Retirement Flashcards

Question

Defined Benefit Plans

Answer 1

Standard type formula = x% times YOS (years of service) times SALARY = annual benefit in retirement for life COLA -- Government generally YES; Private generally NO Prior service can be granted for benefits & vesting Allocation methods = flat amount, same percentage, & unit credit

Answer 2

1. Credits to EE's hypothetical account a) Compensation Credit: pay credit b) Interest Credit: can be fixed or variable &/or tied to a benchmark 2. CB plans look like DC plans but ARE DB PLANS (pension plan)

Answer 3

flat percent b/t 0 & 25% MUST be funded annually could be integrated w/ Social Security DC pension plan

Answer 4

MPPP w/ contributions allocated based on age & compensation like an age-weighted profit sharing plan, but a PENSION PLAN

Answer 5

pension plan funded entirely through purchase of individual insurance or annuity contracts, no traditional trust guaranteed rate in policies is used to establish funding limits for the plan; since this rate is relatively low it allows for significantly higher contributions than traditional plans IRS has looked at these plans for abuses NO actuary required

Answer 6

1. ALL DB plans are subject to PBGC EXCEPT professional firms w/ fewer than 25 employees 2. Pension plans pay PBGC yearly insurance premiums; $101 2024 per worker or retiree in single-employer plans 3. For single-employer plans ended in 2024, workers who retire at age 65 can receive up to $85,295 per year

Answer 7

eligible combined defined benefit plans & qualified cash or deferred arrangements: - small employer = no more than 500 EEs, DB & DC plan assets of which are held in a single trust - DB Benefit can be in form of a traditional benefit (1% per yr of service) or as a cash balance benefit w/ earnings credits increasing w/ age - CODA requires ER match of 50% up to a 4% EE deferral; EE must be automatically enrolled for 4% deferral - DB & non-elective contributions use 3-year Cliff vesting; the 401(k) match requires full & immediate vesting - DB(k) plans satisfy ADP, ACP, & Top Heavy tests

Answer 8

contributions = flexible & discretionary; should be substantial & recurring allocation methods = same dollar amount to all participants (flat), same percentage, permitted disparity or age weighted permitted disparity = benefits higher paid EEs Integration level generally equal to EE's Social Security wage base but not always Excess percentage = 2 x base limited to 5.7% New comparability formulas are also available & generally skew benefits towards owners; these plans are generally more expensive to maintain Age weighted = contributions are skewed based on age & compensation

Answer 9

very similar to profit sharing plans Key Differences: pass through of voting - participants get voting rights for shares held in a stock bonus plan EEs have right to receive ER securities as a form of distribution Put option - EEs can sell stock back to plan at FMV; 60 day window after distribution; another 60 day window is required in the following year deduction for non-cash contribution of stock allocation methods - same as PS plan valuation issue - increases cost for privately-held company since there is no readily established market; must pay an appraiser to value company at least annually concentrated portfolio issues distributions may qualify for NUA treatment

Answer 10

ER & EE - double stack - total cannot exceed annual additions limit, except for catch up contributions

Answer 11

$23,000 2024 & $7,500 catch-up for those age 50 or over

Answer 12

EE deferral - always 100% vested Match & ER PS contribution - 3 year cliff or 2-6 yr graded

Answer 13

MUST meet the ACP & ADP tests (except safe harbor plans & starter 401(k) plans

Answer 14

Standard: - required ER contribution = match dollar for dollar up to 3% plus 50% from 3% to 5% OR Non-elective: 3% - ER contribution is 100% vested Qualified Automatic Contribution Arrangement (QACA) - Required Deferral year 1 = at least 3% year 2 = at least 4% year 3 = at least 5% year 4: at least 6% (not to exceed 15%) - Match: 100% for first 1% plus 50% from 1% to 6% or NE 3% - Vesting: 2 years, 100% Plans may allow EEs to elect Roth ER matching contributions (increases EE taxable income; may require increased withholding or estimated tax payments)

Answer 15

must have immediate & heavy financial need & other funds are NOT available; ER can rely on written representation by EE (facts & circumstances test) Amount Available = total elective deferrals, QNECs, QMACs, & earnings on these contributions, less previous distributions Subject to ordinary income & possibly 10% penalty (no 20% withholding) could be for medical, residence, funeral, tuition, eviction, etc

