Retirement Flashcards
What is the safe harbor test?
70% or more of the non highly compensated, eligible employees are covered by the plan
covered employees/total NHC eligible employees
What is the ratio test for qualified plans?
% of NHC covered / % of HC covered
What is the average benefits test for qualified plans?
AB % of NHC covered / AB % of HC covered must be greater than 70%
And non discriminatory test
What is the ADP Test?
Actual deferral percentage test
Limits the employee elective deferrals for HC based on the elective deferrals of the NHC
Looks at both traditional and Roth contributions
Ex: If NHC defers 2%, highly can go up to 4%
If NHC defers 3%, highly can go up to 5%
If NHC defers 8%, highly can go up to 10%
What is the 50/40 test?
The plan must cover at least 50 employees, or 40% of employees - whichever is less
For defined benefit plans only
What is the ACP test?
Actual contribution percentage
Uses the same scale as ADP test
What are features of a safe harbor 401k?
Not required to pass ADP and ACP
Employer must provide either:
- 3% nonelective contribution to all edible employees -OR-
- A matching contribution
–100% up to 3% and 50% from 3%-5%
–OR- a flat 4% match on contributions
Employer contributions are always 100% vested
Requirements to contribute to an IRA:
- Must have earned income
Note that a non-working spouse can have their spouse contribute
When is an IRA deductible?
Limited deductibility when the taxpayer is an active participant
What is an active participant in a employer sponsored plan?
If it’s a defined benefit plan, the participant is active if they meet the eligibility requirement of the plan
If it’s a defined contribution plan, the participant is active if they:
- Receive a contribution to the qualified plan (Including forfeitures of non vested)
- Defers comp to a CODA plan (401k)
What IRA contribution is deductible for someone who is NOT and active participant in a plan, but their spouse is an active participant?
What is the formula for calculating IRA deductibility when taxpayer is in the phaseout?
For single:
((Top of phaseout range - AGI)/10) * 6,000
What are the Roth IRA phaseouts?
Based on AGI
What are exceptions to the 10% early withdrawal penalty?
- Turning 59.5
- death
- disability
- Substantially equal periodic payments
- Medical expenses over 7.5% of AGI
- Higher education
- IRS Levy
- First time home purchase up to $10k
- payment of health insurance premiums during unemployment
- certain distributions to reservists called to active duty.
- Birth or legal distribution
What is a leveraged ESOP?
Typically it’s used as an owner exit strategy
The company can’t afford to buy out the owner so the company gets a loan from the bank
Subject to max 25% deduction
- bank loans fund the ESOP trust
- ESOP buys stock from existing stockholders
- Company distributes annually (tax deductible) to the ESOP trust, the ESOP trust repays the bank both principal and interest
- Employees receive distributions of the company stock when they retire
ESOP distributions in stocks are NUA
Employees in an ESOP may demand 25% of balance is diversified
Can life insurance be part of qualified plans?
Yes, if:
- it must not be the primary focus of the plan
What is the 25% test for insurance in qualified plans?
For defined contribution plans
For term and universal life: The aggregate life insurance policy premiums cannot exceed 25% of the employer’s aggregate contribution
For whole life: can’t exceed 50%
The entire life insurance policy must be converted to cash or an annuity at or before the participants retirement.
What is the 100 to 1 ratio test for including life insurance in a defined benefit plan?
The DB can’t be more than 100 times the monthly accrued benefit in the plan
If your defined benefit is $100 per month, you can only have $100,000 DB
What is a 412(e) plan?
Used to be 412 (i)
Specific type of defined benefit plan that is entirely funded by life insurance
What is 10 year forwarding average?
- only available to participants born prior to Jan 1 1936
How is company stock in a qualified plan taxed at distribution?
Initial company contribution (basis) taxed as OI
Gain taxed capital gains rates
What are the loan maxes on qualified plans?
lesser of $50k or 50% of the vested account balance
If the vested balance is between $10k to $20k, you can take $10k
If the vested balance is below $10k, you can take it all.
If you’d taken out another loan in the prior 12 months, the max loan amount is reduced by that first loan as well
How long do you have to repay a qualified plan loan?
Up to five years
Up to 30 years if for a residence
Should have substantially level amortization of the loan over the required term
Payments must be made at least quarterly
Loan becomes due if terminated. (Can sometimes roll loan into IRA and take 60 days to pay it back)
Failure to pay is treated like a distribution
What are 72(t) distributions?
Electing for early distributions from a qualified account that are made at substantially equal periodic payments
Must be made at least annually
Must be made for the longer of 5 years or the number of years until you reach 59.5. (So if 50, 9.5 years)
When must the first RMD be made?
