Retirement Flashcards
Who is an eligible designated beneficiary for RMD purposes and what are their RMDs?
-
who
- spouse
- child of account owner <21 (age of majority)
- goes to 10 years after 21
- individual disabled or chronically ill
- anyone else <10 years younger than owner
- rule: RMDs are based on their own life expectancy
Who is a ineligible designated beneficiary for RMD purposes and what are their RMDs?
- Who: an individual person who is designated but not eligible
- rule: must distribute within 10 years
What is a non-designated beneficiary for RMD purposes and what is the RMD rule?
- what: estate, charity, some trusts
- If RMDs have begun: take distributions based on owner’s RMD
- If RMDs haven’t begun: must distribute within 5 years
calculate self-employed contribution max
- step 1: calculate self-employment tax
- net self-employment income
- x 92.35%
- = net earnings subject to self-employment tax
- x 12.4% up to $147K + 2.9%
- = self-employment tax
- step 2: calculate contribution
- net self-employment income
- ½ self-employment tax
- = adjusted net self-employment earnings
- x self-employed contribution rate (i.e. assume you deducted contribution of 25% = 20% because .25/1.25 = .2)
- = self-employment plan contribution (‘ER contribution)
Leveraged ESOPs
purpose, how it works, max cont., benefits
- purpose: exit strategy for business owner
-
how it works:
- ESOP purchases the stock (via bank loan),
- company & owner guarantee the loan
- company contributes to ESOP to pay off the loan
- EEs receive distributions of company stock at retirement/termination
- max cont: same 25% as all other qual. plans
- benefits: allows leverage, can deduct interest payments
life insurance in retirement plans
requirements, limits, 412 plans
- requirements
- cannot be used in IRA but can be in other qualified plans
- must be converted to cash or annuity at retirement
- cannot be the primary focus on plan
- 25%/50% tests (defined contribution) - premiums cannot exceed 25% (universal or term) or 50% (whole) of ‘ER cont.
- 100 to 1 ratio (defined benefit i.e. pension) - death benefit must be 100x monthly accrued retirement benefit provided
- 401(e)(3)/412(i) - exception; specific defined benefit pension plan entirely funded by life insurance; ‘ER deduction for cont. for premiums
lump sum distributions from qualified plans
- entire amount distributed within 1 tax year
- plan participant for 5+ years prior to distribution
- distributed at death, age 59 ½, separate from service, disability
10-year forward averaging distributions from qualified plans
only for people born before 1936
pre-1974 cap gain treatment for qualified plan distributions
must be born before 1936
does inherited NUA get step up in basis or LT holding period?
No step up but is LT regardless
Heir just takes over the ‘EEs position
NUA taxation and penalty
- at distribution, ‘ER basis taxed as ordinary
- NUA is locked in at LTCG
- remaining is ST or LT CG based on holding period
- 10% penalty on the ordinary income piece unless 59.5+ or 55+ and separated from service
NUA (net unrealized appreciation)
purpose, distribution options, calculating
- purpose: get favorable tax treatment from distribution of employer stock (ESOP, stock bonus)
- distribution: must be lump sum distribution
-
calculating NUA
- FMV at distribution
- ‘ER basis at distribution
- = NUA
qualified plan loan limits
- lesser of
- $50K or
- ½ vested account balance
- if balance <$20K, can loan $10K (assuming you have $10K+)
- reduced by highest outstanding loan balance LTM (even if paid off)
qualified plan loan repayment
- pay off max of 5 years (30 if used to buy principal residence)
- if terminated, due within 60 days
- amortized, equal payments
- at least quarterly
- plan sponsor may have additional rules
- failure to pay considers it a taxable distribution (so ordinary income + penalty if <59 ½)
exceptions to 10% penalty for qualified plan distributions prior to 59 ½
- death
- disability
- substantially = distributions (regulation 72(t))
- medical expenses >7.5% AGI
- federal tax levy
- DC only
- birth or legal adoption up to $5K
- qualified plans only
- separate from service 55+
- separate from service 50+ if public service
- QDRO
- IRA only (HHH)
- health insurance for unemployed
- higher education
- first home purchase up to $10K
72(t) distribution requirements
- substantially equal
- must be for longer of 59.5 or 5 years
- for life expectancy of participant
- after separation
RMDs
when they begin, exception if still employed, when they must be taken
- begin: by 4/1 following year attaining age 72
-
exception if still employed: delayed until 4/1 following year separated from service.
