Retirement

Question 1

Alternatives to compensate for projected cash flow shortfalls

Answer 1

1. Save more each pre-retirement year
2. Increase investment risk to achieve higher returns
3. Retire later than expected
4. Work part-time in the early retirement years

Question 2

Serial Payments

Answer 2

Increasing payments (either savings or distributions) meant to keep pace with inflation or aid a client who can’t save the full amount needed to reach their goals to potentially do so in the future (gives them something to shoot for).

Question 3

Self-determination/Self Efficacy

Answer 3

Rather than selling products, empowering clients to be involved in their own planning and decision making process is the most effective way to apply behavioral finance.

Question 4

OASDI (AKA Social Security)

Answer 4

Old Age, Survivor and Disability Insurance

Question 5

Fully Insured Worker (for SS)

Answer 5

40 quarters of coverage. Effectively 10 full years of working and paying into the SS system. Can also be called Social Security Credit which is a dollar amount of FICA-taxed earned income. Once fully insured, you are fully insured for life and eligible for survivor and retirement benefits.

Question 6

Currently Insured Worker (for SS)

Answer 6

6 quarters of coverage. Only eligible for lump sum death benefit of $255 for spouse or dependent, a survivor spouse’s benefit (if children are under 16) or a dependent benefit.

Question 7

Employment Categories not covered by SS

Answer 7

Federal employees who have been continuously employed since before 1984 unless they elected to switch
Some Americans working abroad
Student Nurses and students working for a college or college club
Railroad employees
A child under 18 employed by a parent in an unincorporated business
Ministers, members of religious orders, Christian Science practitioners who claim exemption
Members of tribal councils
Some state employees and teachers

Question 8

Eligibility for SS Benefits

Answer 8

A fully insured worker age 62 or older is entitled to retirement benefits
A worker under 65 who has been disabled for 12 months, is expected to be disabled for at least 12 months, or has a disability which is expected to result in death and has satisfied a 5 month waiting period is eligible for disability benefits under SS

Question 9

Spousal Benefits for SS

Answer 9

The spouse of a retired or disabled worker qualifies for SS payments if:
They are over 62 or
Any age if they care for a child under 16 or
Any age if they care for a child over 16 who was disabled before age 22

A spouse (including ex-spouse, if marriage was 10 years and did not remarry) of a deceased worker qualifies for SS payments if the widow(er) is 60 or older or
Any age if they care for a child under 16 or became disabled before age 22

NOTE: A divorced spouse who is at least 62 and has been divorced for at least 2 years can receive retirement benefits based on the worker’s earnings even if the worker claims no retirement benefits.

Question 10

Dependent Benefits for SS

Answer 10

The surviving dependent, unmarried child of a deceased, disabled, or retired insured worker qualifies for SS payments if the dependent is:
Under 19 and a full-time elementary or secondary school student
Age 18 or over but has a disability that began before age 22

Question 11

Taking SS Before FRA

Answer 11

For the 36 months prior to FRA, the benefit amount is reduced by 5/9 of 1% (1/180).
Calculate using PIA - [(Number of months before FRA/180) X PIA]

Question 12

Working After Retirement (reduction in benefits before FRA)

Answer 12

Workers who have attained their FRA may keep all benefits regardless of how much they earn.
If a worker is younger than their FRA, there is a limit as to how much they can earn. For workers younger than FRA, $1 is deducted for every $2 earned above $19,560
Workers who reach FRA in the current year will have $1 deducted for every $3 earned over $51,960 until the month full retirement is reached. (note, earnings are calculated in the partial year before the month FRA is reached)

Question 13

Taxation of SS Benefits

Answer 13

0% is taxable if income plus half of SS is less than $25,000 single/$32,000 joint
50% is taxable if income plus half of SS is greater than $25,000 single/$32,000 joint
85% is taxable if income plus half of SS is greater than $34,000 single or $44,000 joint
Note: Municipal Bond interest counts for purposes of income to calculate taxable SS
Review Page 2-7 in retirement

Question 14

File and Suspend (repealed)

Answer 14

Prior to April 2016, a fully insured worker was able to apply for benefits then suspend them choosing spousal benefits instead. They would then claim their own benefits at FRA or Age 70

Question 15

Withdrawing SS Application

Answer 15

One time right to withdraw an application for benefits within 12 months of the initial claim. Any benefits received must be repaid (no interest)

Question 16

Qualified vs. Nonqualified Retirement Plans

Answer 16

Qualified Plans are subject to IRC Section 401(a). A nonqualified deferred compensation plan is any employer, retirement, savings or deferred compensation plan for employees that does not meet ERISA requirements.

Question 17

Qualified Plan Features

Answer 17

May not discriminate
ERISA
Immediate tax deduction for employer for contributions (though may not be vested for employee)
Earning accrue tax deferred until distribution
Distributions are taxable at ordinary income tax rates with the exception of 10-year averaging and NUA under Stock Bonus, ESOPs and 401(k)s

Question 18

Nonqualified Plan Features

Answer 18

May discriminate
Exempt from most of ERISA requirements
No employer tax deductions for contributions until employee is taxed
Plan earnings are taxable to the employer
Distributions taxable at ordinary income tax rates

Question 19

Qualified Defined Contribution (DC) Plans

Answer 19

Money Purchase Pension
Target Benefit Pension
Profit-Sharing
Profit-Sharing w/ 401(k) provision
Stock Bonus/ESOP

Question 20

Retirement Plans (not qualified)

Answer 20

SEP
SIMPLE
SARSEP
Thrift or Savings Plan
403(b)

Question 21

Factors affecting employees benefits under DC plans

Answer 21

1. Years to retirement
2. Investment Returns (employee bears risk)
3. Salary Levels (contributions based on salary level not retirement needs)
4. Employer contributions (minimum funding standards as low as 3%)
5. Forfeitures - used to fund other participants or reduce employer contributions

Question 22

Money Purchase Pension Plan

Answer 22

Benefit Formula requires a flat percentage of each employee’s compensation (subject to salary cap of $305,000 and section 415 limit of $61,000)
Employer can contribute up to 100% of each employee’s compensation, but can only deduct up to 25% of total plan compensation (eligible payroll)
Benefit determined by account balance
Employee assumes investment risk
No annual actuarial determination is required
Forfeitures can be reallocated or reduce employer contributions
Contributions are mandatory (not necessarily fixed)

Question 23

Section 415 limit (maximum contributions to DC plans)

