Retirement Flashcards

Question

Defined Benefit Plans | (Integration with Social Security)

Answer 1

**Base % + Permitted Disparity = Excess %** _Base %_ - DB plan contribution for compensation below integration level _Permitted Disparity_ - Lesser of base % or 26.25% _Excess %_ - DB plan contribution for compensation above integration level

Answer 2

Elective Deferrals: More than one employer (2021) * Elective Deferrals to multiple plans are always aggregated (2021) 401k/403(b)/SIMPLE/SARSEP * $19,500 plus catch up $6,500 SIMPLE and other SIMPLE * $13,500 plus catch up $3,000 457 Plans are NOT part of aggregated amounts.

Answer 3

According to the Treasury Regulations, life insurance benefits must be merely "incidental" to the primary purpose of the plan. If the amount of insurance meets either of the following tests, it is considered incidental: * The aggregate premiums paid for a participant's insured death benefit are all times less than the following percentages of the plan cost for that participant: * Ordinary life insurance 50%; Term Insurance 25%; Universal Life 25% * The participant's insured death benefit must be no more than 100 times the expected monthly benefit. Defined benefit plans typically use the "100 times" limit.

Answer 4

* Transfers to another 457 plan remain the only option for non-governmental tax exempt organizations * Hardship distributions can not be rolled into any other qualified plan * Required minimum distributions

Answer 5

* Death * Disability * Substantially equal periodic payments following separation from service * Distribution following separation from service after age 55 * Distribution in accordance with QDRO (to any alternative payee) * Medical expenses in excess of 7.5% of AGI or health insurance costs while unemployed * Distribution used to pay insurance premium after separation from employment (must file for unemployment)

Answer 6

The required beginning date is April 1st of the year following the year in which the covered individual attained 72. Subsequent distributions must be made by December 31st of each year thereafter.

Answer 7

The required beginning date, with the exception of 5% owners, is the later of April 1st following the year in which the individual attained 72 or retired. Subsequent distributions must be made by December 31st of each year thereafter. **5% owner RBD is the same as IRA/SEP RBD.**

Answer 8

* If neither spouse (or single person) is an active participant in an employer plan, the IRA is deductible. * Employer plans that affect participant status include almost all plans EXCEPT for 457 plans. * If one spouse is an active participant, the other spouse (not active) can do a deductible IRA if combined AGI is less than $198K-$208K (2021) * If both spouses are active, AGI limits apply: $66K-$76K (single) and $105K-$125K (Married) (2021) **NOTE**: Activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan.

Answer 9

* Death * Substantially equal payments * Disability * First home expense up to $10,000 * Qualified education expense * Medical expense greater than 7.5% * Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)

Answer 10

* Any contributions (not conversions) are withdrawn first * Conversions are withdrawn second * Earnings are withdrawn last

Answer 11

* Distributed within 5 years of owner's death (no named beneficiary), or * Distributed over 10 years of the designated beneficiary with distributions commencing prior to the end of the calendar year following death (stretch) * Where the sole beneficiary is the owner's surviving spouse, the spouse may delay distributions until the Roth owner would have reached 72, or may treat the Roth as his or her own (roll it to her/her Roth)

Answer 12

* **Salary Reduction Plan:** Uses some portion of the employee's current compensation to fund the ultimate compensation benefit (also called Pure Deferred) * **Salary Continuation Plan:** Uses employer contributions to fund ultimate benefit

Answer 13

* **Key Words:** Merger, Acquisition, or Change of Ownership * Assets in Rabbi Trust available for company's creditors * Fear that ownership / management may change before deferred compensation is paid

Answer 14

Holding Period: * 1 year from Exercise Date and 2 years from Grant before selling ISOs * Violating either rule results in a Disqualifying Disposition

Answer 15

* Non-Qualified Deferred Compensation Plans of governmental agencies and non-church controlled tax exempt organizations * Deferral limited to $19,500 or 100% of compensation (2021) * Catch-up of $6,500 allowed for those 50 and over ONLY for governmental plans (2021) * Salary deferrals NOT aggregated with other plans (401k, etc.) * Non-governmental plans can ONLY be rolled into another 457 plan

Answer 16

* No Loans * No Life Insurance * Immediate Vesting * May not be creditor protected (state specific) * 59½ not 55 for no 10% penalty * Must take RMDs at 72 (even if not owner)

Answer 17

* Inflation * Retirement period and life expectancy * Add 5-10 years to life expectancy * Lifestyle

Answer 18

Because a pure life annuity provides the highest payout, the selection of pure life is referred to as a pension maximization or pension max application.

