Retirement Flashcards
Pure Life Annuity
Highest payout. No benefits for spouse.
Fully insured for social security
40 quarters of coverage in a lifetime. If they are fully insured, they are eligible for both survivors and retirement benefits
Currently Insured
Only attained 6 quarters over coverage and eligible for the following:
-Lump sum benefit ($255) for spouse or dependent.
-A surviving spouse benefit if children are UNDER 16.
-a dependent benefit
(DONT EXPECT QUESTIONS ON THIS)
Worker benefits
Fully insured and 62.
Disability benefits - eligible if under 65 and has been disabled for 12 mos, expected to be disabled for 12 mos, or expected to die and completed 5 mos waiting period.
Spousal benefits
spouse of retired or disabled worker qualifies for Social security if they meet any of following:
- age 62 or any age if spouse
- has child UNDER 16
- has child 16 and over AND disabled before 22
Surviving spouse benefits
qualifies if spouse is deceased and you are 60 or over.
OR any age if they have child under 16 (or disabled before 22)
Divorced spouse benefits
eligible if divorced for at least two years. (Must have been married for 10 years and not remarried).
**You can only get the greater of your benefits OR 50% of his benefit. You also cannot pick one type of benefit and then switch.
Dependent benefits
eligible if unmarried child of deceased, disabled, or retired worker. Must be under 19 or disabled before 22.
Lump sum death benefit
Get $255 if spouse living in same house of deceased at death or child. (one or the other, not both)
Reduced benefit calculation
(# of mos before Full Retirement Age/180) x Primary Insurance Amount
Primary Insurance Amount (PIA) is just the amount you would get paid SS.
Working and taking Social security
Before full retirement age - Benefits are reduced $1 for each $2 earned for anything above $19,560.
For the year you turn full retirement age - Benefits reduced $1 for every $3 for anything earned above $51,960 until month of full retirement age.
Taxation of benefits
if income, muni bond interest, and 1/2 of social security benefits are more than the following numbers, then the corresponding percentage of social security is taxed.
50% if over $25,000 (Single) $32,000 (MFJ)
85% if over $34,000 (Single) $44,000 (MFJ)
Disability policy coordinating with social security
If it does coordinate with SS, then the policy pays the amount less SS amount. You still get the SS.
Defined Benefit plan
-Favors older EE/owner (50+)
-GUARANTEED retirement benefit amount
-requires very stable cash flow
-forfeitures in defined benefit plans must reduce plan cost or contribution.
-past service credits are allowed
-Has vesting schedule, administration costs, exempt from creditors, integrates with social security.
-Life expectancy affects DB plans, not DC
-annual ER contributions are required and actuarially determined each yr. Max benefit is $245k, benefit can be based on max salary of $305k, BUT the contribution could be more than those (it’s whatever is actuarially determined)
Cash Balanced Plan - A pension type of DB plan. ER guarantees contribution level and a minimum rate of return. (like a money purchase pension plan, but does not require ER to guarantee min. rate of return.) Most ER’s like this better than traditional DB so they don’t have to guarantee an exact amount and are a little cheaper.
Defined contribution plan
-Has vesting schedule, administration costs, exempt from creditors, integrates with social security.
Money Purchase Pension Plan - up to 25% ER deduction, fixed contributions (fixed % of salary), stable cash flow needed. (Like cash balance plan, but don’t have to guarantee a interest rate)
Target Benefit Pension Plan - up to 25% ER deduction, fixed contributions, stable cash flow needed, favors older EE.
Profit Sharing Plan - up to 25% ER deduction, flexible contributions (must be recurring and substantial)
Profit Sharing 401(k) - maximum flexibility. ER could contribute the maximum 415 limit or nothing at all. 
Stock bonus plan - up to 25% ER deduction, flexible contributions, 100% of the contribution can be in company stock, ESOP cannot be integrated with S.S. or cross tested.
Other retirement plans (not DB or DC)
SIMPLE IRA - 100 or fewer EE, requires ER match (immediate vesting), salary reduction limit up to $14,000 (FICA), company cannot have another plan.
SEP IRA (only allows ER contributions) - up to 25% cont. for owner/ up to 18.59% cont for self employed (or 12.12% for ER and for 15% cont.), acct immediately vested, can be integrated with S.S. No required contribution each year.
SARSEP
403B (TSA) - for 501c3 organizations and public schools. Subject to ERISA only if ER contributes. Salary reduction limit up to $20,500. ER contributions may be subject to vesting schedule.
457 plan
operate as a NQ Deferred Comp plan
DC Plans Cont.