Answer 23

The lesser of 100% salary (salary capped at $305,000 for calculation) or $61,000
NOTE: This includes employer contributions, salary reductions, and plan forfeitures)
If exceeded - employer has the following options:
Reallocated to employees who did not exceed the limit
Applied in a later year for the same employee
Used to reduce future plan contributions
NOTE: there is a separate 415 limit for DB plans (maximum benefits from a DB plan)

Question 24

Selection/Requirements of a Money Purchase Pension Plan

Answer 24

Retain key employees
Simple to administer and explain
Employees are relatively young and well-paid

Must have stable cash flow and profit. Contributions are mandatory (not necessarily fixed)

Question 25

Target Benefit Pension Plan

Answer 25

Maximum contribution is 100% of compensation or the section 415 limit (fixed %)
Benefit is determined by account balance (annuitized at retirement)
Employee assumes investment risk
No annual actuarial determination required (Actuary does determine initial contribution level, which cannot exceed 415 limit)
Forfeitures can be reallocated or reduce employer contributions
Contributions are fixed and mandatory

Question 26

Selection/Requirements of a Target Benefit Pension Plan

Answer 26

Benefits older employees
Fixed mandatory contributions
Contributions will not change except to reflect new participants and increases in compensation of participants
Seeks but does not guarantee a specific target benefit amount
Lower cost and simpler than a DB plan that can provide for older employees

Question 27

Profit Sharing Plan

Answer 27

Qualified defined contribution plan that features flexible employer contribution provisions up to 25% of compensation
2001 tax act eliminated the need for a tandem plan to get to 25%
Purely discretionary contributions that could be nothing at all
Contributions must be substantial and recurring, but no clear rules define this
If contributions are too infrequent or too little dollars are contributed, the IRS could come in and retroactively disqualify the plan and terminate it.
Each participant has an account, the balance of which consists of employer contributions, returns and forfeitures.
Forfeitures are unvested terminated employee account balances
Forfeitures in a Profit Sharing Plan are generally reallocated to remaining participants

Question 28

Selecting a Profit Sharing Plan

Answer 28

Profit margin or financial stability varies from year to year
Incentivize employees to make the firm profitable
Employees are young, well-paid and have substantial time to accumulate assets for retirement

Question 29

401(k) plan (Cash or Deferral Arrangement - CODA)

Answer 29

Provision of a profit share or stock bonus plan
Option to put money in the plan (defer)
Deferrals are subject to FICA and FUTA but not federal tax withholding
Limit is $20,500 for employee deferrals
$6,500 catch up for participants 50 or older
Can be part of a section 125 (cafeteria) plan

Question 30

Selecting a 401(k) plan

Answer 30

Wants to provide a qualified retirement plan but can only afford minimal extra expense beyond existing salary and benefit costs
Employee wants to increase savings on a tax-deductible basis

Question 31

Solo 401(k)/Uni-401(k)

Answer 31

401(k) type plan for owner, owner and spouse or owner and partner (2 people max)
No coverage testing applies
Contributions consist of deferrals and employer contributions
$20,500 max deferral (employee)
Up to $61,000 combined (employee deferral and employer contributions)
$6,500 catch up (age 50) is permissible as well (total $67,500)

Question 32

Safe Harbor 401(k)

Answer 32

Automatically satisfies nondiscrimination tests involving HCEs with either matching contribution or non-elective contribution
Statutory safe harbor contribution is $1/$1 on first 3% AND $0.50/$1 on next 2%
Non-elective deferral method is a 3% employer contribution regardless of whether the employee is deferring or not.
Employer contributions must be immediately vested
Exempt from top heavy (key employee) rules if only deposits are ee deferrals and er contributions (otherwise top heavy employer contributions may be required

Question 33

Stock Bonus and Employee Stock Ownership (ESOP) plans

Answer 33

A stock bonus plan may invest plan assets in employer stock, however an ESOP MUST invest primarily in employer stock
Participants’ accounts are stated in shares of employer stock
Benefits are generally distributable in employer stock certificates
Employers may deduct dividends with respect to stock held in an ESOP
To be deductible, dividends must satisfy at least one of the following:
Paid in cash directly to participants or beneficiaries
Paid to the plan and subsequently distributed in cash to participants or beneficiaries no later than 90 days after close of plan year
Used to make payments (principal and interest) on loans used to acquire employer securities
Paid to the plan and reinvested in qualifying employer securities

Question 34

Selecting a Stock Bonus or ESOP

Answer 34

Company wants to broaden ownership or create a market for its stock
Provide liquidity for shareholder’s estates or to provide for business continuity
Provide employees with a tax-advantaged means to acquire company stock
Wants workers to feel a sense of ownership
Availability of NUA

Question 35

Leveraged Employee Stock Ownership Plan (LESOP)

Answer 35

An ESOP is a stock bonus plan that allows an employer to borrow money from a bank or other financial institution. When the ESOP is used to borrow money, it becomes a LESOP.

Question 36

ESOP diversification rules

Answer 36

Participants 55 years or older who have 10 years in an ESOP generally have a right to diversify up to 50% of their account balance. The ESOP must offer at least 3 alternative investment options OR distribute cash or certificates to participants

Question 37

New Comparability Plan

Answer 37

Contribution percentage formula for one category of participants is greater than the contribution percentage for other categories. These plans, like age-based plans, are cross-tested.

Question 38

Cross-tested Plans (except ESOPs)

Answer 38

Cross-testing seeks to provide maximum benefits to HCEs while providing minimum benefits to non-HCEs under nondiscrimination regulations.
Differentiates HCEs from non-HCEs
Generally results in higher contributions for older employees (presumably due to higher compensation) and are sometimes referred to as age-weighted, however age-weighting is available without cross-testing
HCEs might get full $61,000 contribution (section 415 limit) while non-HCEs get the lesser of 1/3 highest HCE contribution rate (%) or 5%

Question 39

Traditional Defined Benefit (DB) Plan

Answer 39

Qualified employer sponsored pension plan that guarantees a specific benefit amount at retirement. DB and cash balance pension plans are required to carry PBGC insurance. (money purchase and target benefit DC pension plans are NOT)

Question 40

Selecting a traditional DB plan

Answer 40

Employer wants to maximize contributions to older employees
Older controlling employee wants to maximize tax-deferred retirement savings for their benefit

Question 41

Section 415 limit (defined benefit plans maximum benefit)

