Retirement Flashcards
Excise tax for over contributing
6% tax on amount above
Defined contribution plans
qualified plans
Individual account for each participant
Subject to ERISA
Vesting schedule
May not be enough benefits for people who enter at older ages
Forfeitures are reallocated or applied to reduce employer contribution
Money purchase plan
DC plan
Benefit formula: annual employer contribution that’s a flat % of each employees salary
Salary cap is $305k
Max contribution is lessor of 100% of compensation or $61k
Employer can only deduct 25% of total comp
SELECT IF:
Stable CF
mandatory contributions
Retain key employees
Employees young and well paid
Simple to explain
Target benefit plan
DC plan
Shares some features of DB plans
Max contribution is lessor of 100% of compensation or $61k
Benefits older employees
Actuary determines initial contribution
Fixed mandatory contributions
No guarantee that target among will be reached
Employer can deduct 25% of contribution
SELECT IF:
stable CF
provide adequate retirement to older employees
Lower cost
Simple
Profit sharing plan
DC plan
Flexible employer contributions
Contributions must be substantial and recurring or else IRS can disqualify or terminate
Forfeitures are invested terminated employer accounts which are reallocated to participants
SELECT IF:
financial stability varies from year to year
Incentive feature to motivate employees to make company profitable
Young and well paid
NOT EASY to install expensive
Types: 401k, solo 401k, safe harbor or ESOP
Hardship withdrawals allowed
401k
Type of profit sharing plan
Employees can defer $ to plan subject to FICA and FUTA not federal
Max contribution is $20,500 with catch up of $6,500 if age 50 or older
SELECT IF:
employees can only afford minimal extra expenses
Employees want to increases saving on a tax deferred basis
Solo 401k
Profit sharing plan
Not subject to coverage testing or non discriminatory rules
Allowed for owner and spouse or 2 partners
Max employee contribution is same as 401k
Max corporate contribution is 25% of owners compensation with max of $61k
May produce larger contribution amounts when compared to KEOGH plans
Safe harbor 401k
Profit sharing plan
Satisfies non discrimination tests by either:
1. Match $1 for $1 on first 3% of employee contribution and $0.50 for $1 on next 2%
2. Non elective employer must contribute 3% or all eligible employees regardless of if employee defers anything
ESOPS
Profit sharing plan
Stock bonus may invest in employer stock
ESOP MUST invest in employer stock
ESOP dividend deduction if received in cash or reinvest
Employees 55 and older may diversify 50% or assets. Plan must provide 3 alternative investment options
ONLY corporations can establish NOT partnerships
SELECT IF:
company wants to broaden ownership of stock shareholder or provide business continuity
Tax advantage mean to acquire stock
Employees feel sense of ownership
Means to finance company operations
Cross testing
ALL DC plans (except esop and solo) are tested for non discrimination on the basis of contributions
Differentiate highly compensated employees with non
Defined benefit plans
Qualified plan
Guaranteed specific amount at retirement
Required to carry PBGC insurance even if business fails insurance will cover
Maximum annual life benefit is lessor or:
1. $245k
2. 100% of participants compensation over their 3 highest earning consecutive years
SELECT IF:
Employer wants to maximize plan contributions
Older employee controlling me ever want to maximize tax deferred retirement savings for their own benefits
Cash balance pension plans
DB plan
Provides annual employer contribution at a specified rate to hypothetical individual accounts for each participant
Guarantees contribution level and minimum rate of return
Older employees get less of a payout
SELECT IF:
Less expensive and simple
When a company can no longer afford benefit guarantees under a DB plan or a small employer with high earners.
Factors for DB plan contributions
Age of employee older the more money
Past service you get a credit for it
Forfeitures must be applied to reduce employer contributions
Investment return assumptions lower then higher contribution amount
Qualified plan age and service requirements
21 AND 1 years of service
21 AND 2 years of service but 100% immediate vesting
Year of service = 1,000 hours during initial 12 month period
Employees worked 500 hours for at least three consecutive years
Coverage testing for qualified plans
Ratio % test: plan must cover % of non highly compensated employees that is 70% of highly compensation employees that are covered if not then average benefit test
((100% of HCE covered)*70%=x
100-x= percentage of NHCE that can be excluded
x= percentage of NHCE that must be included
Average benefits test: average benefits for all NHCE must be at least 70% of those for HCE
Minimum participation for DB plans
Lessor of:
1. 50 employees
2. Greater of 40% of all employees or two employees
Highly compensated employee “HCE”
Relates to discrimination testing
Greater than 5% owner or made 135k in previous year
Key employees
Relates to vesting; same as rank and file employees
-Greater than 5% owner
-Officer and has comp of more than $200k
-Greater than 1% owner and comp more than $150k
Top heavy plans
More than 60% or accrued benefits to key employees
HCE salaries up to $305k divided by HCE salaries up to $305k plus NHCE salaries
Vesting schedule
Top heavy DB plans and ALL DC plans (faster)
- 3 year cliff
- 2-6 year graded
- 100% vested after two years
Non top heavy DB plans
- 5 year cliff
- 3-7 year graded
- 100% vested after two years
Family attribution
Family member of a key or HCE will be deemed the same for testing
ADP/ ACP testing
Adp: percentage of deferral
ACP: contribution testing non discrimination
IF NHCE defers 0-2% then HCE can defer X2 of NCHE contribution
If NCHE defers 2-8% then HCE can defer +2% of NCHE contribution
If HCE is 50 or older they can defer additional catch up
Social security integration
Equalize employers contributions to benefits higher paid employees
DB plans: based % given
Permitted disparity: base % + lessor of base % or 26.25%
Excess: base plus permitted disparity
DC plans: base % given
Permitted disparity: base % + lessor of base % or 5.7%
Excess: base plus permitted disparity
KEOGH plan
Qualified plan for sole proprietorships and partnerships
Owner contribution based on net earnings
Self employment tax should be deducted
For 15% non owner employer contributions; owner can contribute salary times 12.12%
For 25% non owner employer contributions; owner can contribute salary times 18.59%
Salary is schedule c income
Top heavy contributions or benefits
Top heavy plans provide minimum before for non key employees
DB: minimum benefit for non key employees is 2% * number of years of employment - max 10 years
DC: 3% of each non key employees compensation
Loans from qualified plans
Requires repayment
Total loans don’t exceed lesser of 50% vested plan benefit or $50k
Small accounts can borrow $10k without regard to percentage
Loan has to be repaid in 5 years unless money is used to buy primary house
Repayment = level installments at least quarterly
If person doesn’t make payments then entire balance is taxable distributions ordinary income plus 10% penalty if under 59 1/2
Interest is never deductible for key employees
Non key employees can deduct id
Loan is for primary house
Loan is secured by house
No loans allowed for: IRAS, SEPS, SIMPLE, ROTH
Early distributions for IRAs
Before age 59 1/2 there is a 10% penalty UNLESS one of the following:
- Death
- Permanent disability
- Qualified education expenses
- Substantial but equal payments
- First home expense up to $10k
- Medical expenses greater than 10% of AGI
- Birth or adoption up to $5k
Roth IRA conversion distributions
Contributions then converted assets then earnings
Conversion assets that meet 5 year holding period - No income tax or penalty
Fail to meet 5 year holding period but distribution for special purpose then no income tax or penalty
Fail to meet 5 year but no special purpose no income tax but 10% early withdrawal penalty