- not allowed if owner of 5%+
- not for SEPs or SIMPLE IRAs
- all other RMDs must occur by 12/31 and are based on last year’s balance and age as of 12/31
RMDs for beneficiaries
- most use Single Life Table
- if spouse is >10 younger, uses Joint and Survivor Table
- if participant dies prior to full distribution:
- spouse only: treat as own
- eligible designated beneficiary: take over own life expectancy beginning year after participant’s death
- designated beneficiary: 10 years
- no designated beneficiary or beneficiary is estate, charity, some trusts: 5 years
defined benefit plan types
- pension plans
- defined benefit pension plans
- cash balance pension plans
defined contribution plan types
- pension plans
- money purchase pension plans
- target benefit pension plans
- profit sharing plans
- stock bonus, ESOP, 401k, Thrift, New Comparability, Age-Based profit sharing
what are the rules around the qualified plan distribution without a penalty for a first time home purchase?
Lifetime max of $10K but it can be for you, child, grandchild, etc.
“First time” is based on the person not owning a home within the last 2 years
pension vs profit sharing plan
in-service withdrawals, mandatory funding, investment in ‘ER securities, mandatory QJSA
- in-service withdrawals: only for profit sharing plans after 2 years
- mandatory funding: only for pension plans
- investment in ‘ER securities: 10% for pension; no limit for profit sharing
- mandatory QJSA & QPSA: only for pension plans
defined benefit vs defined contribution plans
contribution limits, forfeiture use, separate accounts, credit for prior years of service
- contribution limits: DB must fund unfunded current liability; DC up to 25% covered comp
- forfeiture use: DB reduce plan costs; DC reduces plan costs OR allocates
- separate accounts: not for DB but yes for DC
- credit for prior years of service (e.g. when plan is created): only for DB
defined benefit plan limits
- “Maximum includible compensation” on tax sheet ($305K)
- DB benefit amount
- typically based on average of last 3 consecuritve years, but plan can specify
- up to the max on tax sheet ($245K)
defined contribution plan limits
what is it and what does it include
- “Maximum includible compensation” on tax sheet ($305K)
- “defined contribution limit” on tax sheet ($61K) + $6500 catch up
- shared if multiple DC plans (i.e., max per person, not per plan)
- limit includes:
- ‘ER contributions
- ‘EE deferrals ($20,500 + $6500 catch up)
- forfeitures allocated
who can be excluded from qualified plans
- anyone ineligible (doesn’t meet age or years of service requirement)
- ‘EEs under collective bargaining agreement
- nonresident alien ‘EE that doesn’t work in US
- any other group of people as long as it’s not discriminatory on it’s base (e.g., can’t only cover women, or only people with brown hair)
Safe Harbor Test vs Ratio % Test vs Average Benefits Test vs 50/40 Test
- Must pass one of the below; To pass, must cover > or = 70% of:
- Safe Harbor: NHC
- Ratio % Test: % NHC Covered / % HC Covered
- Average Benefits Test: AB% NHC / AB% HC
-
50/40 Test (additional DB only)
- must cover lesser of 50 ‘EEs or 40% of ’EEs
ADP vs ACP Tests
- ADP
- limits ‘EE elective deferrals based on % deferral of NHC
- If NHC 0-2%: HC can do 2x ADP for NHC
- If NHC 2-8%: HC can do 2% + ADP for NHC
- if NHC >8%: HC can do 1.25x ADP for NHC
- If HC don’t meet the test, can either return excess deferrals or make contribution on NHC behalf
- limits ‘EE elective deferrals based on % deferral of NHC
- ACP
- Same scale and same corrective procedures as ADP, but looks at after-tax contributions (i.e., Thrift) and ‘ER match
- Neither required if Safe Harbor Plan
Safe Harbor Plan
requirements, vesting, and what it means
- ‘ER must provide either:
- 3% non-elective contribution
- AMC match OR 100% up to 4%
- 100% vested immediately
- If Safe Harbor, do not have to pass ADP or ACP
is payroll tax owed on contributions?
Not for employer contributions
Yes for employee contributions
who can utilize pre-1975 capital gain treatment and 10-year forwarding?
those born prior to 1936
who is eligible for qualified plan, what are entrance dates
- 21+
- 1 year service+ (1000 hrs)
- ONLY option for profit sharing
- exception: 2 years service if 100% vested
- exception: 3 years service if 500 hrs (started 2020)
- entrance date: 2 per year, 6 months apart
who can be excluded from qualified plans?
- ineligible employees (<21, <1 yr service)
- union ‘EEs
- nonresident who don’t work in US
- part-time <3 yrs
- any entire group as long as it’s not discriminatory in nature (e.g., sales associates)
what makes someone highly compensated vs key employee
- Both
- >5% owner this year or last
- Highly compensated
- >$135K for prior year
- OR can elect to consider the top 20% earners highly comp.
