Retirement Flashcards
Worker’s eligibility and benefits for SS
Worker is entitled to disability benefits if he/she is under 65 and has been disabled for 12 months, is expected to be disabled for at least 12 months, or has a disability which is expected to result is death
THERE IS A 5 MONTH WAITING PERIOD
Not Covered for Social Security
Railroad employees - have their own retirement system. However they are eligible for Medicare although they are excluded from Social Security coverage
A child, under 18, who is employed by a parent in an unincorporated business
Minitsters, memebers of religious orders, and Christian Science practitioners if they claim an excemption
Members of trial councils (native Americans)
Spousal elibility and benefits for Social Security
Spouse of a retired or disabled worker qualifies for SS benefits if he/she
- is age 62 or over OR
- has a child in care under age 16 or age 16 and over if disabled
The SURVIVING SPOUSE (including a surviving divorced spouse) of a deceased insured worker qualifies for SS payments if the widow(er) is age 60 or over
The divorced spouse must have been married to the worker for at least 10 years and must not be remarried
The surviving spouse of a deceased insured worker, regardless of age, qualifies for SS payments if caring for an entitled child of the deceased who is either under age 16 or is disabled before age 22
Dependent’s eligibility and benefits
The surviving dependent, unmarried child of a DECEASED insured worker, qualifies for SS payments if the child is:
- Under 19 and a full-time elementary or secondary school student or is
- age 18 or over but has a disabiolity which began before age 22
PIA
Receive 100% of worker’sPIA at FRA
Spouse/divorced spouse is entitled to benefits if not entiltled to his/her own that is 50% or more of the workers PIA
Taylor PIA is 500, Chris is 1500, Taylor will get greater or 500 or 750. Chris dies, Taylor gets higher of 500 or 1500
255 lump sum death benefit to surviving spouse or a dependent child (NOT BOTH) .. must have been living in the same household at death
Collecting earlyer
36 months early?
36/180 = 20% reduction or 80% of his PIA
Working after retirement - Effect on benefits
If you are FRA and continue to work, no reduction, no limit as to how much you can earn
Under FRA during all of 2021, government must deduct $1 from your benefits for each $2 you earn above $18,960
If you reach FRA during 2021, the government will deduct $1 from your benefits for each $3 you earn above $50,520 until the month you reach FRA
Taxation of benefits*
Income plus half of his/her SS benenfits, up to 50 % of benefits will be included in taxable income
Single - MAGI $25,000
MFJ - MAGI $32,000
Income plus half of his/her SS benenfits, up to 85% of benefits will be included in taxable income
Single - MAGI $34,000
MFJ - MAGI $44,000
Be careful … Look for municipal bond interest ** that will be included for the calculation
Municipal bond interest is added to AGI when determining the taxation of Social Security benefits
DB 403b pension plan
Benefit beginning at age 65, maximum BENEFIT is 230k (given) or highest compensation averaged over three highest earning consecutive years. Only the first 290K (given) is taken into consideration
Factors that affect the amount the employer contributes (403b plans, more or less)
- *-Forfeitures MUST be applied to reduce employer contributions (always less)
- participants proximity to retirement age (older more, younger less)
- investment return assumptions (lower assumption more, higher assumption less)
- Salary scalre assumptions (older, experiences employees - more and more.. new younger employees - less)
Defined benefit plan. - unit benefit formula/percentage-of-earnings-per-year-of-service formula
Most commonly used. Factors service and salary
Average annual comp: 100K
Years of service: 30 (1.5% per year of service)
= 1.5 x 30 x 100k = 45K
Limited to 30 years of service
Profit Sharing Plan
Flexible employer contribution provisions
Employer can only deduct a maximum of 25% of all participants’ compensation. Only first 290K(given) - of each employee’s compensation can be taken into account for purposes of the limit in 2021
Section 401(k) plan / cash or deferral arrangement (CODA)
Qualified profit sharing or stock bonus plan under which participants have an option to put money in the plan ($19,500)
This deferral is subject to FICA and FUTA taxes
50+ catch up contributions
If the question says DEFERRAL, it is the $19,500 maximum
If the question says CONTRIBUTION, then it includes the deferral AND the catch-up (max $26,000)
Maximum annual contribution company can make to the employee’s profit sharing account for 2021 is 25% of compensation
Annual additionals are the less of 100% of compensation or $58,000
Hardship withdrawals
Hardship withdrawals CAN NOT come from profit sharing plans. The plan has to have 401(k) provisions
An employee’s distributable amount equals participants elective deferrals and vested profit sharing contributions
Solo 401(k) / Uni-401(k)
Not subject to coverage testing and nondiscrimination rules that are required for the typical 401(k) plan
Allows for 2 different types of contributions:
Elective deferral up to $19,500 plus the employer contribution WITH A CAP OF $58,000
Who is solo? You, you and your spouse, or two partners.
