Retirement Flashcards
Safe Harbor Test
> = 70% of NHC covered
Ratio % Test
% of NHC Covered / % of HC Covered >= 70%
Average Benefits Test
AB% of NHC Covered / AB % of HC Covered >= 70%
AND nondiscriminatory test
Defined Benefit Plans must pass the ___ test
50/40 test
50/40 Test
must cover lesser of 50 EE or 40% of EE
What is Nondiscriminatory Testing definition?
must provide benefits to certain percentage of rank and file employees
What are the Nondiscriminatory Testing types?
Actual Deferral Percentage Test (ADP)
Actual Contribution Percentage Test (ACP)
Actual Deferral Percentage Test (ADP)
limits EE elective deferrals for HC based on elective deferrals of NHC
- looks at Trad & Roth
ADP & ACP
NHC deferral percentages to HC deferrals
Actual Contribution Percentage Test (ACP)
limits EE after-tax contributions and employer matching contributions for HC based on elective deferrals of NHC
Safe Harbor 401(k) Plan overview
- not required to pass ADP/ACP tests
- ER must provide one of following:
—- 3% non-elective contributions to all EE
—- matching contribution of 100% up to 3%, and 50% from 3%-5% - ER contributions 100% vested at all times
Exceptions to 10% Early Withdrawal Penalty
- 59.5 yrs old
- death/disability
- substantially equal periodic payments (72(t))
- medical expenses > 7.5% AGI
- IRS levy
- higher education expenses
- first time home purchase
- payment of health insurance premiums if unemployed
- adoption
Additions to Exceptions to 10% Early Withdrawal Penalty by SECURE 2.0 Act of 2022
2023 qualified federally declared disasters
- qualified individual
- $22,000 aggregate (include in gross income over 3 yrs)
- repaid to tax preferred retirement account within 3 yrs
- retroactive for disasters occurring after 1/26/2021
2024 domestic abuse
- IRA/SEP/SIMPLE
- max lesser of $10,000 or 50% of vested balance
- can be recontributed within 3 yrs
- effected for tax years after 12/31/2023
2024 emergency personal expense distributions
- up to lesser of $1,000 of vested balance (or total of IRA) in excess of $1,000 per calendar year
- repaid within 3 yrs
- no additional distributions allowed during 3yr period unless repaid
- effective for tax years after 12/31/2023
Leveraged ESOP
- when a principal shareholder wants out but company can’t afford to buy them out, they receive money from a lender to borrow money
- creates its own trust fund, funded by own stock or cash to buy existing shares, then distributed to existing employees
- ER can contribute and deduct up to 25% covered comp
- company & shareholders can usually guarantee the loan for certain amount of time
- must have qualified cashflow and contribute annually (tax deductible)
ESOPs and Leveraged ESOPs are the only qualified plans that can _____
borrow money from a bank
ESOP Advantages - ER
- tax-advantaged way to sell part of company (sell shares to trust & defer capital gains taxes)
- EE-owned companies see greater productivity, profitability, and EE retention
ESOP Advantages - EE
- partial owners of company with vested interest in helping it succeed
- ESOPs grow tax-deferred as stock value increases over time
- distributions taxed as OI upon retirement
- EE have valuable retirement benefit that doesn’t require any contribution from paycheck
Qualified Plans - Life Insurance
- NOT allowed in IRAs
- limited to providing incidental death benefits (not primary focus of plan)
- 25% test (DC plan)
- 100 to 1 ratio test (DB plan)
25% Test - Life Insurance in DC Plan
- aggregate life insurance policy premiums CANNOT exceed 25% ER contributions (term & universal)
- increases to 50% for whole life
- entire life insurance must be converted to cash/annuity at/before retirement
- what is ‘going into the plan’
100 to 1 Ratio Test - Life Insurance in DB Plan
- what is coming ‘out of the plan’
- limit death benefit amount to 100x monthly accrued retirement benefit provided under qualified plan
$5,000 monthly benefit x 100 = $500,000 Death Benefit
Plan 412(e)(3) formerly known as 412(i) - Life Insurance in Plan
- exception to the rule
- DB that is entirely funded by life insurance or annuity
- ER claims tax deduction for contributions to pay premiums
IRA Distributions allowed for terminal illness?