- Key
- >1% but >$150K
- Officer with >$200K
what is highly comp used for vs key employee
- highly compensated
- coverage testing
- ADP/ACP testing
- key
- funding:
- DC 3%
- unless key gets <3%
- tip: C is 3rd letter
- DB 2%
- tip: B is 2nd letter
- DC 3%
- vesting: 2-6 or 3 year cliff
- funding:
defined contribution plan vesting
- noncontributory (i.e. ‘ER contributions)
- 2-6 graduated
- 3 year cliff
- contributory (i.e., deferral)
- 100% vested
defined benefit plan vesting
3-7 graduated or 5-year cliff
what makes a plan considered top heavy?
>60% of account balances belong to key ‘EEs
what is annual contribution limit for DB or DC?
- DB: none unless plan is underfunded
- DC: 25% of covered comp (max of $305K)
what are benefit/contribution limit for DB or DC?
- DB: lesser of
- $245K (Defined Benefit Limit on sheet)
- average 3 highest consecuttive years salary
- DC: max covered comp $305K (Max Includible Comp on sheet)
DC annual contribution limit and what does it include
- annual contribution: 100% ‘EEs comp up to $61K per ’ER NOT per person
- includes ‘ER and ’EE contributions and forfeitures
DC annual deferral limit
$20,500 per person (unless ‘ER is contributing $40,500+ because 61,000-20,500)
+$6500 catch up
who can use catch up deferral?
age 50+
when is an actuary required?
- Annually for defined benefit and cash balance
- At inception for target benefit
Excess vs Offset method of SS integration and what plans is each used for
Excess provides more benefits to those above SS wage base
Offset reduces benefits of those with earnings below SS wage base
does inherited NUA get step up in basis?
No
restricted stock options
what it’s used for, taxation, holding period
- typically for higher levels for retention
- restriction is around when it vests
- taxation: not taxable at grant but is taxable when it vests (i.e., substantial risk of forfeiture is eliminated)
- holding period: begins when it vests
Election 83(b) for restricted stock options
what is it, what is the catch
- ‘EE can choose to be taxed at the date of grant instead of when it vests
- starts the holding period at grant
- the catch: if you don’t stay long enough for it to vest, you don’t get that tax back; not favorable if stock declines in value
how are ISOs taxed if you don’t meet holding requirements?
i.e. disqualifying disposition
- taxed as ordinary at exercise and CG at sale depending on holding period (i.e., treated like NQSO)
- taxation doesn’t actually happen until sale since we don’t know if it’ll be held long enough to be qualified
ISOs taxation
- taxed when stock is sold, NOT when it’s granted or exercised
- LTCG if you hold for 2 years after grant and 1 year after exercise (can happen concurrently)
ISO impact on AMT
Positive AMT adjustment at exercise
Negative AMT adjustment at sale
Tip: Both ISO and AMT have 3 letters
is a 403(b) a qualified plan?
No, it is only a tax-advantaged plan
advantages of qualified plans
‘ER contributions are deductible
‘ER contributions aren’t subject to payroll taxes
‘EE contributions pre-tax and grow tax-deferred
ERISA protection
Lump sum distribution options
can qualified plans be gifted to charity without being taxed?
Only after age 70 ½
what is the 50/40 test
DB plan must cover 50 ‘EEs or 40% of all eligible ’EEs
tip: people (50) come first
how many ‘EEs can be treated as officers for top heavy plan purposes?
50
If >50, ranked by compensation
when is a DB plan considered top heavy?
When PV of accrued benefits for key ‘EEs is >60% of total
when is a DC plan considered top heavy?
when account balances of key ‘EEs is >60% of total
what is the vesting schedule for a top heavy plan?
2-6 graduated or 3-year cliff
what is the minimum non-key ‘EE funding for top heavy plans?
3%+ unless key ‘EE funding is <3% in which case non-key must get equal funding
when does a parent-subsidiary relationship exist?
- 1+ corporations are connected through stock ownership with a common parent corp AND
- 80% of the stock in each corp is owed by 1+ corps in the group AND
- parent company owns 80%+ of at least one other corp
when does brother-sister relationship exist?
- 2+ corps in which <6 common owners own a controlling interest of each and have effective control
- controlling interest is 80%+ stock ownership
- effective control is >50% of stock
what is a combined group?
- 3+ corps where each is a member of either parent-subsidiary or brother-sister group AND
- 1+ corp is common parent of parent-subsidiary and is also member of brother-sister group
- Control groups dictate whether the ‘EE can get up to $61K max at both companies (NOT controlled group) or just $61K combined (controlled group)
can pension plans offer in-service withdrawals?
only over 59 ½ (PPA 2006 rule)
how much can pensions invest in ‘ER securities?