Answer 19

* Saving more in each preretirement year * Increasing investment risks to achieve higher returns * Retiring later than expected or working part-time in the early retirement years

Answer 20

* Social Security (Old Age, Survivor, and Disability Insurance—OASDI) * Medicare * Federal Unemployment Insurance * Supplemental Security Income (SSI)

Answer 21

* Workers who have acquired 40 quarters or credits of coverage are fully insured for life. * workers are eligible for both survivor benefits and retirement benefits.

Answer 22

A currently insured worker has only attained 6 quarters of coverage and is only eligible for the following: * A lump-sum death benefit ($255) for spouse or dependent * A surviving spouse’s benefits (if children are under age 16) * A dependent benefit

Answer 23

* **Federal employees** who have been continuously employed since before **1984** unless they elected to switch * *_Some_* **Americans working abroad** * **Student nurses and students working for a college** or college club * **Railroad** employees * **A child, under age 18, who is employed by a parent** in an unincorporated business * **Ministers, members of religious orders, and Christian Science practitioners** *_if they claim an exemption_* * Members of **tribal councils** * *_Some_* **state employees and teachers**

Answer 24

* Railroad employees are excluded from Social Security coverage. * They have a separate retirement system – Railroad Retirement Board. * They are eligible for Medicare

Answer 25

* A retired fully insured worker **age 62 or over** is entitled to retirement benefits. * A worker is entitled to **disability benefits** if he/she is ***_under_*** **age 65** and * **disabled for 12 months**, is ***_expected to be disabled for at least 12 months_***, or * has a disability which is **expected to result in death** and * has **completed a 5-month waiting** period.

Answer 26

* Is age 62 or over or at any age if * the spouse 1. Has a child in care under age 16 2. Has a child age 16 and over and disabled before age 22 * **The surviving spouse** (i*_ncluding a surviving divorced spouse_*) of a **deceased** insured worker qualifies if the widow(er) is **age 60 or over**. **The death benefit is only $255. A spouse who was living in the same household.**

Answer 27

* **married** to the worker for **at least 10 years** and **generally must not be remarried**. * **at least age 62** and has been **divorced** from the worker for **at least 2 years** * *_even if the worker claims no retirement benefits_*

Answer 28

* The surviving dependent, unmarried child of a deceased, disabled or retired insured worker, qualifies for Social Security payments if the dependent is either 1. **Under 19** *_and_* a **full-time** elementary or secondary school **student** 2. **Age 18 or over** but has a **disability began** ***_before age 22_***

Answer 29

PIA - [( # of mths b4 FRA / 180 ) x PIA]

Answer 30

* For workers **younger than full retirement age** * deduct **$1** from benefits **for each $2** earned income above **$18,960**. * Workers at FRA during 2021 * **$1** deducted from benefits f**or each $3** of earned income above **$50,520**

Answer 31

_Provisional Income = Income + (soc sec x 50%)_ * If Provisional Income \> **$25,000** Single or **$32,000 MFJ** THEN * Taxed at **50%** * If Provisional Income \> **$34,000** Single or **$44,000 MFJ** THEN * Taxed at **85%** **Municipal bond interest is considered income for the purposes of determining the taxation of Social Security benefits.**

Answer 32

1. Is **insured for disability benefits**, is **under age 65** 2. Has been **disabled for 12 months**, is **expected to be** for at least **12 months** or expected to **result in death** 3. Has **filed for disability benefits,** and has **completed a 5-month waiting** period

Answer 33

* one-time right to withdraw application for benefits within 12 months of the initial claim. * Benefits received prior to the withdrawal must be repaid (no interest applies).

Answer 34

1. Qualified May NOT discriminate, NonQual CAN 2. Qualified: Erisa, NonQual Exempt from ERISA 3. Qualified: Immediate Tax ded for empR; NonQual No empR ded until empEE taxed 4. Qual earnings accrue deferred; Non Qual Earnings are taxable to empR 5. Qual Distributions tax at ord inc EXCEPT for 10yr avg, NUA under Stock Bonus, ESOP and 401k 6. NonQual Distrib Tax at ord income

Answer 35

(vesting schedule/administration costs/exempt from creditors/integrate with Social Security) 1. favors older employee/owner (age 50+) 2. guaranteed retirement benefit amount (can meet a set retirement objective) 3. requires very stable cash flow 4. past service credits allowed Cash Balance Plan (a Pension type of DB plan)

Answer 36

They may be offered as either defined benefit or defined contribution plans.

