Retirement Flashcards
1
Q
What are the defined benefit pension plans?
A
Defined benefit pension plan, Cash balance Pension plan
2
Q
What are the defined contribution pension plans?
A
Money purchase pension plan, target benefit pension plan
3
Q
What are the defined contribution profit sharing plans?
A
Profit sharing plans, stock bonus plans, ESOPs, 401(k) plans, Thrift plans, New comparability plans, age-based profit sharing plans
4
Q
Pension Plan - what is the legal promise of the plan?
A
Paying a pension at retirement
5
Q
Profit sharing Plan - what is the legal promise of the plan?
A
Deferral of compensation
6
Q
Pension Plan - in service withdrawals?
A
Yes (Over 59 1/2)
7
Q
Profit sharing plans - in service withdrawals?
A
Yes (But after 2 years)
8
Q
Pension Plan - Mandatory funding?
A
Yes
9
Q
Profit sharing plans - Mandatory funding?
A
No
10
Q
Pension Plan - Investment in ER Securities
A
10%
11
Q
Profit sharing Plan - Investment in ER Securities
A
100%
12
Q
Pension Plan - QJSA & QPSA?
A
Yes
13
Q
Profit sharing plans - QJSA & QPSA?
A
No
14
Q
Defined Benefit - what is the annual contribution limit?
A
Not less than the unfunded current liability
15
Q
Defined Contribution - what is the annual contribution limit?
A
25% of Covered compensation
16
Q
Defined Benefit - Who assumes the investment risk?
A
Employer
17
Q
Defined Contribution - Who assumes the investment risk?
A
Employee
18
Q
Defined Benefit - How are forfeitures allocated?
A
Reduce plan costs
19
Q
Defined Contribution - How are forfeitures allocated?
A
Reduce plan costs or allocate to other participants
20
Q
Defined Benefit - Is this covered by PBGC?
A
Yes (Except professional firms with less than 25 EE)
21
Q
Defined Contribution - Is this covered by PBGC?
A
No
22
Q
Defined Benefit - Does this plan have separate investment accounts?
A
No, these accounts are commingled into one account and have accrued benefits
23
Q
Defined Contirbution - Does this plan have separate investment accounts?
A
Yes, they are separated and have account balanaces
24
Q
Defined Benefit - Can credit be given for prior service?
A
Yes
25
Defined Contribution - Can credit be given for prior service?
No
26
Defined benefit & Defined contribution - which favors young and which favors older?
DB - older // DC - Younger
27
Employer contributions avoid which tax?
Fica (Payroll tax)
28
Eligibility for qualified plans
1) 21 year old and 1 year of service (1,000 hours worked during one plan year) OR 2) 2 years of service with 100% vesting - not available to 401(k) plans
29
For education institutions, what is the oldest someone has to be to enter into a plan?
26
30
How many entrance dates must the plan have?
2
31
401(k) Eligibility for qualified plans (For part time employees)
500hrs each year for 3 consectuative years
32
Coverage tests - Safe harbor test Calculation
≥ 70% of NHC Covered
33
Coverage tests - Ratio % test Calculation
(% of NHC Covered / % of HC Covered) ≥ 70%
34
Coverage tests - Average benefits test Calculation
(AB % of NHC Covered / AB % of HC Covered) ≥ 70%
35
50/40 Test - who is this for?
Defined benefits plans only
36
50/40 Test - How to calculate this
Lesser of: 50 EE or 40% of employees
37
Highly compensated employee - qualifications
>5% this year or last year OR compensation in excess of $150,000 for prior year
38
Tactic to lower the amount of employees as HCE?
Rank top 20% as HCE ranked by Salary
39
Vesting - Defined contribution plan
ER contribution - 2 to 6 year graduated or 3 year cliff // EE contribution - 100% vested
40
Vesting - Defined Benefit plan
3 to 7 year graduated or 5 year cliff
41
What % of assets in a DB/DC plan make it top heavy?
>60% of account balance (DC) or accrued benefits (DB) to key employees
42
Key employee - qualifications?
>5% owner // >1% owner and compensation in excess of $150k // Officer with compensation in excess of $215,000
43
Top Heavy Defined contribution plans - What must be the minimum funding amount?
