Retirement Flashcards
Key
NE = non-elective
EE = employee
ER = employer
DB = defined benefit plan
DC = defined contribution plan
CB = cash balance plan
FMV = fair market value
NUA = net unrealized appreciation
MPPP = money purchase pension plan
HC = highly compensated
NHC = non highly compensated
ADP = actual deferral percentage
ACP = actual contribution percentage
SH = shareholder
WRR = wage replacement ratio
Retirement Funding Key Points
inflation erodes purchasing power of funds
saving for retirement - start early - compounding
wage replacement ratio - top down & budget approaches
SS benefits are skewed - 70% WRR for low income w/ same age non-working spouse
appropriate withdrawal rate - generally accepted - 4% to 5% but early significant losses can be devastating
Retirement Funding Capital Needs Analysis
4 step solution
- funding amount in today’s dollars = (income x WRR) - SS
- inflate current annual needs to retirement age; solving for FV, inflation rate, end mode; represents first year needs in retirement
- determine funding needs at retirement age (inflation adjusted ROR formula for i); begin mode; solve for PV annuity due; represents lump sum needed at retirement
- determine the annual funding amount; end mode, solve for Pmt (annual amount paid at end of the year)
Remember: PV of an annuity due (BEGIN key) when simultaneously discounting & inflating (step 3 of capital budgeting); real rate of interest (1+ nominal rate) / (1 + inflation rate)
Top Down Wage Replacement Ratio
a person’s wage replacement ratio can range from 70% to 80% but it can also be significantly lower or it can be higher d/t ER fringe benefits & non-traditional benefits, such as housing
FICA taxes 7.65% fall off in retirement
Pension Plan Types
Defined Benefit
Cash Balance
Money Purchase
Target Benefit
DB(k)
Profit Sharing Plan Types
Profit Sharing
401(k)
Stock Bonus
ESOP
Age Based Profit Sharing
New Comparability
Thrift Plans
Other Tax Advantaged Plan Types
IRAs
Roth IRAs
403(b)
SEPs
SIMPLEs
SARSEPs
Non Qualified Plans Deferred Comp Plan Types
ISOs
NQSOs
ESPPs
Rabbi Trust
Secular Trust
Phantom Stock
Promise to Pay
Restricted Stock
457 Plans
Features of Qualified Plans (7)
- ER contributions deductible
- EE contributions deductible (except Thrift & Roth)
- ER contributions NEVER subject to payroll tax
- EE contributions subject to payroll tax (except FSA)
- Earnings w/in the trust are tax deferred (until distribution)
- ERISA non-alienation of benefits (IRAs are protected under federal bankruptcy law, but not ERISA)
- NUA (no age requirement, taxation of cost basis is ordinary, taxation of NUA is LTCG - must be lump sum)
NOTE: Rules 1-5 also apply to other tax advantaged plans
Eligibility
age 21 & 1 year (1,000 hrs) in a 12 month period
Exception 2 years 100% vesting (does not apply to 401(k) plans)
Long-term part-time EEs (3 years of service w/ at least 500 hrs)
age 21+ are eligible to participate in 401(k) plans
Highly Compensated
either a greater than 5% owner or compensation greater than $155,000 (2024)
Exception is compensation greater than $155,000 (2024) & in top 20% of paid employees
> 5% owner includes family attribution - stocked owned by spouse & lineal descendants
Key Employees
Defined (owner or officer):
- > 5% owner
- officer w/ compensation > $220,000 (2024)
- 1% owner w/ compensation > $155,000 (not indexed)
Coverage Tests
ALL QPs must comply w/ 1 of the 3 coverage tests – all concerned w/ the # of NHC EEs who are covered:
- General Rule – plan must cover 70% NHC
- Ratio Percentage Test – %NHC / %HC at least 70%
- Average Benefits Percentage Test – NHC AB% / HC AB% at least 70%
Additional Coverage Test (DB ONLY) – 50/40 rule (“people come first”) must cover the LESSER of 50 EEs or 40% of nonexcludable EEs
Annual Limits
Defined Contribution Limits = IRC 415(c) the LESSER of 100% of compensation or $69,000 for 2024 (includes contributions from EE, ER & forfeitures)
Defined Benefit Limits = IRC 415(b) $275,000 2024; maximum distribution from a DB plan is the LESSER of $275,000 or 100% of the average of the 3 highest consecutive years of compensation
Covered Compensation = $345,000 2024; any income earned above this limit is NOT counted for QPs
NOTE: understand that IRC 415(c) is an individual limit – max per EE from one ER; a plan limit of 25% is the max that can be contributed to a plan for all eligible EEs
Vesting
Post PPA 2006 – 3 year cliff or 2 to 6 graded
Non-top-heavy DB plans = 5 year cliff or 3 to 7 graded
Cash Balance Plans = 3 year 100% vesting
DB(k) = 3 year cliff for ER contributions & 100% vesting for ER matching; full vesting at normal retirement & upon plan termination
Top Heavy (Two Issues)
Top Heavy = plan in which accounts or accrued benefits for key employees exceeds 60% of total for the plan
- Accelerated vesting – now ONLY applies to DB plans
- Minimum benefits for non-key employees:
- DC = LESSER of 3% or KE percentage if lower
- DB = 2% x years of service but NOT to exceed 20%
ADP & ACP Tests
NHC 0-2% – HC Times 2
NHC 2-8% – HC Plus 2
NHC 8+% – HC Times 1.25
*max deferral for HC based on deferral for NHC
ADP Test – typically found in 401(k) plans
