Retirement Flashcards
Qualified vs tax advantage vs NQ plans
QUALIFIED
DB, DC
TAX ADVANTAGED
SEP IRA, SIMPLE IRA
NonQualified
NQ Def Comp
SERP
Top Hat plan
S162 bonus plan
Suitability of retirement plans
3 common elements
1. currently deductible ER contributions
2. benefits not currently taxable to EE/participant
3. ER can LIMIT PARTICIPATION to select individuals - pick and choose
Qualified plan 1 and 2
Tax advantaged plan 1 and 2
ie cannot pick and choose in these 2
NQ S 162 bonus 1 and 3
taxable to EE
NQ Def Comp 2 and 3
not deductible to ER (until paid)
Inherited ROTH IRAs
Spouse can treat as own and therefore no RMDs are required
Others must take RMDs from the ROTH!
Inherited Traditional IRAs
5 years
Estates, charities, trust not qual as desig
Own life
Spouse: own or spouse’s life exp
Eligible Desg not more than 10 years younger (ie a sibling) : own life expectancy
chronically ill falls in here too
Once a child is age of the majority they are NOT an eligible designated beneficiary and subject to 10-year rule
-Minors: years to 21 + 10
-Others: 10 years
if in RMD status, must take EVERY year
see through trusts, successor beneficiaries
NQSO and ISOs
Types of income:
-Ordinary/compensation
-AMT pref
-Capital gain/loss
GRANTdate Neither have tax consequences
EXERCISE DATE
NQSO taxed on bargain element (FMV @ ex vs grant) as ordinary income on W2 (Compensation income)
ISO
bargain element is positive AMT preference item
SALE DATE
NQSO taxed as capital gain. Sale price less strike price at ex date
ISO.
If holding periods met, capital gain or loss
If not, disq disp treated as NQSO and taxed as ordinary income
Something about an AMT negative item for the exercise price and the sale price difference
Do both ISOs and NQSOs have holding periods and if so how long
NQSO do NOT have holding period requirements
ISOs; hold 2 years from grant and 1 year from ex. (So 2 total ok if ex after 1 yr then held another)
If not, DISQ DISP and treated as ORDINARY income.
upside for ER is they can deduct it. Otherwise it is not deductible at all for ER
NQSO v ISO
When does company receive a deduction
Which one is subject to vesting
Which one is limited $/yr
NQSO
-usually subject to vesting
-can be transferred or gifted to fam members, charities or trusts
-Corp receives ded when EE pays tax @ exercise
ISO
-Corp only receives ded if EE has disq disp (does not meet the holding period)
-May create AMT
-No more than $100,000/year can be granted
83b election
appendix
Restricted stock
Normally pay tax on RSUs @ time of VESTING
-83b election @ time of grant and pay tax @ time of grant based on FMV @ grant date
-holding period then starts @ date of grant/election
-make this when expect the stock to go up (esp useful in a startup, nonpublicly traded)
Make election within 30 days
Nondiscrimination testing of QPs
ADP test
A qualified plan MUST meet one of the following three benefit tests:
-The Safe Harbor Test – plan must cover at least 70% of the non-highly compensated employees
-The Ratio Percentage Test - plan must cover a percentage of non-highly compensated employees equal to at least 70% of the percentage of highly compensated employees covered
-The Average Benefits Test – the percentage of benefits received by non-highly compensated employees must equal at least 70% of the percentage of benefits received by highly compensated employees
2nd test is tricky. Ex question
The Acme Corporation employs 56 employees of whom 18 are highly compensated. The plan covers 23 of the non-highly compensated employees and 15 of the highly compensated employees. Does the plan meet ERISA nondiscrimination testing requirements?
The plan does not meet the safe harbor test but it does meet the ratio percentage test. Safe harbor test: 23 / 38 NHCE = 60.53% Fail BUT….
Ratio percentage test:
23 of 38 = .6053 NHCE
15 / 18 = .8333 HCE
.6053 NHCE / .8333 HCE = .7264 = PASS
QP SS integration
for SS to get $ above the 168k
2 methods
1. Excess integration (DB &D DC) - may be tested. see below
2. Offset integration (DB)
In either integration method, the maximum increase in benefits produced by the integration formula used cannot exceed 26.25% (3/4ths of 1% x 35 years). This may be a stand-alone exam question.
