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CFP > Retirement > Flashcards

Retirement Flashcards

1
Q

Safe Harbor Test

A

> = 70% of NHC covered

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2
Q

Ratio % Test

A

% of NHC Covered / % of HC Covered >= 70%

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3
Q

Average Benefits Test

A

AB% of NHC Covered / AB % of HC Covered >= 70%

AND nondiscriminatory test

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4
Q

Defined Benefit Plans must pass the ___ test

A

50/40 test

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5
Q

50/40 Test

A

must cover lesser of 50 EE or 40% of EE

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6
Q

What is Nondiscriminatory Testing definition?

A

must provide benefits to certain percentage of rank and file employees

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7
Q

What are the Nondiscriminatory Testing types?

A

Actual Deferral Percentage Test (ADP)
Actual Contribution Percentage Test (ACP)

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8
Q

Actual Deferral Percentage Test (ADP)

A

limits EE elective deferrals for HC based on elective deferrals of NHC
- looks at Trad & Roth

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9
Q

ADP & ACP
NHC deferral percentages to HC deferrals

A
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10
Q

Actual Contribution Percentage Test (ACP)

A

limits EE after-tax contributions and employer matching contributions for HC based on elective deferrals of NHC

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11
Q

Safe Harbor 401(k) Plan overview

A
  • 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
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12
Q

Exceptions to 10% Early Withdrawal Penalty

A
  • 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
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13
Q

Additions to Exceptions to 10% Early Withdrawal Penalty by SECURE 2.0 Act of 2022

A

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

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14
Q

Leveraged ESOP

A
  • 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)
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15
Q

ESOPs and Leveraged ESOPs are the only qualified plans that can _____

A

borrow money from a bank

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16
Q

ESOP Advantages - ER

A
  • 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
17
Q

ESOP Advantages - EE

A
  • 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
18
Q

Qualified Plans - Life Insurance

A
  • 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)
19
Q

25% Test - Life Insurance in DC Plan

A
  • 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’
20
Q

100 to 1 Ratio Test - Life Insurance in DB Plan

A
  • 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

21
Q

Plan 412(e)(3) formerly known as 412(i) - Life Insurance in Plan

A
  • exception to the rule
  • DB that is entirely funded by life insurance or annuity
  • ER claims tax deduction for contributions to pay premiums
22
Q

IRA Distributions allowed for terminal illness?

A
  • YES, for both qualified plans and IRA
23
Q

Lump Sum - Qualified Plan Distributions

A
  • 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
24
Q

Net Unrealized Appreciation (NUA) - Qualified Plan Distributions

A
  • lump sum distribution of ER stocks (ESOP or Stock Bonus Plan)
  • any other assets in plan may roll over
  • no step up for inheritance
25
Q

Determination of Net Unrealized Appreciation (NUA)

A

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)

26
Q

Plan Loans - Qualified Plan Distributions

A
  • 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
27
Q

Plan Loans SECURE ACT 2.0 - Qualified Plan Distributions

A
  • qualified disaster - extended loan amount to $100,000 or 1/2 vested balance
  • effective retroactively to disasters occurring on/after 1/26/2021
28
Q

Plan Loans Repayment - Qualified Plan Distributions

A
  • 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
29
Q

72(t) Distributions - Qualified Plan Distributions

A
  • 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
30
Q

How 72(t) Distributions Are Calculated - Qualified Plan Distributions

A
  • same as RMDs
    or
  • fixed amortization method
    or
  • fixed annuitization method
31
Q

What is permitted under VEBA?

A
  • life, sickness, and accident benefits
  • severance and supplemental unemployment
  • job training
32
Q
A

CFP (3 decks)

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