Retirement Flashcards
What is covered by the Social Security Act?
Social Security (OASDI), Medicare, Federal Unemployment Insurance, and Supplemental Security Income (SSI)
Requirements of a spouse for a retired or disabled worker
Age 62 or over or at any age if the spouse, has a child in care under 16, or has a child age 16 and over and disabled before age 22.
Surviving spouse of a deceased insured worker
Age 60 or over. Exception is if caring for a child under 16 or became disabled before 22.
Benefit requirements for divorced spouse
Must have been married to the worker for at least 10 years and not remarried. Exception is if age 62 and divorced at least 2 years.
Surviving dependent benefits
Under 19 and a full time elementary or secondary student
18 or over with disability before 22
Working after retirement
If you take benefits and continue to earn income before full retirement age, you can lose those benefits if your workplace earnings exceed threshold.
Income tax of benefits
If you take benefits, then you may have to pay income tax on those benefits if your provisional income exceeds a threshold.
Social security disability benefits
- Insured for disability benefits and 65
- Disabled for 12 months, expected to be disabled for 12 months or suffered from disability that will result in death
- Filed for disability benefits and completed 5 month waiting period.
Primary Insurance Amount Reduction formula
PIA - [(#months before FRA/180) x PIA]
Discrimination in retirement plans
Favor highly compensated employees
Retirement plans (Not qualified)
SEP, SIMPLE, SARSEP, Thrift or savings plans, 403(b)
Forfeitures in a profit-sharing plan
Typically reallocated to the remaining participants.
How does a safe harbor 401(k) automatically satisfy the nondiscrimination tests with highly compensated employees?
Either an employer matching contribution or a non-elective contribution.
Difference between money purchase plan and cash balance pension
Money purchase receives fixed employer contributions. For cash balance, the company must guarantee the return.
Maximum permissible contribution of a defined benefit plan
Actuarially determined
Money purchase plan if a key employee retires and is replaced with a clerical employee?
Company contributions would decrease on behalf of lower paid worker.
Investment returns in a money purchase plan
They affect account balances, not contributions.
What happens if forfeitures are not reallocate to remaining money purchase plan participants?
Employer contributions would decrease.
What happens in money purchase plans if salary levels increase?
Employer contributions would increase due to fixed percentage.
Target benefit plan maximum benefit
The value of the participant’s account at retirement
Profit-sharing plan & Money purchase plan similarity
Forfeitures may be allocated to increase account balances of remaining plan participants.
Unit-benefit formula
Percentage-of-earnings-per-year of service
Age and service in a qualified plan
At least age 21 and one year of service.
Ratio percentage test
Plan must cover NHCEs at least 70% of the percentage of HCEs who are covered.
Average benefit test
The average benefits for all NHCEs must be at least 70% of those for HCEs.
A defined benefit plan must benefit at least the lesser of what?
The lesser of 50 employees or 40% of all employees
Highly compensated employee
Either greater than 5% owner or earn more than $150,000
Key employees
Either a greater than 5% owner, an officer AND compensation greater than $215,000, or greater than 1% owner AND compensation greater than $150,000.
When is a plan top-heavy?
If more than 60% of its aggregate accrued benefits or account balances are allocated to key employees.
Vesting schedule for top-heavy DB plans and all defined contribution plans (faster schedule)
3-year cliff or 2-6 year graded or 100% vested with 2-year eligibility
Vesting schedule for non-top-heavy DB plans (slower schedule)
5-year cliff or 3-7 year graded or 100% bested with 2-year eligibility
Best vesting schedule to retain employees?
Graded over cliff.
NHCE to HCE deferral calculation
0 to 2% is “times 2” while 2 to 8% is “plus 2”
Best vesting schedule for top-heavy profit sharing plan with high turnover
3-year cliff
Stock bonus, SEP, Defined Benefit, and Target Benefit vs. ESOP
ESOP can’t be integrated with social security
Formula for permitted disparity using the excess method
Lesser of the base benefit or 26.25%
Examples of a controlled group
Brother-sister
Combined group under common control
Parent-subsidiary
Section 415 annual additions limit
The lesser of $66,000 or 100% of compensation
Keogh plan
A qualified retirement plan for sole proprietorships and partnerships. May operate as defined benefit, money purchase, or profit-sharing
Net earnings
Determined after claiming all allowable business deductions, including the deduction for the employee only retirement contribution. Also describes the self-employed person’s contribution or benefit.
When is a defined contribution plan top-heavy?
If more than 60% of the total amount in the accounts of all employees is allotted to key employees.
Defined benefit calculation
At least 2% of compensation x the number of years of service.