Answer 41

For a benefit beginning at 65, the maximum annual life annuity benefit is the lesser of $245,000 or 100% of the average compensation the employee earned over their highest earning 3 consecutive years.
Plan is not required to reduce benefits to a participant who retires as early as 62
NOTE: there is a separate 415 limit for DC plans (maximum contributions to a DC plan)

Question 42

Unit Benefit Formula for Pensions

Answer 42

Percentage of earnings per year of service formula (do not confuse with flat amount per year of service or flat percentage of earnings formula AKA fixed benefit formula)
Factors salary and service to determine pension benefit
E.G. 1.5% of earnings for each year of service
1.5% times annual earnings times years of service = annual pension amount
Most frequently used formula
Benefits long-tenured the most

Question 43

Final Average Formula for Pensions

Answer 43

Usually better matched to employees pre-retirement income vs. career averaged compensation (unit benefit method)
Uses average earnings over a specific number of years (usually 3 to 5 prior to retirement)
Only $305,000 (salary cap) can be taken into consideration for calculating

Question 44

Past Service Credits

Answer 44

Past service is service with the employer before inception of the pension plan
Defined benefit and cash balance pension plans may offer credit for past service.
DC plans CANNOT provide credit for past service

Question 45

Fixed Benefit Formula

Answer 45

Flat amount per year of service or flat percentage of earnings used to calculate pension benefit

Question 46

Income Replacement Ratio

Answer 46

Amount of pension benefit divided by average salary

Question 47

Employer Contributions to Pension Plans (disadvantage to employer)

Answer 47

Potentially large funding obligation regardless of profitability
Actuarily determined contributions cannot be predetermined
Factors that affect contributions
Proximity to Retirement Age (closer/older = more, further/younger = less)
Past Service
Forfeitures MUST be applied to reduce employer contributions (contributions cannot be more or less than actuarily determined amount)
Investment return assumptions (lower assumptions = higher contributions, higher assumptions = lower contributions)
Salary scale assumptions (older/longer tenured employees are paid more, newer/younger employees are paid less)

Question 48

Cash Balance Pension Plan

Answer 48

A defined benefit pension plan that provides for annual employer contributions at a specified rate to hypothetical individual accounts for each participant.
Employer guarantees the contribution level AND a minimum rate of return.
Very similar to Money Purchase DC plan, except a Money Purchase does not require employers to guarantee a minimum rate of return.
Actual rates of return DO NOT affect actual value of the benefit to the employee in the future. Only the guaranteed rate does.
Actual rates of return CAN affect future employer contributions. If plan assets experience a higher rate of return than guaranteed, future contributions can be reduced and vice versa.
Account balance is annuitized at retirement to provide the end benefit

Question 49

Selecting a Cash Balance Pension Plan

Answer 49

Less expensive option compared to traditional DB plan

Question 50

Disadvantage of Cash Balance Pension Plan for Employees

Answer 50

Older, longer-tenured employees receive a lower benefit when a traditional DB plan is converted to a cash balance plan.
Older employees generally get a smaller lump sum and annuity payout
Cash balance contribution is based on all working years vs traditional DB plan which uses average highest 3 years
Cash Balance contribution is generally fixed
Traditional DB plan may be higher
See page 3-17 in retirement for comparison of traditional DB to Cash Balance

Question 51

412(i) Plan

Answer 51

A defined Benefit Plan funded entirely with insurance products and annuities
Insurance company actuarial assumption determines the contribution due
Exempt from minimum funding standard
412(i) is IRC section for fully insured plans
Also known as a 412(e) 3 insurance contract plan

Question 52

Selecting a 412(i) plan

Answer 52

Appeals to employers that have some need for life insurance
Allows for large contribution, but plan returns will typically be lower than other DB plans

Question 53

Non-discrimination and eligibility requirements for Qualified Plans

Answer 53

Must cover a broad group of employees
Two requirements must be satisfied:
Age/Service (21/1 or 2-year/100% rule)
Coverage (Ratio Percentage Test or Average Benefit Test)

Question 54

Age/Service Rules for Qualified Plans

Answer 54

Maximum Age/Service is 21 years old, 1 year of service (21/1 rule) subject to vesting
Special provision requires 2 years of service, but employee is 100% vested at the end of 2 year (2-year/100% rule). This rule is not available with most 401(k) plans.
An employee who meets the Age/Service requirement must be allowed to participate no later than the first day of the first plan year following completion of the requirement or 6 months after the conditions are met.
Year of Service = 1,000 hours worked during initial 12 month period
Employees also become eligible if they average 500 hours worked for at least 3 consecutive years (instead of 1,000 in the single 12 month period)

Question 55

Coverage Tests for Qualified Plans

Answer 55

Ratio Percent Test:
The percentage of non-HCEs is at least 70% of the percentage of HCEs that are covered.
E.G. 50% of HCEs are covered (given). At least 35% of non-HCEs must be covered (50%X70%)

Average Benefit Test:
The average benefits for all non-HCEs must be at least 70% of the benefits for HCEs
E.G. $200,000 of benefits go to HCEs. At least $140,000 must go to non-HCEs ($200,000X70%)

Be careful of question phrasing. May ask how many must be included or how many can be excluded.

Question 56

Additional minimum participation requirements for Qualified DB plans

Answer 56

Must benefit at least the lesser of:
50 employees
The greater of 40% of all employees or 2 employees (or if only 1, that employee)

E.G. - Two doctors are employed by LM, each wants their own DB plan. They have to participate in the same plan.
E.G. - O.S. employs 10 doctors and 40 staff. Minimum participation is the lesser of 50 employees or 40% of all employees (20 employees in this case - 50X.40)

Question 57

Highly Compensated Employee (HCE)

Answer 57

Either a greater than 5% owner, or an employee that earned more that $135,000 in the previous year (2021).
HCE concept relates to discrimination (ADP/ACP testing)

Question 58

Key Employee

Answer 58

Either a greater than 5% owner, an officer with compensation greater that $200,000 (2022), or a greater than 1% owner with compensation greater than $150,000 (2022).
Key Person concept relates to plan vesting

Question 59

Top-Heavy Plans

Answer 59

A plan is top heavy if more than 60% of its aggregate accrued benefits or account balances are allocated to key employees. The salary cap if $305,000 applies when calculating.
A top-heavy plan requires minimum benefits (DB) and minimum contributions (DC) for non-Key employees:
DB Plans (2nd letter of Alphabet) - benefit = 2% of non-Key employee compensation multiplied by years of service up to a maximum of 10 years
DC Plans (3rd letter of the Alphabet) - contribution = 3% of non-Key employee compensation

