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Retirement Flashcards

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1
Q

What is the maximum amount of ISOs that can vest in any 1 year and still receive favorable tax treatment?

A

$100,000

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2
Q

When does a spouse of a retired or disabled worker get benefits from Social Security?

A
  1. Age 62 or over
  2. Has a child in care < age 16
  3. Has a child >= age 16 and disabled before age 22
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3
Q

Benefits for surviving spouse of a deceased insured worker qualifies for SocSec benefits when?

A
  1. Age 60 or over
  2. Caring for an entitled child of the deceased who is either <16 or became disabled before age 22
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4
Q

Surviving dependent, unmarried child of a deceased, disabled or retired insured worker, qualifies for SocSec payments when?

A
  1. < age 19 and a full-time elementary or secondare school student
  2. Age 18+ but has a disability which began before age 22
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5
Q

When is a divorced spouse eligible for spousal benefits?

A

At least age 62, and married to the worker for at least 10 years and divorced for at least 2 years.

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6
Q

Calculate reduced SocSec benefit

A

PIA - [(# months before FRA/180) x PIA]

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7
Q

Deduction for turning on SocSec before SSNRA and continue to work

A

Gov’t will deduct $1 from benefits for each $2 earned above $19,560

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8
Q

Deduction in the year worker reaches SSNRA for turning on SocSec before SSNRA and continuing to work

A

Gov’t will deduct $1 for each $3 of earned income above $51,960 until the month full retirement age is reached

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9
Q

Provisional Income

A

AGI + tax exempt interest + 1/2 SocSec income

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10
Q

Taxation of Social Security Benefits

A

50% taxable when provisional income is $25,000 for single taxpayer and $32,000 for married filing jointly
85% taxable when provisional income is $34,000 for single taxpayer and $44,000 for married filing jointly

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11
Q

Salary Cap for retirement plans

A

$305,000, EXCEPT SIMPLE, which is $466,667

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12
Q

Why choose Money Purchase Plan?

A
  1. ER wants stable work force (retain key EEs)
  2. Simple to administer and explain (pension stated % contributed)
  3. EEs relatively young and well paid
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13
Q

Requirement for Money Purchase Plan

A

Stable cash flow and profit to make annual fixed contributions - Contributions are MANDATORY

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14
Q

Describe Target Benefit Pension Plan

A

Form of Defined Contribution plan that generally benefits older EEs. Has a fixed mandatory contribution that is actuarily determined at plan opening - does not change from year to year.

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15
Q

Profit Sharing Plan

A

Qualified DC plan that features FLEXIBLE ER contributions up to 25% of compensation.
When:
1. ER profits or fin’l stability varies year to year
2. ER wants to adopt a qualified plan w/ incentive feature to motivate EEs to make company profitable
3. EEs are young, well-paid, and have substantial time to accumulate retirement savings
**Contributions must be substantial and recurring

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16
Q

Types of profit sharing plans

A
  1. Cash contribution
  2. Stock Bonus Plan
  3. EE Stock Ownership Plan (ESOP)
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17
Q

When would ER choose Stock Bonus Plan or ESOP?

A
  1. Company wants to broaden ownership of stock, to create a market for its stock, to provide liquidity for shareholders’ estates, or to provide for business continuity
  2. Company wants to provide its EEs w/ tax-advantaged means to acquire company stock
  3. ER wants its workers to feel sense of ownership
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18
Q

How do Stock Bonus Plans and ESOPs differ from traditional profit sharing plans?

A

-Stock Bonus plan MAY invest plan assets in ER stock, however, ESOP MUST invest plan assets primarily in ER stock
-Participants’ accounts are stated in shares of ER stock
-Benefits are generally distributable in ER stock (certificates)
-ERs may deduct dividends with respect to stock held in an ESOP

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19
Q

When can ER deduct dividends in ESOP?

A

-When paid in cash directly to participants or beneficiaries
-When paid to the plan and subsequently distributed in cash to participants or beneficiaries no later than 90 days after the close of the plan year
-When used to make payments (of principal and interest) on loans used to acquire ER securities
-When paid to the plan and reinvested in qualifying ER securities

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20
Q

What participants are eligible to diversify ESOP holdings?

A

Participants age 55 or older having 10 years of participation in ESOP - can diversify up to 50% of account balance
–ER must offer at least 3 investment alternatives or distribute cash or certificates to participants

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21
Q

Who can establish an ESOP?

