Retirement

Question 1

Pension

Answer 1

= Defined Benefit Plan
= Defined Contribution Plan

Question 2

All Defined Benefit Plans

Answer 2

= Pension Plans (Defined Benefit Pension Plan or Cash Balance Pension Plan)

Employer assumes Investment Risk
Annual contribution limit = no less than unfunded current liability
Forfeitures reduce plan costs only
PBGC YES… except less than 25 employees
Commingles accounts, no separate
credit given fro prior years worked

Max allowable benefit payable is greater of 100% salary or 265k annually
Less predictable costs compared to DCP

Question 3

All Defined Contribution Plans

Answer 3

= Pension Plans (Money Purchase Pension plan or Target Benefit Pension Plan)
= Profit Sharing

25% total employee covered comp.
Employee assumes investment risk
Forfeitures reduce plan costs or allocation to others
PBGC NO
Separate Accounts
No credit given fro prior years worked

Question 4

All Profit Sharing Plans

Answer 4

= Defined Contribution Plan only

Question 5

Qualified Plans

Answer 5

Provide Employers:
Current Income Tax Deduction (only when the employee HAS the income)
Payroll Tax Savings

Provide Employees:
Income tax deferrals
payroll tax savings
Federally provided creditor protection

Negatives of Q Plans:
Cost and compliance

Employer is limited to 25% of total comp covered paid to employee’s

*Assets are protected against Chapter 7 (anti-alienation)

Question 6

Payroll Taxes

Answer 6

In addition to income taxes paid…
The employee is subject to 6.2% OASDI up to 160,200.
And 1.45% tax for Medicare on 100% of compensation.

All in = 7.65%* employee side.

The Employer is required to MATCH any payroll taxes paid by the employee.

Creating a total 12.4% OASDI up to 160,200 and 2.9% medicare on 100% of compensation.

All in for both = 15.3% OASDI & Medicare

*both employee and employer are EXEMPT from payroll taxes on employer contributions to a qualified retirement plan.

Plus… additional medicare tax of 0.9% on all income over MFJ 250k or Single 200k
* Distributions from a qualified retirement plan will NOT be subject to payroll taxes.

Question 7

Traditional IRA

Answer 7

**Assets are NOT protected against Chapter 7 (anti-alienation)

Question 8

Roth IRA

Answer 8

**Assets are NOT protected against Chapter 7 (anti-alienation)

Question 9

SEP IRA

Answer 9

**Assets are NOT protected against Chapter 7 (anti-alienation)

Question 10

SIMPLE IRA

Answer 10

**Assets are NOT protected against Chapter 7 (anti-alienation)

Question 11

Money Purchase Pension Plan

Question 12

Coverage Tests

Answer 12

To be qualified… must meet one of the three tests.

General Rule: Plan Must Cover at least 70% of NHC Employee’s

General Safe Harbor Test

Ratio Percentage Test

Average Benefits Test

Additionally… DBP’s must ALSO meet the 50/40 Test**

Question 13

Both Eligible Employees:

Highly Compensated Employee

NonHighly Compensated Employee

Answer 13

HCE = Greater than 5% Owner in company (stock or capital) during or preceding the plan year… (also counting family’s assets as ownership - children, parents, wife, grandchildren).

OR

Employee compensation exceeding 150,000 current plan year

OR

Employee compensation exceeding 135,000 (2022) for the prior plan year.

Question 14

General Safe Harbor Test

Answer 14

General Rule: Plan Must Cover at least 70% of Non-excludable (eligible) NHC Employee’s…

If this is accurate… then move on!

i.e.

125 Total
100 Eligible

75 NHC
25 HC

Plan Benefits:
21 HC
55 NHC

Calculation:
100/125 = .80%
***55/75 = .73%

Question 15

Ratio Percentage Test

Answer 15

% NHC Covered / % of HC Covered (greater or equal to) 70%*

• A DB plan must also pass 50/40

i.e.

Total 100 HNC
Covered 60 NHC

= 60% NHC

50 HC
40 HC Covered

80% HC

60/80 = 75% PASSES

Question 16

Average Benefits Test (Both Tests: average bene & non discrimination classification test)

Answer 16

1. Average Benefits Test

AB% of NHC / AB% of HC

(greater or equal to) 70%*

2. Non Discriminatory Test

• A DB plan must also pass 50/40

Question 17

Cash Balance Plans

Answer 17

use a 3 year vesting schedule

Question 18

Profit Sharing

Answer 18

Employer Only Contributions

Amounts contributed are NOT subject to payroll tax for the employer

Amounts contributed are not included in employee’s gross income

Question 19

Cash Balance Pension Plan (DBP - Qualified Plan)

Answer 19

Benefits younger, guarantee return, uses a three year cliff vesting.