Excess. Max above base rate they can put in is 2x for up to 5.7% and for 6% and above is base plus 5.7%
if base is 7% and income 208400, then EE gets 168400.07
Plus 40000.127
Nua election
When a person wants to keep the employer stock in their former employers profit sharing plan
Net unrealized appreciation
3 buckets
- Employer contribution taxed as ORDINARY income @lump sum date
- Nua. Fmv @lump sum date less employER basis will be taxed at LTCG without regard to holding.
- Subsequent appreciation is taxed as short-term OR long-term based on the holding period AFTER the lump sum distribution
No step up in basis at death for any nua remaining
But it does retain the long-term character
Applies only to the employer stock held in the plan
Must be executed as part of a qualified lump sum distribution ie 100% of the employee’s account
Exceptions to early withdrawal
Qp vs ira
SOS to QPs
Separation of service after 55 applies only to QP not IRAs
HHH to IRAs
Qual Higher Ed expenses,
First time HB and
Health insurance premium when unemployed applies only to IRAs
Exceptions to early withdrawal that apply to both QP and IRAs (most likely to be tested
Unreimbursed med
Death
Disability
SSEPP
QP only sep service 55
IRA only. HHH
Higher Ed
Homebuyer fthb 10k
Health premium unemployed
Qualified plans social security integration
Max increase in benefits is 26.25% per year 3/4% *35yrs
Plan may put in more $ above “integration level” (typically the SS wage base)
DC pension
Money purchase
Target benefit
BOTH
100% employer funded
mandatory annual contributions
>= 10% stock
Money purchase favors younger
Vs Target benefit favors older as skews higher cont to them
Target benefit needs an actuary in Year One.. expensive
*Money purchase is easy for participants to understand with stated guaranteed contributions defined in the plan document
DC Defined contribution summary
Flexibility is key with DC profit sharing
DC CONT
Profit sharing
Traditional
401k (coda added to traditional
Stock bonus
Esop
DC pension
Money purchase
Target benefit
DC Defined contribution common elements of all
Participant directed
Combined ee/er 69k excl catch-up
Accelerated vesting
>=3 yr cliff or <=graded 2-6
Maxcomp considered 345k
*Max deductible employer 25% of covered payroll (in total not per person)
Max covered 345k
DC
EmployER contribution differences between profit sharing and DC pension
Profit sharing substantial and recurring versus mandatory contributions DC pension
Therefore DC pension aren’t as good for younger companies with fluctuating profits
DC pensions are 100% employer funded
DC trad ps vs 401k
Traditional ps can offer loans but not hardship wd
401K allows employEE contributions, loans&hardship
Withdrawals
401k subject to ADP, ACP testing
ADP EE. D is for deferring inc
ACP ER. C is for ER cont
Testing is Expensive
Loans in 401k
Max is the lesser
vested balance or 50K
Must be charged interest
Max term is 5 years unless for primary residence
Default is deemed a distribution
Even if some is repaid any outstanding loan balance within the past 12 months is considered in the 50k Max
Solo 401k
For a business with only one owner and no employees other than spouse
EmployEE same as trad 401k
EmployER Max 25% of W-2
DC pension
Money purchase
Plan document defines mandatory ER contribution
Company needs stable cash flow
Remember in a $P company needs $
Favors younger
Easy for participants to understand, Stated guaranteed ER cont %
Like all DC participants have investment risk
Vesting
Accelerated
Defined benefit top-heavy plans
Cash balance plans
All DC plans
Forfeitures
If used to offset plan expenses does not count towards AAL or EE deferral limits
Reallocation among participants makes them an active participant
Also counts towards the 23 k and the 69k AAL
DB Traditional DB plan
Only QP that guarantees a specific monthly pension
Older higher earning can have substantial funding
Accruing a benefit in any way is considered active participant for IRA rules
If married must be joint and survivor and less spouse waives
No predetermined Max for employer contributions and NOT subject to the 69k
PBGC
must satisfy 50/40 rule
Expensive must have annual actuary
DB cash balance
Guarantees a specific cash balance at stated normal retirement age
Hypothetical participant accounts are for record keeping only.NOT participant directed
Accrues a pay credit % of comp plus an interest credit. fixed or variable rate linked to an index
Must use 3-year Cliff vesting
Uniform benefit accrual for all employees
Easier for participants to understand than a traditional DB
Can convert guaranteed CB into a lifetime pension
403b TSA
Tax advantages not qualified
2 special features…
*Limited investment choices mutual funds or annuities only
Extra catch-up.