A

Any business established as a corporation including S corps and Closely Held C Corps

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22
Q

When would an ER choose a DB plan?

A

–ER wants to maximize plan contrib to older EEs
–Older controlling EEwants to maximize tax-deferred retirement savings for his/her own benefit

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23
Q

Section 415 limits in DB plan

A

Maximum Annual Benefit (NOT contribution) is the lesser of 1) $245,000 or 2) 100% of participants’ compensation over three highest consecutive years

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24
Q

What is most frequently used DB formula?

A

Unit Benefit formula, AKA percentage-of-earnings-per-year-of-service formula
= % of earnings (given) x # yrs of service x Avg annual comp

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25
Q

Final Average method for DB plan

A

Earnings are averaged over a number of years - usually 3 to 5 years prior to retirement
**Only first $305,000 of comp can be taken into consideration

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26
Q

What effects do the following have on ER contrib to DB plans:
1. Company hires older workers
2. Investment earnings are up significantly
3. New EEs rarely stay a year
4. Inflation is lower than expected

A
  1. Older EEs means Increased company contrib
  2. Investment earnings up means Decreased company contrib
  3. New EEs don’t stay long means No effect on copmpany contrib
  4. Lower than expected inflation means Decreased company contrib
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27
Q

Cash Balance Pension Plan

A

A type of DB plan that provides for annual ER contributions at a specified rate for each plan participant - ER GUARANTEES the contrib level and the return on ea participant’s acct
–Min interest to each EE’s hypothetical account is guaranteed by ER - if trust assets earn higher return, future ER contrib are reduced; if trust assets earn lower return, future ER contrib are increased

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28
Q

412(i) plan

A

A DB plan funded entirely with insurance products such as life insurance and annuities
–Appeals to ERs that have some need for life insurance

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29
Q

Which type of pension plan would ER install if wanting to make a reasonable contribution of eligible compensation, investment risk to fall on participants, and be fairly easy to explain to EEs?

A

Money Purchase Plans - received fixed ER contrib and EEs choose investments
NOT Target Benefit b/c plan contrib based on age, compensation and other factors

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30
Q

How can forfeitures be used in a Money Purchase Plan?

A

Only options are:
1. Reallocated to remaining participants
2. Used to reduce company contributions

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31
Q

On what is the maximum deductible contribution in a target benefit plan based?

A

A maximum of 25% of the aggregate eligible compensation of all covered participants

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32
Q

What are Age and Service requirements for a qualified plan?

A
  1. 21 and 1 = age 21 and 1 year of service
  2. 2/100% = if 2 yr service requirement, then EE is immediately vested (n/a in most 401(k) plans
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33
Q

Define year of service

A

1,000 hours worked during initial 12 month period after being employed, or EEs working 500 hours for at least 3 yrs consecutively

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34
Q

What are the 2 coverage tests for qualified plans?

A
  1. Ratio Percentage Test: The plan must cover a percent of the NHCEs that is at least 70% of the percent of HCEs who are covered. Ex. 90% of HCEs covered means 90% x 70% = 63% of NHCEs must be covered, and 37% can be excluded.
  2. Average Benefit Test: The average benefits for all NHCEs must be at least 70% of those for HCEs.
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35
Q

Minimum participation requirements for DB plans

A

In addition to coverage requirements, min participation must meet the lesser of:
1. 50 EEs
2. The > of a) 40% or all EEs, or b) 2 EEs

36
Q

Who is a Highly Compensated EE (HCE) and when does it apply?

A

HIghly CEs relates to plan dIscrimination (ADP/ACP tests) (I in Highly - dIscrimination)
EEs considered highly compensated if:
1) > than 5% owner
or
2) EE earning >$135,000 in the preceding year

37
Q

Who is a Key EE, and when does it apply?

A

KEy EE relates to vEsting (E in Key = Vesting)
EEs are considered key EEs if at any time during the current year they have been any of the following?
1. >5% owner
2. An oFFicer AND has comp >$200,000 (2 Fs = $200k)
3. >1% owner AND comp >$150,000

38
Q

What is a Top Heavy Plan?

A

If more than 60% of its aggregate accrued benefits or account balances are allocated to KEY EEs
**For new plans, calculations are based on Payroll

39
Q

Who must use the faster vesting schedule, and what is it?

A

Top-heavy DB plans, and ALL DC plans must use faster vesting schedule:
-3 yr cliff
-2- to 6-year graded
-100% vested w/ 2 yr eligibility

40
Q

Who can use the slower vesting schedule, and what is it?