Many same characteristics of a a defined contribution plan but a cash balance plan provides specific defined retirement benefits.

Question 20

Money Purchase Pension Plan (DCP - Qualified Plan)

Answer 20

DCP - Benefits Younger… is a NON Contributory Plan.

Each year employer makes a PROMISE to contribute specified % each plan year… not required to provided specific retirement benefit.

Employee chooses investments. Separate Accounts of each client.

Contribution Limit: Employer cannot deduct over 25% of employee’s total covered compensation.

Limited: To the lesser of 100% of participants compensation or 66k for 2023.

DCP: Subject to shorter vesting plans… 2-6 graded or 3 cliff.

Question 21

Target Benefit Pension Plan (Type of Money Purchase DCP)

Answer 21

Separate Accounts
Employee Manages Investments

Older contributes more to make up for gap in retirement goal

Question 22

RMD’s

Answer 22

Do not apply to Roth IRAs

Do apply to 401k, IRA, 403b, SEP, SIMPLE, 457, and inherited Roth IRA’s.

Attain 70.5 (12/31/2019 - 1/1/2023) must take RMD’s at 72.

Must take RMD’s at 73 if attained 72 after 12/31/2022…

i.e. Turned 72 in November of this year… His first distribution will occur before April one of next year.

Exception to RMD’s: Still working. If you own more than 5%.. then regardless must take RMD’s.

Question 22

Exceptions to 10% Qualified Plan Distribution Penalty:

Answer 22

IRA’s:
- First Home
- Higher Education
- Health Insurance
- Death Disabiltiy
- Medical Expenses over 7.5
Equal Periodic Payments (72t)
separation from service, age, terminal illness, health disability,

401k’s:
- Medical expenses 72t, separation from service, health, terminal, age. QDRO. disaster and tax levies,

Question 22

Net Unrealized Appreciation (NAU) Inherited Securities

Answer 22

after date of death gains are taxed as short term cap gains.. order income.

NAU inherited is taxed as long term capital gains.

When inheriting stock with NAU treatment… bene assumes FMV - unused NUA.

Different than Inherited IRA’s or inherited RE property.

Question 23

Social Security Dependent Benefits

Answer 23

Surviving Dependent
Unmarried Child of Decedent
Disabled or retired insured worker

the Dependent qualified for SS if:

*Under 19 and full time elementary/secondary school student.
*Age 18 or over with disability that occurred before age 22.

Question 24

Lump Sum Death Benefit

Answer 24

$255 for spouse living in same household or dependent. One but not both.

Question 25

Worker Benefits (Social Security)

Answer 25

Retired and Fully Insured:

*entitled to receive benefits at Age 62 or older
*Under age 65 & has been disabled for 12 months, expected 12 month disability, or disability that will end in death…. AND has completed a 5 month waiting period.

Although railroad employees & dependents are excluded from SS coverage… they ARE eligible for MEDICARE.

Question 26

Social Security Spousal Benefits

Answer 26

Spouse of retired or disabled worker.

Must meet ANY of the following:

*At least Age 62 or older (not remarried) and divorced for minimum 2 years - even if worker claims no benefits.
*Has child age 16 or under.
*Child any age with disability before 22.

Divorced wives included (worker dies) she must be over 60.

Question 27

Social Security Act Coverage (4)

Answer 27

OASDI
Medicare
Federal Unemployment
Supplemental Security Income SSI

Question 28

Retirement Needs Analysis

Answer 28

1.) Inflate the annual need in todays dollars (solving for FV)
- Determines the funds needed for the first year
* Accumulate for 15 years (no inflation adjusted return - inflation only i/yr).

2.) Determine what lump sum is is needed at the beginning of retirement (solving for PV)
- amount needed to FUND the presumed years … with INFLATION adjustment.
*I/yr is the real rate of return (1.08/1.03)…

Question 29

How much should his “monthly” payment be?

Answer 29

Begin Mode
12 p/yr***

Question 30

PIA & FRA

Retirement Benefits before full age

Answer 30

Primary insurance amount = 1000
Full Retirement Age (not maxed… but you can start taking at age 62)

(24/180 x 1000) - 1000
= $866 instead of 1000 for life from taking SS two years early.

