Retirement Flashcards
What are two retirement plans only available to Sole proprietors and partnerships?
Keogh and SeP
Two people married tend to live longer than the joint expectancy tables. One should add how many years to their plan
5-10 years
In retirement projections we should use straight-line and
Serial payment, the amount of savings increases each year based on an inflation projection. Starts small and is raised by inflation
Social security benefits are
Oasdi (old age, survivor, and disability)
Medicare
Social security income
Federal unemployment insurance
A worker is fully covered for social security is
40 credits
No more than 4 credits per year
Or 40 quarters
People that have 40 credits are fully covered for survivor benefits and retirement benefits
Currently insured social security worker has only 6 credits of coverage and the only benefits are what?
A lump-sum db for spouse or dependent
A survivor’s spouse’s benefit (if child is under 16)
A dependent benefit
Employees not covered by social security include
Federal employees who been employed since 1984 unless elected to switch
Some Americans working abroad
Nurses and students working for a college or college club
Railroad employees
A child that is employed by a parent of an unincorporated business
Ministers if they claim an exception
Members of a tribal council
Some state employees and teachers
A retired fully insured person can first collect benefits at what age?
62
A fully disabled person can collect benefits at what age?
At any age if the disability has lasted 12 months, is expected to be disabled more than 12 months or is expected to die and has completed the 5 month waiting period
Spouse benefits of a retired or disabled worker qualify for benefits if what?
Is 62 or older or at any age if the spouse has a child Under 16
Or the child is older than 16 and is disabled before 22
A surviving spouse (including divorce) get benefits if what?
The deceased spouse qualifies and the surviving spouse is 60 or older
A surviving divorced spouse typically needs to have been what?
Married for at least 10 years
And not remarried
They can also claim benefits at 62 even if the other spouse hasn’t claimed benefits
*they need to have been divorce for two years
The surviving spouse with a child under 16 or disabled between 16 and 22 can claim social security, true or false?
True
Dependent benefits of an unmarried child of a deceased, disabled or retired insured worker if what?
Under 19 and a full-time elementary or secondary student
Age 18 or older but has a disability that started before 22
The lump sum death benefit for social security is what and who receives it?
$255 and either the spouse or the dependent, not both.
The primary insurance amount (PIA) is what?
The basic unit used to determine the amount of each monthly benefit payable under social security
A spouse /divorced spouse is entitled to a 50% or more increase if
The spouse has a larger pia, no increase if their pia is larger
Taking social security prior to FRA calculation
PIA-(number of months prior to fra/180)*PIA
Workers who attain FRA can keep how much PIA(primary insurance amount?
All of it
Workers taking early primary insurance amount before FRA is capped at how much?
$22,320. After that the benefit is reduced $1 for every $2 earned over $22,320
Workers who reach full retirement age during the current year will have a reduced amount at what income?
$59,520. A reduction of $1 for every $3 over the $59520 occurs
Regarding social security benefits, The base amount for provision income are the following up to 50%
$25k for a single person
$32k married filing jointly
The base amount for provision income are the following up to 85%
$34k for single
$44k for joint
Municipal income is considered income for the purposes of determining what?
The taxation of social security benefits
Provision income for taxing social security is the following
Agi plus tax exempt interest and .5 social security income
A non-qualified deferred compensation plan is what?
Any employer retirement, saving or deferred compensation plan for employees that does not meet the tax and labor laws (Erisa)
Discrimination means the plan’s contributions and or benefits do what?