10% of FMV plan assets
If ‘ER securities are publicly traded, must allow 3+ investment options to diversify
When do DB plans use an actuary?
annually
when do Target Benefit plans use an actuary?
only at inception
when do Money Purchase plans use an actuary?
never; not needed because annual contribution is predefined in plan documents
what is the max PBGC benefit?
$6204.55
what does PBGC not insure?
- DC plans
- profit sharing plans
- DB pension plans for professional service groups with <26 participants
can DBs or DCs give credit for prior years of service?
DB only
what kind of plans can use SS integration? can they use excess or offset method?
all qualified pension plans allow permitted disparity
DCs can only use excess (applies higher % to comp. over SS wage base)
DBs can use excess or offset (provides lower benefit amount to those under SS wage base) method
which pensions benefit younger?
Cash Balance and Money Purchase
tip: cash money
what is the unit credit formula for funding DB plans?
utilizes years of service x salary
‘ER can choose what to look at for salary (e.g., average of last 3 years, highest average 3 years, etc.)
cash balance pension plan
what is it, does it benefit younger or older, vesting
- DB plan with hypothetical cash balance using pay credit (may be integrated with SS) and interest credit (guaranteed return)
- benefits younger because younger have more years of contributions and earnings which is a guaranteed rate
- 3-year cliff
money purchase pension plan
what is it, limits, benefit younger or older, vesting, use
- DC plan where ‘ER promises to make specific contribution
- ‘ER can only deduct up to 25% of ’ERs total covered comp paid and limited to $61K
- benefits younger because increased number of contributions and compounding periods
- 2-6 years or 3-year cliff
- basically useless after EGTRRA 2001 increasesd profit sharing plan limit to 25% (previously was only 15%)
target benefit pension plans
what is it, use of actuary, how is it funded
- determines contribution to an individual participant based on benefit that will be paid at retirement
- actuary required at inception
- doesn’t necessarily fund to attain the target, but funds annually based on that actuarial assumption and participant chooses investments
what is the deadline for establishing and making contributions to profit sharing plans?
federal tax due date + extensions
what is an age-based profit sharing plan and when is it used?
uses both age and compensation as basis for allocating
chosen when owner/key ‘EE is older than most other ’EEs
what is a new comparability plan?
contributions based on ‘EE class (e.g., officer vs rank and file)
must comply with cross-testing rules which dictate testing on expected benefits to b received at retirement
more expensive to administer
what is the vesting schedule for profit sharing plans?
standard is 2-6 or 3-year cliff unless plan requires 2-year waiting period in which case contributions vest at 100%
when can profit sharing plans permit in-service withdrawals?
after 2 years of service
what type of entities can establish a 401(k) plan?
corporations
partnerships
LLCs
proprietorships
tax-exempt entities
how many years of service can a 401(k) plan require?
no more than 1 year
what does the $20,500 (+$6,500 catch up) annual deferral apply to?
401(k)s, SARSEPs, 403(b)s, 457(b)s
what is a thrift plan?
allows after-tax ‘EE contributions (like Roth)
what is a nonelective contribution?
contribution that ‘ER makes whether or not the participant elects to defer
what is the ADP/ACP schedule?
if NHC contributions ___, HC can contribution ___
- 0-2% = 2x
- 2-8% = +2%
- >8% = 1.25x
what is a corrective distribution, when must it be made, and what happens if the deadline is missed?
When plan fails ADP, return excess deferrals back to HC
within 2 ½ months of plan year end
if not, 10% excise tax on excess
what is recharacterization, when must it be done, and what happens if the deadline is missed?
another solution to fix ADP test where you recharacterize HC contributions to after-tax
within 2 ½ months of pan year end
if not, 10% excise tax
when must a safe harbor election be made for 401(k) plans, what is the contribution, and when does it vest?
30+ days before end of plan year
non-elective contribution of 4%+ for all eligible ‘EEs OR the match AMC does
must vest immediately
what is the qualified automatic enrollment feature and how much can/must it be for ‘EE contributions?
another method of safe harboring
cannot exceed 15% but must be at least:
- 3% year 1
- 4% year 2
- 5% year 3
- 6% year 4 and thereafter
what are the ‘ER contribution requirements for qualified automatic enrollment feature and when do they vest?
must provide either of the below and vest in 2-year cliff
- non-elective contribution of 3% or
- match 100% of 1% and 50% of 2-6% and cannot match more for HC
when must distributions begin and end for stock bonus plans?
begin within 1 year of normal retirement age, death, or disability
begin within 5 years of termination
complete within 5 years
are stock bonus plan contributions deductible to ‘ER?
yes, to extent of FMV at time of contribution
do stock bonus plan holders have voting rights?
yes
what are the eligibility and vesting rules for stock bonus plans?
same as other qualified plans (21 and 1 year service or 2 years with 100% vesting)
2-6 or 3-year cliff)
how much of a corporation’s stock must an ESOP own immediately after the sale?