By April 1 of the year following the year the participant turns 72
UNLESS they are still employed by the plan sponsor - in this case they can delay the first RMD until April 1 of the year after the participant terminates employment
—- This exception is not allowed if they own more than 5% of the company, it’s a SIMPLE or a SEP
How is RMD calculated?
FMV of participants account at Dec 31 of the preceding /
Distribution period determined based on the participants age at 12/31 of the distribution year
How are distributions treated if the IRA owner dies?
If you inherit an IRA, and you’re not a spouse, you take the RMDs based on your life expectancy. They start in the year following death
If you inherit an inherited IRA, you have the 10 year rule. Ex, spouse gets spouses IRA then dies and the inh IRA goes to their kid..
If no beneficiary, 5 years
When can insurance be included in a qualified retirement plan?
Only life insurance may be included in a qualified retirement plan - no accident, severance, or health benefits may be offered under the incidental benefit rules.
To qualify under the incidental benefit rules, the entire premium for universal life cannot exceed 25% of the employer’s aggregate contributions, and 50% for whole life insurance.
What is a new comparability plan?
Type of profit sharing plan
What is the contribution rate formula?
What is a SERP?
SERP supplements the pension plan without regard to limits imposed upon salary levels (i.e., maximum salary of $305,000 in 2022) or the maximum funding levels of Section 415.
Which plans are pension plans and which are profit sharing plans?
What are characteristics of Defined Benefit Pension Plans?
INclude DB Pension Plans
Include Cash Balance Pension plans
-
What are types of Profit Sharing Plans?
Profit Sharing Plans are always Defined Contribution
Stock Bonus
ESOPs
401(k)
Thrift Plans
New Comparability plans
Age Based profit sharing plans
When does a plan document need to be in writing?
end of tax year
What is eligiibility for qualified plans?
Age 21
One year of service (1000 hours worked)
EXCEPTION - can make it 2 years of service IF they are then 100% vested. Can’t do this with a 401k
What are 401k participation rules for long term PT employees?
401k must allow LT PT employees participation if at least 500 hours for at least 3 years.
Starts Dec 31 2020 — so eligible in 2024
How many plan entrance dates are required?
Twice a year, at least 6 months apart
Who is excludible from a plan?
Under 21
less than 1 year of work
nonresident alien employees who are not in the US
Part time employees that don’t meet the 500/3 year rule
You can exclude a whole group as long as it’s not discriminartoy. Ex: Sales team
Who is considered highly compensated?
> 5% owner this year OR last year. ALWAYS. Note GREATER THAN but not equal to 5%
Compensation > $135k
You can also elect to consider the top 20% as highly comped. THis would be useful if most employees made over $135k
What are the minimum vesting schedules?
DC:
– 3 year cliff
– 2-6 year graduated
DB:
– 5 year cliff
– 3-7 year graduated
Who are key employees?
> 5%
1% AND compensation over $150k
An officer with comp over $200k
When is a plan top heavy?
DC - when over 60% of account balance is attributable to key employees
DB - >60% of accrued benefits attributable to key employees
What do you do if you have a top heavy DC plan?
Non-key employees must be provided with a contribution equal to at least 3% of key employee contribution
(unless key employee contribution is less than 3%)
DB- 2%
DC- 3%
What do you do if you have a top heavy DB plan?
Non key employees must be provided with a benefit equal to 2% per year of service times employee average annual comp
The vesting schedule must increase to 2-6 year graduated or 3 year cliff
What is the max covered comp for retirement plan purposes??
$305k
So if an employee makes $400k, only $305k is counted toward the 25% employer contribution
What is the max annual benefit of a defined benefit plan?
lesser of $245k (2022)
or 100% of the average of the employees three highest years of salary
What is the max contribution in a DC plan?
$61k or 100% emoployer compensation
Employee can only contribute $20,500 + $6,500)
You can have $61k in multiple plans IF they are not the same owner. In this case, your employee deferral limit is still $20.5k across all plans
What are the 2 types of DC pension plans?
Money Purchase
Target Benefit
What are 2 types of DB pension plans?
Defined benefit pension plan
Cash balance pension plans
What is a target benefit pension plan?
Type of DC pension plan
Better for older employees
Trying to get a specific benefit so the older the employee the more you need to put in
favors older entrants
Participant bears risk – you only get based on how the investments perform!
Actuary is required at inception
What is a cash balance pension plan?
Cross between DB and DC because it relies on the cash accumulation
Uses a 3 year cliff or better
Requires an actuary every year
DB Pension plan
Mandatory funding
Favors younger people bc cash has more time to accumulate
Quasi separate account
Pension benefit based on an annual gaurenteed contribution rate and gaurenteed earnings
Guaranteed minimum investment return
Which plans require an actuary?
