Retirement Flashcards
When to select a Money Purchase Pension Plan
- employer wants a stable work force
- employer wants a plan simple to administer and explain
- employees are relatively young and well paid
Requirements to use a Money Purchase Pension Plan
- must have stable cash flows
- must make fixed contributions
- up to 25% employer deductions
When to select a Target Benefit Plan
- wants an alternative to a defined benefit plan
- wants to provide adequate retirement benefits to older employees
- wants lower costs and simplicity
When to select a Profit-Sharing Plan
- when employers profit margin or financial stability varies from year-to-year
- when employer wants to adopt a qualified plan with an incentive to motivate employees to make the company more profitable
- when employees are young and well-paid
When to select a 401(k) plan
- when employer wants to provide a qualified retirement plan but can only afford minimal extra expenses
- when employees want to increase savings on a tax-deductible basis
When to select a stock bonus or an ESOP
- company wants to broaden ownership of stock, create a market for stock, or provide liquidity for shareholders
- company wants to provide a tax advantage mean to acquire company stock
- employer wants its workers to feel a sense of ownership
When to select a defined benefit plan
- employer wants to maximize contributions to older employees
- an older employee wants to maximize tax-deferred retirement savings for their own benefit
When to select a Cash Balance Plan
- employer is looking for a less expensive and simpler Defined Benefits plan.
Disadvantages of Cash Balance Plans
- older, long-service employees receive lower pension benefits when a DB plan is converted to a Cash Balance Plan.
- lump-sum payout at termination is considerably smaller
When to select a 412(i) plan
- when employer has some need for life insurance
- allows large contributions but lower returns
ADP/ACP Testing Shortcut
- 0-2% = times 2
- 2-8% = plus 2
- times/plus is added to NCHE value
Parent Subsidiary
- One entity (the parent company) owns at least 80% if one or more other entities
Brother-sister
- five or fewer owners of 2 or more entities own 80% or more of each entity
Affiliated Service Group
- apply to service organizations in health, law, accounting, engineering, etc.
Employee Leasing
- reduce the discrimination potential from an employer choosing to lease employees rather than employ.
Defined Benefit Plan Integration
- permitted disparity = lessor of base benefit percentage or 26.25%
- base percentage + permitted disparity = excess percentage
Defined Contribution Plan Integration
- permitted disparity = lessor of base or 5.7%
- base percentage + permitted disparity = excess percentage
PIA Calculation if Social Security is taken before Full Retirement Age (FRA)
- [# of months before FRA/180] x PIA = Benefit
Taxation of Social Security Benefits
- if income + 50% of social security is more than $25,000 (single) or $32,000 (MFJ), social security is taxable at 50%
- if income + 50% of social security is more than $34,000 (single) or $44,000 (MFJ), social security is taxable at 85%
Keogh Plan Deductible Contribution Shortcut (also used for Self-Employed SEP Contribution)
- multiple net schedule c income by 12.12% for 15% contribution
- multiple net schedule c income by 18.59% for 25% contribution
When to select a Simplified Employee Pension (SEP)
- employer wants an alternative to a qualified profit-sharing plan
- employer wants a plan that is easy and inexpensive to install
Simplified Employee Pension (SEP) Characteristics
- lessor of 25% (not 100%) of compensation up to $330,000 or $66,000
- easy to adopt by filing Form 5305-SEP
- permits employer contributions only
- must cover all employees over 21 and have worked 3 out of last 5 years. (Part time counts)
- contributions do not beed to be made for employees whose compensation for the year was less than $750
When is an Simplified Employee Pension (SEP) advantageous
- when employer has numerous short-term employees.
- if employer has numerous long-term or part-time employees an SEP is a major disadvantage.
When to select a SIMPLE plan
- employer is looking for an easy to administer plan through salary reduction and employer match.