Answer 37

1. Money purchase 2. Profit-sharing 401(k) 3. Target benefit 4. Stock bonus / ESOP 5. Profit-sharing

Answer 38

* SEP * SIMPLE * SARSEP * Thrift or savings plans * 403(b)

Answer 39

* **Years to retirement**: Better for younger empEE. Inadequate for employees who enter the plan at older ages. * **Investment returns**: **Employees assume the investment risk** under the plan. * **Salary levels**: based on the **participant’s salary level for each working year** *_rather than on the salary at retirement_*. * **Employer contributions**: subject to minimum funding standards, but employers may make contributions as low as 3%. * **Forfeitures**: can be **reallocated** to the participants **or** applied to **reduce employer contributions**.

Answer 40

* LESSER OF: * 100% of salary OR * $58,000

Answer 41

* Employer wants to * retain key employees and stable work force * Simple to administer and explain (stated % of pension) * Employees young and well paid * Contributions are MANDATORY

Answer 42

**Provisions shared with defined contribution plans** • Maximum contribution is the lesser of 100% of compensation or $58,000 (2021) • Retirement benefit is _determined by account balance_ • Employee assumes investment risk • _No annual actuarial determination_ is required • Forfeitures may be reallocated to remaining participants or used to reduce employer contribution **Provisions shared with defined benefit plans** • Plan generally benefits **older** employees • Fixed mandatory contributions • Actuary determines initial contribution level but it's _not guaranteed_

Answer 43

* qualified defined contribution plan featuring flexible employer contribution provisions up to 25% of compensation. * empR contributions are discrtionary, but MUST be substantial and recurring * Forfeitures are normally reallocated to the plan participants **Selecting a profit-sharing plan** • Variable profit margin or financial stability • When an employer wants to adopt a qualified plan with an incentive feature to motivate employees to make a company profitable • When the employees are **young, well-paid**, and have substantial time to accumulate retirement savings

Answer 44

401(k) plans make sense when: • An employer wants to provide a qualified retirement plan for employees but can afford only minimal extra expense beyond existing salary and benefit costs • The employees want to increase their savings on a tax-deductible basis

Answer 45

* No coverage and discrimation rules * 2 contributions * Elective deferral 19,500 PLUS * employer contribution cap of $58,000 (also, 6,500) generally permitted when the only participants are the **owner and spouse** or **two partners**.

Answer 46

* **automatically** satisfies the **nondiscrimination** tests which involve (HCEs) with either an employer matching contribution **or** a non-elective contribution. * If the employer chooses the **non-elective deferral method**, the employer **must** contribute **3**% of all eligible employees’ compensation regardless of whether the employee is deferring. * Safe harbor plans are **exempt from top heavy (key employees) rules** if the only **deposits are employee deferrals and employer contributions** (3% non-elective or safe harbor match)

Answer 47

• A stock bonus plan **may** invest plan assets in employer stock; however, an **ESOP must** invest plan assets **primarily in employer stock** • Participants’ **accounts are stated in shares** of employer stock • Benefits are generally distributable in employer stock (certificates) • **Employers** may **deduct dividends** with respect to stock held **in an ESOP** **To be deductible, dividends must** satisfy at least one of the following requirements: • **Paid in cash** directly to participants or beneficiaries • **Paid to the plan** and then **distributed in cash \<90 days** _after the close of the plan year_ • **Used to make payments** (of principal and interest) **on loans** used **to acquire employer securities** • **Paid to the plan and reinvested in qualifying employer securities**

Answer 48

* A company wants to **broaden ownership** ,create a **market** , provide **liquidity** for **estates**, or for **business continuity** * A company wants to provide its employees with a tax-advantaged means to acquire company stock * An employer wants its workers to feel a sense of ownership _(NUA) may not be taxed to the employee at the receipt of distributions from the plan (retirement)._ *Participants age 55 or older having ten years of participation in the ESOP have the right to **diversify** up to a total of **50%** of their **account balance**. The ESOP must offer at least **3 investment alternatives** or **distribute cash** or **certificates** to the participant.*

Answer 49

In a new comparability plan, the contribution % formula for **one category of participants** (such as managers) i**s greater than** for other categories of participants. AKA age based plans, new comparability plans are tested under cross-testing rules.