Defined benefit
Cash Balance
target benefit
What is social security integration?
Excess: People who earn more than the social security wage base will get additional money added to their pension
- DB and DC plans
Offset: reduces the benefit to employees who earn less than the social security wage base
- DB plans
What are characteristics of the DB pension plan?
Mandatory funding
pension benefit based on defined funding formula
- flat amount
- flat percent formula
- unit credit formula
Commingeled accounts
Favors older plan entrants
Must meet eligibility/coverage/vesting rules
What are money purchase pension plans?
DC pension plan
Mandatory annual funding of a fixed percentage of total employer covered - up to 25%
Participant bears investment risk
Seperate account
Favors younger plan entrants
When does PBGC help?
For DB plans only
Employer must have more than 25 employees
What is a contributory plan?
EmployEE money goes in
What are requirements for profit sharing plans?
- Contributions must be made by due date of income tax return
- No company profit required
- Contributions are discretionary but must be “Substantial and recurring”
- limited to 25% of total employer covered comp
- limited to the lesser of 100% of comp or $61k for 2022 per employee per year
What is a new comparability plan?
Allows for segmentation based on roles.
What happens if you fail the ADP test?
corrective distribution
(less likely) recatagorize the over contribution from prre-tax to after tax (via thrift not Roth)
QNEC - Qualified Non Elective Contributions. Employer makes contribution to all eligible non-highly. 100% vested
QMC - Qualified matching contribution
Employer elects to match to all eligible employees that defer
100% vested
What testing does a safe harbor plan need?
just coverage testing, no ADP or ACP
What is a CODA?
401k can be attached to it
CODA are employee self-reliance plans
What is a stock bonus plan?
Big difference is about deduction and distributions
- Tax deduction is the FMV of the stock at the date of the distribution
- Employee uses NUA
-Defined contribution profit sharing
-Employee puts stock into the plan
-Contributions are discretionary but must be substantial and recurring
-Allocations to the plan must be nondiscriminatroy
-Tax deduction for the FMV of the stock
What is a NUA?
Net Unrealized Appreciation
Only usable on a lump sum distribution.
NUA is equal to the FMV at date of distribution MINUS the value of the stock when the employer contributed it
Not taxed on NUA until stock is later sold
In the year of distribution, NUA gets LTCG, employer contributions (whatever they gave you) are taxed OI
What happens in a loss NUA?
Ex: Employer contributes $25k in stock, when you sell it it’s only worth $20k
$5k loss
What is the diversification requirement for ESOP plans?
25% for the first 5 years
50% of sixth and final year
Can be satisfied with distribution, transfer to another plan, or by offering 3+ alternative investments
Employee money can ALWAYS be diversified
Options for taking qualified plan money after termination before retirement age?
- lump sum distribution
- Rollover plan assets to IRA or other qualified plan
- Leave assets in plan (value must be over $5k)
What are options for taking qualified plan money after termination AT retirement age?
Lump sum distribution
Rollover to IRA or other plan
Qualified join survivor annuity or single life annuity
How are qualified plan distributions taxed?
Typically ordinary income!
If adjusted basis, the basis is tax free (thrift or annuity)
If NUA, LTCG
If QDRO, taxed later
If you rollover to an IRA you lose..
ERISA protection
10-year forward averaging
NUA options
Pre-1974 cap gain treatment
What happens when you do an indirect rollover?
Mandatory 20% withholding!
IF you put money back in, you have to front the 20% and wait for your refund
Rules for paying back a loan from a qualified plan?
Back in 5 years
Mortgage loan can be 30
Termination cause loan to be due
Must make periodic payments at least quarterly
if you fail to repay it, taxable and penalty
Who is an eligible designated beneficiary?
Surviving spouse
child of IRA owner who has not reached age of majority - Once they are AOM they are changed to designated bene
Someone disabled or chronically ill
Someone who is not more than 10 years younger than the employee
What are the designated beneficiary distribution rules?
Balance must be paid in 10 years
What are the eligible designated bene distribution rules?
May be distributed over the life of the eligible bene beginning the year following death
Spouse can roll into their IRA
What are the non-designated bene rules?
Follows pre-secure act rules
If the original owner was taking RMDs - use owners age as of birthday in the year of death.
Reduce by 1 for each subsequent year
Can take owners RMD for year of death
If the original owner was pre RMD
Take entire balance by end of 5th year
What is earned income?
W2 income
Schedule C net income
Income as a general partner
Alimony for Pre 2019 divorce
When are you an active plan participant?
If anything goes in
QNEC, safe harbor, etc
Any money but earnings
What are the rules around QUALIFIED vs NON QUALIFIED Roth IRA distributions?