- employer has no more than 100 employees
- cannot obtain any other qualified plan
SIMPLE plan Eligibility
- plan must cover any employee who earned $5,000 in any two previous years and is reasonably expected to earn $5,000 in the current year
Minimum Participation (Defined Benefit Only)
- lessor of 50 employees or [greater of 40% of all employees or 2 employees]
Social Security Integration Calculation
- integration level x base contribution
- [total salary - integration level] x excess contribution
- add above two
Investment Considerations for Retirement: Money Market Accounts
- short term
- low risk, low return
Investment Considerations for Retirement: Fixed Income Bonds
- short to medium term
- may lose value, but has a fixed return
Investment Considerations for Retirement: Common Stock
- long term
- volatile, income/growth
Investment Considerations for Retirement: Mutual Funds
- long term
- more diversification
Investment Considerations for Retirement: Real Estate
- long term
- above average return during inflationary periods
Investment Considerations for Retirement: GIC’s
- 2 to 7 years
- low risk, fixed return
Life Insurance incidental to Plan must be lower than:
- ordinary life/whole life: 50%
- term life: 25%
- universal life: 25%
*Defined Benefit can be no more than 100x the expected monthly benefit
When are Rabbi Trusts often used
- possibly that ownership or management might change before the deferred compensation benefits are paid
- new management might be hostile to the key employee in the future and fail to honor the compensation agreement
- risk that litigation to enforce payment of deferred compensation in the future would be too costly to be practical
When to choose to offer SARs and phantom stock
- the company’s owners want to share the economic value of equity, but not equity itself
- the company is a division of another company but can create a measurement of its equity value and wants employees to share in that
- the company is a nonprofit or government entity
- the company cannot offer conventional kinds of ownership because of restrictions
PIA Calculations
- two reductions: early benefits, earned income under FRA.
- months before FRA = percentage reduced
- 12 mo = 6.67%
- 24 mo = 13.34%
- 36 mo = 20%
- 48 mo = 25%
- 60 mo = 30%
IRA Keys (SIMPLE, SEP, SARSEP)
- no loans
- no life insurance
- must take RMDs at 73
- 59.5 not 55 for no 10% penalty
- immediate vesting
- may not be creditor protected
DB/DC Limits
- DB/DC salary cap = $330,000
- SIMPLE IRA cap = $516,667
- DC max contribution = $66,000 (73,500 if 50+)
- DB max contribution = stuff it like a pig
- tandem plan is a wrong answer
When to Recommend Defined Benefit Plan
- when older controlling employee wants to maximize tax-deferred retirement savings for their benefit and company has very stable cash flow.
When to Elect a Cash Balance Plan
- when company can no longer afford the benefits guaranteed under a defined benefit plan
Implementing a Money Purchase Pension Plan
- when employer wants stable work force
- a plan simple to administer and explain
- employer must have stable cash flows and profits to make fixed contributions
401k Deferral Meaning
- maximum $22,500
401k Contribution Meaning
- deferrals and catch up ($30,000)
When to select stock bonus or employee ownership plans
- want to broaden ownership of its own stock
SIMPLE Employer Max Contribution
- 3% of salary up to $330,000 limit (401k)
When to choose SEP
- easy and cheap to install
- alternative to profit sharing plan
403(b) Max Contribution
- lesser of $66,000 or SALARY
Minimum Benefits and Contributions
- DB = 2% of compensation
- DC = 3% of contributions
Vesting Calculation
- ignore year 1
- add up remaining
- multiply by contribution
- multiply by vesting %
Salary Reduction Plans
- defers some portion of the employees current compensation to fund the ultimate benefit
Salary Continuation Plans
- plan uses additional employer contributions to fund the ultimate benefit
Unfunded Plans
- owned by company
- subject to creditors of company
- holds regular investments
- no tax deduction until employee is taxed which occurs when employee has constructive receipt
Indications of Ownership
- if able to name beneficiary, ownership exists
Social Security Integration Calculations
- base % is multiplied by $160,200
- permitted disparity is multiplied by amount above $160,200