Workers who have attained their FRA… may keep all benefits - no matter how much is earned. If a worker is younger than FRA.. there is a limit to how much that worker can earn*** and still receive full SS benefits.

Question 31

Taxation of Social Security

Answer 31

Calculation: Persons income PLUS 1/2 their Social security = base. (Whether SS income is included or not in taxable income)

*50% of THE ENTIRE Social Security is included taxable income over:
Single: 25,000
MFJ: 32,000

*85% of THE ENTIRE Social Security benefit is included in taxable income over:
Single: 34,000
MFJ: 44,000

• Muni bond interest is CONSIDERED INCOME (added to AGI/provisional income) for purposes of determining taxation of Social Security Benefits.

Question 32

Qualified Plans

Answer 32

DEFINED CONTRIBUTION PLANS
- All are effected by investment returns, years to retirement, salary levels, employer contributions, forfeitures MAY be reallocated.)

1. Money Purchase (Defined Contribution)
   330k accounted, employer deduct 25%, 66k cap
   Annual fixed contributions form employer
   stable work force
   simple to administer
   favors young.
   *** Unlike Cash balance plan (defined benefit) Money Purchase plans do not require employer guarantee’s.
   *Employer will make reasonable annual contributions, fairly easy set up
   *Money Purchase received fixed employer contributions.

2.Target Benefit Pension Plan:
Employer hopes to provide benefit (target) at retirement.
Employer does not guarantee. (employee assumes invest risk)
66k cap, account balance, no annual actuary required.
*Favors older
**fixed mandatory contributions
*actuary determines initial contribution level
*Target benefit plan is an alternative to a defined benefit that provides adequate retirement to older employees but with the cost and simplicity of a defined contribution plan.

3. 401k/Profit Sharing
   “Cash or deferred arrangement”
   401k is a provision added to a qualified profit sharing or stock bonus plan.
   Deferral amount IS SUBJECT to FICA/FUCA taxes but NOT federal withholding.
   22,500 + 7500 catch up on elective deferrals.
   *Employer wants to provide qualified retirement plan with minimal expenses.
   *Employee’s want tax deferrals/deduction

• Safe-harbor 401k = automatically satisfies nondiscrimination tests involving HCE’s with either an employer matching contribution or a non-elective contribution.

4. Profit Sharing:
   Flexible employer contributions
   25% cap on compensation
   Forfeitures are normally reallocated to plan participants.
   *Unstable financially
   *Employer wants a Qualified plan with an incentive feature.
   *Favors young well paid and longer time horizon
   *May reallocate forfeitures.
   *Disadvantage = unpredictable retirement benefits
5. Stock Bonus/ESOP
   Stock bonus plans and ESOP’s are variations of profit sharing plans.
   Stock bonus MAY invest plan assets in the company stock.
   ESOP MUST invest primarily in the companies STOCK.
   *When a company wants to broaden ownership of its stock/create a market.
   *provide liquidity for investors
   *Wants employees to feel “ownership” and provide them tax advantaged means to acquire company stock.

ESOP*** is really a stock bonus plan that the employer can use to finance operations (while profit sharing classic is not) as a strategy for borrowing money from a bank or other financial institution. When an ESOP enables the employer to borrow money, it is knows as a leveraged ESOP.
*Porhibited from establishing an ESOP? Partnerships (KEOGH). MUST BE a corporation: S Corp, Public Traded Corp, Closely held C Corp.
*Contributions are typically made in cash - not stock.

DEFINED BENEFIT PLANS

Qualified Employer Pension Plan.
Guarantees certain amount at requirement - for life.
*Employer wants to maximize plan contributions to older employees
*Older controlling employee wants to maximize tax-deferred savings for himself
*Max benefit = 265k or 100% of employee’s compensation.

Unit Benefit: Most frequently used, aka percentage of earnings, factors both service and earnings,
i.e. 1.5%of earnings each year added. i.e. Dave annual compensation = 100,000, 1.5%, 30 years = 1.4 x 30 = 45% of 100k, annual pension = $45,000

Final Average Method: Earnings are averaged over number of years.
usually 3-5 years prior to retirement. Only first 330k ins taken into account. Max benefit is 265k.

1.) Defined Benefit Pension
Required PBGC
Allow credits for past service (initial set up).