Equal to 3% of non key EE's compensation except if the key EE is less than 3%
44
Top Heavy Defined benefit plans - What must be the minimum funding amount and vesting?
2% per years of service (Max is 20%) times the EE average annual compensation AND increase vesting to either 2-6 year graduated or 3 year cliff
45
Non Top Heavy Defined benefit plans - What must be the minimum funding amount?
1.5% * by average 3 highest years of compensation * Years of service
46
Defined contribution - plan funding limits
Covered compensation of $330k
47
Defined benefit - plan funding limits payouts
Lesser of: $265k OR 100% of the average of the EE's highest consecutive years salary
48
Defined contribution - Maximum contribution for the year
Lesser of: 100% of EE compensation OR $66k (The limit consists of EE contributions ($22,500 + $7,500), ER contributions, any forfeiture
49
Pension plans - which need an need annual actuary and which only need actuary at inception?
Required annually - Defined benefit pension plan, Cash Balance pension plan // Required at inception - Target benefit pension plan (No other plans need an actuary)
50
What is social security integration?
Allocating plan contributions in favor of participants who are in excess of the social security base
51
Social Security Integration - Formula and how is permitted disparity solved?
Base rate + Permitted disparity = Excess rate //
Base rate can be anything
Permitted disarity can be double the base rate up to 5.7%
Excess rate is when you add the two
52
Social Security Integration - Excess method - what is this and who can use it?
Provides and excess benefit to those particpants whoes earnings are in excess of the social security wage base (DB and DC plans use this)
53
Social Security Integration - Offset method - what is this and who can use it?
Reduces benefit to those EE whose earnings are below the Social security wage base
54
Excess method - How the calculation works
You double the base rate up to 5.7% - then you add 5.7% instead. (Base -4%, Max - 8%) (Base - 6%, Max - 11.7%)
55
Which plans cant be integrated with Social security? 4^3STRES
401(k), 403(b), 457, Simple, traditional IRA, Roth IRA, ESOP, Sarsep,
56
Defined benefit plan - does this favor young or older participants?
Favors older
57
Defined benefit plan - Flat Amount Forumla, Flat percentage formula, Unit credit formula
Flat Amt - Equal dollar benefit // Flat % - % of salary // Unit credit - YOS x % x Salary
58
Cash Balance Pension plans - what is the vesting for this?
ONLY 3 year cliff 100% vested
59
Cash Balance Pension plans - favors younger or older?
Young
60
Cash Balance Pension plans - What is this?
Quasi-Separate accounts that gaurantee contribution rate and gaurantee earnings on the contributions
61
Money Purchase Pension Plans - Favors younger or older
Younger
62
Money Purchase Pension Plans - who bears the investment risk?
EE
63
Money Purchase Pension Plans - Separate or conmingled accounts?
Separate
64
Target Benefit Pension Plans - Who bears the investment risk?
EE
65
Target Benefit Pension Plans - actuary is needed when?
at inception of plan
66
Target Benefit Pension Plans - favors older or younger?
Older
67
Target Benefit Pension Plans - How is the contribution determined?
By participants age
68
Money Purchase Pension Plans - How is the contribution determined?
Fixed percentage mandatory up to 25%
69
Profit sharing plan contributions - they are discretionary but must be ___________
Substantial and recurring
70
What social security integration method can Defined benefit plans use?
Excess or offset
71
What social security integration method can profit sharing (DC plan) plans use?
Excess method
72
Profit sharing plans - when must the contributions be made by?
By the company's income tax return
73
New comparability plan - what does this plan take into consideration?
Dependent upon EE classification (Owner, Officer, Rank-and-file)
74
What can be attached to a profit sharing plan?
CODA/401(k) plan
75
401(k) plans - Vesting
EE - always 100% vested // ER - 2-6 graduated or 3 yr cliff
76
ADP (Actual deferral percentage) test - what is the purpose of this plan?
to ensure that HC's deferrals gap is not that big between them and the NHC
77
ACP/ADP Calcuation Chart
0-2% HC - 2x for NHC // 2%-8% HC - 2% plus ADP for NHC // 8% and over HC - 1.25x for NHC
78
If you fail the ADP/ACP tes, you can: 1)Corrective distributions, 2)Recharacterization 3)QNEC, 4)QMC
1) CD - Decrease ADP of HC 2)Rechar - Change pretax contributions to after tax contributions 3)QNEC - Increase ADP of NHC (All NHC EE) 4)QMC - Increase ADP of NHC (Only NHC EEs that have contributed)
79
ACP (Actual Contribution Percentage) Test - what does this test?