Question 60

Vesting Schedule for Top-Heavy DB plans and ALL DC plans

Answer 60

3-year cliff OR
2-6 year graded (20% vesting in years 2,3,4,5,6) OR
100% vested with 2-year eligibility (2-year/100% rule)

Question 61

Vesting Schedule for non-Top-Heavy DB plans only

Answer 61

5-year cliff OR
3-7 graded (20% vesting in years 3,4,5,6,7)
100% vested with 2-year eligibility (2-year/100% rule)

Question 62

Family Attribution Rules

Answer 62

Attribution rules can affect who is a key or highly compensated employee for the >5% ownership rule. An individual may be deemed a >5% owner based on their relationship to an actual >5% owner.
Spouse, grandparent, parent or children of a >5% owner are deemed to be >5% owners
Only a parent (not a grandparent) is deemed to own stock on behalf of children under 21

Question 63

Special Note from Page 4-10 of Retirement Book

Answer 63

The CFP exam generally has no calculation questions on the non-discrimination rules. ESOPs, 401(k)s, and matched 403(b)s are not tested on a benefits basis but must satisfy the ADP and ACP tests which are both focused on contributions. However, cross-tested profit-sharing plans are tested in terms of benefits.

Question 64

Actual Deferral Percentage and Actual Contribution Percentage Tests

Answer 64

Employee Elective Deferral and Employer matching and profit-sharing contribution discrimination tests.
Compares percentages of HCEs versus non-HCEs
Not more than 125% of the NHCE Rate (ADP is 8% or greater)
Not more than 200% of the NHCE Rate (ADP is between 1% and 8%)
*Shortcut - take NHCE ADP/ACP and multiply by 2% for 0-2%, add 2% for 2-8%
E.G.
NHCE actual deferral HCE deferral allowed
1% X2 2%
2% X2 4%
3% +2 6%

Question 65

Catch-up Deferral

Answer 65

Lesser of $6,500 or the amount of the participant’s compensation reduced by any other elective deferrals by the participant for the year.

Question 66

Controlled Groups

Answer 66

Parent-subsidiary - One entity (the parent) owns 80% or more of one or more other entities.
Brother-sister - Five or fewer owners of two or more entities own 80% or more of each entity
Affiliated service group (ASG) - Apply primarily to PSCs (HEAL - health, engineering, accounting, law)
Employee leasing - Employee is directly employed by one organization, but is leased to another unrelated organization (for instance on a project basis)
Importance of Controlled Groups - Annual additions to a participant’s qualified plan account are limited to $61,000/annually. This must be aggregated for participants between multiple plans offered by a single employer OR related employers. However, if a participant works for two unrelated employers, the plans are treated separately, and the participant could in theory receive $122,000 in annual additions.

Question 67

Integration with Social Security/Disparity Limits

Answer 67

Purpose is to equalize employer’s contributions to qualified retirement plans between higher and lower paid employees.
DC plans handle this differently that DB plans

Question 68

DC Plan Integration

Answer 68

Integration Level - any dollar amount up to the Social Security Wage base ($147,000 in 2022)
Base contribution percentage - Contribution percentage for compensation below integration level.
Excess contribution percentage - Contribution percentage for compensation above integration level.
Permitted disparity is the lesser of base contribution percentage or 5.7%
To calculate (3 steps):
Calculate the base contribution for amount for compensation before $147,000
Calculate the excess contribution amount for compensation over $147,000 but less than $305,000 (salary cap)
Add the two results together. Lesser of result or $61,000
Note: you will be given the variables or will be given enough information to solve the one you need.

Question 69

DB Plan Integration

Answer 69

Integration Level - level of compensation above which a contribution is made. May not exceed the Social Security Wage Base ($147,000 in 2022).
Base benefit percentage - Plan benefit for compensation below integration level.
Excess benefit percentage - Plan benefit for compensation above integration level.
Permitted disparity is the lesser of the base benefit percentage or 26.25%.
To calculate:
Formula is base benefit percentage + permitted disparity = excess benefit percentage

Question 70

Deduction Limits for Employers who sponsor a Qualified Plan (Section 404(c) limit)

Answer 70

The employer may only deduct a maximum of 25% of all participants’ (aggregate) eligible compensation. Certain plan participants may exceed the 25% threshold as long as total company contributions do not exceed 25% and do not violate discrimination rules.

Question 71

Definition of Compensation for Qualified Plans

Answer 71

Includes taxable compensation paid or accrued during the tax year
Also includes elective deferrals under 401(k) and Section 457 plans
Generally includes salary reduction contributions to Section 125 plans (FSAs) but that is determined by the plan document

Question 72

Elective Deferrals for workers with more than 1 employer

Answer 72

Aggregated as follows:
401(k)/403(b)/SIMPLE/SARSEP - $20,500 max plus age 50 catch up if applicable ($6,500)
SIMPLE and another SIMPLE - $14,000 max plus age 50 catch up if applicable ($3,000)

Question 73

Annual Additions for workers with more than 1 employer

Answer 73

Lesser of 100% of compensation or $61,000
Aggregated amongst all accounts if plan is offered by single employer or two or more related employers (Controlled group - cannot exceed $61,000)
Separately to each account in unrelated employer plans (two accounts added together could receive more than $61,000)

Question 74

Keogh Plans (HR-10)

Answer 74

Qualified Retirement Plan for sole proprietorships and partnerships (i.e. self-employed)
May operate as DB, money purchase pension or profit-sharing plans.
Contribution is based on net earnings, not salary. Net earnings is Schedule C income (which includes the deduction for non-owner employee plan contributions)
Self-Employment tax must be computed and the 1/2 SE tax deduction must be taken before determining the self-employed deductible contribution.
Shortcut for Self-Employed deductible contribution amounts:
15% plan (non-owner employee contribution) - 12.12%
25% plan (non-owner employee contribution) - 18.59%
Note - same calculation for self-employed SEP contribution
Note - If this calculation appears, it will use a wage base under $147,000

Question 75

Loans from Qualified Plans (IRC Section 72(p))

Answer 75

Tax free loans from Qualified Plans based on following requirements being met:
Made under enforceable agreement requiring repayment
Total loans do not exceed lesser of 50% of participant’s vested benefit or $50,000 (small accounts can borrow up to $10,000 without regard to % limit)
Loan is repaid within 5 years (exception for principal residence not pledged, or leave of absence)
Repayments are made in level installments at least quarterly. If participant fails to make payments according to the schedule, the full balance due is taxable and subject to the 10% early withdrawal penalty
Loan interest is generally not deductible (exception is a pledged residence loan for non-key employee)
Loan interest is never deductible for a key person
Loan provisions are not required. All Qualified Plans, 403(b) and TSA can have loans. IRAs, ROTH IRAs, SEPs, SARSEPs and SIMPLEs cannot.