2.) Cash Balance Plan
A hypothetical individual account for each participant. Funded with interest credits. The return’s can therefore increase or decrease the employers payment liability.
Forfeitures MUST be used to reduce employer contributions.
Required PBGC
Allow credits for past service (initial set up).
Employer GUARANTEE’S contribution level and minimum rate of return.
* Employers use when looking for a less expensive and simpler fedinef benefit plan.
When covered to cash balance plan… hurts older employers. Favors younger.

Question 33

Non Qualified Retirement Plans

Answer 33

SEP (Pension)
SIMPLE
SARSEP
Thrift
403b

Question 33

DCP Integration

Answer 33

Any dollar amount up to social security wage base $160,200

Can be used in Target Benefit, money purchase, profit sharing, stock bonus, & SEP.
NOT AN ESOP or SIMPLE

It allows the highly compensated employees to maximize the company contributions 66k and minimize the non highly compensated employee.

Max permitted disparity for an integrated money purchase? 5.7% lesser to floor base contribution***

Profit Sharing allocation formula:
* may allocate on a pro rata basis
*May discriminate - favor HCE
May Skew contributions to specific

Question 34

Excess Method for permitted disparity

Answer 34

Lesser of the base benefit or 26.25%

Base = 20%… the permitted disparity = 20%
Base = 30%… the permitted disparity = 26.25%

Question 35

HCE & Key Employee

Answer 35

HCE = related to plan discrimination in ADP/ACP testing

• Greater 5% Owner OR Employee over 150k in preceding year

Key Employee = related to vesting (ANY OF THESE)
- Greater 5% owner
- Officer AND compensation greater than 215k
- Greater 1% owner AND compensation greater 150k

Question 37

Top Heavy & ADP/ACP

Answer 37

Top Heavy is when greater than 60% of benefits are allocated to KEY employees.

Calculation:

330k (Cap) each ALL TOP HEAVY EMPLOYEE ALLOCATIONS / Total Eligible Comp (non top heavy employee compensation = under 60% for not to be top heavy

Eligibility rules apply in accounting

Question 38

Vesting

Answer 38

Faster:
Top Heavy DB Plans
All Defined Contribution Plans
= 3 cliff & 2-6 graded & 100 vested with a 2 year eligibility

Slower:
Non Top Heavy BD Plans only
5 year cliff, 3-7 graded, 100 vested with a 2 year eligibility

Question 39

Elective Deferrals

Answer 39

SIMPLE & another SIMPLE Max = 15,500 MAX + 3,500 Catch Up 50+

John can do 6,500 into a SIMPLE…. but only another 16,000 into separate 401k. Max 22,500 if they are related***.

If the employers are UNRELATED….. John’s ABC company Money Purchase Plan can accept 36,000 contribution AND his XYZ Company’s Money Purchase Plans 40,000 contribution.

Question 39

Keogh

Answer 39

Qualified retirement plan

Sole Proprietorships
Partnerships

Keogh may operate as:
Defined Benefit Plan
Money Purchase
Profit Sharing

Question 40

Schedule C Income & Retirement Contributions***

Money Purchase
Profit Sharing
SEP Self Employment

Answer 40

On 1040

Income/Loss reportable from Sole Proprietorship.

*The owner employee contribution benefit is based on NET EARNINGS, not salary.

*Net earned income is owners net income after deductions for non-owner employee contributions.

IRS ruled self employment tax must be computed and a deduction of one-half of the self employment tax must be taken before determining the deductible contribution. (** 92.35 x .0765)

i.e. *******
George is a Sole Proprietor
Has a 25% money purchase plan.
Will produce 50,000 in Schedule C Earnings.
What amount can he CONTRIBUTE TO HIS PROFIT SHARING/KEOGH PLAN/SELF EMPLOYED SEP:

50,000 x .1859 = $9,295

SHORTCUT CALC:
Multiply by .1212 for 15%
Multiply by .1859 for 25%

Question 41

IRA Contribution Deductibility

Answer 41

IRA Contribution = Anyone with Earned income. Alimony & separate counts as income for IRA deductibility.

S Corp and Deferred Comp sources are not earned income.

Plans that effect deductibility include: Qualified Plans, SIMPLE plans, SEP, TSA’s, Union Plans. NOT 457’s**.

Always deductible (not subject to AGI limits)
** Neither Spouse has 401k
** A single person does not have 401k

MFJ Phase out deductibility: 116 - 136 …. Single phaseout deductibility: 73 - 83

*If one spouse is active participant, other spouse is not, the NON ACTIVE can make a deductible contribution if the couples AGI is less than 218 - 228.