EE after tax thift contributions and ER matching contributions
80
Safe Harbor 401(k) plans - They are not requried to pass _____
ACP/ADP tests
81
Safe Harbor 401(k) plans - Non-elective contribution and matching contribution
Non-elective contribution - 3% to everyone // Matching - 100% to 3% AND 50% from 3% to 5% (4% rule)
82
Safe Harbor 401(k) plans - Vesting
Safe harbor 401(k) ER contributions are fully 100% vested
83
Stock bonus plan - What benefit doest the ER get?
Cashless tax deduction
84
NUA - what plans does this apply to?
ESOP or Stock bonus plan
85
NUA - what is the NUA portion always taxed at?
LTCG
86
NUA - what is the allocated stock given to the EE taxed at?
Ordinary income
87
Qualified plans - what are the advantages to the ER?
ER contributions are tax deductible // ER contributions are not subject to payroll taxes
88
Qualified plans - what are the advantages to the EE?
Pretax contributions // Tax deferral of earnings // ERISA protection // Lump sum distributions (NUA)
89
Qualified plans - who has an accrued benefit and who has a Account balance?
DB has Accrued benefit and DC has accrued balance
90
Defined benefit plans - Treatment of fortfeitures can be allocated to?
Reducing plan costs only!
91
Defined contribution plans - Treatment of fortfeitures can be allocated to?
Reducing plan costs OR to other plan participants
92
What DB plan is a popular choice to get rid of expensive DB plans?
Cash balance plan
93
Which entities can establish a 401(k) plan?
Corporations, partnerships, LLCs, proprietorships, tax-expempt entities
94
What kind of plan is an ESOP?
Defined contribution Profit Sharing Plan
95
What are the voting rights of an ESOP? (For Public and Private Corps)
Public - Participants have the same rights as the shareholders // Private - Participants must be allowed to vote in major corporate decisions too
96
What happens in an ESOP?
Cash gets borrowed from the bank (Leveraged ESOP) to buy the employer stock, when then gets transferred into the trust to be distributed out.
97
How much interest is deductible on the loan of an ESOP?
Anything above 35%!
98
Can an ESOP use social security integration?
It cannot
99
Can an ESOP discriminate?
Yes - it be can be age- based
100
What are the two ways to distrubute ER securities for ESOP to participant?
1) Substantially equal periodic payment requirements (5 Years over $1.33M) 2) Lump sum (NUA is involved)
101
ESOP participant protection - Put Options
EE can require that the ER repurchase the stock at FMV of distribution date (Withing 60 days of distribution date) // This reduces the EE risk but the ER needs to have existing cash to fulfull it (If needed)
102
ESOP - Qualified participant
1) at least 55 2) 10 completed years of participation in the plan
103
ESOP -Diversification requirement - How much can they diversify?
1) 25% for first 5 years of qualified election period 2) 50% for the 6th year
104
ESOP -Diversification requirement - What can it be diversified to?
Distibution, transfer to another qualified plan or offering 3 investment options in the ESOP
105
Pension plan - at what age can participants withdrawal from plan?
After 59 1/2
106
Pension plan - When can EE make distributions?
After 59 1/2, participant death, disability, termination of service BEFORE and AFTER Full retirement age
107
Pension Plan - when terminated from service BEFORE normal retirement age, what options with existing assets?
you can do lump sum, rollover, or leave assets in plan (Value must be more than $5,000)
108
Pension Plan - when participant dies, what options with existing assets?
Can go to beneficiary, Participant estate, qualified preretirement survivor annuity (QPSA)
109
Qualified preretirement survivor annuity (QPSA) - what is this?
It is an annuity benefit going to the participant spouse if the working spouse dies before the EE reaches its full retirment age
110
Pension Plan - when terminated from service AFTER normal retirement age, what options with existing assets?