A

Non-top-heavy DB plans only can use slower vesting schedule:
-5 yr cliff
-3- to 7-year graded
-100% vested with 2-yr eligibility

41
Q

When would a graded vesting schedule be used?

A

When an ER wants to “retain” EEs

42
Q

ADP/ACP Testing

A

ADP = Actual Deferral Percentage test for salary deferrals
ACP = Actual Contribution Percentage test for ER matching and profit-sharing contributions
For both, HCEs rate must be both of the following:
1. Not more than 125% of the NHCE rate (ADP is 8% or greater)
2. Not more than 200% of the NHCE rate and not more than 2 percentage points > than NHCE rate (ADP is between 1% and 8%)

43
Q

ADP/ACP calculation shortcut

A

0 to 2% is times 2
2 to 8% is plus 2
NHCE deferral = 1%, HCE = 2%
NHCE deferral = 2%, HCE = 4%
NHCE deferral = 3%, HCE = 5%
NHCE deferral = 4%, HCE = 6%

44
Q

Integration with Social Security - DB plan

A

Excess Benefit Percentage - the permitted disparity is the lesser of the base benefit percentage of 26.25%
ex.
1) If offer a base contrib rate of 30%, permitted disparity is 56.25% (30% + 26.25%)
2) If offer a base contrib rate of 20%, permitted disparity is 40% (20% + 20%)
**Remember, $147,000 is what the base contrib rate is multiplied by b/c that is SocSec max for 2022

45
Q

Integration with Social Security - DC plan

A

Permitted disparity is the lesser of the base contribution percentage or the 5.7% formula for determining components of the integrated DC plan
ex.
1) If base percentage is 10%, permitted disparity is 5.7%, and excess percentage is 15.7%
2) If base percentage is 16.77%, permitted disparity is 5.7% and excess percentage is 22.47%
3) If base percentage is 4%, permitted disparity is 4% and excess percentage is 8%

46
Q

Which DC plans allow Social Security integration?

A

Target Benefit Pension plan, Money Purchase plan, profit-sharing, stock bonus, and SEP
NOT ESOP or SIMPLE

47
Q

Section 404(c)

A

A deduction limit - ER can only deduct a maximum of 25% of all participants’ (aggregate) eligible compensation - which means certain plan participants can receive contributions in excess of 25% as long as total company contributions do not exceed 25%, and plan does not violate discrimination rules

48
Q

Section 415 annual addition limits

A

Annual additions incl ER contrib + EE deferral + plan forfeitures
Limit is lesser of $61,000 or 100% of compensation

49
Q

Keogh Plan

A

(HR-10) is a qualified retirement plan for sole proprietors and partnerships
–May operate as DB, money purchase or profit-sharing type plan

50
Q

Keogh contributions

A

–Owner EE contribution or benefit is based on net earnings instead of salary
–Self-employment tax must be computed and a deduction of 1/2 of the self-employment tax must be taken before determining the Keogh deduction
–Shortcut:
*15% contrib: multiply net earnings by 12.12%
*25% contrib: multiply net earnings by 18.59%

51
Q

Top Heavy Plan

A

If more than 60% of the total amount in the accounts of all EEs is allotted to Key EEs

52
Q

Contribution requirements for Top Heavy plans

A

–DB: Benefit must be at least 2% of comp multiplied by the # of years of service in which plan is top-heavy up to a max of 10 yrs
**B = 2nd letter - use 2%
–DC: Min ER contrib must be no less than 3% of each non-key EE’s comp
**C - 3rd letter - use 3%

53
Q

Can loans from a qualified plan ever be deductible?

A

Only for Non-Key EEs, and only if:
1. Loan is for participant’s primary residence
2. Loan is secured by the primary residence

54
Q

Income limits for IRA Deductibility

A
  1. Neither spouse active participant in a plan = no income limit
  2. If 1 spouse is an active participant and 1 is not, the income limit for non-active spouse to make deductible contribution is <$204,000 (phased out at $214,000)
  3. For active participants, phase out ranges are as follows:
    –Sgl taxpayers: $68,000 - $78,000
    –MFJ taxpayers: $109,000 - $129,000
55
Q

IRA early withdrawal penalty exceptions

A
  1. Death
  2. Total, permanent disability
  3. Qualified education expenses
  4. Distrib used to pay medical insurance premium after separation from employment
  5. Substantially equal payments
  6. First home expense up to $10,000
  7. Medical expenses >10% of AGI
  8. $5,000 for qualified birth/adoption
56
Q