Answer 50

* **Cross Testing Measures** * DC plans for nondiscrimination on the basis of benefits, and * DB plans are tested on the basis of contributions. * **Results in** * higher contribution rates for older employees, (“age-weighted.”) * A cross-tested plan does not apply a fixed age-weighted formula – designed to provide maximum benefits to highly compensated employees * \*can have age weighting w/o cross testing * differentiates btwn HCE and NHCEs

Answer 51

* Defined benefit plans make sense when: * An employer wants to maximize plan contributions to older employees * An older controlling employee wants to maximize tax-deferred retirement savings * New plans take past service credits into account ## Footnote **Forfeitures must be applied to reduce employer contributions because the actuarially determined annual contribution must be made—not more and not less**

Answer 52

* At age 65 * The LESSER OF * (1) $**230,000** (2021) or * (2) 100% of compensation * averaged over 3 highest earning **consecutive** years. * The plan is not required to reduce benefits to a participant who retires as early as age 62.

Answer 53

% x yrs x $salaryCareerAverage = benefit 1.5% x 30yrs x $100,000 = 45,000

Answer 54

% x #yrs x $Average of a number of years ($209 max) = annual benefit

Answer 55

* a qualified employer pension plan that provides for annual employer contributions at a specified rate * employer guarantees contribution leveland a minimum rate of return on each participant’s account. * Like a money purchase plan, _but_ * money purchase plans **do not require** employer **guarantees** of minimum **rates of return**. * The **disadvantage** to **older employees** when a traditional DB plan is **converted** to a cash balance plan is that the lump sum payout at termination is smaller. (beneft based on all working years rather than highest 3).

Answer 56

* A 412(i) is a defined benefit plan funded entirely with insurance products such as life insurance and annuities. * appeals to employers that have some need for life insurance. * The plan allows for a large contribution, but the plan return would typically be lower than those of other DB plans.

Answer 57

* 21 and 1 * 2 year special provision 2yr/100% vested * must be allowed to participate no later than the earlier of * (1) the first day of the first plan year beginning after the date the employee first met the age and service requirement or * (2) the date 6 months after these conditions are met.

Answer 58

**Ratio percentage test** The plan **must** cover a percentage of NHCEs ≥ 70% of cpvered HCE **Average benefit test** The average benefits for NHCEs ≥ 70% HCEs

Answer 59

* A defined benefit plan must benefit the **lesser of**: * 50 employees OR * The greater of * 40% of all employees or * 2 employees (or **if there is only one employee, that employe**e)

Answer 60

* Either: > * 5% owner OR > * employee earning \> $130,000

Answer 61

> 5% owner > > An officer AND com \> $185k > > \> 1% owner AND comp \> 150k

Answer 62

If \> 60% of aggregate accrued benefits or account balances are allocated to KEY employees

Answer 63

1. In both tests, the HCEs rate must be both of the following: 1. ≤ 125% of the NHCE rate (ADP is 8% or greater) **or** 2. ≤ 200% of the NHCE rate and ≤ 2% NHCE rate (ADP is between 1% and 8%) Shorthand method: 0 to 2% is “times 2,”and 2 to 8% is “plus 2”. **NHCE HCE** Deferral 1% *_x2_* 2% Deferral 2% *_x2_* 4% Deferral 3% +*_2_* 5% Deferral 4% +*_2_* 6%

Answer 64

**Parent-subsidiary**: parent company) owns at least **80**% of one (or more) of the other entities. **Brother-sister**: Five (or fewer) **owners** of **two or more entities** own **80**% or more of each entity. **Affiliated service group**: The affiliated service group (ASG) rules apply primarily to **service organizations** that provide professional services in the field of **health, law, accounting, engineering**, etc. **Employee leasing**: Provisions were adopted to reduce the discrimination potential from an employer’s choosing to lease employees

Answer 65

1. Excess Method 1. Integration level: level of comp above the excess contrib. May not exceed the soc sec taxable base 2. Base benefit %: below integration 3. Excess benefit %: above integration Using the excess method, the permitted disparity is the lesser of the base benefit percentage or 26.25%. **Base Percentage + Permited Disparity = Excess Percentage** **10% + 10% = 20%** **30% + 26.25% = 56.25%** 2. Offset Method

Answer 66

* *Integration level**: $ up to ss wage base ($142,800 for 2021) * *Base contribution percentage**: contrib below the integration level * *Excess contribution percentage**: contrib above the integration level * *Permitted disparity**: Lesser of the base contribution percentage or the 5.7% formula for determining components of integrated DC plan Base % + Permited disparity = Excess % 10% + 5.7% = 15.7%

Answer 67

Employer can DEDUCT a maximum of 25% of ALL pp eligible comp

Answer 68

* May be reallocated among other employees * May be applied in a later year to the same employee (funds held in a suspense account) * May be used to reduce future plan contributions

Answer 69

Taxable comp paid during the year ALSO includes elective deferrals (401k and 457 plans) and salary reduction to 125 plans