It must meet the 5 year rule
Qualified Distribution must be
- 59.5
- death
- disability
- first time home buyer
Always comes out
1. contributions
2. conversions (5 year clock starts with conversion date)
3. earnings
What about non-qualified distribution? (see chart)
What are differences between Roth 401k and Roth IRA
Roth 401k - prorata taxed rather than FIFO
Holding period for roth IRAs are combined, for Roth 401ks are individual
What are non permitted investments for IRAs/SEPs/Simples?
Life insurance
collectibles
coins (except for US eagles)
What are features of a SEP?
A retirement plan for small businesses
Tax deferred growth
NOT a qualified plan
Unique Contribution, vesting, and distribution rules
No catch up provision!
Limited to 25% of employee comp or $61k (versus profit sharing which is 100% or $61k
$305k covered comp limit
Who is eligible for the SEP?
Benefits must be provided to all employees that
- are at least 21
- received comp of at least $650 during the year
- Performance of services 3-5 years
So it’s good for when you have employees that don’t work more than 3 years. High Turnover
Who funds a SEP?
Employer
Contributions are discretionary
Must be made to ALL employees even if dead or no longer employed
What is the self employed contribution rate?
Contribution rate to other participants / 1+contribution rate to other partcipants
This is for people who are not getting w2 income
Exl: .20/1+.20
What are SEP vesting and distribution rules?
Employees are 100% vested at all times
Withdrawals get the same treatment as IRAs
- ordinary income
- 10% penalty when necessary
How do you calculate social security witholdings?
Multiple income by .9235
Multiple again by 7.65 (half of social security)
Who can establish a SIMPLE?
Small ermployer who has 100 or fewer employee who each earned at least $5k in the proceeding year
Employer can’t already have a qualified plan
How do you establish a SIMPLE?
5304 SIMPLE or 5305 SIMPLE
Provide participants a 60 day period to elect deferral
Who is eligible for a SIMPLE? What is vesting?
earned $5k in any 2 preceding years and expected to earn $5k in the current year
Always 100% vested
What is max deferral on a SIMPLE?
$14k + $3k catchup for age 50+
What must an employer put into a SIMPLE?
EITHER
- matching contribution up to 3%
– this can be reduced for up to 2 years in a 5 year period if financial hardship
–The match doesn’t have a covered comp max
–In a 401k, the SIMPLE does have a covered comp max of $305k - 2% non-elective employer contributions. 2% of covered comp for EACH eligible employee
How are SIMPLE distributions treated?
Ordinary income
May be rolled into a qualified plan or IRA
May be subject to withdrawal penalties which are 25% rather than 10% if completed in the first 2 years
Who are 403 bs for?
Public schools
Educational organizations
Tax exempt organizations
When does ERISA apply to a 403b?
If there is an employer contribution
Erisa does not apply if it’s a government or church 403b
What happens when your plan is covered under ERISA?
PLan must meet nondiscrimination test
matching contributions must satisfy ACP test
In 403bs, distributions options must include prertiremen annuities and qualified joint and survivor (doesn’t apply to 401k)
Who is eligible for 401ks and 403bs?
21
1 year of service
What is the 15 year catch up contribution?
For 403b plans
MUST BE A HER
- Health
- Education
- Religious
Permits up to an additional $15k, (max $3k per year)
- Must have completed 15 years of service
- Must have unused deferrals
What can fund a 403b?
Insurance Annuity Contracts
Mutual Funds
NOT STOCK DIRECTLY
What are 457 plans?
NON qualified
Not a combined limit with 401k and other plans!!
$20500 max + catch up
Public and private options
- Public is for Gov
- private is for 501(c) companies
-Public is protected by trust
-Private is not protected
No catchups with private 457s!
Private can’t rollover because it’s not protected!
What is the 457 plan special catch up?
Three years prior to normal retirement age, the employee can defer an additional $20,500
Available for public and private 457
Limited to unused deferrals
Can’t combine this with the 50+ catchup
What are features of a deferred comp plan?
Not qualified
can discriminate
No employer deduction until employee includes income
Taxable at constructive receipt
What is code section 83?
For deferred comp plans
You are taxed based on whatever the employer gave you.
Ex: Employer gives $10 worth of stock, you owe taxes on $10 – ORDINARY
If you get $10 of stock, but you paid $3 for it, taxed on $7
What is a secular trust?
Used in a deferred comp plan
What is a rabbi trust?
Used in deferred comp plans
SOMETIMES funded
Irrevocable trust
Not taxed when money is put in
Retirement payments subject to OI
Funds are set aside for the executive. Not available to employer
– UNLESS bankruptcy and general creditors
- Can’t be held off shore
- springing irrevocability possible in change of ownership (but not bankruptcy)
What can and cannot be included in a VEBA?