30%+
how long does the seller of an ESOP have to reinvest the proceeds and what is the holding period requirement?
12 months and must hold those securities for 3+ years to avoid a taxable event
(also cannot be a security that gets >25% of income from passive investments or where seller/relatives own >25%)
when must ‘ER offer diversification options to ESOP ’EEs and how much can ‘EE diversify?
age 55 AND 10 years of participation
may diversify up to 25% of account balance for first 5 years
50% in year 6
do ESOP ‘EEs have voting rights?
yes
is ESOP interest deductible for ‘ER?
yes
what are the types of profit sharing plans?
401(k), stock bonus plans, ESOP,
noncontributory vs contributory
noncontributory are ‘ER contributions
contributory are ‘EE deferrals
when must contributions be made for profit sharing plans?
by the due date of the company incme tax return
can a 401(k) be a standalone plan?
no, it is a feature attachment to a profit sharing plan; must attach to something
what are QNEC vs QMC, when are they used and when do they vest?
both are ways to correct failed ADP test
QNEC is qualified nonelective contribution
QMC is qualified matching contribution
both are always 100% vested
when are put options required for ESOPs and what are the time limits around exercising?
always; ‘EE and always require ’ER to repurchase at FMV on distribution date
must be done within 60 days of distribution or within 60 of plan year end
distribution options for pension plans before normal retirement age
lump sum
rollover to IRA or other qualified plan
leave in plan (must be >$5K)
what do you lose if you roll a qualified plan over to an IRA?
ERISA
NUA
10-year forward averaging
pre-1974 cap gain treatment
direct vs indirect rollovers
- direct: from qualified plan to trustee; no withholding
-
indirect:
- to participant who then transfers it
- mandatory 20% withholding
- must redeposit all (incl. withheld amount) within 60 days to avoid taxes
can a QDRO override plan rules?
No; e.g., if plan doesn’t allow for lump sum, QDRO cannot overrule it
what is IRA contribution max?
Anyone with earned income can contribute (not necessarily deduct) to:
- Lesser of $6,000 or earned income
- Additional $1,000 if 50+
Note: earned income includes alimony pre-2019 divorces
what is the penalty for contributing too much to an IRA?
6% excise tax (even if you don’t deduct too much) or withdraw excess by tax due date
when are Roth IRA distributions qualified and therefore tax-free?
- 5 taxable years after first contribution (period begins Jan. 1 year of contribution) AND
- 59 ½+, death, disability, first-time home (up to $10K)
in which order do distributions come out for Roth IRA vs Roth 401(k)?
- Roth IRA
- 1st: contributions
- 2nd: conversions
- 3rd: earnings
- Roth 401(k)
- Pro rata
which non-qualified Roth IRA distributions have a penalty?
Conversions if within 5 years of conversion (unless exception)
Earnings (unless exception)
NEVER penalty on contributions
which non-qualified Roth IRA distributions are taxable?
Earnings only
NEVER tax on earnings or conversions, though there pay be a penalty
can qualified Roth distribution be taken for 1st time home purchase?
Only from Roth IRAs NOT Roth 401(k)s
which investments are and are not permitted for IRAs?
- Allowed
- Cash
- Stocks
- Bonds
- Options
- US gold, silver, platinum coins (eagles)
- Real estate
- Not allowed
- life insurance
- collectibles
- other coins (krugerrands, maple leaf, panda)
what is a SEP?
who funds it, is it qualified?
- small business retirement plan
- ‘ER funded only
- NOT a qualified plan but very similar
- unique contribution, vesting, and distribution rules
who is eligible for a SEP?
21+
Performed services 3 out of 5 last years
Comp $650+
How much can be contributed to SEP?
lesser of 25% of covered comp OR $61K
E.g., someone making $100K can only have $25K contribution, NOT $61K like in profit sharing account
what is the annual deferral limit for a SIMPLE?
$14K +$3K catch up
On the tax tables, but note it is not the same as 401(k)
what is a SIMPLE?
- Savings incentive match plan for ‘EEs
- retirement plan for small ‘ERs but allows ’EE deferrals (unlike SEP)
- ‘ER is required to make contribution
- easy to establish and maintain
- similar tax advantages to 401(k)
- can be funded as IRA or 401(k) but almost always IRA
are RMDs per person or per account?
Per account; RMD must be applied to and taken from each account
in which plans does the ‘ER take on the investment risk?