Question 76

Definition of Compensation for IRA purposes

Answer 76

Wages
Salary
Tips
Professional Fees
Bonuses
Alimony (pre-2019)
Separate Maintenance Agreements (pre-2019)

Question 77

Spousal IRA

Answer 77

Spouse who does not work or has limited compensation can contribute to a spousal IRA as long as the couple has compensation to support funding both.

Question 78

IRA Eligibility

Answer 78

All persons receiving compensation can contribute to an IRA. The IRA contribution may or may not be deductible

Question 79

IRA Deductibility

Answer 79

If neither spouse nor a single person is an active participant in a qualified plan, SIMPLE, SEP, TSA and Union Plan, then IRA contributions are deductible and not subject to AGI limits.
Active participant is defined as someone who is making elective deferrals or receiving annual additions (which consist of employee deferrals, employer contributions and forfeitures)
If one spouse is an an active participant, but the other is not, the non-active spouse can make a deductible IRA contribution subject to AGI phase-out limits.
For all active participants, deductibility is subject to AGI phase-out limits.
The phase out ranges are given.

Question 80

Early IRA Distribution Penalty Exceptions

Answer 80

Death
Total and permanent disability
Qualified education expenses
Medical Insurance premiums after separation from employment (subject to 10% AGI floor unless unemployment is received in the same year as separation or the following year)
Substantially equal periodic payments (72(t)/SEPP)
First home expense up to $10,000
Medical Expense > 10% of AGI
$5,000 for qualified birth/adoption

Question 81

Loans with respect to IRAs

Answer 81

IRA loans are not allowed
IRAs pledged as collateral for a loan is treated as a distribution

Question 82

Roth IRA Conversions

Answer 82

No AGI limit
60 day rule applies to QP, IRA, SEP, SIMPLE, 403(b) or governmental 457 conversions
Roth Conversions DO NOT satisfy RMDs
A QP can be converted to a Roth IRA, but careful considerations should be made

Question 83

Non-Spouse Beneficiaries

Answer 83

A non-spouse beneficiary who inherits a QP is eligible to convert the plan to a Roth IRA via direct transfer (a non-spouse beneficiary cannot make a 60-day rollover)
A non-spouse beneficiary who inherits an IRA cannot convert it to an Inherited Roth IRA

Question 84

Roth IRA 5-year rule (only applies to Conversions and Earnings)

Answer 84

For purposes of withdrawing earnings tax-free (income and penalty), a Roth IRA must be established for at least 5 years and experience a qualified triggering event (59 1/2, Death, Disability, First Time Home up to $10,000).
Earnings are subject to income tax but NO penalty if the the Roth IRA meets the 5 year rule and the remaining special purposes (medical expense, medical insurance, SEPP, Higher Education birth/adoption) OR existed for less than 5 years and meets all special purposes (including 59 1/2, Death, Disability or First Time Home up to $10,000).
There is one 5-year clock for earnings that starts when the first Roth IRA is opened and it carries over to new accounts.
For purposes of withdrawing converted Roth assets tax-free, each conversion has its own 5-year clock. If it meets the 5 year holding, no tax or penalty applies. If it fails to meet the 5-year rule, only the penalty applies. If it fails to meet the holding period, but does meet one of the special exceptions, no tax or penalty applies.

Question 85

Roth IRA Distribution Rules (not RMD)

Answer 85

Roth IRAs must be distributed in the following ways due to death of the owner:
Within 5 years if no designated beneficiary
By the 10th year following death to designated beneficiary
Is the sole beneficiary is a surviving spouse, they can delay distributions until the owner would have attained 72 or roll it to their own Roth IRA and no distributions would be required.

Question 86

Recharacterizations of IRA contributions

Answer 86

TCJA eliminated all but corrective IRA recharacterizations. A taxpayer who cannot contribute to a Roth IRA due to AGI limits can recharacterize to a traditional IRA (deductible or non-deductible)

Question 87

Roth 401(k)

Answer 87

Roth 401(k) contributions are subject to the 5-year rule on contributions
To be tax free, the distribution has to be after 5 years and post 59 1/2, death, or disability
No in-service distribution for Roth 401(k) (55)
Roth 401(k) is subject to RMD rules
Roth 401(k) provisions are optional for employers

Question 88

ABLE Accounts

Answer 88

Achieving a Better Life Experience Act expands IRC Section 529 to create tax-advantaged accounts for the disabled. $16,000 annual contribution limit (gift exclusion).
Distributions for disability are excluded from gross income if beneficiary was disabled before 26
ABLE account is exempt from the $2,000 asset limit for Medicaid and SSI
Maximum 1 ABLE account per beneficiary

Question 89

SEP

Answer 89

Form 5305-SEP
Employer contributions only, employees get same % as owner
Contributions are non mandatory (flexible)
Lesser of 25% of Compensation ($305,000 maximum) or $61,000
Self-Employed Owners subject to KEOGH Rules (20% of net income max) (12.12%/18.59%)
Fully vested immediately
Use when employer wants an alternative to a qualified profit share that’s easy to install
Must cover all employees over 21 who have worked 3 out of 5 previous calendar years
Part-time work counts for years of service
Contributions do not need to be made for employees whose compensation for a calendar year is less than $650
Can be integrated with Social Security
Not flexible when it comes to participation requirements
Short-term employees make this an advantage.
Long-term part time employees make this a disadvantage

Question 90

Salary Reduction SEP (SARSEP)

Answer 90

SARSEPs are no longer available (12/31/96), but old plans are grandfathered
No more than 25 employees
50% of all eligible employees must participate (make a deferral)
Limit is $20,500 and $6,500 age 50 catch up
New employees can join the grandfathered plan

