Retirement

Question 1

Vesting

Answer 1

• Must be 100% if plan terminates
• Can be 100% after 4 years in DB pension plan
• DC plans must use accelerated vesting even if top-heavy

Question 2

Qualified Plans

Answer 2

**Defined Benefit Pension Plans: **
promise benefit or contributions; mandatory annual funding; inservice withdrawals age 62+; jt/survivor annuity automatic benefit form
- DB Pension
- CB Pension - no inservice withdrawals
- DB(k)

Defined Contribution Pension Plans:
- Money Purchase Pension - inservice withdrawals 62+
- Target Benefit Pension

Defined Contribution Profit Sharing Plans:
no mandatory funding; inservice withdrawals if plan allows
- Traditional Profit Sharing
- Stock Bonus
- ESOP
- 401(k) - discrimination testing on elective deferrals
- Thrift
- SIMPLE 401(k)
- Age-Based Profit Sharing - discrimination testing on benefits
- New Comparability - discrimination testing on benefits

distributions may qualify for special lump-sum distribuion

Question 3

Tax-Advantaged & Nonqualified Plans

Answer 3

Tax-Advantaged Plans:
- SEP
- SARSEP
- IRA
- Roth IRA
- 403(b)
- SIMPLE IRA

Nonqualified Plans:
- Deferred Comp
- 457

Question 4

Plan Features

Answer 4

Mandatory ER funding: 1) DB, 2) CB, 3) Money purchase, 4) Target Benefit, 5) SIMPLE

EE Contributions:
- Pretax: 1) DBk, 2) Profit sharing, 3) 401k, 4) SARSEP, 5) SIMPLE
- After tax: 1) money purchase, 2) profit sharing, 3) thrift, 4) 401k

Plan investment in ER securities:
- unlimited: 1) profit sharing, 2) stock bonus, 3) thrift, 4) 401k, 5) ESOP
- 10%: 1) DB, 2) money purchase, 3) CB, 4) Target Bene
- NA: 1) SEP/SARSEP, 2) SIMPLE

Forfeitures offset plan expenses:
- must: 1) DB, 2) CB
- can: 1) money purchase, 2) profit sharing, 3) stock bonus, 4) thrift, 5) 401k, 6) ESOP, 7) target bene
- NA: 1) SEP/SARSEP, 2) SIMPLE

No Loans: 1) SEP/SARSEP, 2) SIMPLE IRA

10 year forward averaging: 1) SEP/SARSEP, 2) SIMPLE IRA

Vesting:
- immediate:1) EE 401k, 2) SEP/SARSEP, 3) SIMPLE
- 5 yr cliff/graded 3-7: 1) DB
- 3 yr cliff/graded 2-6: 1) Top-heavy DB, 2) money puirchase, 3) profit sharing, 4) stock bonus, 5) thirft, 6) 401k, 7) ESOP, 8) CB 3 yr only, 8) target bene

Question 5

NUA

lump sum distributions of ER contributions

Answer 5

stock share price at plan purchase (tax basis):
- ordinary income
- taxed @ distribution

share price @ distribution - share price @ purchase (NUA portion):
- LTCG
- taxed @ sale

share price @ sale - share price @ distribution (post distribution growth):
- LTCG or STCG
- taxed @ sale

NUA treatment requires:
- triggering event: death, disability, separation from service, age 59.5
- lump sum distribution

Question 6

Plan Coverage Requirements

Answer 6

Highly Compensated EE meets one of the following:
1. ER ownership > 5% (current or prior year)
2. prior year comp > 135k (if ER makes “top-paid group” election, only EE in top 20% of comp = HCE)

Key EE meets one of the following:
1. officer with comp > 200k
2. ER ownership > 5%
3. ER ownership > 1% with comp > 150k

Coverage Requirements:
1. safe-harbour test: 70% coverage for non-HCE
2. ratio test: NCHE coverage % ÷ HCE coverage % ≥ 70%
3. average benefits % test: NCHE average benefit % ÷ HCE average benefit % ≥ 70%