Answer 16

ESOPs are stock bonus plans w/ added features similar to stock plans: pass through of voting, right to demand securities upon distribution, put option distributions must be completed w/in 5 years - unless amount exceeds annual limit stock is allocated to EE's accounts over time by the trustee in lieu of cash contributions Differences b/t ESOPs & stock bonus plans: - no permitted disparity (SS integration) allowed in ESOP - key difference is that plan can borrow funds - generally a prohibited transaction - dividend deduction - deferral of gain under IRC 1042 (non-recognition of gain)

Answer 17

ESOP must own at least 30% of stock after sale SH must have owned stock for at least 3 years SH must purchase qualified replacement property w/in 12 months after transaction (or 3 months prior) Qualified replacement property: 1. securities of domestic companies (stocks, bonds, warrants) 2. max 25% from passive investments - no mutual funds 3. could be an S-corporation

Answer 18

Annuities Lump sums Rollovers In-service withdrawals

Answer 19

ordinary income exceptions: - adjusted taxable basis - NUA treatment

Answer 20

distribution option that pays the recipient over a specified period of time: either term certain, fixed period of time, life span of beneficiary, or some combination

Answer 21

may receive special tax treatment on the net unrealized appreciation (NUA) in ER stock held w/in the plan to qualify as a lump sum distribution, 3 requirements must be met (ORE): 1. O - distribution must be paid w/in one taxable year 2. R - distribution must be made on account of a participant's death, disability, separation from service or attainment of age 59.5 (retire) 3. E - distribution must represent entire balance in the account

Answer 22

age at which RMDs begin increased to 73 for those turning 72 after 12/31/22 (age 75 for those attaining age 74 after 12/31/32) penalty for failure to take RMD reduced from 50% to 25% (10% if corrected w/in a specified correction window) 10% early distribution penalty exceptions added for terminal illness, qualified federally declared disasters (max $22,000), domestic abuse, emergencies (max $1,000), & pension-linked emergency savings account distributions

Answer 23

distributions from a QP are generally subject to a 20% withholding for federal income tax purposes N/A for IRA

Answer 24

Direct - funds transferred from the old trustee to the new trustee w/out the owner receiving the funds; generally the best choice Indirect - funds distributed to participant/owner & then subsequently rolled over to another QP or IRA - time period = 60 days; IRS may grant an exception for specific reasons - 20% withholding = distributions will generally be subject to the withholding unless from an IRA; impact of this is that the owner will only receive 80% & will need to rollover 100% - Limit for IRAs = taxpayers can only rollover funds from an IRA once per year only one indirect rollover from an IRA to another IRA in any 12 month period is permitted, regardless of the # of IRAs owned

Answer 25

generally funds in a QP or IRA are funded w/ pre-tax income; after-tax contributions create basis adjusted basis for annuity = the portion of the annuity payment that represents a taxpayer's basis is referred to as the exclusion ratio ER = cost basis / total expected benefits product of the exclusion ratio times the annuity payment is NOT subject to taxation Adjusted basis for an IRA = basis is prorated for each distribution based on the total value of all IRAs

Answer 26

lump sum distribution option potentially beneficial tax treatment for lump-sum distributions of company stock from QPs; often from ESOPs or stock bonus plans distributions of NUA may result in lower tax by allowing the NUA to be taxed at capital gains rates, rather than OI rates, at the time the stock is sold a lump-sum distribution consists of two elements: 1. cost basis 2. NUA cost basis = value of the stock at the time it was contributed or purchased w/in the plan & is taxed as ordinary income in the year of distribution NUA = value of the distribution in excess of the cost basis; taxed as LTCG upon sale any future appreciation from the date of distribution is taxed as LT or ST depending on holding period from date of distribution tax treatment only favorable in event that the NUA portion is sufficiently large