Question 91

SIMPLE IRA

Answer 91

5304-SIMPLE or 5305 SIMPLE
100 employees max. 2 year grace period if this is exceeded
$14,000 max contribution ($10,000 indexed for inflation)
Mandatory employer contributions $1/$1 up to 3% of employee comp (matching based on employee deferral)) OR non-elective 2% contribution (regardless of whether the employee does anything)
Lower % not less than 1% can be used in no more than 2 out of 5 years (ending current year)
No compensation cap for matching purposes
Vested immediately
No non-discrimination testing
Deferrals are subject to FICA and FUTA
Termination of SIMPLE can only happen January 1 of the year following notification (contributions available until then)
Cannot maintain any other qualified plan, 403(b), or SEP at the same time
Must cover any employee who earned $5,000 in any 2 previous years and is reasonable expected to earn $5,000 in the current year.
60-day notice of election period just prior to the calendar year to make a deferral election or modify a previous election
Contributions to SIMPLE IRA for domestic employees (housekeeper) are non-deductible

Question 92

SIMPLE 401(k)

Answer 92

Exempt from ADP/ACP Tests
Exempt from Top-Heavy requirements
An ERISA plan
Same $14,000 deferral plus $3,000 age 50 catch up
Does not have special 1% match election of a SIMPLE IRA
Salary cap of $305,000 applies for matching
Other rules of SIMPLE IRAs apply to SIMPLE 401(k)s
Employers interested in a SIMPLE will generally go with the IRA and not the 401(k)

Question 93

403(b) (TDA/TSA)

Answer 93

Can only be adopted by certain tax-exempt organizations and certain public school systems (501(c)(3) organizations - religious, charitable, scientific, literary or educational)
Public schools must have a regular faculty and curriculum and a regular student body
Reductions are subject to FICA and FUTA
$20,500 plus $6,500 age-50 catch up for deferrals
Special 15-year service rule allows an additional $3,000 deferral
$61,000 limit on all contributions
Annuity Contracts or Mutual Funds only (cash value life insurance may be incidental)

Question 94

Section 457 Plans

Answer 94

IRC Section 457 governs all non-qualified deferred compensation plans of governmental units, governmental agencies, and certain non-church controlled tax-exempt organizations. (no church, mosque or synagogue)
$20,500 or 100% of compensation
$6,500 catch up for age 50 only by governmental employer (not non-profit)
Special catch up applies for the final 3 years of participation
No coordination with elective deferrals of 401(k), 403(b), or a SARSEP
Only governmental 457s can be rolled into an IRA, Roth IRA or qualified plan
Non-governmental 457s can only be rolled into other non-governmental 457s
Section 457 plans are subject to QDROs
FICA taxes apply when constructive receipt occurs or substantial risk of forfeiture is removed.

Question 95

ERISA

Answer 95

Employee Retirement Income Security Act
Protects the interest of participants
the DOL enforces ERISA
the DOL and PCGC issue interpretive guidelines on ERISA provisions
DOL issues advisory opinions on specific situations affected by ERISA
DOL has the authority to issue prohibited transaction exemptions (PTE)
Occasionally, a PTE may apply to qualified plans generally

Question 96

Fiduciary Liability Issues

Answer 96

Discharge duties:
Solely in the interest of participants and beneficiaries
While providing benefits to participants and their beneficiaries while defraying reasonable plan expenses
With care, skill, prudence and diligence under the circumstances then prevailing, that a prudent person familiar with such matters would
By diversifying investments of the plan so as to minimize the risk of large losses unless, under the circumstances it is clearly prudent not to do so.
Can be sued for failing to diversify

Question 97

ERISA Prohibited Transactions

Answer 97

Between a plan and a party in interest or fiduciary
Fiduciary should avoid the following conflicts of interest
Furnishing goods or services or facilities between the plan and the party in interest with respect to the plan.
Transfer to, or use by or for the benefit of, a party in interest, any assets of the plan.
ERISA also prohibits self-dealing and transactions violating the anti-kickback rule

Question 98

Pension Benefit Guaranty Corporation (PBGC)

Answer 98

Insure payment of guaranteed benefits
Funded by annual premiums paid by DB plan sponsors
Only guarantees DB plans (traditional and cash balance)
Guarantees monthly benefits payable (nonforfeitable) or payments already being paid
Does not guarantee lump sums
PBGC is part of the DOL

Question 99

DB Plan Terminations

Answer 99

May be voluntary or involuntary (by PBGC)
Voluntary Termination is also called Standard Termination (sufficient assets to fund)
Distress Termination (insufficient funds) can only occur when:
1. The employer is in bankruptcy (either liquidation or reorganization)
2. The employer can prove to the PBGC that plan termination is necessary to pay debts

Only the PBGC can initiate an involuntary DB plan termination. Termination cannot be the result of unpaid premiums.

Question 100

Pension Welfare Benefits Administration (PWBA)

Answer 100

Enforces reporting, disclosure, and Fiduciary provisions of ERISA

Question 101

Key Factors Affecting Plan Selection for Business

Answer 101

Maximizing benefits for the owner, highly compensated, or older employees
Maximizing or Minimizing employer contributions
Maximizing employer contribution flexibility
Vesting to minimize employee turnover
Allowing employees to make before-tax salary deferrals

Question 102

Establishing Qualified Plans

Answer 102

Plan document must be executed within the tax year for which the employer wishes to take the tax deduction for its contribution. The following are exceptions:
Safe-Harbor 401(k) must be adopted before the beginning of the plan year
Standard 401(k) with deferrals must be established before deferrals can be made.
SIMPLE 401(k) plans may be adopted any time on or after January 1, but not later than October 1.

Question 103

Methods to make deductible employer contributions

Answer 103

Cash
Borrow from a bank
File an extension for tax purposes

Question 104

Pension Protection Act of 2006

Answer 104

Allows annuity-LTC combinations
Allows “safest available annuities” to be included in 401(k) plans

Question 105

Diversification in ERISA plans

Answer 105

Trustees have the requirement to diversify available investments to minimize risk of large losses
DC plans of publicly traded employers must allow participants to diversify employer contributions after 3 years of service
Participant investment, model-driven, and flat fee advice is permitted
Automatic investments may be invested in balanced accounts with stocks and bonds

Question 106

Unrelated Business Taxable Income (UBTI)

Answer 106

If UBTI exceeds $1,000, the UBTI is subject to income tax in the current year. Income from a limited partnership or dividends from a margined account are considered UBTI.

Question 107

Life Insurance in a qualified plan

Answer 107

Must be incidental to the primary purpose of the plan. Must meet the following tests:
Aggregate premiums are less than the following percentages of the benefit for that participant:
Ordinary Life/Whole Life - 50%
Term Insurance - 25%
Universal Life - 25%

The death benefit amount must be no more than 100 times the expected monthly benefit.

