption does not apply. It is likely the administrative expenses would be beneficial on the Estate Income tax return (Form 1041) to offset the income from the stocks paid during the estate and before distribution.

Question 104

Ben is interested in using a Qualified Personal Residence Trust (QPRT) as part of his estate plan. Which of the following are false regarding QPRTs?

1. At the end of the trust term, the house will revert back to the grantor.
2. With a QPRT, the grantor must survive the trust term to realize any estate tax savings.
3. A QPRT can be used with either primary residences or vacation homes.
4. The grantor will have made a taxable gift upon the creation of the QPRT.

Answer 104

Solution: The correct answer is A.

At the end of the trust term, ownership of the house is transferred to the beneficiaries of the QPRT. All of the other statements are true.

Question 105

Qualified Personal Residence Trust (QPRT)

Answer 105

A qualified personal residence trust (QPRT) is a specific type of irrevocable trust that allows its creator to remove a personal home from their estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary.

Qualified personal residence trusts allow the owner of the residence to remain living on the property for a period of time with “retained interest” in the house; once that period is over, the interest remaining is transferred to the beneficiaries as “remainder interest.”

Question 106

Charitable Lead Trusts (CLT)

Answer 106

• The charity receives the income; the remainder is left to a noncharitable beneficiary.
• Used by high net worth individuals who do not need current income.
• Generally uses appreciating assets!
• The CLT must be a grantor trust in order to receive a charitable income tax deduction.

Question 107

advantages of qualified plans

Answer 107

Question 108

qualified plan requirements

Answer 108

two years of service - 100% vesting (not available for 401k plans)

Question 109

db plans must pass discrimatnory test (70% ratio, safe harbor, etc) AND the 50/40 test

Answer 109

must cover lesser of 50 employees or 40% of of employee

(remeber “employees come first”)

Question 110

A noncontributory plan is any pension plan or other type of benefit plan that is paid for entirely by the employer. Participants in the plan are not required to make any payments. Employers frequently set up life insurance noncontributory plans for their employees, though the total amount of coverage tends to be low.

Answer 110

Ex: profit sharing plan

Question 111

key employes are used to determine if plan is top heavy or not (60% of account balance/accrued benefits are attribute to key ee)

Answer 111

key employees :

greater than 5% owner

greater than one percent owner with comp in excfess of $150K

officer with comp in excess of $200K

Question 112

Plans that require actuary:

Answer 112

Defined Benefit Plans only
Annually (DB): DBPP, CBPP

Inception: TBPP

MPPP does not need an actuary

Question 113

Social security integration

Answer 113

Wage base for Social Security is up to $147K (6.2% for ss not taken out after that)

Social security integration:

excess method (DB and DC plans) - provides an excess benefit to those participants whose earnings are in excess of the SS wage base

offset method (DB plans only) - reduces benefit to those employees whose earnings are below the ss wage base

Question 114

SS

Answer 114

Self-Employment Tax Rate

The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

For 2021, the first $142,800 of your combined wages, tips, and net earnings is subject to any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement (tier 1) tax. The amount increased to $147,000 for 2022. (For SE tax rates for a prior year, refer to the Schedule SE for that year).

All your combined wages, tips, and net earnings in the current year are subject to any combination of the 2.9% Medicare part of Self-Employment tax, Social Security tax, or railroad retirement (tier 1) tax.

If your wages and tips are subject to either social security tax or the Tier 1 part of railroad retirement tax, or both, and total at least $142,800, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings.

An additional Medicare tax rate of 0.9 % applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012. See the Questions and Answers for the Additional Medicare Tax page for more information.

Question 115

MPPP favors younger entrants

DBPP - favors older plan entrants (probably coming in an getting a higher salary and mortality tables)

CBPP - favors younger plan entrants

tbpp - favors older plan entrants

Answer 115

DC plans - participant bears investment risk

Question 116

401k./coda plans have ratio tests plus adp test

Question 117

sfe harbor 401k plans

Answer 117

not required to pass ADP or ACP tests

ER muyst provide 3% non-elective contribution to all eligible employees

Or

matching 100% up to 3%

**ER contributions are 100% vested at all times (no vesting schedule)

Question 118

403 b plans have a combined limit with other CODA plans

Question 119

contributions

Answer 119

The amount of salary deferrals you can contribute to retirement plans is your individual limit each calendar year no matter how many plans you’re in. This limit must be aggregated for these plan types:

• 401(k)
• 403(b)
• SIMPLE plans (SIMPLE IRA and SIMPLE 401(k) plans)
• SARSEP

If you’re in a 457(b) plan, you have a separate limit that includes both employee and employer contributions.

Make sure you don’t exceed your individual limit. If you do and the excess isn’t returned by April 15 of the next year, you could be subject to double taxation:

• once in the year you deferred your salary, and
• again when you receive a distribution.

Question 120

The top-heavy rules generally ensure that the lower paid employees receive a minimum benefit if the plan is top-heavy. A plan is top-heavy when, as of the last day of the prior plan year, the total value of the plan accounts of key employees is more than 60% of the total value of the plan assets.

If a 401(k) plan is top-heavy, the employer must contribute up to 3% of compensation for all non-key employees still employed on the last day of the plan year. This contribution is subject to a vesting schedule requiring participants to be 100% vested after three years; or 20% after 2 years, 40% after 3, 60% after 4, 80% after 5 and 100% after 6 years.

Key employee: To determine if your plan is top-heavy, you must first identify key employees - any employee (including former or deceased employees), who at any time during the plan year was:

• An officer making over $200,000 for 2022 ($185,000 for 2021 and for 2020; $180,000 for 2019, $175,000 for 2018, and $170,000 for 2015 through 2017);
• A 5% owner of the business (a 5% owner is someone who owns more than 5% of the business), or
• An employee owning more than 1% of the business and making over $150,000 for the plan year.

A non-key employee is everyone else.

Remember, when you’re determining ownership interests, family aggregation rules apply. These rules may affect the treatment of stock owned directly or indirectly by family members. The rules treat any individual who is a spouse, child, grandparent or parent of someone who is a 5% owner, or who, together with that individual, would own more than 5% of a company’s stock as a 5% owner. As a 5% owner, the law considers each of these individuals a key employee for the plan year. It’s important to identify the family ownership interests of all company stock and to forward that information to your TPA, advisor or person performing the nondiscrimination tests.

SIMPLE 401(k) plans and certain safe harbor 401(k) plans aren’t subject to the top-heavy rules.