Qualified joint survivor annuity (QJSA), Lump sum distribution, Rollover plan assets to IRA or other qualified plan
111
Qualified joint survivor annuity (QJSA) - what is this?
An annuity payout to the participant and his spouse as long as the both of them live. THERE is an election to do a single life annuity just on the participant (Higher payout) but more risk if participant dies
112
What must happen to elect a single life annuity instead of a qualified joint survivor annuity?
Non participant spouse must sign it and be notarized
113
Profit sharing plans - how long until they can make in service withdrawals?
2 Years
114
Profit sharing plans - At termination of service, what can they do with the assets?
Lump Sum distribution, Rollover to IRA or qualified plan or purchase an annuity
115
Distributions of qualified plans taxed ordinary income UNLESS it is
1) Direct Rollovers 2) the adjusted basis coming out of the plan 3) Lump sum distributions (NUA) 4) QDRO
116
When you do a rollover to an IRA - you lose what 2 big things?
1) ERISA protection (Although you do get other protection) 2) NUA
117
Rollovers to IRAs - what is a direct rollover?
Straight to the account - goes directly to the receiving account (No income tax withholding)
118
Rollovers to IRAs - what is a indirect rollover?
A distribution to the participant (Check going to them first) and then a later transfer to the other account (Mandatory 20% income tax withholding)
119
Indirect rollover - how long until they have to redeposit it all?
60 days
120
Plan Loans - what is the amounts that you can get loaned out to you? For Normal Loans
May not exeed the lessor of: $50,000 or 1/2 the participants vested account balance UNLESS the account balance is under $20k in which you can take the lesser of $10k or the vested account balance.
121
Plan Loans - the loan you are eligble to take out is reduced by the loan balance by _______
withing the previous 12 month period
122
Plan Loans - what is the amounts that you can get loaned out to you? For QUALIFIED DISASTER AREA
The lesser of: $100k (Which is doubled the amount that can be taken out of a normal loan) OR 1/2 the participant vested account balance
123
Plan Loans - what is the repayment period and how often payments are? (For normal and purchasing principal residence)
Normal - 5 years & Home purchase - 30 years // Payments must happen quarterly
124
Plan loans - what happens to loan if the person fails to repay the loan?
It counts as a taxable distribution (Cancellation of debt)
125
Plan loans - what happens to loan if the person gets terminated from employment?
Causes the loan to become due
126
10% Early withdrawals penalty exceptions - BOTH Qualified plans and IRAs
1)59 1/2 2)Death, disability 3)Substantially equal periodic payment 4)Medical expenses in excess of Schedule A 5)Federal tax levy 6)Birth or legal adoption 6)terminal illness 7) $22k if qualifed disaster
127
10% Early withdrawals penalty exceptions - Qualified plans ONLY
1)Separation from service at age 55 2)Separation of service 50 or with 25 years of service for PUBLIC SAFETY EE (Firefighter, police) 3)QDRO
128
10% Early withdrawals penalty exceptions - IRA ONLY
1)Higher education costs 2) Health insurance for unemployed 3)First time home purchase ($10,000)
129
Qualified plans - Substantially equal periodic payments - How often are payments // How are these calculated // when do they start?SKIP
Payments are made annually // calculated of life expectancy of lives // Start after separation of service
130
Qualified plans - Substantially equal periodic payments - Differrent ways to calculate? 3 methods
1)RMD (Slowest) 2) Fixed amortization method 3) Fixed Annuitization method [Method 2 and 3 are faster than RMD]
131
When do RMDs start - They must begin at ___ if they turn 72 BEFORE 1/1/23 AND they begin at ____ if they turn 72 AFTER 1/1/23
If before - 72 // if after 73
132
When does the first RMD payment begin?
by April 1st of the following year
133
Exception for not having to take RMD's (ie. Delaying) (This exception does not apply to SEPS or SIMPLE IRAs)
Participant (not >5% owner) who is still employed can delay until the participant terminates the employment
134
RMD Equation
(Fair market value of participants Account at December 31st of the preceding year) / (Table number based on age)
135
Portfolio withdrawal strategies 1)Flat amount 2)Inflation-adjusted 3)Performance-based
1)Flat - fixed throughout lifetime 2)Inflation - Annual income increased based on inflation 3)Performance - based on performance of investment portfolio
136
Distributions due to death - What is a designated beneficiary?