DC plans usually use the premium limits, DB plans usually use the death benefit limit.

Question 108

Using Life Insurance in a Qualified Plan

Answer 108

Satisfies the need for life insurance protection of the owner of a small business and provide a tax deduction to the business
The pure life insurance cost is usually taxed to the participant at the table 2001 cost
If the death benefit is payable, the difference between the total and the cash value is treated as death proceeds and is received by the beneficiary tax-free (assuming the table 2001 cost was paid). The cash surrender value is taxed at ordinary income.
Can reduce the actuarial assumptions in a DB plan and allow for additional contributions
Only profit sharing plans can hold second-to-die policies

Question 109

Using Disability Insurance in a Qualified Plan

Answer 109

Qualified Plans are eligible to hold disability insurance.

Question 110

In-Service Distributions

Answer 110

May be allowed in three situations:
Attainment of a specific age or number of years of service
Hardship
Attainment of age 62 for DB plans (Pension Protection Act rule - considered as retirement income)
Note: Governmental 457s do not allow for in-service distributions until 70.5.

Question 111

Hardship tests

Answer 111

Financial needs test - need must be immediate and heavy
Resources test - the withdrawal must not exceed the amount needed, and the participant must have no other sources to meet the need

Question 112

Hardship 10% penalty exemptions

Answer 112

Medical expenses for participant, spouse or dependents
Tuition, room and board, and other educational expenses for the next 12 months
Principal residence purchase
To prevent eviction/foreclosure
Funeral expenses
Certain repair expenses for damage to the principal residence
Cannot exceed the immediate need
Employer cannot force loans, and cannot limit deferrals for 6 months
Hardship withdrawals are limited to deferrals and vested matching/earnings amounts

Question 113

10% Penalty Exceptions for Early Distributions (qualified plans)

Answer 113

Death
Disability
SEPP (72(t)) following separation of service
Separation of service at 55 or later
QDRO
Medical expenses in excess of 10% of AGI
$5,000 distribution for qualified birth/adoption

Question 114

SEPP (72(t))

Answer 114

Avoids the 10% penalty following separation of service
Must be paid at least annually
Paid without changing the amount for a minimum of 5 years or age 59 1/2 (if changed outside of the exception below, the 10% penalty is applied retroactively)
Based on life expectancy
Based on reasonable rate of interest
Based on reasonable mortality assumptions
Generally, no modification to the payments is allowed, but there is a one-time election which allows participants to change from the annuity or amortization method to the RMD method. There is no penalty for this change. The change sharply reduces the payout.

Question 115

Qualified Joint and Survivor Annuity (QJSA - pension plans)

Answer 115

Annuity option that provides a benefit for a survivor (usually a spouse)
Survivor benefit not less than 50% nor greater than 100% of the annuity payable while participant is still living.

Question 116

Qualified Optional Survivor Annuity (QOSA - pension plans)

Answer 116

PPA requires a second survivor annuity option. Must be a 50% joint and survivor annuity at a minimum. Participant can only opt out of this benefit with written spousal consent. Election must be made within 180 days of annuity start. Participant must be given notice explaining the right to defer and potential consequences.

Question 117

Qualified Preretirement Survivor Annuity (QPSA)

Answer 117

Pre-retirement death benefit payable to the plan participant’s spouse upon the death of a participant before the starting date of the QJSA. The benefit must not be less than the QJSA.

Question 118

Rollover Rules (aside from standard ones)

Answer 118

Non-deductible IRA contributions cannot be rolled into a qualified plan
Non-governmental 457 plans can only roll to another 457 plan
Hardship Withdrawals cannot be rolled over
Qualified plans, 403(b) plans or a 457 plan may roll into a SIMPLE, but only if the SIMPLE was opened for at least 2 years.
SIMPLEs can be rolled into qualified plans and IRAs, but only if the SIMPLE was open for 2 years.

Question 119

RMDs

Answer 119

April 1st of the year following the year in which an individual turns 72, then by December 31st every year after.
IRA distributions start at 72 no matter what
Qualified Plans, Governmental 457s and 403(b)s allow for later RMDs for participants who work beyond age 72. RMDs apply April 1st the year following retirement.
5% owners must begin distributions by April 1st following 72, but can still contribute to their plan until they retire.

Question 120

QCD

Answer 120

Available at 70.5
Up to $100,000 annually
Satisfies RMD

Question 121

SECURE Act 10 year rule exceptions

Answer 121

Owner’s surviving spouse
Owner’s child under 18 (once they reach 18, the 10 year rule applies)
Disabled Individual (may use their own life expectancy)
Chronically ill individual
Any person not more than 10 years younger than the owner

Question 122

Pension Protection Act (Updated by the SECURE Act)

Answer 122

Non spouse beneficiaries can transfer 401(k) proceeds to an inherited IRA and withdraw the funds over 10 years. Applies to 403(b) and governmental 457s as well.
Must roll directly (direct transfer) to an inherited IRA
If money is distributed or goes to a traditional IRA, taxes will be due
Non spouse beneficiaries can tap into 401(k) funds for qualifying medical or financial emergencies.

Question 123

Retiring Early (401(k) plans only)

Answer 123

Participants who retire between 55 and 59 1/2 can take withdrawals without paying the 10% penalty. Does not apply to IRAs.

Question 124

Special Penalty Waiver for Public Service Employees

Answer 124

10% penalty is waived for distributions for non-457 governmental plans for qualified public safety employees beginning at age 50.
Law enforcement, customs and border patrol, and firefighters

Question 125

NUA

Answer 125

Net unrealized appreciation of stock in a qualified plan is not taxable until the stock is sold. The basis is taxable at ordinary income rates. The appreciation is long-term capital gain regardless of holding period.
If the stock appreciates after distribution from the qualified plan (but before sale) the additional appreciation must be held for long-term to qualify for LTCG rates
NUA can be considered income in respect of the decedent (IRD)

Question 126

Nonqualified Deferred Compensation

Answer 126

May discriminate
Exempt from most ERISA requirements
No employer deduction for contributions until employee is taxed
Funds earnings may be taxable to employer
Distributions are taxable at ordinary income rates (except for ISOs)

Question 127

Choosing a nonqualified plan

Answer 127

Additional benefits for executives already receiving max benefits or contributions under a qualified plan.
Used as a way to recruit/retain talent
Can be created just for 1 employee
Usually effectively implemented by C Corps

Question 128

Salary Reduction (Pure Deferred Compensation)

Answer 128

Use some portion of employee’s current compensation to fund the ultimate compensation benefit.