CAN
- job training
- life, sickness, and accident benefits
- severance and supplemental unemployment
CAN’T
- Retirement benefits
- Commuter benefits
What is a phantom stock plan?
You get fictional stock. Nothing is issued.
The employer could ‘give’ you the full value of the stock, or partial value and you pay the difference.
You’re taxed ordinary income
What are incentive stock options?
The right to buy at a specified price within a specified time.
Special tax advantaged treatment– if you do it right you’re only paying LTCG
Owner of stock options are not obligated to buy the stock
Only grantable to employees
The aggregate FMV of an ISO grant must not exceed $100k per year per executive
What is the max ISO allowed per executive per year?
$100k
If you exercise more than $100k, then anything in excess is treated like a NQSO
How are ISOs taxed?
No tax obligation when stock is granted, unless FMV is greater than exercise price
No tax obligation at exercise (except AMT!)
ISO is not subject to payroll tax,
If ISOs are held 2 years from grant and 1 year after exercise to be taxed at LTCG
If you don’t hit the minimum 1 year/2 year, you must recognize what the employer gave you as OI, the rest is typical Cap Gain treatment
“What employee gave you” is equal to FMV at grant minus what you paid
Note: AMT Adjustment with ISOs!!
What is a cashless exercise?
In an ISO you sell when you exercise
OI on what employee gave you
No gain or loss so nothing else to worry about
NO AMT
How are non qualified stock options taxed?
Non-qualified stock options are taxed on the “bargain element” (difference between the market price and the strike price) as ordinary income when exercised. (Market Price – strike price) × Number of Shares × Tax Rate = Tax
NQSO is subject to payroll tax
Employer gets the deduction matching your OI
Ex: Strike price $3, exercise price $10, sold LT @ $25
—$7 ordinary income
—$15 LTCG
What happens when gifting an ISO and NQSO?
ISOs can’t be gifted
NQSO can be gifted only when employer allows it
– Employee always recognizes the income, not the person receiving the gift
– Giftee has basis equal to exercise price (because donee already paid)
What are stock appreciation rights?
Grant the holder cash in an amount equal to the excess of the FMV of the stock over the exercise price
What is the 83 b election?
You are requesting to be taxed when you are granted to stock
This wouldn’t make sense for someone who is not going to meet vesting requirements
Must elect within 30 days of receiving the stock
Write a letter to the IRS
What are ESPPs?
employees purchase stock at a discount and might receive favorable tax treatment
Discount can’t be less than 85% of stock price - so 15% discount max.
Exercise at the lesser of grant price or exercise price
$25k limit on ESPP - $25k worth of shares (so you pay less because you’re getting a discount)
How are ESPPs taxed?
If held 2 years from grant, 1 year from exercise, the discount is taxed at ordinary income
If you don’t hold it for 2/1 years, taxed at ordinary income + social security/payroll
What is a VEBA?
Voluntary Employee Beneficiary Association
When a company wants to put some money aside for future employee benefits.
Employer is allowed to deduct what they contribute to the VEBA. Tax exempt moving forward so earnings on these contributions grow tax free
employee does not recognize any income
What are types of alternative retirement?
Lean FIRE
Barista FIRE
Fat FIRE
What are the main components and differences between pension plans and profit sharing plans?
What are the main components and differences between defined benefit and defined contribution plans?
How do qualified plans effect payroll taxes?
The employer gets to avoid payroll tax on their contributions
Employee still pays the payroll tax
What is anti alienation?
ERISA protection that prohibits any action that would cause the plan assets to be assigned, garnished, levied, or subject to bankruptcy.
What is a coverage test?
Determines who at the company is eligible for coverage from a plan
can exclude:
- ineligible employees (21 and 1 year)
- union/collective bargain agreement
- non resident alien employees
- part time employees who don’t meet eligibility under the secure act
On exam questions that mention top heavy…
always use the 2% or 3% top heavy formula! Ignore whatever formula they give you, unless it is greater than the top heavy result.
On exam questions that mention top heavy…
always use the 2% or 3% top heavy formula! Ignore whatever formula they give you, unless it is greater than the top heavy result.
What is a contributory plan?
The employEE contributes
Non-contributory means that the employEE never contributes
What is the diversification requirement?
A qualified participant may force investment diversification during the qualified election period
Qualified participant is age 55 with 10+ years of participation
The qualified election period is the 6 plan years beginning after becoming a qualified participant
during these 6 years they
- can diversify 25% of stock in years 1-5
- can diversify 50% of stock in year 6
What are possible distributions for a qualified pension plan?
If after age 59.5, can take in service withdrawals
Death
Disability
Termination of service before retirement age:
- Lump sum
- rollover to IRA or other qualifies plan
- leave assets in plan (if >$5k)
Termination at normal retirement age:
- Annuity - joint or single life
- lump sum distribution
- rollover
If a participant chooses a 72t, how are the periodic payments calculated?