DB only (DB Pension, Cash Balance)
Which qualified plans do not allow SS integration?
401(k) (traditional or Roth)
ESOP
SIMPLE
what is a Keogh plan?
qualified plan for a self-employed person
what is the penalty for prohibited transactions?
15% excise tax on the amount involved for each year (or part of year) unless it is corrected within 14 days of the date it was discovered
if not corrected within the taxable period, additional 100%
what are prohibited transactions for qualified plans and who is a disqualified person?
- when a disqualified person transfers assets to themselves or sells/exchanges/lends/borrows
- who is disqualified:
- plan fiduciary or servicer
- ‘ER
- ‘EE organization
- Direct/indirect owner of 50% + of voting power or capital interest
- family member of those above
what is the Saver’s Credit?
Nonrefundable credit
Applicable % x qualified retirement savings
Up to $1K if single and $2K if MFJ
what transactions are prohibited within an IRA and what is the penalty if done?
selling/exchanging property to an IRA
lending money to an IRA
pledging IRA for a loan
borrowing from IRA
buying property for personal use with IRA funds
impact: 10% penalty
which entities can establish a SEP?
sole proprietor
partnership
corporation
S-corp
what is the vesting schedule for SEP?
None; immediately 100% vested because it’s basically an IRA contribution which vests immediately
SARSEP
- not permitted to be established 1997+
- replaced in 1997 by SIMPLEs
- same deferral limit and ADP testing as 401(k)
who can establish a SIMPLE?
- companies with <101 ‘EEs who earned $5K+
- Note: even those who don’t meet other eligibility requirements are still counted toward the 100
- CANNOT establish a SIMPLE if ‘ER contributes to any other defined contribution plan
what is the ‘ER contribution for a SIMPLE?
‘ER must do either match or non-elective contribution
- Match: 3% (no covered comp limit)
- non-elective contribution: 2% of covered comp
Note: can temporarily reduce match to 1%+ for 2 years if ‘EEs given 60-day notice
what is the deadline for establishing a SIMPLE?
Oct. 1 of plan year
what is the vesting schedule for SIMPLE?
100% immediately
who is considered an active participant for IRA deductibility purposes?
DB - participates or is eligible
DC - receives contribution (including forfeitures), or contributes
if you set up a second Roth 401(k), does your holding period carry over from your first Roth 401(k)?
No; unlike Roth IRAs, the holding period for Roth 401(k)s is per account.
what is the penalty for early withdrawals on SIMPLE plans?
25% if within first 2 years
10% after that
same IRA penalty exceptions apply
403(b)
eligibility, deferral, vesting
very similar to 401(k)
same eligibility, deferral (combined with 401(k)), vesting schedule, loans
differences: what you can invest in, who can set up, catch up contributions
who can set up a 403(b)
public education
tax-exempt
does ERISA apply to 403(b)?
generally no ERISA if:
- ‘EE participation is voluntary
- no ‘ER contributions
- government or church-related
must require QJSA
403(b) catch up contributions
who: applies to HER (health, education, religious)
amount: additional $3K/year up to $15K max (CAN also use normal 50-year catch up)
requirement: must have 15-years of service and unused deferrals
what can a 403(b) invesst in?
insurance annuity contracts
mutual funds
i.e., cannot invest in stock directly but can indirectly through a mutual fund
what can a 403(b) invest in?
insurance annuity contracts
mutual funds
i.e., cannot invest in stock directly but can indirectly through a mutual fund
who can set up a 457?
public: government
private: tax-exempt 501(c)
how much can be deferred in a 457? what about catch up?
- deferral: same 20,500 but it is in addition to 401(k)/403(b)
- 50+ catch up: only for public 457s
-
add’l catch up: if within 3 years of normal retirement, can do additional 20,500 if you have unused deferrals
- public and private can use
- cannot also do the 50+ catch up
- ‘ER is not required to offer
what can a 457 be rolled into?
public 457: 401(k), 403(b), IRA
private: only other 457
what is a 457(f) plan?
ineligible deferred comp
“top hat plan” just for HC
deferred comp
- way to provide benefits without qualified plan limits
- don’t have tax advantages of qualified plans
- ‘ER gets deduction when ’EE includes the income
- ‘EE must have substantial risk of forfeiture and no constructive receipt (secular/rabbi trust)
rabbi trust vs secular trust
- both
- irrevocable (i.e., ‘ER can’t get back)
- rabbi
- is subject to creditor retrieval so substantial risk of forfeiture
- ‘EE not taxed until distribution
- secular
- not subject to creditors
- no substantial risk of forfeiture unless it includes something like a vesting schedule where ‘EE will pay tax as it vests
ISO vs NQSO
ISO:
- potential for more favorable taxation because you don’t pay tax until you sell
- only the first one exercised in a year will be an ISO and rest will be NQSO
NQSO
- W2 income (so SS withholdings) at exercise and CG at sale
what is the annual limit for ISO grant?