B is 2nd letter in alphabet = 2%
Defined contribution calculation
Employer contribution must be no less than 3% of each non-key employee’s compensation.
C is 3rd letter in alphabet = 3%
When are the only times a non-key participant can deduct interest paid on a plan loan?
The loan is for the participant’s primary residence or the loan is secured by the primary residence.
Which plans do not allow loans under IRC Section 72(p) on a tax-free basis?
IRAs, SEPs, SIMPLEs and Roth accounts
Two jobs with SIMPLE plans - Aggregate total
$15,500
Loans from a 401(k) plan
Must be made available to all participants without discrimination.
When would the loan interest from a 401(k) plan be deductible while using the loan to purchase a house?
The rank-and-file employee secures the loan only with the primary residence purchased with the loan.
IRA compensation
Includes alimony and separate-maintenance payments.
IRA deductibility
If neither spouse is an active participant (not subject to AGI limits), which includes SIMPLEs, SEPs, and employer/employee contributions.
Contributions in a Roth IRA
Not deductible
What is not subject to required minimum distribution rules?
A Roth IRA and a Roth inherited by a spouse rolled into his/her own Roth IRA.
Variable annuity benefit
Tax-deferred growth until retirement.
When is Roth recharacterization permitted?
When the taxpayer’s AGI exceeds the contribution threshold for that year.
Medical exceptions to the 10% early withdrawal penalty for IRAs
Medical expense in excess of 10% of AGI and distributions used to pay medical insurance premiums after separation from employment.
457 plans and deductibles
Does not count as active participation, so you can make a deductible contribution.
Roth 401(k)
Similar to the 403(b) and 457(b) as they may offer a qualified Roth contribution program. Also, no income restrictions for a Roth 401(k).
Simplified Employee Pension (SEP)
Employer-sponsored plan where contributions are made to each employee’s IRA. Permits for employer contributions only.
SEP Employer Contributions
The lesser of 25% of compensation ($330,000 max) or $66,000. No requirement to make a contribution. Vested immediately.
Why use a SEP plan?
An alternative to a qualified profit-sharing plan that is easy and inexpensive.
SARSEP
Only available to a company with up to 25 eligible employees.
SEPs and social security
Can be integrated.
SIMPLE IRA
All eligible employees can make elective pretax contributions of up to $15,500. Unlike a 401(k), there is no nondiscrimination testing. Mandatory employer contributions.
SIMPLE 401(k)
Exempt from both ADP and ACP tests and top-heavy requirements. Less flexibility on plan design. As an ERISA plan, it is exempt from creditors.
403(b) plans
Tax-deferred employee retirement plans that can be adopted by certain tax-exempt orgs and certain public-school systems, a 501(c)(3) org.
403(b) plan investment vehicles
Open-end mutual funds, annuity contracts, and cash value life insurance (incidental benefit). Unit investment trusts (closed-end funds) are not allowed.
SIMPLE 401(k) vs. SARSEP, Stock bonus 401(k), Profit sharing 401(k)
Deferral limit of $15,500 ($3,500 catchup) vs. $22,500 ($7,500 catchup)
457 plan eligibility
State, city, agency/political subdivision of a state, and any organization exempt from federal income tax. Churches are not eligible.
SIMPLE penalties
Employer contributions are non-forfeitable. 10% penalty is increased to 25% for distributions taken two years of the employee’s first participation.
Difference between money purchase plan and a SEP or a profit sharing plan
While both allow $66,000 contribution, the money purchase plan has a mandatory contribution.
SIMPLE IRA vs. SIMPLE 401(k)
Employer may elect a 1% match under the IRA. There is no special match election with the 401(k)
SEP and FICA/FUTA
Because the SEP is funded entirely by employer contributions, FICA and FUTA do not apply.
SEP and SIMPLE withdraw
Since they are IRA-type arrangements, you can withdraw at any time, though there may be a 10% penalty.
Governmental 457 plan option when nearing retirement
Roll directly into a Roth IRA.
Governmental 457 plan deferrals
Because they are not aggregated with other types of elective deferral programs, you can defer the lesser of $22,500 or 100% of compensation.
Uni-401(k) benefits vs. other plans
Can defer $22,500 plus add employer profit-sharing contributions up to $66,000 with a catchup of $7,500. SIMPLEs only allow $15,500 for deferral. Profit-sharing and SEP has no catchup contributions.
Pension Benefit Guaranty Corporation (PBGC)
Under ERISA rules, It is charged with the administration of defined benefit plan termination rules.
Defined benefit plans under PBGC
Cash balance plans, defined benefit plans, integrated db plans.
Unrelated Business Taxable Income (UBTI)
Income from a limited partnership or dividends from a margined account.