Other employees? Part-time workers are not “employees”
ESOP/Stock bonus plan
When company wants to broaden ownership of its stock
An S corp can offer an ESOP. NO MATTER HOW MANY EMPLOYEES, AN ESOP IS ONE SHAREHOLDER
Keogh plans/ HR-10 plans
These are for business organizations that are NOT incorporated (sole proprietorships and partnerships)
It is a qualified plan with special contribution limites for owner employee
The plans are: defined benefit, money purchase, or profit sharing
There are NO calculations for defined benefit plans
For owner
15% plan — multiply business profit by 12.12%
25% plan — multiply business profit by 18.59%
For employee
15% plan — employee would receive 15% of salary
Simple plan
Max is 13,500. — given
50+ can put in another 3k —given
Employers can make dollar for dollar matching contributions up to 3% of the employee’s compensation. (Even in the 401(k) SIMPLE .. it would be 3% of 290K) Salary cap woudl apply here… Deferral would still be $13,500
Alternate contributions are allowed
Matching contributions are mandatory/ THERE IS NO SALARY CAP OF 290K
These plans aore for sole-proprietorships, tax-exempt organizations, and government entities, with 100 or fewer employees
Cannot maintain any other qualified plan at the same time it maintains a SIMPLE
25% premature distribution penalty during the first 2 years of participation
Simplified employee pension (SEP)
NO SALARY DEFERRALS
Employer contributions only
Contributions limited to 25% (not 100%) of compensaiton (290K max) or 58K for 2021
For self employed owners only, contribution is calculated like Keogh plans (12.12% or 18.59%)
Requirements:
- Must cover all employees who are at least 21 years of age and have worked for employer during 3 out of the preceding 5 calendar years. Part time employment counts in determing years of service
- Contributions need NOT to be made on behalf of employees whose compensation for the current year was LESS than $650
Advantage for company with numerous short term employees
Disadvantage for company with many returning, part-time employees
SARSEP (salary reduction SEPs)
Must be adopted before jan 1, 1997. Plan can be grandfathered
AN early withdrawal of elective deferrals from a SARSEP does not require a financial hardship condition like a 401(k) does
Fiduciaries
ERISA states that a fiduciary includes any individual “who renders investment advice for a fee or other compensation”
One would breach ERISA fiduciary limites when he/she provides investment advice for a fee while they also accepts additional fees from investment product providers
Age and service rules (eligibility) for qualified plans
Maximum age and service are age 21 and one year of service (21-and-one rule)
Special provision allows up to a 2-year service requirement, but then the employee is immediately vested (2-year/100% rule)
Special provision rule is not allowed for 401(k)
1 year of service
Employee who works 1,000 hours during the initial 12-month period after being hired will earn a “year of service”. This includes vacation, hollidays, and sick time
Coverage tests (non-discrimination)
**Both use 70%
Ratio percentage test
Plan must cover a percentage of NHCE employees that is at least 70% of HCE covered .. 10 HC covered, 100 NHCs, 30 can be excluded and still qualify under this test
Average benefits test
Average benefits for NHCE’s must be at least 70% of that for HCE
Highly compensated employee (HCE)
A greater than 5% owner
OR
Any employee earning in excess of $130,000 in the preceeding year (2020)
Key employee (Affects whether a plan is top-heavy)
Any individual is a key employee if at any time during the current year he/she has been one of the following
A greater than 5% owner OR An officer AND compensation > $185,000 OR A greater-than-1% owner AND compensation >$150,000
Top Heavy Plans
Rule #1
Top-heavy if more than 60% of its aggregate accrued benefits or account balance are allocated to key employees
Rule #2
A top heavy plan must provide minimum benefits or contributions for non-key employees
DB- The benefit must be at least 2% of compensation
DC - The minimum employer contribution must be no less than 3%
*PSP are not subject to the minimum funding standard but are subject to substantial and recurring contributions
B - 2nd letter of alphabet
C- 3rd letter of alphabet
Permitted vesting schedules (based on Date of Hire)
Faster
Top heavy DB plans and all DC plans
3 year cliff OR
2-6 year graded OR
100% vested with 2 year eligibility
Slower
Non-top heavy and DB Plans
5 year cliff OR
3-7 year graded OR
100% vested with 2 year eligibility
Actual Deferral percentage test and actual contribution percentage
Shortcut method:
0 to 2% is “times 2”; 2% to 8% is “plus 2”
NHCE HCE Deferral 1% X2 2%
Deferral 2% +2% 4%
Deferral 3% +2% 5%
Deferral 4% +2% 6%
Be careful with wording; deferral and contribution
Plans that can be integrated with Social Security
Yes
Defined Benefit, Cash Balance, Money Purchase, Target Benefit, Profit Sharing, Stock Bonus, and SEP
No
ESOP, SIMPLE, 401(k) SIMPLE
Difficult without profit sharing company contribution
Safe harbor 401(k) and 401 (k) match only
Integrated with Social Security vs. Age weighted plan
Integrated with Social Security
- Owner’s age is age 50 or under
- Owner’s income is under $200,000 per year
- Rank-and-file employees are making under $90,000 or less (+1)
Age-weighted plan
- Owner’s age is 50 or older (+1)
- Owner income is over $200,000 per year (+1)
- Rank-and-file employees are younger than the owner (+1)
Cross-Test Plan / New Conparability Plan
Contribution for one category of participants is higher than the contribution percentage of other categories of participants.