Anyone who isnt a Eligible designated beneficiary
137
Distributions due to death - Designated beneficiary - when does the balance need to be paid out by?
10 years
138
Distributions due to death - What is a eligible designated beneficiary?
Surviving Spouse // Child of IRA owner who has not reached age of majority (21) // Disabled or chronically ill (2/6 ADL) individual // any individual who is not more than 10 years younger than the EE or IRA owner
139
Distributions due to death - Eligible Designated beneficiary - when does the balance need to be paid out by?
May be distributed over the eligible designated beneficiary's life // Spouse can roll it over into their IRA // When Child gets to age of majority (21), they become designated beneficiary
140
Distributions due to death - What is a non-designated beneficiary?
Can be an estate, charity or some trusts
141
Distributions due to death - Non-Designated beneficiary - when does the balance need to be paid out by?
After RMD - Take RMD for year of death and continue // Before RMD - Entire balance by 5th year following year of death
142
IRA Contibution limited to the lesser of:
$6,500 ($7,500 for catch up) or individuals earned income
143
What is earned income?
W-2 Income, Income as general partner, Alimony (If before 12/31/18) and Schedule C net income
144
What if a spouse does not have an income? Can they still contribute?
They can still contribute if the account owner has enough income ($13,000 combined for both spouses to contribute)
145
What happens if you have excess contributions in an IRA?
6% excise tax for each year that the excess is still in the account
146
When must IRA contriutions must be done in by?
April 15th of the following year (No extensions)
147
What is the deduction on your IRA contribution based on?
Income and Qualified plan status
148
Deductible Traditional IRA limit - If not a participant, what is the AGI limit for someone who wants to deduct the full amount?
Unlimited amount of money if not active participant
149
Deductible Traditional IRA limit - What is an active participant for a defined benefit plan?
Someone that participates OR meets the eligibility requirements of the plan
150
Deductible Traditional IRA limit - What is an active participant for a defined conrtibution plan?
Receives a contribution to the qualified plan during the year (Fortfeitures are included)
151
Nondectible traditional IRA contributions - How is this taxed?
Basis is tax free but the earnings are tax-deferred growth
152
Nondectible traditional IRA contributions - How are distributions will be returned in the form of…
Partial return of capital and partial earnings
153
Nondectible traditional IRA contributions - Are there phase out limits to how much you can put in here?
No (As long as you have earned income)
154
Nondectible traditional IRA contributions - Distributions of adjusted basis formula
(Adjusted tax basis before withdrawal) / (FMV of account at withdrawal)
155
Roth IRAs - what is the contribution limited by?
Based on AGI (Single - $138k to $153) (MFJ - $218k to $228k)
156
When you convert a traditional IRA to a Roth IRA - what does this create?
creates a taxable event
157
Recharacterized contributions - what is this?
When you change the contribution from an IRA to a Roth IRA (Or vice versa) for that one year
158
Roth IRA qualified distributions - how are these taxed?
Income tax free and not subject to 10% early withdrawal penalty
159
Roth IRA qualified distributions - Requirements? (There are 2)
Distribution is made after 5 years after the first contribution AND Either 59 1/2, death, disability or first time home purchase
160
Roth IRA NON-qualified distributions - How are contributions, conversions and earnings taxed?
(Contributions = T-No,10%-No)(Conversions = T-No,10%-Yes, if within 5 years of conversion)(Earnings = T-Yes,10%-Yes)
161
Roth 401k vs Roth IRA - which does NOT have a phase out?
Roth 401k
162
Roth 401k vs Roth IRA - Which one does not have RMD
Roth IRA
163
Roth 401k - How is a nonqualifying distribution calculated? (Ie Roth IRA are done by FIFO - this is different from Roth 401k)
Prorata - Exclusion ratio
164
IRAs- what are not permited investments?
Life insurance, collectibles, Other country coins (Maple leafs)
165
Rollovers from Qualified plans to IRAs - what do you lose?