Tip towards the employer’s highly compensated employees
Non-qualified deferred compensation plan
May discriminate
Exempt from Erisa
No employer deduction until employee is taxed
Plan earnings are taxable to employer
Distributions are taxable at ordinary income rates
Qualified plan
Can’t discriminate
Many Erisa requirements
Immediate tax deduction for contribution (but employee may not be vested)
Earnings accrue tax deferred until distributions
Distributions are taxable at ordinary tax rates (exception to nua under stock bonus, esops, 401k
Defined benefit pension(qualified plan, Erisa, pbgc) it has the following
Vesting schedule, admin costs, exemption from creditors, integrates with social security
Favors older employees/owner age 50+
Guaranteed retirement benefit amount (can meet a set retirement objective)
Requires very stable cash flow
Past service credits allowed
Cash pension plan (a pension type of db plan)
Defined contribution details are the following
Qualified plans/erisa
Vesting schedule, admin costs, exemption from creditors, integrated with social security
Simple iras factors
For small employers (100 or fewer employees
Required employer match(immediate vesting
Salary reduction limit ($16k) FICA
Company cannot have another plan
Money purchase plan details
Up to 25% employer deduction
Fixed contributions
Stable cash flow needed
SEP IRA keys
No salary deferrals
Up to 25% contributions for owner (w2) up to 18.59% contribution for self-employed
Account immediately vested
Can be integrated with social security
Special eligibility:21 or older, paid at least $750 and worked 3 of 5 prior years
Target benefits pension keys
Up to 25% employer deduction
Fixed contributions
Stable cash flow needed
Favors older employees
Profit sharing plan keys
Up to 25% employer deduction
Flexible contributions ( must be recurring and substantial
401k provisions $23k, fica, hardship withdrawals
SIMPLE 401k is exempt from creditors
Sarssep keys
May have up to 25 employees and 50% of the eligible employees must defer
Must have been in existence since ‘96
Salary deduction limit $23k fica
New employees may participate in a sarsep if it was established before ‘97
Stock bonus plan keys
Up to 25% employer deduction
Flexible contributions
100% of the contribution can be invested in company stock
ESOP cannot be integrated with social security or cross tested
403b keys
TSA/TDA
For 501(c)(3) organizations or public schools
Subject to erisa only if employer contributes
Salary reduction limit is $23k fica
Employer contributions may be subject to vesting schedule
What Retirement contribution plans and retirement benefit plans Based on contributions, return and account balance at retirement?
They include the following:
Money purchase
Target benefit
Profit-sharing
Profit-sharing 401(k)
Stock/bonus/esop
Retirement plans (not qualified)
Based on contributions, return and account balance at retirement
SEP
SIMPLE
SARSEP
Thrift or savings plan
403 B
Money purchase plan uses a formula requiring annual employer contributions that is a flat percentage of each employee’s comp. What is the basis for comp
Only the first $345k can be taken into account. The employer can contribute 100% up to $345k but can only deduct 25% total plan comp
Maximum contribution for (section 415 limit)
The maximum annual additions limit that an employee can receive is 100% of the salary or $69k
An employer’s Selection of a money purchase pension plans would include
The employer wants a stable work force (retain key employees)
The employer wants a plan that is simple to administer and explain(pension stated % contributed)
The employees are relatively young and well-paid
Employers are required to fund money purchase pension plans, to do so a company needs what?
Stable cash flow and profit to make the annual fixed contributions
Target date pension plan is what?
A unique defined contribution plan because it also includes certain features associated with defined benefit plans
Target benefit pension plans Provisions shared with defined contribution
Maximum contribution is the lesser of 100% compensation or $69k
Retirement benefit is determined by account balance
No annual actuarial determination is required
Forfeitures may be reallocated to remaining participants or used to reduce employer contributions
Target benefit pension plans Provisions shared with defined benefit
Plan generally benefits older employers
Fixed mandatory contributions
Actuary determines initial contribution level
Profit sharing plan is a defined contribution plan. What are the details
Flexible
Up to 25% contributions
The contributions must be substantial and recurring
Each participant has an individual account
Forfeitures are unvested employee balances
Forfeitures are normally reallocated to plan participants
Why select a profit sharing plan?
Employers profit margin varies from year to year
When an employer wants to adopt a qualified plan with incentive features
When the employees are young, well-paid and have time to accumulate retirement savings
Employer selecting a 401k reasons
An employer wants to provide a qualified plan for employees but can only afford minimal extra expenses beyond existing salaries and benefit costs
The employees want to increase their savings on a tax deferred basis
Employee deferral of $23k if under a certain age
Employer can give 100% of salary or up to $69k
Why would someone elect a Solo 401k or uni 401 k?