Designed to provide the maximum benefits to highly compensated employees, and benefits for other employees are designed to provide the minimum contribution that is required by nondiscrimination regulations
Provides the most generous benefit to the older owner/employee
Elective deferrals
Must ALWAYS be aggregated if there is more than one employer
*457 plans are non-qualified deferred compensation programs and are not aggregated
Annual additions
Unrelated employees can get the maximum annual additions
Related employers can’t go over the annual limit
Controlled group/related employers
Parent-subsidiary One entity (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
Addiliated service group
(Look for doctor)
A service organization and a professional organization
Life insurance suitability
If either of following tests are met, it is considered incidental:
- DC plans use the “percentage” limits. Aggregate premiums paid for participants insured death benefit are at all times less than the follwing percentages of the plan cost contributions for that participant.
Ordinary life insurance (whole life) 50%
Universal life 25%
Term life 25% - DB plans typically factor the “100 times” limit. Participants insured death benefit must be no more than 100 times the expected monthly benefit. For example, if the monthly benefit is $4,000, then the life insurance can’t exceed $400,000
412 (e)3 / 412 (i)
DB plans are insured retirement plans ( a fully funded plan).
Funding for these plans is restricted to life insurance (100 times rule) and/or fixed annuities
Unrelated business taxable income (UBTI)
Taxable income generated by a tax-exempt entity by means of certain passive activities
When a plan invests in a limited partnership
Rollovers
A 60 day distribution from a qualified plan does NOT disqualify an IRA from another 60-day distribution within one year
Qualified plan and TSA distribution before 59.5 — 10% tax penalty exceptions
- death or total disability
- SEPP following separation from service
- distribution following separation from service at age 55 or later
- distribution under a QDRO (to any alternative payee)
- medical expenses in excess of 7.5% of AGI
- $5,000 for birth/adoption of child
Substantially equally periodic payments — IRC Section 72 (t)
If the amount of the periodic payments is modified before the LATER OF:
1. The end of the five-year period
OR
2. The attainment of age 59.5
The penalty tax that would have been imposed on all payments received before the taxpayer turns 59.5, plus interest, is imposed in the year in which the modification occurs
Exceptions: death or disability
If client starts at 58, and ceases at 62, the penalty will apply to the payments received BEFORE 59.5
Qualified Charitable Distribution (QCD)
Direct transfer from IRA to qualified charity. Individuals 70.5 (NOT 72) may make QCDs of up to $100,000 annual and have the amount excluded from taxable income.
Can not claim a charitable income tax deduction
Plan tax year
DC and DB - plan document must be executed within the tax year for which the employer wishes to take the tax deduction
Standard 401(k) plans (with deferrals) must be established BEFORE the first deferral can be made
A SEP may be established after an employer’s fiscal year-end (advantage). An employer has until the due date of the business tax return, including extensions, to establish and contribute to a SEP for the taxable year
Qualified domestic relations order (QDRO)
If a participant has no right to an immediate cash payment from a plan, a QDRP CANNOT require the plan trustees to make such a cash payment. If compensating cash payments (other assets) are not available, QDROs may require plan administrators to segregate plan assets into a sub trust for the benefit of the ex spouse making the claim, with cash distributions made at the earliest time they would be permitted under plan provisions.
Ex. If qualified plan provides benefits at age 55 (or later) or at separation from service, QDRO distributions to a former spouse can be scheduled to begin at the ex husbands age 55, whether or not the ex husband retires at that date. The QDRO can not override the plan provisions
QDROs
Dont apply to nonqualified retirement plans, such as annuities and certain deferred compensation plans.
