Retirement Flashcards
What are the pension plans and which of them are defined contribution?
Defined benefit
Cash balance
Money purchase
Target benefit
DC: money purchase, target benefit
Are in-service withdrawals permitted with pension plans?
No, except for participants older than 59.5
Are in-service withdrawals permitted with profit sharing plans?
Yes, after two years if permitted by plan documents
What percent of plan assets can be invested in employer securities in a pension plan and what percent in a profit sharing plan?
10%, 100%
Is a QJSA required in a profit sharing plan?
No, only a pension plan
When is a pension plan not required to be covered by PBGC?
If a professional firm with less than 25 employees
What is the annual contribution limit by employers for defined contribution plans?
25% of total employee covered compensation
What are the advantages to an employer for a plan being qualified?
Employer contributions are currently tax deductible, and are not subject to payroll taxes
What are the advantages to an employee for a plan being qualified?
-Availability of pretax contributions for employees
-tax deferral of earnings on contributions
-ERISA protection
-lump sum distribution options (10yr, NUA, pre74 cap gain treatment)
How many of coverage tests must a retirement plan satisfy in order to be considered qualified?
1, except defined benefit plans must also meet the 50/40 test
What are the coverage tests?
General safe harbor, ratio percentage, average benefits, and 50/40 if defined benefit plan
What is the formula for the general safe harbor test?
% of NHC covered >= 70%
What is the formula for the ratio percentage test?
% of NHC covered / % of HC covered >= 70%
What is the average benefits test?
Must satisfy both tests
- AB % or NHC / AB % of HC >= 70%
- Non-discriminatory test
What is the formula for the 50/40 test?
The defined benefit plan must benefit the lesser of 50 eligible employees or 40% of eligible employees on each day of the plan year
50 people / 40 % = people come first!
What is a highly compensated employee?
> 5% owner
Or
$150k in comp
at any time during year or prior year
Do family shares count towards the >5% ownership in regards to HC?
Yes
What vesting schedule is required for deferred eligibility (the ability to sign up for the plan has a waiting period)?
Immediate vesting after 2 years of service
Is deferred eligibility allowed for 401k plans?
No
What vesting schedules are available for defined contribution plans?
2 to 6 year graduated
3 year cliff
What vesting schedules are there for defined benefit plans?
3 to 7 year graduated
5 year cliff
What vesting schedules are there for top-heavy defined benefit plans?
2 to 6 year graduated
3 year cliff
What are the vesting schedules?
2 to 6 year graduated: 0, 20, 40, 60…
3 to 7 year graduated: 0, 0, 20, 40…
3 year cliff: 0, 0, 100
5 year cliff: 0, 0, 0, 0, 100
What vesting schedule does a cash balance plan use?
3 year cliff, and is not impacted by being top heavy
How does a part time employee become eligible for a plan?
Must have worked 500+ hours for 3 consecutive years
What is a key employee?
> 5% owner
Or
1% owner with comp in excess of $150k
Or
An officer with comp in excess of $215k
(Must be owner or officer)
When is a plan considered top-heavy?
If >60% of the benefits or contributions are going to key employees
How is funding handled when a plan is considered top-heavy?
DB: at least 2% x years of service x comp factor
DC: 3% to eligible employees
Does the $66k max contribution for an individual include catch-up provisions?
No
How must a qualified plan handle life insurance in order to maintain it’s qualified status?
25% test or 100:1 ratio test
What is the 25% test for life insurance in a qualified plan?
The premiums paid for term cannot exceed 25% of the employer’s contributions, 50% for whole
What is the 100:1 test for life insurance in a qualified plan?
Death benefit limited to 100 times the monthly accrued retirement benefit
Do defined benefit plans favor younger or older employees? What about defined contribution?
Older, younger
Which SS integration methods are available for DB plans? What about DC plans?
DB can use offset or excess, DC can only use excess
What formulas are used for defined benefit pension plans?
Flat amount, flat percentage, unit credit
For permitted disparity (SS integration in DC plans), how much higher is the excess rate than the base rate?
5.7%
Which entities are allowed to establish a 401k plan?
Corporations
Partnerships
LLCs
Proprietorships
Tax-exempt entities
What qualified distribution exists for Roth IRAs that doesn’t exist for Roth 401ks?