The elective 401k can be $23k with a catch-up of $7500 if over 50
Additionally an employer can put in $69k
This is typically only for an owner and their spouse or two partners
This plan could allow for more contributions than a SEP and a keogh plan due to the “employee” contribution
Safe harbor 401k details
Automatically satisfies non discrimination tests which involve hces with either an employer matching contribution or a non-elective contribution
Exempt from from top-heavy(key employees) rules if only employee contributions and employer contributions (non-elective or safe harbor match)
Top heavy employer contributions may be required if the above is not done
Stock bonus plan and employee stock ownership (esop) details
Variations of profit sharing plans
A stock bonus plan may invest in company stock
ESOP must invest primarily in employer stock
Participants accounts are stated in employer stock
Benefits are distributable in employer stock
Employers may deduct dividends with respect to stock held in esop
ESOP stock deductible if
Paid in cash directly to participant or beneficiaries
Paid to the plan and then distributed to the participant or beneficiaries no later than 90 days after the close of the plan
Used to make payments on loans used to acquire employee securities
Paid to the plan and reinvested in qualifying employer securities
Selecting a stock bonus plan or an esop, they make sense when
A company wants to broaden ownership of its stock, to create a market for its stock, to provide liquidity for its shareholders’ estate, or to provide for business continuity
A company wants to provide its employees with a tax-advantaged means to acquire company stock
An employer wants its employees to have a sense of ownership
In addition the net unrealized appreciation NUA may not be taxed to the employee at the receipt of distributions from the plan (retirement)
What is An esop burrowing money from a bank or other financial?
Leveraged esop or lesop
What is esop diversification?
When an employee is over 55, having over 10 years of of participation in the esop, they generally have the right to diversify the account up to 50%
The plan must have three investments options or distribute cash or certificates
Cross testing (except esop) measures what?
Defined contribution plans for non discrimination on basis of benefits
Defined benefit plans are tested on the basis of contributions
Cross testing generally results in higher contribution rates for older employees. How do the crossing testing work?
The plan is designed to maximize benefits to hce, while other nhces are designed to provide the minimum benefit
The plan may provide for $69k for the hce but the lessor of 1/3rd allocation to the hce or 5% of the nhce’s salary
Defined benefit plans are qualified employer plan that guarantees for a specific amount at retirement. Why would an employer select this plan?
Any employer wants to maximize plan contributions to older employees
An older controlling employee wants to maximize tax-deferred retirement savings own benefit
What plans are required to carry PBGC?
Defined benefit and cash balance plans
Under section 415 limit there is a maximum benefit amount not contribution. What are they?
The lesser of $275k or the highest average of three consecutive years
What is the unit benefit formula or percentage-of-earnings-per-year-of-service formula)?
It’s the most frequently used take (percentage rate time years of service) times salary
How do you calculate Final average method for defined benefit calculation?
Remember that a max salary of $345k can only be calculated and the max yearly payment is $275k
You would add the last three salaries and divide by 3
Defined benefit plans and cash plans can provide what to long time employees?
Past service credits
Defined benefit are tough because the amount owed is unknown. The following are the factors that affect the amount of employer contributions
Participants proximity to retirement
Past service
Forfeitures must be applied to reduce employer contributions because the actuary determines annual contributions must be made, not more/not less
Investment return assumptions
Salary scale assumption (older employees are paid more, new and younger employees paid less
A cash balance pension plan is a qualified employer pension plan that provides an annual employer contribution based a specific rate to a hypothetical individual account
The employer guarantees the contribution level and also a minimum rate of return for each participant. It’s like a money purchase plan but MPPs do not guarantee a minimum rate of return
Why select a cash balance pension plan?
When looking for a simpler and less expensive defined benefit plan
Many companies that had db switched to cash balance plans because guaranteeing specific benefits made employers uncomfortable
Disadvantages to a cash balance plan to the employees?
If one is older and close to retirement the cash balance pension benefits are lower. There is a significantly lower LUMP SUM PAYOUT
Cash benefit plans base the benefit on all working years, while dbs base benefit on the top three highest paid years
The fixed contribution of a cash balance plan is generally lower than a db plan
412(I) plan or 412(e)3 is fully funded with insurance products and annuities. The insurance company actuarial assumption determines the actual contribution rate. Exempt from the minimum funding standard. Who would get this plan?