>$100K/year/’EE
can ISO or NQSO be gifted?
ISO: only after exercise date
NQSO: yes if allowed by ‘ER
- ‘EE still has W2 income when donee exercises
- donee basis equals what they paid to exercise + donor income recognition
stock appreciation rights (SARs)
- just like phantom stock
- cashless exercise without any right to buy stock but still partake in appreciation
- W2 income at exercise for amount above grant price
- can make the 83b election
restricted stock plans
you receive actual stock but don’t vest until certain period of time
‘EE doesn’t pay anything for the stock so recognizes income at vest based on FMV at grant
how/when to make the 83b election?
‘EE files statement with IRS within 30 days of stock grant
Employee Stock Purchase Plan (ESPP)
what is it, price, annual limit, tax impact
- allows ‘EEs to purchase stock at a a discounted price and get tax benefits (not as favorable as ISO)
- price must be at least 85% of lesser of FMV at grant or exercise
- limited to $25K/year based on 100% of FMV at grant
-
tax:
- if you hold 2 yrs from grant and 1 year from exercise, discount is taxed ordinary (i.e., no SS)
- if you don’t meet holding period, discount is W2 (i.e., SS included)
VEBA
rarely tested
‘ER tax-exempt trust to put money aside for future ’EE benefits; earnings grow tax free
NQDC
non-qualified deferred comp
‘ER saves on payroll taxes (except 1.45% Medicare)
can discriminate
above what amount is an ‘EE achievement award taxable?
Nonqualified: $400
Qualified: $1600
- part of a written plan that does not discriminate
how much of ‘ER education assistane is not taxable?
$5250
lean FIRE vs barista FIRE vs fat FIRE
lean - minimalist lifestyle; only cover necessities
barista: may need part-time job to cover expenses
fat - more than cover lifestyle expenses; live it up
what kind of plan would not consider you as active participant for IRA contribution deduction purposes?
a 457 because it is not a qualified plan or a SEP
which plans would consider you an active participant for IRA contribution deduction purposes?
401(k), 403(b), DB plans, SEP, SIMPLE
NOT 457
are ‘ER contributions to a Rabbi trust exempt from payroll taxes?
yes
what documents must be distributed to DB participants/beneficiaries?
Summary Annual Report
terminating ‘EEs benefit statement
what does the max retirement benefit someone can receive in a target-benefit plan depend on?
value of their account at retirement
who are tax-sheltered annuities (TSAs) for?
nonprofit, nontaxed entities
are TSA salary reduction contributions subject to SS tax?
yes
are loans and catch-up contributions permitted for TSAs?
yes
what is the maximum disparity allowed when using the offset method of SS integration?
lesser of:
- 0.75% OR
- 50% of the overall benefit funding percentage
x years of service (max 35)
what is the maximum disparity allowed when using the excess method of SS integation?
lesser of:
- 0.75% OR
- the percentage applied to earnings below covered comp limit
x years of service (max 35)
not commonly tested
what happens to the ‘ER’s required contribution of a cash balance plan if the investments perform better than the guaranteed rate?
the required ‘ER contribution will be lowered
what is dependents’ group life insurance?
a policy that covers all eligible dependents; ‘ER may pay entire premium cost
what did the american jobs creation act of 2004 change for rabbi trusts?
springing irrevocability is allowed if there is a a change of control or ownership
rabbi trust cannot be held off-shore
what type of investments can a TSA hold?
fixed annuities
variable annuities
mutual funds
do age-based plans consider years of service?
no
do negative elections require immediate 100% vesting?
no
how much in life insurance premiums can ‘ERs deduct and what is taxable to ’EE?
‘ERs can deduct 100% but ’EE is taxed on amount for coverage >$50K
how is the catchup deferral amount impacted by the ADP limitation if not a safe harbor plan?
it is not; can still contribute full $6500 catch up even if HC
what is a TSA also known as?
403(b)
which plans must have a joint and survivor annuity option?
pension plans
for group life insurance, what is the minimum group size and how many must it benefit to be qualified?
minimum group: 2
to be qualified:
- non-discriminatory: bottom tier with benefits 10%+ of the top tier and <250% increase between tiers OR
- must benefit 70% of all ‘EEs or 85% of non-key ’EEs
can S Corps and proprietorships deduct premiums for group health insurance for owners?