First time home purchase
Between Roth IRA and Roth 401k, which has RMDs?
Roth 401k
How are non-qualified distributions handled for Roth IRAs?
contributions first, conversions second, earnings third
How are non-qualified distributions handled for Roth 401k?
Each distribution consists of basis and earnings
What is the ADP schedule?
If ADP for NHC employees is
0-2%, 2-8%, >8%
Then permissible ADP for HC employees is
2x ADP, 2% + ADP, 1.25x ADP for NHCs
How can a plan be brought back into ADP/ACP compliance? How quickly must it be done? What is the penalty if it isn’t?
Corrective distributions
Recharacterization
Qualified non-elective contributions
Qualified matching contributions
Must be done within 2.5 months after end of plan year or subjected to a 10% excise tax
What is the standard match to qualify as a safe harbor plan?
5% employee deferral, 4% employer
What are the rules for plan loans?
Loans permitted up to the lesser of:
Half of the balance up to $50k
Unless below $20k balance, then
The greater of $10k or the balance
Must be repaid within 5 years, unless for home purchases
Loans permitted up to $100k in federally declared disaster
Out of stock bonus plans, profit sharing plans, and ESOPs, which generally receives cash as its contribution rather than stock?
Profit sharing plans
What is the deductibility of ESOPs for employers?
25% of covered comp PLUS interest paid on loan
Out of stock bonus plans, profit sharing plans, and ESOPs, which generally needs an evaluation?
Stock bonus plan (annually), ESOP (dividends)
Do ESOPs allow SS integration?
No
Out of stock bonus plans, profit sharing plans, and ESOPs, which allows for NUA lump sum distribution?
Stock bonus plans and ESOPs
Out of stock bonus plans, profit sharing plans, and ESOPs, which generally distribute stock rather than cash?
Stock bonus plans and ESOPs
Out of stock bonus plans, profit sharing plans, and ESOPs, which generally have voting rights?
Stock bonus plan and ESOPs
What is the only account type that can roll to a simple IRA?
Another simple IRA
What is the only account type that can roll to a designated Roth account?
Another designated Roth account
What are the requirements for a qualified lump sum distribution?
It must be the entire balance
Be on account of separation from service, disability, death, or 59.5
Employee must have participated in the plan for at least 5 taxable years prior
Must attach form 4972 to income tax return
What is the NUA formula?
FMV at Date of Distribution - Value Used at Date of Employer Contribution
(Distribution value - contribution value)
What happens after an NUA distribution is sold?
Taxpayer required to pay either short or long term capital gains deferred since the date of the distribution
What are the exceptions to the early withdrawal penalty for both qualified plans and IRAs?
Death, Disability, Terminal illness
Attainment of age 59.5
SEPP
Medical expenses that exceed 7.5% AGI
Adoption expenses up to $5k
Federally declared disaster
What are the ages for RMDs?
People who turned:
70.5 prior to 2020
72 between 2020-2023
73 after 2023
What is the penalty for RMDs not taken?
25%, or 10% if taken during the correction window
Which type of Roth account(s) are not subject to RMD rules?
Roth IRAs. Roth 401k, 403b, etc. are all subject
What are the categories of IRA beneficiaries?
Eligible designated, non-eligible designated, and non-designated
What are the rules for IRA eligible designated beneficiaries?
Spouse: May roll into IRA
Child: once they reach age of majority they become designated
Disabled or chronically ill
Any person who is not more than 10 years younger
Upon death of eligible designated beneficiary, their beneficiary becomes designated
What are the rules for IRA designated beneficiaries?
Balance must be paid out by 12/31 of the year containing the 10th anniversary of the participant death
What are the rules for IRA non-designated beneficiaries?
After RMD: take owner’s RMD
Before RMD: take entire balance by end of 5th year following death
What is a Keogh plan and what is the formula?
A qualified plan for a self-employed individual (can be any kind, Keogh just indicates self-employed status)
Contribution rate / (1 + contribution rate)
What are the contribution limits for a Keogh plan?
25% technically (due to same covered compensation rules as other plans) but effectively 20% because of taxes paid
What is considered earned income for purposes of IRAs?
W2
Schedule C net income
K1 income from LLC or material partnership
Alimony (prior to 2019)
When can a taxpayer deduct an IRA contribution?