- limits avg deferral of HC EEs based on the avg deferral of the NHC EEs
If plan fails ADP test, several ways to correct:
1. Corrective Distribution = distributions from HC EEs occur until the ADP test is passed
2. Qualified Non-Elective Contributions (QNEC) = ER adds funds to all NHC until ADP is passed
3. Qualified Matching Contribution (QMC) = ER adds funds to participating NHC until ADP is passed
QNEC & QMC are both 100% vested
ACP test is the same except it tests ER matching contributions & EE after tax contributions
Plan Selection - Key Points
based on needs & objectives
Age Based PS plans & DB plans good for older owners
integrated formulas generally benefit higher paid EEs
DB plans can allow for higher annual funding above the 415(c) limit
401(k) plans allow for higher funding than a SEP or PS plan alone
DB plans & Cash Balance plans require actuaries & have higher administrative costs
SEPs & Qualified Plans can be set up after the end of the year which makes them ideal for procrastinators
Establishing & Funding a Qualified Plan
Adoption of a written document = plan must be in writing; must be established at least by due date of tax return including extensions
SPD (Summary Plan Description) = must be provided to eligible EEs & participants w/in 90 days of being covered
Generally, ERs will use a prototype plan w/ an adoption agreement
Determination letters = IRS approves plan as written; does NOT eliminate possibility of disqualification
Plans must generally be funded by the due date of the tax return plus extensions
Defined Benefit Plans Characteristics
Annual Contribution Limit = GREATER of (1) sum of plan’s funding target, target normal cost, & a cushion amount over the value of the plan assets, or (2) the minimum required contribution for the plan year
Investment Risk = EMPLOYER
Forfeiture Allocation = reduce plan costs
PBGC Coverage = yes (except professional firms w/ less than 25 EEs)
Separate Investment Accounts = NO
Credit for Prior Service for purpose of benefits = YES
Defined Contribution Plans Characteristics
Annual Contribution Limit = 25% of covered compensation
Investment Risk = EMPLOYEE
Forfeiture Allocation = reduce plan costs, pay plan expenses, or allocate to other participants
PBGC Coverage = NO
Separate Investment Accounts = YES
Credit for Prior Service for purpose of benefits = NO
When an ER maintains both a DB plan & a DC plan:
general rule is total deduction limited to GREATER of 25% of covered compensation or the required DB plan contribution
combined limit does NOT apply if the plan is subject to PBGC, is a multiemployer plan, or if contributions do NOT exceed 6% of compensation
salary deferrals are ignored for this limit
Pension Plans Characteristics
Legal promise of the plan = paying a pension at retirement
In-service withdrawals = NO (may permit distributions to current EEs at least age 59.5)
Discretionary contributions = NO
Percent of plan assets available to be invested in employer securities = 10%
Must provide qualified joint & survivor annuity & a qualified pre-survivor annuity? YES
Profit Sharing Plans Characteristics
Legal promise of the plan = deferral of compensation & taxation
In-service withdrawals = YES (after 2 years) if plan document permits
Discretionary contributions = YES
Percent of plan assets available to be invested in employer securities = up to 100%
Must provide qualified joint & survivor annuity & a qualified pre-survivor annuity? NO
Defined Benefit Plans
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
Cash Balance Plans
- Credits to EE’s hypothetical account
a) Compensation Credit: pay credit
b) Interest Credit: can be fixed or variable &/or tied to a benchmark
- CB plans look like DC plans but ARE DB PLANS (pension plan)
Money Purchase Pension Plan (MPPP)
flat percent b/t 0 & 25%
MUST be funded annually
could be integrated w/ Social Security
DC pension plan
Target Benefit Plan
MPPP w/ contributions allocated based on age & compensation
like an age-weighted profit sharing plan, but a PENSION PLAN
412(e) Plans (formerly 412(i) Plans)
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
Pension Benefit Guarantee Corporation (PBGC)
- ALL DB plans are subject to PBGC EXCEPT professional firms w/ fewer than 25 employees
- Pension plans pay PBGC yearly insurance premiums; $101 2024 per worker or retiree in single-employer plans
- For single-employer plans ended in 2024, workers who retire at age 65 can receive up to $85,295 per year
DB(k) Plans [414(x)]
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
Profit Sharing Plans
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
Stock Bonus Plans
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
CODAs (401(k) Plans) - Two Layers of Contributions
ER & EE - double stack - total cannot exceed annual additions limit, except for catch up contributions
CODAs (401(k) Plans) - Limits on Employee Deferrals
$23,000 2024 & $7,500 catch-up for those age 50 or over
CODAs (401(k) Plans) - Vesting Schedule
EE deferral - always 100% vested
Match & ER PS contribution - 3 year cliff or 2-6 yr graded
CODAs (401(k) Plans) - ACP/ADP Tests