Additional Coverage Test for DB Plans: 50/40 test
- minimum plan benefit is lesser of: 50 EEs or 40% of all eligible EEs

Top-Heavy (Key EE benefit > 60%) Plan Funding for Non-Key EEs:
- DB: 2 x YOS (up to 20%)
- DC: 3 x total comp

Question 7

ADP & ACP Testing

Answer 7

ADP (401k plans) = deferrals ÷ EE comp
- Test
if NHCE ≤ 2% –> HCE max = 2 x NHCE ADP
if NHCE > 2% but ≤ 8% –> HCE max = 2% + NHCE ADP
if NHCE > 8% –> HCE max = 1.25 x NHCE ADP

ACP (all qualified DC plans): same rules as ADP

Correction:
1. Corrective distribution (decrease HC)
2. Qualified nonelective contribution (increase NHC)
3. Qualified matching contribution (increases NHC)

Safe Harbor Rules (alternate method to meet nondiscrimination tests)
ER can avoid if one is met (note: safe-harbor contributions = 100% vested always)
- 100% match up to 3% + 50% match 3-5%
- nonelctive 3% contribution

note: 401(k)s must meet both if not safe harbor

Question 8

Plan Max Benefits

Answer 8

DB:
- 100% average EE comp over 3 highest years (consecutive)
- max 245k (2022)

DC:
- 100% EE comp
- max 61k (2022)

Includes:
- ER contributions
- EE (non-rollover) contributions
- allocated forfeitures

ER Contributions deductible up to 25% covered EE comp

Question 9

Stock Bonus Plans & ESOPS

Answer 9

• ER contributes cash or stock
• Stock bonus: EE can divest ER stock purchased with EE contribution
• ESOP: no elective deferrals
• Distributions must begin w/in 5 years of separation (1 year for retirement, death, disability)
• EE voting rights for stock
• Deferred NUA taxation for lump sum distributions
• NUA = distribution $ - ER cost $ –> CG treatment at sale
• ESOP can be leveraged (LESOP) -> ER can borrow on favorable terms

Question 10

Qualified Automatic Contribution Arrangement

Per 2006 Pension Protection Act

Answer 10

-incentives for ER to adopt automatic EE enrollment in 401k
-PPA includes safe harbor provisions –> relieve ADP and ACP testing

Nondiscrimination ADP/ACP testing if:
-automatic deferral of 3%-15% EE covered comp
-if ADP < 6% auto deferral rate must increase 1% / year until 6%
-ER contributions for NHCs either 1) ER match: 100% on 1% and 50% on next 5%, or 2) 3% profit share
-ER contributions 100% vested after EE meets 2 YOS

Question 11

SIMPLE 401(k)

Answer 11

ER eligibility:
- < 100 EEs (2 year grace period when limit is hit)
- no other sponsored retirement plan (457 is allowed)
EE eligibility:
-5k+ income any 2 preceeding years
-no other ER retirement plans
Characteristics:
-no ADP testing
-no top-heavy rules
-14k EE deferrals + 3k catch up
-ER contributions: 3% match or 2% nonelective (100% vested)

Question 12

Keogh

Answer 12

SE Tax:
Earnings ≤ SS wage base (147k 2022)
1. total earnings x .1413 = SE tax (1/2 is above-line deduction)

Earnings > SS wage base
1. total earnings x .9235 = net earnings
2. wage base x .153 = SE tax on wage base
3. net earnings - wage base = amount > wage base
4. amount > wage base x .029 = SE tax on amount > wage base
5. SE tax on wage base + SE tax on amount > wage base = total SE tax (1/2 is above-line deduction)

Self-Employed Owner Max Deductible Contribution
1. total income - deductible SE tax paid = net income considered
2. net income considered x [plan contribution % ÷ (1 + plan contribution %)] = max deductible contribution