3k Special catch-up IF > 15 yrs @ same employer
Over 50 can have BOTH the 3K and the 7500
457b
3 special features
Not aggregated with other salary deferrals for the max
Not considered active participant for IRA deduction
Special catch-up see below
I think also no early withdrawal penalty
Remember they can’t contribute more than 100% of compensation
Special catch-up in last 3 years of service at normal retirement age
Lesser of
Unused to deferrals from the past
Up to 2x normal contribution limit ie 46k
CanNOT use both the special catchup and the 50 plus in the same year
Special catchups
457b and 403b
Also 457b can use unused deferrals
Capital preservation and purchasing power
Amount needed day 1 retirement.
Capital utilization like steps 1 and 2 of education
Capital preservation. Then do another o
Pv calc using the FV of step 2 as PV and the nominal or portfolio rate. Use years IN retirement as n. Then add this pv to step 2 pv
Purchasing power
Same thing except use inflation adjusted rate
Who do SEP contributions have to be offered to
Employees over 21 who
-employed in 3 of last 5 years
-Had $750 in 24
SEP with employees
First do the owner because it’s easy to forget the extra calcs
Sch c - 50% of (C.9235.153)
And watch if above se max
Times 20% for owner
Use the 25% for the employees
Or if the rate isn’t 25% take the rate / 1 + rate for owner
Elements to consider when selecting QP, NQP
Reduction in SS early
If start at 62, max reduction is 30%
It’s 5/12% for 24 mo 62-64
and 5/9% for 36 mo 64-67
Social security benefits summary
Ss impact of earned income prior to fra. If claiming SS already
Temporary reduction
Prior to fra
See tables. Over 22230 wh 1 for every 2 over
First year rule. Use 1/12 for month. starts when they claim
Could have partial years or even scattered months
Taxation of ss benefits
First compute provisional income
0/50/85
32/44 mfj.
25/34 sing
Overview of Medicare
Also know irmma calc is on magi plus tax exempt
Spousal SS benefits
Frequently tested
Max benefit is 50%
Currently married to worker
-Worker must have filed for own benefit
-Must have been married at least a year
Divorced from worker
-Worker must be at least 62
-Must have been married for at least 10 years, currently unmarried to anyone, divorce from worker at least 2 years
And start when you are age 62 but the benefit is reduced
No delayed credits past fra
Claiming SS on another’s record
Survivor. Widower
With or without child
Age and percentage
Remarried ok?
Any age with child 75%
Once age 60 100%
Age 60 without child 100%
For both of these current sp must have been married greater than equal to 9 months
Or 10 years for ex
The ex does not have to have been divorced for 2 years
In both cases must be currently unmarried OR got married after age 60
Widower mother/father and child
Looks like each can receive 75%
The child must be under age 16 or disabled
Once the widowed is 60 it goes up to 100%
Nua election example
SS survivor my summary
Capital utilization approach
Most used calc for retirement funding
Takes account down to zero at day of death
Like Ed funding
We are using it all up. I eat if we die at exactly our life expectancy our account balance will be zero
ADP for 401k
Average deferral of HCE cannot exceed the greater of
- 125% of nonHCE avg
Or
-Lesser of
-2x non HCE avg
-nonHCE avg +2%
Example non-hce average 4%
Greater of
-5% is 125%
-Lesser of
2x is 8%
nonHCE +2% is 6%
So hce max is 6%