No
duties of plan administrator vs trustee
administrator: determine who is eligible, vesting, plan benefits, prepare and file reports
trustee: invest assets in prudent manner and monitor/review performance
what is the deadline to make an IRA contribution to be deductible?
due date of tax return (4/15). NO extension allowed
do SIMPLE IRAs withhold 20% when distributing?
No, because it is not a qualified plan
if you have a pre-existing condition, how long does HIPPA allow you to be excluded from group plan coverage?
12 months for most
18 months if you enroll late
what is the section 415 limit?
$61K
what is the excise tax on RMDs not taken?
50% of amount not taken
how does electing 83b impact holding period?
holding period begins at grant, even if not vested yet
does vesting period start even if you are <21?
yes, as long as you work 1000+ hours
golden handshake vs parachute vs handcuffs
- handshake: severance package, often designed to encourage early retirement
- parachute: substantial payments to executives being terminated due to change in ownership
- handcuffs: designed to keep the ‘EE with the company
supplemental executive retirement plan (SERP)
non-qualified deferred comp arrangement
provide additional benefits during retirement
what is the purpose of excess benefit plans?
type of SERP designed to provide benefits in excess of the benefits available in qualified plans
annuity due vs ordinary annuity calculator mode
- Due: BEG mode (rent is due at beginning of month, we need retirement money at the beginning of each year)
- Ordinary: END mode
reduction of SS benefits for early retirement
- 5/9ths of 1% for each month up to 36 months
- 5/12ths of 1% for each month after 36
- tip: 36 months = 3 years which is the difference between 9 and 12. Bigger penalty earlier to discourage taking it early
increase in SS benefits for late retirement
8% per year up until age 70
what to factor out if WRR is not given when calculating retirement need
FICA of 7.65%
if two spouses have SS, what is the minimum the lower spouse will get?
50%
E.g., if he is getting $20K and she is getting $7K, she will actually get $10K
are 403(b)s subject to ADP testing?
No
are SIMPLE’s subjected to ADP testing?
No
what is Form 8606 for?
IRA contributions
do 457s have early withdrawal penalty?
generally not; considered deferred comp
do
do Roth IRA distributions have a penalty if >59.5 but account <5 yrs?
No; only tax on any earnings distributed
how is growth taxed if you don’t meet the holding period requirement for an ISO?
- Holding period = 2 years from grant and 1 year from exercise
- at grant: no tax implication
- at exercise: no regular tax implication; + AMT = current price - exercise price
- at sale:
- AMT = price at exercise - exercise price
- ordinary income = price at exercise - exercise price
- cap gain = price at sale - price at exercise
can SIMPLEs invest in real estate?
yes
what kind of taxation will you have at distribution and sale for a stock bonus plan distribution of 50% of account?
- at distribution, ordinary income = value at distribution because not lump sum distribution so no NUA
- at sale, capital gains = appreciation from distribution
are there any limits around how much of a Roth 401k can be rolled into a Roth IRA?
seemingly not; can roll over full amount with no tax or penalty
what is the limit for annual contributions for someone who is self-employed who also has 401k and 457
- CAN exceed $61k
- $20,500 to 401(k) (+6500 if catch up)
- $20,500 to 457
- 20% to self-employment plan
order to calculate social security AIME
- multiply historical earnings x indexing factor
- select top 35 years of earnings
- divide by 420
when can you get SS benefits for an ex-spouse who is living?
when the ex-spouse is 62
at what age can you get SS benefits from a dead ex spouse?
60+
can inherited assets in a qualified plan be rolled directly to a Roth account by the spousal beneficiary?
Yes
is ADP required for 401K plans?
yes
Can companies that do not have safe harbor plans base the current year HCE deferrals on the prior-year deferrals of the NHCEs?
yes
are ineliginle employees counted for 20% HC election purposes?
yes, and round up to whole person
for ADP test, is it the total of all deferrals divided by total of all covered comp or simple average of deferral %?
simple average of deferral %
can owners be considered NHC if you elect the 20% rule?
no, >5% owners will always be considered HC
what is the SS benefit reduction if you exceed the earnings limit?
- before or at full retirement, reduce $1 for every $2 above the limit
- after full retirement age, earnings don’t reduce SS benefits received
can ESOP contributions exceed 25% of comp?
only if it’s exclusvely for interest payments
how are NQSO taxed at grant, exercise, and sale
- grant: nothing
- exercise: ordinary income
- sale: capital gain
is there tax or penalty on a QDRO distribution?
tax but no penalty;
20% withholding
how do relatives impact who is HC?
even if a relative does not have >$135K or >5% ownership, they’re still considered HC if a relative (e.g., kids are HC if parents are owners)
are ineligible ‘EEs considered for ADP testing?
No
E.g., exclude those with <1 year service or <21