Lose lump sum distribution (NUA treatment), You cant do loans anymore, and lose ERISA protection
166
SEPs - is this a qualified or unqualified plan?
Unqualified plan
167
SEPs - what account is established in order to have a SEP?
IRA Account
168
SEPs - ER must provided benefits to all Ees who meet the following requirements
Age 21 or older, performance of services last 3 out of 5 years, and $750 compensation during the year
169
SEPs - ER must complete the following steps by the tax return (plus extensions) to create a SEP plan
1)Complete form agreement 2)Give eligible employees notice 3)Open Sep-IRA accounts for them
170
SEPs - Secure 2.0 act of 2022 - What did this add for SEPs? (ie. Domestic employees AND ability to change contributions to ___)
Domestic employees are nannies and employees can change their employer contribution to a Roth account
171
SEPs - Who contributes into a SEP?
Employer Only! (No EE contribution)
172
SEPs - contribution max amount by ER?
Lesser of: 25% of EE covered compensation or $66,000
173
SEPs - Can SEPs integrate with Social security integration?
Yes
174
SEPs - What is the self employed contribution rate?
(Contribution rate to other participants) / (1 + Contribution rate to other participants)
175
SEPs - What is the max self empoyed contribution rate?
20% (.25)/(1+.25)
176
SEPs - Vesting schedule for EE?
EEs are fully 100% vested
177
SIMPLEs - What types of business are these supposed to be for?
For small employers (100 or fewer Ees who each earned at least $5,000 in any 2 preceding years or $5,000 in current year)
178
SIMPLEs - Can an employer have another plan?
No - this can be the only plan (No qualified plans)
179
SIMPLEs - Vesting schedule for EE?
100% for EE and ER contributions if SIMPLE IRA // If SIMPLE 401(k) - then vested
180
SIMPLEs - What is a major difference between SIMPLE and SEP plans for contributions? (On who gives it)
SIMPLE - EE and ER can contribute // SEP - Only ER can contribute
181
SIMPLEs - What is the max amount of elective deferral for SIMPLE?
Maximum - $15,500 plus $3,500 as catch up!
182
SIMPLEs - ER contributions - what are the two options they can elect?
1)Employer Matching contributions Dollar for dollar match up to 3% (Can be reduced but not permanent) 2)Nonelective ER Contributions - 2% of COVERED compensation to each eligible EE
183
SIMPLEs - How are the contributions tax?
They are taxed deductible and tax deferred (Subject to payroll taxes)
184
SIMPLEs - How are withdrawals taxed and penalized?
Taxed at ordinary income AND penalty of 25% if withdrawal is within first two years of EE participation in plan
185
SIMPLE 401(k) Plans - what are the 1 main difference between SIMPLE 401(k) and SIMPLE IRAs?
1) If 401(k), you can take loan
186
403(b) Plans - Who are these for?
Public schools //.Education Organziations // Tax-Excempt organizations (Religious)
187
403(b) Plans - ERISA applies who which type of organizations that use 403(b)? Church, 501©(3), Governmental
501©(3) organizations (Nonprofits) UNLESS ER involvement is minimal and offers salary reduction agreement // Does not apply to Governmental and Church related 403(b)
188
403(b) Plans - IF ERISA does apply - what must it have? (2 Tests and must offer something)
Tests: 1) Nondiscimination test 2)matching contribution ACP test // Must meet: QPSA & QJSA
189
403(b) Plans - Eligibility?
Age 21 and one year of service
190
403(b) Plans - Contirbutions by EE or ER? (Amounts)
(Similar to 401(k) - EE deferrals - $22,500 + $7,500 for catch up (If you have other CODA plans - this can be eaten up!) // ER can do matching or non-elective contribution
191
403(b) Plans - Vesting for EE?
100% for EE // ER can require vesting on their contributions
192
403(b) Plans - Catch up contributions? How much and requirements?
Permits additonal $15,000 ($3,000 per year) unuesed deferrasl // Requirements - 15 years of service to employer (Age does not matter)
193
403(b) Plans - Catch up contributions for which organizations? HER
Health, Education, Religious
194
403(b) Plans - What are the 3 investments this can be invested into?