An employer that has need for life insurance. The plan allows for large contributions but the plan return would typically be lower than dbs because life insurance returns
In a defined benefit plan what is the maximum permissible contribution?
This is determined by an actuary
The benefit can only be based on a salary of $345k
The max annual benefit cannot exceed $275k
Life annuity defined benefit plan calculation is
Rateyearssalary
Money purchase plan forfeitures outcome is
Either giving to other participants or reducing company contributions
Money purchase plans require a fixed rate on salary, what would happen if salaries increased?
The employer would have to increase contributions
What is the maximum amount of retirement benefit for a participant in a target benefit plan?
Whatever the target date balance is at retirement
What is the maximum deductible contribution in a target benefit plan based?
A max of 25% of the aggregate eligible compensation of all covered participants. Although an actuarial calculation is made, it is always limited to a max 25% of all eligible compensation
Profit sharing plans and money purchase plans can reallocate forfeitures to plan participants?
Yes
What is the Age and service for qualification to participate in a qualified plan?
Must be 21 or older and have 1 year of service
A special provision allows up to 2 year service requirement, but the employee would have to be 100% vested (2 year/100% rule)
An employee who meets the age and tenure requirements must be allowed to
Participate no later than the earlier of the first day of the first plan year beginning after the date the employee first met the age requirement or 6 months after the conditions are met
Hours or Years of service to partipate in a qualified plan
1000 hours during the initial first year or 500 hours of service in at least 3 consecutive years will be eligible
Two other regulations for qualified plans is ratio percentage and average benefit test. How do you calculate each?
Ratio percentage test: The plan must cover a percentage of nhce that is at least 70% of the percentage of the hce who are covered. If this fails then the next test must be passed
Average benefit test
The average benefits for all nhce must be at least 70% of those hce
Example:acme inc plan covers 100% of hce then up to 30% of nhce can be excluded
If acme excludes 50% of hce, up to 65% of nhce can be excluded. 50%*70%=0.35-1=-0.65
If acme excludes 10% of hce up to 37% of nhce individuals can be excluded 90%*70%=0.63-1=-0.37
Minimum participation for DB plan only is what?
Lesser of the following: 50 employees
The greater of 40% of all eligible employees or two employees(or if one employee that employee
Two doctors at one practice, only one db can be selected
10 doctors working in a practice 40 staff persons, the minimum requirement is the lesser of 50 employees or 40% of 50 employees which is 20 employees
Highly compensated employees is
Either greater than 5% or someone making $155k
Relates to discrimination (adp/acp test)
Key employees is
Any point in the current year they are greater than a 5% owner
An officer and has compensation greater than $220k
Greater than 1% owner and compensation greater than $155k
Key person relates to vesting
Top heavy plans is a plan that 60% of it aggregates of accrued benefits or account balance do what
Go to key persons of the company
Calculation is
Key persons salaries/key persons +additional salaries
Vesting schedules based on date of hire
Faster-top-heavy db plans and all defined contribution plans
3 year cliff or 2-6 year graded or 100% vested with 2 year eligibility
Slower-non-top-heavy db plan only
5 year cliff or 3-7 year graded or 100% eligibility
Can always be less not more
Formally allowed 7 year grades vesting and 5 year cliff vesting schedule must
Convert from 7 year graded vesting to new format of 3 year cliff or 2-6 year graded schedule
Or
Convert from 5 year vesting to 3 year cliff or 2-6 year graded schedule
The most stringent service requirement for a qualified plan is
2 year 100%
All other plans have a 1 year or less service requirement
People who are excluded for failure to satisfy statutory employment in a top-heavy calculation are included or not included?
Not included
Employees who are spouse, parent, child, or grandparent that own >5% are what?
Deemed to also be an owner at >5%
Elective deferrals and matches/contributions are likely to cover hce, elective deferrals are subject to nondiscrimination testing, what is the test?
actual deferral percentage (adp)
Actual contribution percentage(acp)
Not more than 125% of nhce rate (adp is 8% or greater)
Not more than 200% of nhce rate and not more than 2% greater than nhce rate (adp is between 1-8%
Adp/acp shorthand method
0 to 2% is times 2
2-8% is plus 2
$345k is
The max salary that can be used to determine benefits
Shorthand method for acp and adp
0 to 2% NHCE times 2
3 to 8% NHCE plus 2
What are the Catchup provision for qualified deferrals?