Answer 27

permitted in 401(k), 403(b) & governmental 457 plans limit for contributions to Roth accounts combined w/ the $23,000 salary deferral limit 2024; no income limits for funding Roth accounts or for in-plan Roth rollovers an in-plan Roth rollover allows pre-tax funds to be rolled over to a Roth account w/in the same plan & results in taxable income to the extent of the pre-tax funds Roth accounts subject to RMDs through 2023 (including 2023 distributions that can be deferred until April 1 2024); SECURE 2.0 Act repealed RMDs from Roth accounts beginning in 2024 qualified distributions from Roth accounts avoid income tax & penalties; distribution must meet the 5-year rule AND be a result of death, disability or attainment of age 59.5 nonqualified distributions are taxed like annuities - prorated basis & income no recharacterization of Roth conversions after 2017

Answer 28

plans for the self-employed; any plan can be a keogh plan w/ minor exceptions primary difference w/ a keogh plan is the special calculation for the self-employed person 4 steps: 1. determine self-employment income 2. subtract 1/2 of SE tax from income in step 1 3. determine appropriate multiplier for determining the maximum contribution = plan limit / (1 + plan limit) 4. multiply result of step 2 by result of step 3 = max contribution

Answer 29

must be an option for pension plans qualified joint & survivor annuity distribution option that provides annuity to participant & surviving spouse surviving spouse's benefit generally b/t 50% & 100% of the participant's benefit actuarially equivalent to other distribution options

Answer 30

must be an option for pension plans qualified pre-retirement survivor annuity provides benefit to a surviving spouse if the participant dies before attaining normal retirement age QPSA offered to the nonparticipating spouse

Answer 31

must be an option for pension plans qualified optional survivor annuity offered to a participant who waived the QJSA an annuity for the life of the participant w/ a survivor annuity for the life of the participant's spouse that is equal to a specified applicable percentage (75% or 50%) of the annuity payable during the participant's life

Answer 32

1. spouse must consent in writing 2. election to waive must designate a beneficiary that cannot be changed w/out spousal consent 3. spouse's consent acknowledges the effect of the election & is witnessed by a plan official or notary

Answer 33

penalty of 15% of the amount involved w/ respect to the prohibited transaction & 100% penalty if not corrected w/in the taxable period any direct or indirect: - sale or exchange, or leasing, of any property b/t a plan & a disqualified person - lending of money or other extension of credit b/t a plan & a disqualified person - furnishing of goods, services, or facilities b/t a plan & a disqualified person - transfer to, or use by or for the benefit or, a disqualified person of the income or assets of a plan - act by a disqualified person who is a fiduciary whereby he deals w/ the income or assets of a plan in his own interest or for his own account - receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing w/ the plan in connection w/ a transaction involving the income or assets of the plan

Answer 34

typically in 403(b) & 401(k) plans loans are funded from the assets in an EE's account & are repaid by the EE to the EE's account w/ after-tax dollars funds that are distributed from a QP (or 403(b)) w/ the expectation of repayment Loans Limit: - lesser of 50% of vested account balance or $50,000 (100% of vested balance/max $100,000 for qualified disaster); this amount further reduced by the highest outstanding loan amount w/in last 12 months De minimis = loans of up to $10,000 can be made w/out adhering to the 50% limit

Answer 35

generally the term is 5 years; loans for home mortgage may be longer (defined as "reasonable") unpaid loans upon termination are generally treated as a distribution subject to ordinary income tax & possibly early withdrawal penalty

Answer 36

similar to 401(k) plans for 502(c)(3) organizations or public schools max possible 2024 annual contribution for a 403(b) plan = $33,500 [$23,000 + $7,500 + $3,000] immediate vesting for EE contributions same limits as 401(k) plans / (50 or older catch up) special catch up = $15k total, $3k per year for unused deferrals, only for EEs of H.E.R. (health, education, religion) Investments - limited to mutual funds & annuities (SECURE 2.0 Act added collective investment trusts (CITs) as a permissible investment, but they are not yet actually available pending a change to securities laws) loans permitted

Answer 37

death 59.5 disability substantially equal periodic payments (3 methods) SOSEPP medical expenses > 7.5% AGI distributions to individual called to active duty (>179 days) birth or adoption (up to $5,000 per individual) terminal illness qualified federally declared disaster (max $22,000) domestic abuse emergency personal expenses (up to $1,000)