Answer 70

Elective deferrals for workers with more than one employer Always aggregated Annual Additions are NOT as long as employers are unrelated

Answer 71

The owner-employee contribution or benefit is based on net earnings instead of salary Employee contributions ## Footnote The IRS has ruled that the self-employment tax must be computed and a deduction of one-half of the self-employment tax must be taken before **determining the deductible contribution of the employee** Shortcut: Take the net schedule C income, then: Multiply by **12.12% for 15%** contribution for non-owner employees or Multiply by **18.59% for 25%** contribution for non-owner employees

Answer 72

more than 60% of the total amount in the accounts of all employees is allotted to key employees. DB beneift must be 2% of comp x years of service (B 2nd letter of the alphabet) DC benefit must be 3% of comp x years of service (C 3rd letter of the alphabet)

Answer 73

* lesser of 50% of the participant’s vested plan benefit or $50,000. small accounts up to $10,000 * repaid over a period ≤ 5 years (unless for principal residence. * Must be made in level installments at least quarterly. If you miss a payment the entire balance due is a taxable distribution 10% penalty and ord inc tax. * Interest is consumer interest (but not deductible unless for residence)

Answer 74

* Death * Substantially equal payments * Total, permanent disability * First home expense up to $10,000 * Qualified education expenses * Medical expense \> 10% of AGI * Distribution used to pay medical insurance premium after separation from employment**\*** * $5,000 for qualified birth/adoption **\***Subject to floor of 10% of AGI unless unemployment compensation has been received for at least 12 weeks and the withdrawal was made in year of unemployment or year immediately following unemployment. If all or part of the IRA is pledged as security for a loan, the portion that is pledged is treated as a distribution.

Answer 75

* Distributed within **five years of the owner’s death** * Distributed over **10 years to the designated beneficiary** following the owner’s death * Where the **sole beneficiary** is the owner’s **surviving spouse**, the spouse may delay distributions until the Roth owner would have reached age 72 or may treat the Roth as his or her own (roll it into his/her Roth). No RMDs required

Answer 76

* Only 401(k) and 403(b) plans and governmental 457 plans may offer a qualified Roth contribution program. * included in the participant’s gross income * employer contributions (including matching) are made into traditional 401(k) pre-tax accounts * qualified distribution from a Roth 401(k) account will not be includable in the participant’s gross income * The tax-free status of a Roth 401(k) is subject to a 5-year term after the first contribution. * No income limits; 19500 and 6500 catch up

Answer 77

* A SEP can be easily adopted by completing a Form 5305-SEP. * contributions are limited to the lesser of 25% (not 100%) of compensation ($290,000 maximum) or $58,000 * appropriate when the employer wants an alternative to a qualified profit-sharing plan that is easy and inexpensive to install * Contributions for employees must be the same percentage as the owners contribution percentage * must cover all employees who are at least 21 years of age and who have worked for the employer during 3 out of the preceding 5 calendar years and made more than $650. Part-time employment counts

Answer 78

* no more than 25 employees * 50% of all eligible employees must participate * Newly hired employees may join the grandfathered plan

Answer 79

* pretax contributions of up to **$13,500**\* ; 3,000 catch up * Employer contributions represent dollar-for-dollar matching contribution up to 3% * employer can elect a lower percentage, not less than 1%, in no more than 2 out of the 5 years * easy-to-administer plan funded through employee salary reductions and an employer match * adopted by completing IRS form 5304- or 5305-SIMPLE * must cover any employee who earned $5,000 in any two previous years and is reasonably expected to earn $5,000 in the current year. * *Note:** * *A SIMPLE plan cannot be terminated mid-year.** * *Termination must occur on January 1 of the year following notification of employees. Contribution opportunities must be available until then.**

Answer 80

* cannot maintain any other qualified plan, 403(b), or SEP at the same time * Participants are fully vested at all times * penalty is increased to 25% during the first 2 years of participation

Answer 81

* A SIMPLE 401(k) is a plan in which a traditional 401(k) adopts SIMPLE provisions. * A 401(k) plan that adopts **SIMPLE** provisions is **exempt from both ADP and ACP tests**. * **exempt from the top-heavy requirements**. This is an advantage, but it comes at the cost (rigid design) * Still an ERISA plan. * May not choose the special 1% match

Answer 82

* adopted only by certain tax-exempt organizations and certain public-school systems * must be a 501(c)(3) organization * elective deferrals to 403(b) plans is $20,500/6500 catch up * Special addition: 15 years of service additional $3,000 * Employees who are both 50 or older **and** have **15 years of service** qualify for both catch-up contributions * 403(b) **investments** are limited to **annuity** contracts *or* **mutual funds.**