Insurance Annuity Contracts, Mutual funds, Collective investment trusts (Proprietary funds)
195
403(b) Plans - To be able to take a loan out of an 403(b) plan, it need to be from ____ plans.
ERISA
196
403(b) Plans - Do they have to do an RMD?
Yes (like IRAs and qualified plans)
197
ESOPs- Requirements to qualify for nonrecognition of gain treatment
1)ESOP must own at least 30% after sale 2)Sellers must reinvest within 12 months and hold onto securities for three years 2)ESOP must have not class of stock tradeable on the securities market 3)Seller or relatives of sellers are prevented from receiving allocations 4)ESOP cannot sell stock for 3 years 5)Stock sold to ESOP must be common or convertible and seller owned it for alteast 3 years prior
198
For IRAs to avoid the 10% penalty, they say "HIDE ME"
Home purchase, health Insurance, Death and disability, higher Ed, medical expenses, Equal periodic payments …. And of course age
199
Prohibited transactions that can hurt the plan or plan participants
Transactions between disqualified persons (Fiduciary, Owner, ER or famiy or any of these) and doing: 1)Self benefit of disqualified person, 2)Self dealing, 3)Cash for working with people, 4)Lending/borrowing
200
What is not earned income?
Earnings from property (Rental, dividend income), Capital gains, pension and annuity income, unemployment benefits, social security benefits, workers compensation, limited partner income
201
What is not allowed in an IRA?
Insurance and collectibles! (Gold, silver are permitted)
202
Prohibited transactions of IRA
1)Selling or leasing property to IRA 2)Lending/Borrowing money to IRA 3)Receiving too much compensation for managing IRA 4)IRA as a loan 5)Buying property for personal use
203
457 Plans - Is this a qualified or Non-qualified plan?
Nonqualified plan
204
457 Plans - What are the three types of 457 plans?
1) Public 457(b), Private 457(b), 457(f)
205
457 Plans - Out of the three 457 plans, which ware eligible/ineligble?
Eligible - Public/Prive 547(b) // ineligible - 457(f) (Which means only some people can do this plan ie. They can discriminate)
206
457 Plans - Out of the three 457 plans, which have assets protected by trust?
Public 457(b) plans are protected by trust
207
457 Plans - Out of the three 457 plans, which has an unlimited amount of contribution limit?
457(f)
208
457 Plans - Who can the participants can be in public 457(b) plan?
All EEs
209
457 Plans - Who can the participants can be in private 457(b) plan?
Key management and highly compensated AND if this a church, it can be all employees
210
457 Plans - Who can the participants can be in public 457(b) plan?
all EE in public
211
457 Plans - What can a public 457(b) plan rollover into?
Permitted into 401(k), 403(b), 457(b), IRA Plans
212
457 Plans - What can a private 457(b) plan rollover into?
Only to other 457(b) plans
213
457 Plans - What can a private 457(f) plan rollover into?
There are no permitted rollovers allowable in a 457(f) plan
214
457 Plans - Special catch-up amount and requirements
Able to defer an additional $22,500 of prior unused deferrals ($45,000 max total) (You cannot double dip this the 50 and over catch-up) // has to be 3 years prior to retirement
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Nonqualified plans - to have tax deferral, What does substantial risk of fortfeiture and no constructive receipt mean?
(once both of these go - taxable income to EE) substantial risk of fortfeiture - Either there is a vesting component or risk of account from bankruptcy // Constructive reciept - cant have access to the money
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Nonqualified plans - Can you discriminate? When can the ER take the take deduction?
1) Yes they can discriminate to give more benefits to key employees 2) No deduction until the money gets paid to the EE
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Nonqualified plans - What are the two funded trusts called?
Secular Trusts and Rabbi Trusts (Preferred)
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Secular Trust - What characteristic prevents the funds from being taxed? When does it get taxed?
There is a vesting period // when the vesting period ends (then the ER gets the deduction)
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Secular Trust - is there a substantial risk of forfeiture?
No
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Rabbi Trust - is there a substantial risk of forfeiture?
Yes - the creditors of the ER can come after this if the company would go bankrupt
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Phantom Stock plans - What kind of plan is this?