Answer 38

payments under a qualified domestic relations order (QDRO) attainment of age 55 & separation from service public safety EE separated from service after age 50 pension-linked emergency savings account distributions

Answer 39

education expenses first time home purchase (up to $10,000) payment of health insurance premiums by unemployed distributed earnings on corrective distribution of excess contributions

Answer 40

penalty = 25% of the amount that should have been distributed that was not distributed Required Beginning Date (RBD) = April first of year following attainment of age 73 (75 for those who attain age 74 after 2032); exception if participant is still employed & not a 5% owner; then delayed until April 1st of year after retirement (only for employer's plan) Minimum distribution = plan balance from end of prior year / life expectancy factor Factor During Life - uniform lifetime table used by participants (exception if beneficiary is spouse who is more than 10 years younger than participant then use joint table) life expectancy factor recalculated each year

Answer 41

penalty = same at 25% beneficiaries of inherited IRAs & QPs are required to take distributions from these plans death before 1/1/2020: all designated beneficiaries had the option to distribute over lifetime 10 year rule for ineligible designated beneficiary minor child = LE in year following year of death & reduce by 1; account balance must be distributed w/in 10 years of reaching age of majority

Answer 42

IRA Excise Tax - 6% for overfunding (funding in excess of annual limit); can be corrected prior to the filing deadline (including extensions) Qualified Plan - 10% excise tax for overfunding a QP Employer has 2.5 months to fix an excess contribution

Answer 43

same contribution limit (aggregated) & rules on earned income & spousal IRAs same rules on permitted investments same rules on prohibited transactions no maximum age for making contributions

Answer 44

no deductions permitted for Roth IRAs distributions from Roth may qualify for tax-free treatment no minimum distributions for Roth IRAs (during life)

Answer 45

maximum contribution = lesser of the IRA annual limit or earned income 2024 $7,000 + $1,000 catch up if taxpayer age 50 or older a spouse can make use of other spouse's earned income to contribute to an IRA

Answer 46

income tax free & NOT subject to any penalties two prong test, both must be met 1. 5 Year rule = taxpayer must have established a Roth IRA at least 5 years prior to the distribution 2. distribution must be on account of the following four events: age 59.5, death, disability, or first time home purchase (up to $10,000)

Answer 47

distributions that do NOT meet the two prong test are taxed based on the character of the income w/in the Roth account distributions from a Roth IRA (that are not qualified) are distributed in a specific order: contributions, conversions, then income Note: a penalty will apply unless there is an exception to 10% early withdrawal penalty FIRST: Contributions - no tax, no penalty SECOND: Conversions - no tax, possible 10% penalty THIRD: Earnings - yes tax ordinary income, possible 10% penalty

Answer 48

Taxpayer Single, NOT an Active Participant - contribution fully deductible; no limit on AGI Taxpayer IS an Active Participant - Single = deduction phased out for AGI b/t $77k & $87k; MFJ = deduction phased out AGI b/t $123k & $143k 2024 Only one spouse is an Active Participant - that will NOT prevent the other spouse from deducting the IRA contribution unless income exceeds the upper limit; exception phased out AGI b/t $230k & $240k Deductions for IRA contributions are taken on Schedule 1 of Form 1040 as an adjustment for AGI (above the line ATL) IRA contributions do NOT have to be deducted even if permitted; non-deductible IRA contributions are reported on Form 8606

Answer 49

can be established as late as the due date of the return plus extensions; attractive d/t their simplicity & ease of establishment eligibility = age 21 & earned $750 in 3 out of last 5 years contributions discretionary & flexible contribution limit LESSER of 25% or $69,000 2024 immediate vesting since SEPs use IRAs to hold assets EE may elect Roth ER SEP contributions (results in taxable income to the EE; may require increased withholding or estimated tax payments)