- RMD table
- Fixed amortization - use interest rate
- fixed annuitization method - use annuity factor and mortality table
IRA Distribution Rules?
10% penalty unless:
59.5
Death
Disability
72t
MED EXPENSES
$5k for birth or legal adoption
Fed tax levey
What are differences between ROTH 401k and Roth IRAs?
What are differences between ROTH 401k and Roth IRAs?
What happens when you roll a qualified plan into an IRA?
Lose lump sum tax options (10-year forwarding average, pre - 1974 cap gains treatment, NUA)
Loans aren’t premitted
lose ERISA
Can ESOPs have social security integration?
no
But SS integration is allowed with a stock bonus plan
What is an employers max deduction for ESOP contributions?
An employer’s deduction for ESOP contributions and amounts made to repay interest on an ESOP’s debt cannot exceed 25% of the participant’s payroll
How are non-qualified Roth account distributions taxed and penalized?
Roth 401k: The distribution must consist of basis and earnings on a pro rata basis.
Roth IRA: Contributions come out first
What are the 4 things that you can do if you fail the AD/ ACP test?
Correct by:
- Corrective distributions - decreases the ADP of HC
- Recharacterization -change from pre tax to after tax
- Make Qualified non-elective contributions (QNEC)
- puts money into all eligible NHC accounts
- 100% vested - Make Qualified Matching contributions
- Match all NHC employees who elected to defer
- 100% vested
How are ESOP shares taxed when the employee sells them back?
If the employee reinvests the funds within 12 months, then they can defer gains
What can’t integrate with social security?
43 401k, 403B 457
SIMPLE
TRADITIONAL IRA
ROTH
ESOP
SARSEP
– however note that the 401k profit sharing component CAN be integrated with SS. The CODA part cant
How do ESOP Distributions work?
Participants can demand a limited distribution of employer securities
If they want periodic payments, he can elect for this but only for 5 years.
- If his account is more than $1.23, he can extend the periodic payments 1 additional year for ever $245k. Up to 10 years
-Not eligible for NUA
Lump sum = NUA
What is the diversification rule for ESOPs?
Can force the company to diversify
Must be at least 55
must have been in the plan for 10 years or more
Must elect to diversify during the election period: the 6th plan year after becoming a participant
If they elect this,
- company must diversify 25% of the stock they got in years 1-5
- 50% of the stock from year 6
-It’s based on actual shares rather than $$ — so if they got 100 shares, they could diversify 25 of them
If they diversify then they can take that 25% of shares and
- take a distribution
- transfer to another account
- employer must offer three or more diversification options within the ESOP
What are rules for distributions from qualified plans?
If still working for the company
- no in service withdrawals prior to 59.5
- unless death or disability
if no longer working for the company, and not yet 59.5, your options are:
- lump sum
- roll to IRA or other qualified plan
- leave assets in plan (if at least $5k)
If no longer working for the company and over 59.5
- QJSA
- Lump sum
- Rollover plan assets to IRA
* You need spousal agreement to not include them
What are rules for distributions from profit sharing plans?
You can take withdrawals after 2 years of participation
At termination of service, you choose
- lump sum
- rollover
- purchase an annuity
Generally, how are qualified plans taxed at distribution?
Ordinary income
Subject to 20% income tax withholding
Unless
- rolled into an IRA or other qualified plan
- QDRO into an IRA
When you roll to an IRA you lose ERISA, 10 year forwarding average, NUA, Pre 1974 cap gains treatment
Generally, how are loans from a qualified plan taxed?
Balance <$20k - can take up tot $10k
Balance $20-$100 - can take 50% of vested balance
Loan may not exceed $50k
IF there is an outstanding loan, reduce what they can take but the outstanding loan amount
Must repay within 5 years
Unless house, then 30 years
Quarterly payments, must be substantially level amortization
Failure to repay is a taxable distribution with possible penalty
Repay in full if terminated. TCJA allows repayment before next tax return
Generally, how are qualified plans AND IRAs taxed at distribution prior to 59.5?
10% penalty unless
- rollover
- death
- disability
- section 72t - substantially equal payments
- med expenses over 7.5%
- fed tax levy
- $5k for birth or adoption
- after 55 and separated from service (not allowed for IRA)
Penalty exceptions allowed for IRAs only
- health insurance for unemployed
- higher edu
- first time home purchase
What are the rules for 72t substantially equal payments from a qualified plan?
Must be annually
for the life expectancy or joint lives of participant and bene
after separation of service
must be made either for 5 years or until 59.5, whichever is longer
What are the RMD rules for 401k?