-When they aren’t an active participant
-When they are under the phaseout
-When one spouse is not an active participant and is under 218-228 phaseout
When is a taxpayer considered an active participant?
When they contribute or receive benefit from a qualified plan, annuity plan, TSA, certain government plan, SEP, or SIMPLE
Is the savers credit refundable?
No
What exceptions to the early withdrawal penalty are exclusive to qualified plans?
QDRO
Attainment of age 55 and separation of service
Public safety employee who separates from service after age 50 and 25 years of service
What exceptions to the early withdrawal penalty are exclusive to IRAs?
Higher education expenses
First time home purchases
Payment of health insurance premiums by unemployed
What investments aren’t allowed in an IRA?
Life insurance and collectibles
Collectibles does not include gold, silver, platinum, or palladium
What are prohibited transactions with an IRA?
Selling, exchanging, or leasing property to an IRA
Lending money to an IRA
Receiving unreasonable compensation for managing an IRA
Pledging an IRA as security for a loan
Borrowing money from an IRA
Buying property for personal use with an IRA
When should simple IRAs and 401ks be used?
Small employers, limited of 100 employees with compensation >$5k
By what date do SIMPLEs need to be established?
October 1 of the year the plan starts
Do SIMPLEs allow for other plans?
No
How do filings and costs differ between SIMPLE IRA vs. 401k?
IRA requires no annual filings with minimal costs, whereas the 401k has the same requirements as a traditional 401k
Do SIMPLE IRA and 401ks require annual testing?
No if they meet contribution requirements
How does vesting work with SIMPLEs?
Immediately Fully vested
How are in-service withdrawals different for SIMPLE IRAs vs. SIMPLE and traditional 401ks?
If taken within first 2 years, 10% penalty is increased to 25%
What are the employee elective deferral contribution limits for SIMPLEs?
$15500
$3500 catch up
What are the extra catch up provisions available to 403bs?
Age 50
15 year rule
What is the age 50 catch up provision?
Employee is eligible to make catch up contributions if age 50 by end of year.
Catch up amount becomes the lesser of $7500 or includable compensation subtracted by other elective deferrals for the year
What is the 15 year rule exception?
In addition to the $7500 catch up, it worked for the employer for 15 years, then the deferrals allowed are increased by the lesser of
1. $3k
2. $15k reduced by prior year 15 rule allowance
3. $5k times years of service subtracted from total deferrals made during employment
The business has to be health, education, or religious organization (HER)
What are the categories of 457 plans?
457b public plan: governmental entities
457b private plan: tax exempt organizations
457f Ineligible: both but for HCE
Of the unfunded promise to pay, rabbi trust, and secular trust, which is not at risk if employer becomes solvent?
Secular trust
Of the unfunded promise to pay, rabbi trust, and secular trust, which is at risk of forfeiture without employer financial instability?
The unfunded promise to pay
Of the unfunded promise to pay, rabbi trust, and secular trust, which has taxable income to the executive immediately upon funding or vesting?
Secular trust
At exercise of an NQSO, how is an executive taxed?
Recognizes w2 income to extent of difference between current stock price and exercise price
At exercise of an ISO, how is an executive taxed?
Does not recognize taxable income but will have an AMT adjustment for the appreciation over the exercise price
How is an NQSO and an ISO taxed when the stock is subsequently sold?
Capital gain or loss
How is an NQSO and an ISO taxed at the grant date?
No taxable income to holder if issued at the current or greater share price
Which fringe benefits are explicitly non-discriminatory?
Educational assistance programs
Dependent care assistance
No additional cost services
Qualified employee discounts
Adoption assistance programs
Qualified tuition reduction plans
Group term life insurance
Cafeteria plans
FSAs
How do the discrimination rules work for cafeteria plans and FSAs?
Discrimination in favor of either HCE or providing more than 25% of the benefit to key employees will result in the value of the benefits being included in their gross income
Are private 457b plans used for government or tax-exempt employers? Are the assets protected by a trust?
Tax exempt (501c), no
Are public 457b plans used for government or tax-exempt employers? Are the assets protected by a trust?
Government, yes
How are forfeitures treated in DB and in DC plans?
BOTH can reduce future costs,
ONLY defined contribution plans can allocate to other participants