- YES, for both qualified plans and IRA
Lump Sum - Qualified Plan Distributions
- within 1 taxable year
- death, attainment of age 59.5, separation of service, or disability
- EE participated in plan at least 5 yrs prior to date of distribution
Net Unrealized Appreciation (NUA) - Qualified Plan Distributions
- lump sum distribution of ER stocks (ESOP or Stock Bonus Plan)
- any other assets in plan may roll over
- no step up for inheritance
Breakdown of Determination of Net Unrealized Appreciation (NUA) to determine OI, LTCG/STCG
FMV @ date of distribution
LESS: value of stock at date of ER contribution
= NUA
distribution of ER stock:
basis = OI
NUA = LTCG
sale of ER stock:
recognize LTCG of NUA
> NUA = capital long/short term gain (based on holding)
Plan Loans - Qualified Plan Distributions
- permissible by any qualified plan (CODA type)
- may not exceed $50,000 OR 1/2 vested account balance
— exception: if vested <$20,000, then limited to greater of $10,000 OR 1/2 balance (or full balance under $10,000) - reduced by highest outstanding loan balance within 12month period
Plan Loans SECURE ACT 2.0 - Qualified Plan Distributions
- qualified disaster - extended loan amount to $100,000 or 1/2 vested balance
- effective retroactively to disasters occurring on/after 1/26/2021
Plan Loans Repayment - Qualified Plan Distributions
- 5 years OR 30yrs if used to purchase principal residence
- substantially level amortization over term
- payments must be at least quarterly
- plan sponsors often apply additional rules/requirements
- failure to pay = taxable distribution & possibly subject to 10% early distribution
- termination from employment = loan generally becomes due
72(t) Distributions - Qualified Plan Distributions
- substantially equal periodic payments
- at least annually
- for longer of 5yrs or til 59.5
- for life expectancy of participant or joint lives
- after separation of service
How 72(t) Distributions Are Calculated - Qualified Plan Distributions
- same as RMDs
or - fixed amortization method
or - fixed annuitization method
What is permitted under VEBA?
- life, sickness, and accident benefits
- severance and supplemental unemployment
- job training
Unfunded defined compensation plan
- no assets are segregated (as in a rabbi trust or taxable trust)
- plan is considered unfunded even though the employer may establish a pool of assets to meet the obligation
- assets are still owned by the employer and subject to the creditors of the employer.
(T/F) Profit sharing plans may be integrated with SS?
- True
Safe Harbor 401K vs 401k with qualified auto contribution
- safe harbor 401k is more liberal (better for EE) vesting for ER match
Supplemental Executive Retirement Plan (SERP) provides _________ and _______ regard to Section 415c limits
- retirement benefits above company’s qualified plan
- without regard to 415c limits
Section 415c limits are
$69,000 for 2024
- total ER & EE & forfeitures
What types of plans can use the offset method?
- DB plans ONLY
What types of plans can use the excess method?
- DB & DC plans
What is the offset method?
- integrate Social Security into a DB
- reducing the ER’s pension benefits by a percentage of the employee’s Social Security retirement benefit
What is the excess method?
- integrate DC plan with Social Security
- if EE makes more than taxable wage base, take amount excess of that and use the base % or 5.7%
- uses lower benefit accrual rate for earnings below certain level (SS taxable max)
- If base level contribution is 5%, max % above threshold is 10.7%
Social Security Integration: Integration formulas (are/are not) allowed under an ESOP plan
- are NOT
- allowed under Stock Bonus Plan
What is the incidental benefit rules?
- restrictions on the amount of life insurance in a qualified retirement plan
- 25% for premium of term/universal per year
- 50% for whole life