Note: 401k only, does not apply to IRA
If you’re still employed, and less than or equal to 5% owner, you can delay distributions
Delay until 4.1 of the year after you terminate employment
NOT ALLOWED FOR SIMPLES OR SEPS
What are the distribution rules for bene IRAs?
It depends on the type of bene.
- Eligible Designated benes - spouse, minor child
1.1: Dsitrubte the balance over life expectancy of the bene beginning the year following death
1.2 A spouse can roll it into their IRA
1.3 Child becomes a designated bene at age of majority - Designated bene - Anyone other than eligible - balance is paid within 10 years. (Secure act rules)
- Non- designated benes - trusts, estates, charity, etc. Follow pre secure act rules
- If RMD had started, Reduce owners age by 1 and take remaining RMD
-If RMD has not started - take entire balance by end of 5th year following death
When is someone considered an active participant?
If they have a DB plan at work, they are active when
- participation OR
- meets eligibility
Defined Contribution plan
- Receives a contribution to the plan on his behalf, including forfeitures
- Defers comp
What happens when someone is over the phase out for a deductible IRA contribution, but they contribute anyway?
The post tax contribution increases the basis of the account
Withdrawals are then taxed based on the ratio of basis to FMV
Basis portion is not taxed, the rest is OI
What are the special Roth distribution rules?
No RMD
Qualified distributions are income tax free
- five years AND
- 59.5+, disability, death, home buyer ($10k)
Non qualified distributions:
Taxation: Contributions and conversions are still not taxed. Earnings are taxed. FIFO
Penalty:
-No penalty on contributions, ever
- Penalty on conversions if w/in 5 years
- penalty on earnings, unless death, disability, 59.5, house
- No penalty if for education, med expenses over floor, adoption, 72t, med insurance premiums when unemployed
What are the differences between a Roth 401k and Roth IRA?
Contribution amount
No phase out on 401k
No home purchase allowed with 401k
Non qualified distributions Taxed at a pro rata basis instead of fifo!!!!!
What investments are not allowed on IRAs?
life insurance
non us coins
collectibles
What are SEPs?
Non Qualified
Tax deferred growth
Can be established as late as extended due date of tax return (IRA contributions stop at 4.15)
Use traditional IRA accounts
Employers contribute to all employees:
- that are 21
- employed for the last 3 of 5 years
- received comp over $650
Form 5305-SEP
Employees must be notified
Each employee gets a SEP IRA account
Contributions:
- employer only
- discretionary
- must be made to all employees even if they died or quit that year
- max 25% of covered comp or $61k
- CAN utilize pro rata or flat dollar
- CAN SS integrate
Self employed contributions are limited to the contribution rate to other participants/1+contribution rate to other participants
So 25% to employees means 20% to employer for sole proprietor ‘
100% vested
Distributions - same as traditional IRA rules
What are SIMPLES?
Simple to establish/maintain
Employee deferrals
Calendar year plan
Small employers only - 100 or fewer earning $5k+ last year
CANT combine with a qualified plan
Two types:
1. SIMPLE IRA
2. SIMPLE 401k - can take loans
Eligible if earned at least $5k in any of the last 2 years
Max $14k deferral plus $3k catch up
Employer chooses match up to $305k covered comp:
1. dollar for dollar up to 3%
2. 2% non elective
!!!!Tax deductible, tax deferred growth. BUT employee contributions are subject to payroll taxes!
Withdrawals
- OI
- Rollover option
- Don’t require the 20% withholding
!!!!25% penalty if the withdrawal is within the first 2 years of the employees participation in the plan!!! Otherwise same as IRA
Which plan has a 25% penalty on withdrawals in the first 2 years or employee participation?
SIMPLES
What is a 403(b) Plans or tax sheltered annuity?
Technically, non qualified
For public schools and tax exempt orgs 5013c
Although not qualified, ERISA applies to 5013c 403Bs
- it does not apply to government or church 403bs
ERISA applies when :
- meets non discrimination tests AND
- marching contributions satisfy ACP test
- Plan must offer QJSA as well as Preretirement Joint and survivor annuities
Eligibility:
- 21 and one year
Contributions same as 401k and combined with 401k
!!!Only invest in insurance annuity contracts and mutual funds!!!
!!!403B 15 year catch up rule!!! If the employee has been there at least 15 years, and they did not use their full elective deferral over those 15 years, they can increase their contributions up to $3k per year limited at $15k to catch up
- HER organzations - Health, education, religion
- Permits an additional $15k (max $3k per year) to the 403b
- Must have completed 15 years of service with un
Loans: only when an ERISA 403b, same rules as 401k
Distributions: same as 401k
What is a 457?
You are NOT considered an active participant for participation in other plans!