Answer 50

companies w/ 100 EEs or less w/ each $5,000 of compensation in the preceding year; mostly an EE funded plan no other plans permitted (unless plan converts to safe harbor or starter 401(k)) eligibility = $5,000 for previous 2 years & expected to earn $5,000 in current year uses IRAs as funding vehicle generally (could be SIMPLE 401(k)) Limit EE $16,000 2024 & $3,500 catch up; increase by 10% for EEs of small ERs & electing large ERs Employer = match dollar for dollar up to 3% OR 2% NE (4% match or 3% NE for electing large ER) Maximum Match = $16,000 2024; increase by 10% for EEs of small ERs or electing large ERs Early Distribution = 25% penalty w/in 2 years from the period when an individual first participated in the SIMPLE for low income, SIMPLEs can be better than SEPs because SIMPLEs are limited to 100% as opposed to 25% EE may elect Roth contributions

Answer 51

IRC 409A - provides for taxation of deferred income & penalties for deferred comp plans that do not meet requirement of this code section; specifically excludes most qualified plans, NQSO/ISO plans, bonus plans, & 457(b) plans to be deferred, funds must avoid constructive receipt & be subject to a substantial risk of forfeiture (bankruptcy counts) ER tax deduction - employer will receive a corresponding income tax deduction when executive includes deferred income for tax purposes - matching Payroll tax applies when the deferred income is earned or nonforfeitable Arrangements: unfunded promise to pay, secular trust, or rabbi trust Rabbi trust = irrevocable trust that is funded but subject to a substantial risk of forfeiture d/t the funds potentially being used in bankruptcy/liquidation 83(b) Election = allows taxpayer to include the value of stock into taxable income today to allow for future growth as a capital asset; taxpayer must file election w/in 30 days of grant; not always a great idea; no ability to recover loss

Answer 52

eligible governmental entities assets in plan protected by trust elective deferral contribution limit $23,000 2024 Rank & File EEs & Key Management participate pretax contribution funds grow tax deferred age 50 & over catch-up provisions 3-year catch-up $23,000 2024 rollovers permitted to 401(k), 403(b), 457(b), or IRA plans including Roth IRAs no 10% penalty for early withdrawal except for distributions attributable to rollovers from another type of plan or IRA

Answer 53

eligible tax-exempt organizations under 501(c) assets in plan NOT protected by trust; available to ER's creditors elective deferral contribution limit $23,000 2024 Key Managements & HCs for tax-exempt organizations; all EEs if church related organization participate pretax contribution funds grow tax deferred NO age 50 & over catch-up provisions 3-Year catch-up $23,000 2024 rollovers NOT permitted unless rolled into another 457(b) plan 10% penalty for early withdrawal NOT APPLICABLE

Answer 54

ineligible governmental entities (rare) & tax-exempt entities under 501(c) assets in plan NOT protected by trust; available to ER's creditors NO limit on elective deferral contribution Key Management & HCs participate pretax contribution funds grow tax deferred NO age 50 & over catch-up provisions NO 3-year catch-up provisions rollovers NOT permitted 10% penalty for early withdrawal NOT APPLICABLE

Answer 55

NQSO ISO SAR ESPP Cashless Exercise

Answer 56

nonqualified stock option no tax upon grant (as long as exercise price greater than or equal to FMV on date of grant - typical); upon exercise, difference b/t exercise price & FMV is taxable as ordinary income; subsequent gains are capital long or short depending on holding period

Answer 57

simultaneous exercise of the option & sale of the stock EE receives net proceeds minus withholding & transaction costs

Answer 58

incentive stock option must be part of a plan, expire w/in 10 years, have an exercise price not less than FMV upon grant, not be transferrable, & cannot exceed the $100,000 limit exercise of an ISO results in NO regular income but an AMT adjustment & will result in a different basis for regular tax purposes & AMT purposes; the difference will be reconciled upon disposition of the shares of stock ISO shares must be held for at least 2 years from the date of grant & 1 year from the date of exercise; if not then the sale is deemed a disqualifying disposition resulting in ordinary income on the bargain element in lieu of capital gain

Answer 59

Stock Appreciation Rights rights that grant holder cash in the amount equal to the excess of FMV of stock over exercise price conceptually, the same as a cashless exercise for a NQSO

Answer 60

Employee Stock Purchase Plan stock plan that permits EEs to use after tax funds to purchase company stock at 85% of the value of the stock annual limit per employee = $25,000 plans must not be discriminatory