Answer 83

* nonqualified deferred compensation plans of governmental units, governmental agencies and certain non-church controlled tax-exempt organizations * special catch-up contribution provision applies during the participant’s final three years of participation before Normal Retirement Age (but not the last year of employement. * limit on deferrals is increased to the lesser of 2 times the normal limit $39,000 ($19,500 × 2) or some other limit

Answer 84

ERISA imposes various duties, standards, and prohibitions on plan fiduciaries ## Footnote ERISA defines fiduciary as a person who “renders investment advice for a fee or other compensation, directly or indirectly, with respect to any monies or other property of a qualified plan or has the authority or responsibility to do so.”

Answer 85

The DOL regulations further define “investment advice,” discretionary authority or control Regularly renders any advice that will serve as a primary basis for investment decisions with MUTUAL AGREEMENT, written or otherwise.

Answer 86

* **Anti self Dealing Rule**: Furnishing of goods or services between the plan and the party in interest * **Anti Kickback rule**: Transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan == no personal use

Answer 87

When plans lack sufficient assets to pay benefits, the PBGC guarantees a monthly benefit (no lump sums) of NON FORFEITABLE BENEFITS and PENSION BENEFITS.

Answer 88

* A **voluntary termination**, also called a standard termination, occurs when there are sufficient assets to fund accrued benefits * A **distress termination** occurs when there are insufficient assets to fund accrued benefits. * Bankruptcy liquidation * bankruptcy reorganization * employer proves to the PBGC that plan termination is necessary to pay debts **Only the PBGC can initiate an involuntary termination of a DB plan.**

Answer 89

* A hardship withdrawal is allowed at any age in any type of profit-sharing plan. (NOT IRAs) * Financial Needs test (immediate and heavy * Resources test: cannot exceed the amount needed to satisfy the need * The hardship withdrawal is subject to ordinary income tax and often the 10% early withdrawal penalty * EXCEPT FOR: * Medical * Tuition, room and board and other education expenses for POST secondary ed * Funeral expenses * Principal residence * Purchase * to prevent foreclosure * repair from damage * Cannot be in excess of immediate need. Hardship distributions from any retirement plan cannot be rolled into any other qualified plan.

Answer 90

TSA and QUALIFIED Plan exceptions Exceptions to the 10% tax penalty for early distribution (before age 59½) from a qualified plan include the following: • Death • Disability • Substantially equal periodic payments following separation from service • Distribution following separation from service at age 55 or later • Distribution in accordance with a QDRO (to any alternative payee) • Medical expenses in excess of 10% of AGI • $5,000 distribution for qualified birth/adoption

Answer 91

Substantially equal payments must meet all the following requirements: • Paid not less frequently than annually • Paid without changing the amount for the longer of 5 years or until the payee reaches age 59½ • Based upon the life expectancies of the recipient or recipients • Based upon a reasonable rate of interest • If applicable, based upon reasonable mortality assumptions no modification of substantially equal payments, generally. One-Time election allows a switch from the annuity/amort method to the RMD method with no penalty. Reduces payout levels and preserves the retirement fund

Answer 92

* Qualified Joint and Survivor Annuity (QJSA) * the survivorship annuity must be ≥ 50% - 100% of the annuity payable during the joint lives of the participant and spouse * Qualified Optional Survivor Annuity (QOSA) * must be a 50% joint and survivor annuity. Many at 75%. The participant can elect out of this benefit only with written **spousal consent**. * Qualified Preretirement Survivor Annuity (QPSA) * preretirement death benefit for the plan participant’s spouse payable upon the death of the participant who dies before the starting date of the QJSA.

Answer 93

* This can occur only once each year (one-year period) per taxpayer (not per IRA). * To ensure tax-deferred treatment on the entire rollover amount (no 20% withholding), rollovers must be completed by means of a direct transfer (also called a direct rollover or trustee-to-trustee transfer). * The plan’s trustee must convey the funds directly from the qualified plan to the rollover account (another qualified plan or an IRA).

Answer 94

holds the funds that have been distributed from the qualified plan for the subsequent transfer to a new/different qualified plan

Answer 95

April 1st of the year following the year in which the covered individual attained age 72. Subsequent distributions must be made by December 31st of each year thereafter. Owners of 5% or more of the equity of a corporation sponsoring a qualified plan are also subject to this rule.