QDRO rules don’t apply to IRAs
If QDRO orders a distribution of funds, those funds will generally not represent taxable income to the plan participant, nor will the 10% penalty
IRAs
Earned income: wages, salaries, tips, professional fees, bonuses
Alimony and separate-maintenance payments are considered EARNED INCOME for IRA purposes
Catch up provision if the individual has attained the age of 50 before the close of the taxable year
No age limit for contributions
IRA contributions
Plans that affect ACTIVE participation status includes all qualified plans, SIMPLE plans, SEPs, TSAs, and union plans (BUT NOT 457 PLANS)
Activity that results in active participant status includes annual additions to a defined contribution account or benefits accrued for that year to a defined benefit plan
Early IRA distribution before 59.5 trigger a 10% penalty
- Death
- Substantially equal payments
- Disability
- First home expense up to $10,000
- Qualified education expense
- Medical expense >7.5%
- Distribution to pay medical insurance premium after separation from employment after 12 consecutive weeks of unemployment compensation
- Adoption of a child
Ordering rules for distributions (ROTH IRAs)
- The regular annual contributions, not taxable because they were never deductible
- Conversion amounts. The income tax was paid when the IRA was converted. Therefore, there is never any income tax on conversion withdrawals, but there can be a 10% penalty of premature withdrawals
- Earnings are considered to be withdrawn last. They may be exposed ot BOTH tax and penalty
Roth IRA RMDs Exceptions
Owners death
-must be distributed within five years of the owner’s death (tax free)
OR
-With a named beneficiary, the Roth IRA must be distributed within 10 years of the year following the owner’s death (tax-free) (stretch eliminated)
- 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 to his/her roth)
Salary reduction plans (457 Plans, for example)
Plan (also called a pure deferred compensation arrangement) defers some portion of the employee’s current compensation to fund the ultimate compensation benefit
Salary continuation plans
Plan uses additional empoyer contributions to fund the ultimate compensation benefit
Unfunded
Plan has assets
Unfunded is called “informal funding” because the assets are owned by the company and are subject to the creditors of the company (like other assets)
These assets are separate from the employer’s general operating accounts
As a result, there are no tax deductions for the contributions until the employee is taxed
Employee is taxed when he/she has constructive receipt or an economic benefit
The compensation is deemed deferred
Section 162 insurance
Employer pays the premium of the policy owned by the employee
Employee is deemed to have contructive receipt of the premium dollars
This is a direct bonus to pay the premium of the policy
162 plans cause phantom income
A 162 “double bonus” is an additional bonus to the employee to pay the tax on the bonus
Rabbi Trust
- The assets in a Rabbi Trust must be available to all general creditors of the employer if the company files for bankruptchy or becomes insolvent
- Participants must not have greater rights than unsecured creditors
Main factors indicating choice of rabbi trust include:
Merger, acquisition, or change of company ownership
Funded vs. Informally Funded (Unfunded) Plans
If a deferred compensation plan is NOT a naked promise to pay (nor is informally funded), for income tax purposes it may be said to be “funded”. The two major determinants of taxation under Code Section 83 are the following:
- The free transferability of the employee’s risk AND
- The presence of a “substantial risk of forfeiture” at the time the contribution to the plan is made by the employer
Substantial risk of forfeiture
Exists if the employee’s rights to the enjoyment of the property depend on the performance of the services for a period of time (at least 5 years)
The tests for substantial risk of forfeiture are the following:
-The employee’s relationship to other stockholders and the degree of their potential control (Forfeitures are unlikely for an owner and his/her family members)
-The employee’s relationship to corporate officers
Safe Harbor 401k
5%, they would match 4%
Know these
Pre study 3-8
Example on 3-11
New comparability
Owner maxes out at 20% or full max, adn then employees puts in 5%
ADP coverage
Need to inclue 70%! Of NHCE
If you do plan, all HCE in, must include 70% of NHCE
HCE
HCE - discrimintion
Key employee
Vesting
Top heavy
60% aggregate accrued benefits or account balances are allocated to key employees
R 4-5
Family attribution rules
Employees who are the spouse, parent, child, grandparent of an individual who is >5% owner are deemed to be a >5% owner
Integration with social security
Pre study retirement 4-14
Base + permitted disparity (amount you are allowed to cheat)
DB
Cheat page 4-14
DC
Is base + permitted = excess
5.7% (every year) is the amount you’re allowed to cheat
Controlled group
Must know this concept on 4-12 retirement
Annual compensation
Real good question on retirement 5-2
Incentive Stock Option
- known as a qualified stock option (not a qualified plan)
- tax favored plan to compensate executives
- only first $100,0000 worth of ISO grants entitled to favorable tax treatment in the calendar year ($150,000 of ISOs are granted that year, $50,000 is treated as a NSO)
- Corporation granting an ISO does not receive a tax deduction for it AT ANY TIME
- ISOs are not deferred compensation
Holding Period:
1 year from excercise date AND 2 years from grant before selling ISOs. Violating either rule results in a disqualifying disposition