Nonqualified defined contribution plan
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Phantom Stock plans - How des this work?
There is no actual stock issued but the ER give fictional shares to the EE - As time goes on, the EE can cash in on this and cash is given to the EE
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ISOs/NQSOs - What is the tax implications at the grant date?
No taxable income
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ISOs - what is the max an EE can get in $?
$100,000
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ISOs - If there is more than $100,000 of granted to executive, what happens?
The excess are treated as NQSO
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ISOs - to get preferable tax treatment, how long must the EE hold this option?
Must hold the stock onto 1) 2 years from date of grant 2) 1 year from date of exercise
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Stock options - What is the bargain element?
FMV at exercise - FMV at grant
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ISOs - when does AMT become a postive and negative adjustment?
Positive adjustment - When you exercise the option // Negative adjustment - when you sale the stock
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ISOs - What is the tax treatment?
Long term capital gain for all of it if you hold it for the period requirements!
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Disqualifying Disposition - How does this occur?
(You lose favorable tax treatment) When you have an ISO and you sell the stock before 2 years from grant date or 1 year exercise date
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Disqualifying Disposition - What are the tax implications? For EE and ER
EE - Appreciation over exercise price is ordinary income (Instead of capital gains) // ER - There is a tax deduction equal to the income
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Cashless Exercise - What is this?
When the executive does not have enough money exercise the option so they borrow cash from a (third party)
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Cashless Exercise - what are the tax implications of this?
the option becomes a disqualifying disposition and the bargain element is now W-2 income (Instead of waiting and getting capital gain treatment)
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NQSOs - Are there any holding period requirments?
No
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NQSOs - What are the tax implications?
Exercise - W-2 income for the bargain element (ER deduction) // Sale of stock - Capital gain/loss from with holding period from date of exercise
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Gifting ISO/NQSO - Can you gift these?
ISOs - not unexercised ISOs Can only be gifted if this is after exercise // NQSOs - Yes (EE will be taxed, ER deduction)
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Gifting NQSO - What is the tax implications for EE/ER and what is the donee's basis?
EE - will have W-2 income // ER - tax deduction // Donee Basis - Exercise price + W-2 amount
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SARs - What happens in this?
Rights that grant the holder a cash amount equal to the excess of FMV
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SARs (Stock appreciation rights)- What are the tax implications for EE and ER?
EE - W-2 income for excess value above exercise price ER - Tax Deduction for W-2 amount
(No taxation at grant -Unless section 83(b) is selected)
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Restricted Stock plans - What does the EE get?
The EE gets shares of employer stock (Without paying for the stock)
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Restricted Stock plans - What makes this "Restricted?"
This plan is usually on a vesting schedule and there can be a substantial risk of fortfeiture (bankruptcy/creditors)
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Restricted Stock plans - What is the intent of this?
Increases employee retention
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IRC Section 83(b) - Overall, what is this?
An election to include the value of stock as W-2 income right away (When its given to the EE), then any gain over grant date FMV will be taxed at capital gains (Holding period starts whne the W-2 income was included)
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IRC Section 83(b) - How long will the EE have to make the election?
30 Days (Files statement with IRS)
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Employee Stock Purchase Plan - Overall, what is this?
Allows all EE's to purchase ER securities at a discount price no greater than 15% (Of stock on date or average price)
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Employee Stock Purchase Plan - What is the limit per employee?
$25,000 per year
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Employee Stock Purchase Plan - What are the tax implications for the holding requirements?
1) If held 2 year from grant & 1 year from exercise (Like ISO) - the discount is taxed at Ordinary income (no payroll tax) 2) If not held for that required amount, taxed at W-2 Income (OI + Payroll tax) // After exercise, gain/lose is SL/LT (Depending on how long after exercise date)
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VEBA - Overall, what is this? (Purpose and tax implications of income on the contributions to VEBA)
Tax exempt trust vehicle specifically for reimbursements for healthcare costs (ER deductions on contributions and EE no recognition of income)
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LI Policy Ownership - Endorsement Method vs Collateral assignment, who owns the policy?
Endorsement method - ER owns LI policy (employeR owns if endoRsement) / Collateral method - EE owns LI Policy