Answer 96

Same as IRAs And Seps and SIMPLES EXCEPT ## Footnote > 5% owners MUST take RMDs the year AFTER turning 72 > > They may continue to contribute

Answer 97

* If the beneficiary \> 10 years younger than the owner * the actual joint life expectancy of the owner **and spouse** based on the regular **joint life expectancy** table is used. * Look up age of employee and use Distribution period # for the divisor of the year end balance

Answer 98

* If the employee’s sole beneficiary is the employee’s spouse and the spouse is\> 10 years younger than the employee, * the employee is permitted to elect the longer distribution period measured by the joint life and the last survivor life expectancy of the employee and spouse (provided). * RMDs are calculated by dividing the year end balance by the Uniform Lifetime Table

Answer 99

A 50% excise tax is imposed on the amount by which a distribution in a given year falls short of the minimum required

Answer 100

A Qualified Charitable Distribution (QCD) is a direct transfer from an IRA to a qualified charity. Individuals age **70½** (not 72) or older may make QCDs of **up to $100,000 annually** and have the amount **excluded** from taxable income.

Answer 101

In the year of death, the minimum distribution is still calculated ## Footnote In the years after, if the owner died before the required beginning date (72) and there is no living beneficiary as of the owner’s death, the five-year rule applies

Answer 102

Participants in 401(k) plans who retire between ages 55 and 59½ take withdrawals directly from their 401(k)s without paying a 10% early withdrawal penalty. The age 55 early retirement provision is not available for IRAs.

Answer 103

For Non Spouse Must be withdrawn in 10 years * Exceptions to the 10-year rule are: * surviving spouse, * person not more than 10 years younger than the plan participant, * minor child, * disabled person, and * a chronically ill person. For no bene, withdraw in 5 years

Answer 104

Qualified plan can be tapped for: * The IRS – to collect federal taxes owed OR * A spouse or former spouse may attach a qualified plan through a QDRO (typically operating in conjunction with a divorce decree * A QDRO cannot **require** the trustees to make a cash payment if it's not available * QDROs can require that plan assets be segregated for the benefit of the spouse making the claim, with cash distributions made at the earliest time permitted under plan provisions.

Answer 105

* 10% early withdrawal is waived from qualified plan (not ira) age 55 and older * Penatly free from governtment plance (NOT 457 plans) age 50 and older

Answer 106

* The difference between the employer cost basis and market value at lump-sum distribution to the employee * not subject to taxation until employee sells the stock * always taxed at long-term capital gain rates * Basis is taxed at ordinary income at DISTRIBUTION

Answer 107

* NonQual May discriminate (quals can't) * Exempt from most ERISA * No employer tax deductions until employee is taxed (quals get an immediate deduction) * Fund earnings may be taxable to employer * Distributions are taxable at Ordinary tax rates (except ISO)

Answer 108

**Salary reduction plans** (also called **pure deferred compensation** arrangements) use some portion of employees’ current compensation to fund the ultimate compensation benefit. **Salary continuation** plans use **employer** contributions to fund the ultimate compensation benefit

Answer 109

* To maintain deferral the plan must be UNFUNDED. * UNFUNDED may be a mere promise (naked promis) or * informally funded with Life insurance, annuities, MFs or other (assets are owned by the company and subject to creditors) * The employee has no access to the compensation that has been deferred. * As a result, there are no tax deductions for contributions until the employee is ultimately taxed

Answer 110

* In 162: Direct cash bonus made to insurance company * The employer will own the policy and be its beneficiary * Premiums are not currently deductible * Death proceeds paid to the employer are not taxable as income to the employer. * This is because the premiums paid were not deductible. The proceeds remain tax-free death benefits. * **Benefits paid to the covered employee (or to surviving dependents) are a deductible expense to** * *the employer as paid.** * When the employee has **constructive receipt**, or benes economic benefit. **This payment is deferred compensation**, *_not a death benefit_*. Either way, it is taxable income. * The PV of payments to the surviving beneficiaries are included in the employee’s gross estate for estate tax purposes. * This is because under the deferred compensation plan, the employee had a right to name the beneficiaries (creates an incident of ownership).

Answer 111

* Private Letter Ruling * assets in a rabbi trust must be available to all general creditors * participant must not have greater rights than other unsecured creditors * company must notify the trustee of any bankruptcy or financial hardship * When a bankruptcy or financial hardship occurs, the trustee must suspend payment to the trust beneficiary and hold assets for the employer’s general creditors Rabbi trust are often used in the following situations: • Possibility that ownership or management might change before the deferred compensation benefits are paid (takeover/acquisition) • New management might be hostile to the key employee in the future and fail to honor the compensation agreement • Risk that litigation to enforce payment of deferred compensation in the future would likely be too costly to be practical

Answer 112

Solves 2 problems with a Rabbi Trust 1. The lack of security in relying on an informally funded plan 2. The fear that the tax savings will disappear because tax rates after retirement may be higher funded nonqualified deferred compensation arrangement Taxation occurs in the year in which the assets are placed in the trust with a corresponding deduction to the employer in that year or when a substantial risk of forfeiture no longer exists.