Two types:
1. public
- government employers
- all employees participate
- can rollover to 401k, 403b, 457 or IRA
- private
- tax exempt employers
- assets not protected in trust
- NO CATCH UP
- Only rollovers to other 457s
SPECIAL CATCH UP : 3 years leading up to retirement, can contribute an additional $20500
Also 457F - much more limited. for key employees
No churches!
What is the 457 catch up rule?
three years leading to normal retirement age, an employee may defer an additional $20,500 for 2022 to a 457B
- both public and private
- limited to prior unused deferral amounts
- max contribution equals $41k
What is the 457 F plan
Key employees
No catch up
No rollovers
Not protected by the trust
Gov or 501c employers
not eligibleW
What is self employment tax?
What is the non compliance fine for an employer who doesn’t implement COBRA?
$100 per day per participant
How many employees triggers a COBRA requirement?
20 or more
When do short term disability benefits start?
Usually day 8 after sickness
first day of accident
Last no more than 6 months
Does the employer get a tax deduction when they grant ISOs? Or when they are exercised and sold?
NO! ISOs only have an employer deduction if they are non-qualifying disposition. Then they are taxed like NQSO
If someone is ELIGIBLE but does not participate…
NOT ACTIVE for IRA deductibility
unless forfeitures or employer contributions into their account
Do SIMPLES offer loans?
IRAs - NO
401ks - if the plan allows it
What do you need to know about a sep?
Not a qualified plan
Used by small business and sole proprietors
Easy to establish- they use IRAs
Participation is anyone 21+ and 3 of the last 5 years employed! Only had to have made $650.
So good for high turnover part time
Can be funded as late as tax return plus extensions!
Employer contributions based on a specific formula that doesn’t discriminate
What do you need to know about simples?
Either ira or 401k
Deferral limit at $14k!
Less than 100 employees with 2 year grace period
No other plans allowed!!
100% vested
Ira match: 3%
Types of 457 plans
Is long term care insurance allowed in a cafeteria plan?
No!
What is a nonoccupational clause in a disability policy?
Benefits payable from the disability policy will be offset by workers’ compensation benefits received.
Can a tax QUALIFIED LTC policy have a cash value?
NO!
Who are 457 plans for?
A 457 plan in a non-governmental tax-exempt organization would be for a select group of highly compensated individuals and not for a teacher.
Who can adopt 403b?
501(c)(3)
State hospital
Private school
Public school
BUT NOT FED GOVERNMENT
With stock, what would reinvested dividends do?
Increase the basis!
If your company pays some or all of your disability policy, will you be taxed on the benefits?
YES!
Do churches qualify for 457 plans?
No! Just gov agencies and non profits
Are rabbi trusts irrevocable?
Yes! But still available to creditors. No constructive receipt
Do 457 f have a catch-up?
No
When is the 10% penalty for HSAs waived?
once you turn 65
How are SCINs taxed?
Tax free return of principle
LTCG on the gain
Ordinary income on the interest
Payments are broken down pro rata
How do you calculate self employment tax?
What’s true about HIPPA
An employee without creditable coverage can generally only be excluded by the group health insurance plan (if offered) for up to twelve months.
The waiting period is reduced by the amount of “creditable coverage” at a previous employer.
If the employee does not enroll in the group health insurance plan at the first opportunity, an 18-month exclusion period may apply.
All three statements are true. If you have a pre-existing condition that can be excluded from your plan coverage, then there is a limit to the pre-existing condition exclusion period that can be applied. HIPAA limits the pre-existing condition exclusion period for most people to 12 months (18 months if you enroll late), although some plans may have a shorter time period or none at all. In addition, some people with a history of prior health coverage will be able to reduce the exclusion period even further using “creditable coverage.” People with a history of prior health coverage will be able to reduce the exclusion period even further using “creditable coverage.”
How does a money purchase pension plan work?
Pension plan with DC rules
Employer contributes a % of employee income
Employee directs the investments in their own account
No min funding determined by actuary - just stick to the formula
Jay establishes a Money plan that commits to a 2% contribution every year. Claire is able to direct the investments.
Si
What are the penalties for qualified plan prohibited transactions?
The first tier excise tax for prohibited transactions is 15% of the amount involved and is automatic even if the violation was inadvertent. The second tier excise tax is 100% of the amount involved and is assessed if the prohibited transaction is not remedied. There are no income taxes applied; all remedies are made through restitution and excise taxes.
What’s cheaper to establish - simple IRA or simple 401k
IRA
Stock redemption (entity) cross purchase agreements are always..
in a corporaiton
no step up in basis
proceeds not included in GE
Contributory versus non contributory
non contributory - employEEs do not contribute
contributory - employEEs do contribute
