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 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
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 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?
What are differences between ROTH 401k and Roth IRAs?
What are differences between ROTH 401k and Roth IRAs?
Types of 457 plans