Answer 113

economic or financial benefit is conferred on an individual by an employer as compensation in a taxable year, it is taxable to the individual in that year.

Answer 114

1. funds set aside to fund the plan TAXED at corporate level (as are accumulated earnings) 2. Earnings on the funds set aside as reserve (may create additional tax) If an annuity contract is held by an entity, the annuity rules change. The income on the contract must be treated as ordinary income received or accrued by the holder during that year.

Answer 115

Income is not treated as **constructively received** if the taxpayer’s control of its receipt is subject to **substantial risk of forfeiture** (income is taxable to a cash basis in the year paid) * Substantial risk of foreiture test: If depended upon the performance of services for a period of time. * includes employee's relationship to other stockholders and degree of control, and to corporate officers

Answer 116

Only the **first $100,000 worth of ISOs granted** to any employee that vest in one calendar year is **entitled to favorable ISO treatmen**t. **Options granted which exceed that amount are non-qualified.** The excess is treated as a r**egular nonqualified stock** option for tax purposes **(ordinary income tax)**

Answer 117

A nonqualified stock option is the right to purchase a specified number of shares of the employer’s stock at a given time and a given price.

Answer 118

* **Grant**: The date the employee is given the shares and the date the shares are typically valued * **Exercise**: The date the employee chooses to exercise the right to buy the shares awarded. * The spread between the **exercise price** and the **market price** is known as the **bargain element**. * If ISO terms are **bargain element** is taxable subject to FICA/FUTA becomes NSO * IF ISO is within terms, **bargain element** is ordinary income **NO** FICA/FUTA * **Sale**: The date the employee sells the exercised shares. * The amount of time between exercise and sale determines whether the gain or loss is long-term or short-term.

Answer 119

Grant — **one year** ---- Exercise — **one year** ----- Sale If either term (1 year) is violated, the ISO becomes an NSO (a discqualifying disposition.)

Answer 120

Employees are taxed (at the 15% or 20% capital gains rate if they’ve held the shares long term) only when they sell the acquired stock. ISO: Upon exercise, income tax is due on any gains: (the difference between the **strike price** and the shares’ **current MP**). NOT subject to regular tax when exercised. NSO: subject to tax again when they sell the stock (on the difference between the **share price at acquisition** and the **sale price**). ARE subject to regular tax when exercised.

Answer 121

They are most often granted to key employees to motivate productivity. However, the employer receives no tax deduction when the shares are exercised.

Answer 122

* Under an 83(b) election, the employee elects to recognize the tax at the time of the award instead of at the time of exercise. * excess of the fair market value of the stock awarded (granted) over the employee’s cost is taxed as ordinary compensation * appreciation in the stock after the date of the award (grant) will not be taxed to employee * Grantees may choose to elect 83(b) tax treatment when the stock is expected to substantially appreciate over time.

Answer 123

* A **restricted stock** plan normally involves a **sale of stock (not options) to an employee at a bargain price**. _No taxation occurs if a substantial risk of forfeiture exists_ * **SARs** are rights to be paid an amount of money = **difference** between the **value of a specified # of shares of stock** on the **grant date** and the **value of the stock** on the **exercise date**. * **Phantom stock** is a **right to a cash (generally) bonus based on the performance of phantom shares** of a * *corporation’s common stock** over a **predetermined** period of time. * No options * has dividend equivalet rights

Answer 124

* The company’s owners want to share the economic value of equity, but not equity * The company is a division of another company, but it can create a measurement of its equity value and wants employees to have a share in that * The company is not a company; it is a nonprofit or government entity * The company c**annot offer conventional kinds of ownership because of restrictions**, for example, **an S corporation** may be concerned about the **100-owner** rule

Answer 125

A JCS is a junior stock plan. After **expiration of a substantial risk of forfeiture**, the junior class shares (**B**) are **converted** into regular shares (**A).**

Answer 126

* **Section 423** stock purchase plan. * Under this plan the employer is a**llowed to discount the price of stock up to 15%** (charge 85%) of the market value. * **No taxes when purchased** under ESPP. * Taxes are **paid at the time of the sale** of stock. * The **tax treatment applicable** to both the corporation and the employee with respect to the ESPP i**s similar to the tax treatment of ISOs**