Question 129

Salary Continuation

Answer 129

Employer contributions fund the future compensation benefit.

Question 130

Unfunded Deferred Compensation Plans (Informally Funded)

Answer 130

To maintain deferral, a plan must be unfunded (naked promise to pay) or informally funded (with life, annuities, mutual funds or other investments)
Unfunded and Informally funded plans are subject to employer’s creditors.
Employee has no access to the compensation that has been deferred.
No tax deduction for contributions until the employee is taxed (constructive receipt or economic benefit)

Question 131

Life Insurance and 162 (for Deferred Compensation)

Answer 131

Employer Owns the policy and is the beneficiary
Premiums are NOT currently deductible
Death proceeds paid to the employer are not taxable to the employer (because premiums were taxed)
Benefits paid to the employee (or surviving dependents) are a deductible expense to the employer and taxable to the ultimate receiver. Constructive receipt (employee) or economic benefit (survivors of covered employee) requirements are met.
Payments to the surviving beneficiaries are included in the employee’s gross estate for estate tax purposes. This is because of incidents of ownership (right to name a beneficiary)

Question 132

Rabbi Trust

Answer 132

Result of an IRS letter ruling involving a Rabbi and his congregation
Assets in the Rabbi Trust must be available to all general creditors
The participant does not have greater rights than other unsecured creditors
Plan must provide clear rules describing when benefits will be paid.
Company must notify the trustee of any bankruptcy or financial hardship. Trustee must suspend payment to the trust beneficiary and hold assets for general creditors (trap door)

Question 133

When a Rabbi Trust is used

Answer 133

Possibility that management may change before deferred compensation benefits are paid (takeover/acquisition)
New management might be hostile to the key employee in the future and fail to honor the arrangement.
Risk that litigation to enforce payment of deferred compensation would be too costly to be practical.

Question 134

Secular Trusts

Answer 134

Irrevocable Trust that is established for the sole benefit of the employee.
Assets are beyond the reach of the employer’s creditors.
Deduction for the employer and taxation to the employee occurs when assets are placed into the trust, or when substantial risk of forfeiture no longer exists.
Considered a FUNDED nonqualified deferred compensation arrangement.
Tradeoff for creditor protection is the taxation of compensation in the year it is transferred to the trust.

Question 135

Employer Tax Implications of Informally Funded Nonqualified Deferred Compensation Plans

Answer 135

Double taxation is possible
First, the funds set aside in the plan must be taxed at the corporate level as accumulated earnings
Second, the earnings from the plan may create an additional tax

Question 136

Constructive Receipt

Answer 136

Income is taxable to a cash basis taxpayer in the year during which it is paid or made available. It is not considered constructively received if there is substantial risk of forfeiture or other restrictions.

Question 137

Substantial Risk of Forfeiture

Answer 137

Substantial Risk of Forfeiture exists if the employee’s right to the enjoyment of the property are conditioned upon the performance of services for a period of time. Two tests:
1. The employee’s relationship to other stockholders and the degree of their potential control.
2. The employee’s relationship to corporate officers.

Question 138

Economic Benefit Doctrine

Answer 138

If any economic or financial benefit is conferred on an individual by an employer as compensation in a taxable year, it is taxable to the individual in that year.

Question 139

Incentive Stock Options

Answer 139

Generally cannot be exercised by cashless transaction because they lose their favored tax treatment.
Only the first $100,000 of ISOs granted can get special tax treatment. All others are NSO
An ISO can be called a qualified employer stock plan, but is not a qualified plan
ISOs sold 1 year from exercise and sold 2 years from grant (egg) maintain favored status

Question 140

Bargain Element

Answer 140

The spread between the exercise price and the market value of a stock option.

Question 141

Disqualifying Disposition of ISOs

Answer 141

If ISOs are sold in the same calendar year as they were exercised, the bargain element is taxable compensation and subject to FICA and FUTA
If the ISOs are sold within 12 months of exercise, but the following calendar year, the bargain element is taxable at ordinary income, but not subject to FICA or FUTA
If both the 1 year from exercise to sale and 2 years from grant to sale (egg) rules are violated, the ISO bargain element is taxable and subject to FICA and FUTA
Gifting an ISO is a disqualifying disposition

Question 142

Offering ISOs

Answer 142

ISOs reward employees, most often key employees to motivate productivity. The employer receives no tax deduction when shares are exercised.

Question 143

Section 83 Election vs. Section 83(b) Election for NSOs and Restricted Stock

Answer 143

Section 83 election is the standard NSO tax process (option gains are taxed as ordinary income at exercise)
Section 83(b) election accelerates the ordinary income taxation on the difference between the exercise and market price to the grant date. Any appreciation is taxable at favorable gains rates. This may be appropriate if the stock is expected to appreciate substantially.

Question 144

Restricted Stock

Answer 144

Sale of stock to an employee at a bargain price. No taxation occurs if substantial risk of forfeiture exists.

Question 145

Stock Appreciation Rights

Answer 145

SARs are rights to be paid an amount of money equal to the difference between the value of a specified number of shares of stock on the date the SARs are granted and the value of the stock on the date the SARs are exercised.

Question 146

Phantom Stock

Answer 146

The right to a cash bonus based on the performance of phantom shares of a corporation’s common stock over a specified time.

Question 147

SARs and Phantom Stock Similarities

Answer 147

The amount is paid in cash, stock, a combination, or any other form of consideration.

Question 148

SARs and Phantom Stock Differences

Answer 148

Phantom Stock holders have no choice on the specified date of exercise
Phantom stock is not granted in tandem with options
Phantom stock typically carries dividend equivalent rights

Question 149

Choosing SARs and Phantom Stock

Answer 149

Company owners what to share economic value of equity, but not actual equity
The company is a division of another company, but it can measure its equity value and wants employees to have a share in that
The company is actually a non-profit or government entity
The company cannot offer traditional types of ownership because of restrictions (for example, an S corp can only have 100 shareholders)

Question 150

Junior Class Shares

Answer 150

A JCS is a junior stock plan. After expiration of substantial risk of forfeiture, junior class (B) shares are converted to regular (A) shares.

Question 151

ESPP (Section 423 stock plan)

Answer 151

Discounted stock purchase plan for employees. Can offer up to 15% discount.
Similar tax treatment to ISOs.
Available to all employees.