Roth IRA contribution income limits

A

–Individuals: $129,000 - $144,000
–MJF: $204,000 - $214,000
–MFS: $0 - $10,000

57
Q

Ordering rules for Roth distributions

A
  1. Roth contributions come out first
  2. Roth conversions come out next
    **Remember, each Roth conversion $ need to stay in 5 years or 59 1/2 after conversion or subject to income tax and 10% penalty
  3. Earnings come out last
58
Q

SEP ER Contributions

A

Limited to lesser of 25% (NOT 100%) of compensation ($305,000 maximum) or $61,000.
**If self-employed, Keogh rules apply (Sched C inc x 12.12% if 15% plan, or x 18.59% if 25% plan)
–ER contributions flexible, not mandatory, but if make a contrib, must be same % for everyone

59
Q

SIMPLE IRA

A

–Fewer than 100 EEs
–ER cannot maintain any other plan
–Participants fully vested
–Easy to administer and funded by EE salary reductions and ER match
–Max contrib is $14,000 + $3,500 catch up contrib

60
Q

403(b) plans

A

AKA TDA, Tax-deferred annuity or TSA, Tax Sheltered Annuity
–For 501(c)(3) organizations and public schools
–Subject to ERISA if ER contributes
–Salary reduction limit is same as for 401(k)s + if individual has 15yrs of service with same ER can defer add’l $3,000

61
Q

Eligible 403(b) investments

A

Annuity contracts or mutual funds
–Incidental life ins protection under annuity contracts also permitted
**Individual securities not permitted

62
Q

Section 457 eligible entities

A

Governmental units, governmental agencies, and certain non-Church controlled tax-exempt organizations

63
Q

Section 457 contributions

A

Deferral limit is lesser of $20,500 or 100% of comp
**$6,500 catch up ONLY applies to governmental ERs, NOT non-profit ERs
**Contrib limits are not coordinated with contrib limits of 401(k), 403(b), or SARSEP

64
Q

Pension Benefit Guaranty Corp (PBGC)

A

–Funded with annual premiums paid by DB plan sponsors
–Guarantees DB and Cash Balance plans
**DC pension plans, such as Target Benefit and Money Purchase plans, are NOT covered by PBGC

65
Q

UBTI - Unrelated Business Taxable Income

A

If UBTI exceeds $1,000, the qualified plan’s UBTI is subject to income tax in the current year

UBTI Income = Inc from LP, or dividends from a margined account

66
Q

Using Life Ins in a qualified plan

A

Life ins benefits must be merely incidental to the primary purpose of the plan, which is to provide retirement benefits
To be incidental
1. Agg premiums paid for participant’s insured death benefit are at all times < what % of the plan benefit for the EE:
–Ordinary/Whole life: 50%
–Term: 25%
–Universal Life: 25%
2. Participant’s insured death benefit must be no more than 100 times the expected monthly benefit

67
Q

Penalty exceptions for qualified plans and 457 plans

A
  • Death
  • Disability
  • Substantially equal periodic payments following separation from service
  • Distribution following separation from service age 55 or later
  • Distribution in accordance with a QDRO
  • Medical expenses >10% of AGI
  • $5,000 distribution for qualified birth/adoption
68
Q

72(t) - Substantially equal payments

A

Exception to 10% penalty
Substantially equal payments must meet ALL the following requirements:
- Paid not less frequently than annually
- Paid w/o changing the amount for the longer of 5 years or until the payee reaches age 59 1/2
- Based upon the life expectancies of the recipient or recipients
- Based upon a reasonable rate of interest
- If applicable, based upon reasonable mortality assumptions

69
Q

Required Begin Date (RBD)

A

IRAs, SEPs, SARSEPs, SIMPLEs
=April 1st of the year following the year in which the covered individual attained age 72
*Owners of 5% or more of the equity of a corp sponsoring a qualified plan are also subject to this rule

Qualified Plans, Governmental 457 plans and 403(b)s
= Except for 5% owners, RBD is later of April 1st following the year in which the individual attained 72 or retired

70
Q

Uniform Life Table calculation - age 72 RMD

A

IRA balance / 27.4

71
Q

Exception for Joint Life Distributions

A

If person is age 72, and spouse is > 10 yrs younger

72
Q

QCD Max

A

Qualified Charitable Distribution

$100,000/yr for individuals 70 1/2 +

73
Q

If IRA owner dies before RBD, what are options for spouse:

A
  • Roll-over IRA assets to his/her own IRA and take distrib based on his/her own RBD
  • Keep assets in owner’s IRA and take distrib starting when owner would have reached 72 based on spouse’s life expectancy
74
Q

What if no beneficiary named for IRA?