Difference between IRA plans and qualified plans like ESOP and 401(k)
IRA plans can’t provide life insurance. Incidental rules for death benefits do not apply.
What can hold second-to-die insurance?
Profit-sharing plans. Pension plans can’t.
What is taxable in a pure life insurance death benefit?
Cash value. Death benefit is not taxable.
Difference between cash balance pension plan and money purchase pension plan.
Cash balance is a defined benefit subject to PBGC. Money purchase is a defined contribution plan.
Equipment leasing programs
Limited partnerships that produce UBTI income.
Substantially Equal Payments (72t)
Provides for a number of exceptions to the 10% additional tax from distribution prior to age 59 1/2.
QPSA and QJSA death benefits
Doesn’t have to be offered in profit-sharing plans. Required in pension plans.
What does a direct transfer do in a rollover?
Ensures tax-deferred treatment with no 20% withholding
Conduit IRA
Holds funds that have been distributed from the qualified plan for the subsequent transfer to a new qualified plan (changing jobs for example)
RMD Calculation
Previous year ending balance ÷ distribution period in uniform lifetime table
Difference between IRA and pension plan beneficiaries
IRA beneficiary can be anyone. Pension plans have to be spouse.
What’s a qualified plan distribution that would be exempt from the 10% withdrawal penalty?
Qualified plan loan
What do QDROs not apply to?
They don’t apply to IRAs. They apply to qualified plans, 403(b)s, and 457s.
Direct distribution from a qualified plan
Requires the plan administrator to withhold 20%.
Basis of employer stock
Treated as ordinary income at time of distribution regardless if stock is sold or not.
Non-spouse beneficiary after death for IRA
Must take all the money out within 10 years following the year of death.
With two IRA accounts, how do you satisfy the minimum distribution rules from only one plan?
Calculate the RMD from the aggregate IRA values and take the total required distribution from one plan.
60-day IRA rollover
Can only do one per year.
When can a rabbi trust be used? Not used?
Used in a hostile takeover, mergers, and acquisitions. Can’t be used in bankruptcy.
Secular trust
An irrevocable trust that is beyond the reach of creditors. There is taxation the year when compensation is transferred to the trust.
Bargain element
The spread between the exercise price and the market price.
83(b) election
Employee elects to recognize the tax at the time of the award instead of at the time of exercise (where a Section 83 election would recognize it)
Rabbi trust and constructive receipt
Might trigger due to a merger or acquisition, but not guaranteed.
Contributions in a rabbi trust
Not subject to payroll taxes, but distributions are subject to withholding and FICA.
Salary continuation plan
Funded entirely by employer contributions
$100,000 of ISOs
If more than $100,000 of ISOs that vest in the same year are granted, only the first $100,000 are treated as ISOs with the excess treated as NSOs.
Non-qualified employer stock determinants of taxation
The free transferability of the employee’s interest and the presence of a “substantial risk of forfeiture”
What happens when shares are exercised with an ISO?
Corporation will NOT receive a tax deduction.
Money purchase plan
Guarantee that a contribution will be made each year. Attracts young, successful, and retains key employees.
When can an employer contribute more than 25% to an employee’s account in a profit-sharing plan?
When the limit is the lesser of 100% or $66,000 and the total company contributions don’t exceed 25% of total plan compensation.
Keough plan contribution formula shortcut
Net business profit x profit-sharing plan %
Benefits of a profit-sharing plan compared to a SEP
Can provide loan provisions while SEPs can’t.
SIMPLE salary deferrals
Subject to FICA and FUTA.
Profit-sharing plan benefits
Allows flexible yearly contributions that can be integrated with social security.
Example of deductible IRA
When the workplace doesn’t have a retirement plan.
Best asset to pledge as collateral to borrow money?
Common stock because it is like buying stock on the margin.
Secular trust
Contributions are deductible in the contribution year. Irrevocable (funded) and not subject to bankruptcy or creditors. Can be funded with various investments.
What happens if deferred compensation is subject to “substantial risk of forfeiture”?
The amount is uncertain and the deferred income is not taxable until it is distributed.
What plans can’t offer plan loans?
Any IRA plans.
Contributions and benefits in calculator
Contributions = End
Benefits = Begin
S Corp and Disability
S Corp will pass the disability premium to client, which becomes taxable income.
Filing separately as a non-working spouse
Unable to contribute to a Roth IRA.
Benefit of 2-to-6 or 3-to-7 graded vesting compared to cliff
Helpful to retain employees.
What is no longer permitted for top-heavy plans and employer matching contributions?
5-year cliff and 3-7 graded vesting.