-Retirement benefits may be affected for EE who enter the plan at older age.
-EE assumes investment risk
-Contributions are based on salary for each yr, not the salary at retirement.
-ER are subject to minimum funding standards, but they may make cont. as low as 3%
- Forfeitures may be reallocated to participants or to reduce ER contributions.
Money purchase pension plan
-DC
-Needs stable cash flow
-follows a formula that ER follow a flat % of each EE compensation.(Only the first $305,000 is taken in account)
-ER can cont. up to 100% of EE salary
-EE can only deduct up to 25% of overall eligible payroll.
-Used if EE’s are young and well paid and the ER wants a stable workforce and retain key EE.
Target Benefit Pension Plan
Target benefit plan is an alternative to a DB plan that provides adequate benefits to older EE, but has the lower cost and simplicity of a DC plan.
-DC
-Max cont. is lesser of 100% of salary or $61,000
- retirement benefit is determined by acct balance
-EE assumes investment risk
-no annual actuary is necessary
-Forfeitures may be reallocated to participants or to reduce ER contributions.
-fixed mandatory cont. (just like DB plans)
-plan usually favors older (just like DB plans)
-Actuary determines INITIAL cont. level (just like DB plans)
Profit Sharing Plan
Use when company profits vary year to year. When wanting to motivate EE to make company more profitable, or when EE’s are young/well-paid.
-DC
-allows FLEXIBLE ER cont. up to 25% of compensation.
-Cont. amount can be discretionary or nothing at all.
-No mandatory contribution amount or minimum funding, but must be substantial and recurring.
-individual accounts
-consists of ER cont., investment returns, and forfeitures(typically reallocated to EE’s).
-EE cont. subject to FICA. ER cont. are not.
401k
EE cont. subject to FICA(payroll)/ FUTA(unemployment) but not fed tax.
-limit on elective deferrals is $20,500
-$6,500 catch up if EE is over 50
-Deferral amount can also be supplemented by ER cont. up to 100% of salary or $61,000
Sole 401k (uni-401k)
Not subject to coverage testing and nondiscrimination rules.
Safe Harbor 401k
Automatically satisfies non discrimination testing with EW matching cont. or non-elective cont. On non-elective, the ER must cont. 3%.
Stock bonus plans and Employee Stock Ownership Plan (ESOP) are variations of profit sharing plan.
Stock bonus plan MAY invest in ER stock, an ESOP must invest primarily in ER stock.
Partnerships may not offer stock bonus plan because partnerships do not issue stock.
New Comparability Plan
Contribution % formula in one category, such as managers, is higher than another category..
-Tested under cross-testing rules. (Cross-tested may be referred to as age-weighted. They generally result in higher contributions for older EE’s)
Section 415
a max limit on a projected annual benefit (not contribution) that a DB plan can provide.
-Benefit at age 65 is lesser of $245,000 or 100% of participants compensation averaged over his/hers three highest earning consecutive years.
unit benefit formula
a common formula used. Goes off of a percentage of earnings per year.
Non-qualified plans
SEP
SARSEP
SIMPLE
403(b)
Hours of Service
must complete one full year of service AND 1000 hours of service in a year or 500 hours for 3 consecutive years, this makes you eligible to participate in a qualified plan.
Qualified plans are also subject to two coverage tests: Ratio % and average benefit test
Ratio Percentage Test: must cover at least 70% of non highly compensated EE (NHCE) of HCE that are covered. ***If this test is failed then you must pass the next test.
Average Benefits Test: Average benefits for NHCE must be 70% for thos of HCE
Minimum participation – (defined benefit plans only)
Must benefit, at least the lesser of one of the following:
-50 EEs
-the greater of 40% of all EEs or two EEs
Highly compensated EEs
Considered HC if they are either a greater than 5% owner or an employee earning more than 135,000 in the preceding year.
Key employee
Considered a key employee if at any time during the year, they have been any of the following:
A greater than 5% owner, an officer and has a Compensation greater than 200,000, a greater than 1% owner and compensation greater than 150,000 .
Top Heavy Plan
if more than 60% of aggregate accrued benefits are allocated to key EEs
Vesting Schedules for DB and DC
Top Heavy DB plans and all defined contribution plans: 3 yr cliff or 2-6 yr graded or 100% vested with 2 yr egiibility.
Non top heavy DB plans:5 yr cliff or 3-7 yr graded or 100% vested with 2 yr eligibility.
***when exam asks whats the most restrictive pick the 2 yr rule or 3 yr cliff BUT if it says the company wants to retain the EEs, then pick the graded schedule.