Question 46

ISO Holding Period Requirements***

Answer 46

ISO (Qualified Options) *** ISO’s must satisfy numbers IRC Conditions. In return, the IRS levies NO INCOME TAX when options are GRANTED or EXERCISED. Therefore gains are LTCG rates.

When Exercised:
ISO = no regular TAX
NSO = subject to regular TAX.

NSO’s have NO HOLDING PERIOD REQUIREMENTS.
NSO: Upon Exercise… income tax is due on any gains from the FMV & strike price. If the owner holds onto the shares they acquire, they are subject to tax again when they sell the stock (Share price at acquisition and sale price).

There are 2*** Holding Period Rules (to remain an ISO “Qualified Disposition Sale”)

• BOTH must be satisfied to prevent a Disqualifying Disposition.

1. From EXERCISE to SALE (Grantee must hold the exercised option 1 year before selling).

AND***

2. From GRANT to SALE (grantee must hold for 2 years before selling from an ISO exercise).

FAIL Rule 1 (A) : THE BARGAIN ELEMENT IS TAXED ORD. INCOME TO FICA & FUTA TAXES.

FAIL RULE 1 (B) : If the ISO’s are sold within 12 MONTHS OF EXERCISE (BUT IN THE FOLLOWING CALENDAR YEAR****) the bargain element is ORDINARY INCOME * NOT SUBJECT TO FICA/FUTA

*** Violating EITHER RULE results in ISO to NSO (disqualifying disposition). Almost all ISO grants require at least 1 year of vesting period before the ISO can be exercised. If employer allows shorter vesting from grant to exercise, it won’t trigger disqualification. Most often it is the date of sale (not the date of exercise) that triggers a disqualifying disposition.

*** If the SALE occurs LESS than 2 years from the GRANT DATE (ISSUE) … OR LESS than 1 year from the EXERCISE DATE … that triggers a qualifying disposition.

ISO: Disqualifying Disposition
**Subject to FICA & FUTA
- If ISO is SOLD IN THE SAME CALENDAR YEAR as EXERCISE… THE BARGAIN ELEMENT IS TAXABLE COMPENSATION SUBJECT TO FICA & FUTA TAXES.
- IF the ISO’s are sold within 12 MONTHS OF EXERCISE (BUT IN THE FOLLOWING CALENDAR YEAR) the bargain element is ORDINARY INCOME - NOT SUBJECT TO FICA/FUTA.

• If ISO violated the 2 year rule (from grant) but the sale occurs in a different calendar year that the exercise occurred… the bargain element is ORDINARY INCOME - *** NOT SUBJECT TO FUTA/FICA.
• IF BOTH THE 1 YEAR AND 2 YEAR RULE ARE Violated… the bargain element is taxable compensation subject to FICA/FUTA.

Question 47

ISO

*Granted… More than 2 years ago (50,000)

*Exercised (100,000)

*Sold 13 months after exercise (200,000)

Here… bargain element = 50,000 (100,000 - 50,000)

Answer 47

No ordinary income tax at exercise.
Employer receives NOT TAX DEDUCTION when ISO is exercised.

Basis 50,000 - 200,000

Difference = capital gain.

***ISO tax guidelines satisfied. $0 were subject to ordinary income taxes at exercise. *Grant was more than 2 years ago

***AMT Add back item Amount?
= *Bargain Element
= FMV at Exercise Date - Grant Price
(i.e. 100,000 - 50,000)

Question 48

ISO 100k Rule

Answer 48

When more than 100k of ISO’s are VESTED in the same calendar year…. ONLY THE FIRST 100K ARE TREATED AS ISO. The remaining ISO’s that were vested that year will be treated as NSO.

The value of the ISO GRANTED*** in a given calendar year does NOT cause any ISO’s to be treated as NSO.. so long as the value of the ISO’s vested that calendar year does not exceed 100k.

*** if more than 100k of ISO’s are VESTED in a calendar year

1.) Then there is an INCOME TAX LIABILITY ON THE NSO PORTION (TAXABLE WAGES / ordinary income.

AND

2.) There is a bargain element on the ISO portion (possible AMT add back).

Question 49

Rabbi Trust

Answer 49

Assets are always subject to the employers creditors

Employer MAY fund the trust from general assets

Contributions are not subject to payroll taxes - distributions are subject to withholding and FICA.

Rabbi Trust offers no protection in case of BQ or final obligations