A

Payment must be taken within 5 years

75
Q

Eligible Designated Beneficiaries (EDB)

A

Exceptions to the 10yr payout rule on Inherited IRAS:
- Owner’s surviving spouse
- Owner’s child who is <18 yrs of age(10 yr clock begins when turns 18)
- A disabled individual(Can use own life expectancy to calculate RMDs)
- A chronically ill individual
- Any other individual who is not more than 10 yrs younger than the deceased IRA owner

76
Q

Nonqualified Deferred Compensation Plans

A

Why: Can discriminate and provide add’l benefits to executives
Types:
1) Salary Reduction plans - use some portion of EE’s current compensation to fund the ultimate compensation benefit (aka pure deferred comp)
2) Salary Continuation plans -uses ER contributions to fund the ultimate benefit

77
Q

Unfunded plans

A
  • Naked promise to pay, or may be informally funded with life ins, annuities, MFs or other investments
  • Think Gift Card w/ $0 on it - no value to the EE today
  • Assets still owned by company and are subject to company’s creditors, therefore, no tax deduction for contrib until EE is ultimately taxed

Examples: Life ins w/ Section 162 and Rabbi Trust

78
Q

Life ins and Section 162

A

Version of a Split Dollar
- ER owns the policy and is beneficiary
- Premiums NOT deductible
- Death proceeds paid to ER are not taxable as income (b/c premiums were not deductible)
- Benefits paid to covered EE (or surviving dependents) are a deductible expense to ER as paid, and EE (family) reports as taxable income - considered a deferred comp benefit, not a death benefit

**Section 162 insurance represents a direct cash bonus made to an ins company to pay the premium on a policy that is owned by the EE - it is considered an informally funded deferred comp arrangement when ER is owner and beneficiary

79
Q

Rabbi trust

A
  • Key words - merger, acquisition or change of ownership
  • Assets in rabbi trust available for company’s creditors
  • Used when there is a fear that ownership/management may change before deferred comp is paid
    –If merger/acquisition, deferred comp automatically vests
80
Q

Funded Plan

A
  • Think gift card w/ $ on it - there is a benefit to the EE

Example: Secular Trust

81
Q

Secular Trust

A

= Irrevocable Trust that is established for exclusive benefit of EE
- Beyond reach of ER’s creditors
- Taxation occurs in the year in which the assets are placed in the trust with corresponding deduction to ER in that year, or when a substantial risk of forfeiture no longer exists

82
Q

ISO - Incentive Stock Options

A

= A tax-favored plan for compensating executives by granting options to buy company stock
- Only the First $100,000 worth of ISOs granted to any EE that vest in one calendar year is entitled to favorable ISO treatment
- Corp granting an ISO does NOT receive a tax deduction for it at any time (unless a disqualifying disposition)

  • At exercise, Bargain Element (= Grant price - Exercise price) has NO regular tax, but is AMT add-back item
    -At sale, excess above basis (Grant price) is LTCG
83
Q

ISO Holding Period

A

1 year from exercise date and 2 years from grant before selling ISOs.
* EGG
- 1 E in Egg = 1 yr to sell from Exercise
- 2 Gs in Egg = 2 yr sell from Grant
Violating either rule results in a disqualifying disposition

84
Q

NSO - Nonqualified stock options

A

= The right to purchase a specified # of shares of the ER’s stock at a given time and a given price
Difference between EP and GP is taxable at ordinary income tax rates

85
Q

Disqualifying disposition tax consequences

A
  • If ISO sold in the same calendar year as exercised, bargain element is taxable compensation (deemed payroll) and subject to FICA/FUTA
  • If ISO sold w/in 12 months of exercise, but in following calendar year, bargain element is taxable as ordinary income (not subj to FICA/FUTA)
86
Q

83(b) election

A

EE elects to recognize the tax for NSO at the time of award instead of at time of exercise
- Any appreciation in the stock after the date of the award (grant) will not be taxed until sale of the stock - at cap gains rates
-WHY? when expect stock to substantially appreciate over time

87
Q

A QDRO applies to which type of retirement plan?

A

Qualified plans like a defined benefit plan

IR type plans are not subject to QDRO

CFP (6 decks)

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