MUST meet the ACP & ADP tests (except safe harbor plans & starter 401(k) plans
CODAs (401(k) Plans) - Safe Harbor 401(k) Plans
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)
CODAs (401(k) Plans) - Hardship Distributions
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
ESOPs
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)
Non-recognition of gain treatment for sale to ESOP Rules
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
Types of Distributions from QPs
Annuities
Lump sums
Rollovers
In-service withdrawals
General Tax Treatment of Distribution from QPs
ordinary income
exceptions:
- adjusted taxable basis
- NUA treatment
Annuities Distributions from QPs
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
Lump Sum Distributions from QPs
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
- R - distribution must be made on account of a participant’s death, disability, separation from service or attainment of age 59.5 (retire)
- E - distribution must represent entire balance in the account
SECURE 2.0 Act Distribution-Related Changes Effective in 2023 & 2024 for QPs
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
20% Withholding Distributions from QPs
distributions from a QP are generally subject to a 20% withholding for federal income tax purposes
N/A for IRA
Rollovers (direct & indirect) Distributions from QPs
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
Adjusted Basis Distributions from QPs
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
NUA (Net Unrealized Appreciation)
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
Roth Accounts & In-Plan Roth Rollovers
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
Keogh Plans
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:
- determine self-employment income
- subtract 1/2 of SE tax from income in step 1
- determine appropriate multiplier for determining the maximum contribution = plan limit / (1 + plan limit)
- multiply result of step 2 by result of step 3
= max contribution
QJSA
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
QPSA
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
QOSA
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
Waiver for QJSA & QPSA: requirements for participant to waive
- spouse must consent in writing
- election to waive must designate a beneficiary that cannot be changed w/out spousal consent
- spouse’s consent acknowledges the effect of the election & is witnessed by a plan official or notary
Prohibited Transactions
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
Loans QPs
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
Loans Term for Repayment QPs
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
403(b) Plans (Tax Sheltered Annuities)
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
10% Early Withdrawal Exceptions (QP & IRA)
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)
10% Early Withdrawal Exceptions (QP ONLY)
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
10% Early Withdrawal Exceptions (IRA ONLY)
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
Minimum Distributions - During Life
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
Minimum Distributions - Inherited Retirement Accounts
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
Excess Contribution Penalties
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
Similarities b/t Roth IRAs & Traditional IRAs
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
Differences b/t Roth & Traditional IRAs
no deductions permitted for Roth IRAs
distributions from Roth may qualify for tax-free treatment
no minimum distributions for Roth IRAs (during life)
IRAs - Contribution Limits
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
Qualified Roth IRA Distribution
income tax free & NOT subject to any penalties
two prong test, both must be met
- 5 Year rule = taxpayer must have established a Roth IRA at least 5 years prior to the distribution
- distribution must be on account of the following four events: age 59.5, death, disability, or first time home purchase (up to $10,000)
Non-Qualified Roth IRA Distribution
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
IRA Deductibility
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
Simplified Employ Pension (SEP) IRAs
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)
SIMPLE IRAs
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
Deferred Comp (flexible plans)
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
Public 457(b) Plans
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
Private 457(b) Plans
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
457(f) Plans
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
Employer Stock Options (5)
NQSO
ISO
SAR
ESPP
Cashless Exercise
NQSOs
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
Cashless Exercise
simultaneous exercise of the option & sale of the stock
EE receives net proceeds minus withholding & transaction costs
ISOs
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
SAR
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
ESPP
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