Age 50 by end of calendar year
$7500
Control groups must be taken into consideration for the purposes of contribution maximums and non-discriminatory testing. Common rules are
Parent-subsidiary-one entity owns at least 80% of one or more other entities
Brother-sister= fiver or fewer owners of two or more entities own 80% or more of each entity
Affiliated service group=the affiliated service group typically covers health, law, accounting, engineering etc
Employee leasing-employer’s choosing to lease employees rather than employ them directly to avoid discrimination
Integration level with social security
The level of comp above which the excess is made. The integration cannot go above the the social security wage base
What is Base benefit with social security
Plan benefit for comp below the integration level
Excess benefit percentage with social security
Plan benefit for compensation above the integration level
Using the excess method, the permitted disparity is the lesser of the base benefit percentage or 26.25%
Examples of social security integration
Examples of social security integration
Defined contribution plan integration
Integration level-any dollar amount up to social security wage base ($168k)
Base contribution percentage-contribution percentage for comp below the integration level
Excess contribution percentage-contribution percentage for comp above the integration level
Permitted disparity-the lesser of the base contribution percentage or 5.7% formula for determining components of integrated dc plans
Integration can be used in the following
Target benefit pension plan, money purchase, profit sharing, stock bonus, and SEP
Max contribution is always $69k
NOT AN ESOP or SIMPLE
Profit sharing allocation formula
It may allocate contributions on a pro-rata basis
It can discriminate in favor of hces
It may skew contributions to specific participants
Using the excess method for db plans the max permitted disparity is
The lesser of the base or 26.25%
The best vesting schedule with a high turnover for a top-heavy plan is
3 year cliff. The forfeitures will go to the other employees, probably hce, so potential to get 100% compensation or $69k
Deduction limits - Section 404(c)
Employers can only deduct a maximum of 25% of all participants eligible compensation
A employee can receive more than 25% as long as total compensation doesn’t exceed 25% and doesn’t violate the rules of discrimination
Defined contribution limits-the section 415 annual additions limit applies to all defined contribution plans
A lesser of max of $69k or 100% compensation
Excess contributions can be handled through the following:
May be allocated among other employees
May be applied in later years to the same employee in a suspense account
May be used to reduce future plan contributions
The max profit sharing amount is
25% of the salary. If someone makes $200k. 50k can be placed in the profit sharing plan and then $19k can be placed in other plans
$23k is the max you can contribute to
A 401k
The definition of compensation also includes elective deferrals under section 401k and section 457 and generally includes salary reduction contributions to section 125 cafeteria plans (FSAs)
Inclusion or exclusion is determined by the plan document
Elective deferrals if the employer works two jobs
401k, 403b, simple, Sarsep $23k
$7500 catch-up
SIMPLE AND ANOTHER SIMPLE (16k) catch up $3500
A keogh plan may act as what?
Defined benefit, money purchase, or profit sharing type plans for sole proprietors and partnerships
Important differences for a keogh plan for self-employed and corporate plans
Benefit is based on net earnings instead of salary
Net earned income is the owners net income from the business after all deductions, including non-owner employee only plan contributions (net schedule C income)
Self employment tax must be computed and deduction of half the self employment tax must be taken before determining the deduction
For figuring keogh profit sharing, money purchase Sep use the following shortcut when using net schedule C
15% - 12.12%
25% - 18.59%
Loans from a qualified plan
Must be an enforceable agreement
Loans cannot exceed the lesser of 50% of the participants vested plan or $50k
A special rule allows for small account to borrow $10k without regard to %
The loan is repaid with in a timeframe not exceeding 5 years, two exceptions (leave of absence less than a year and loan for primary residence, the loan is not collateralized
Loan repayments for qualified accounts need to be made at least quarterly. What happens if a payment is missed
Entire loan due is deemed taxable at ordinary income and if under 59.5 a 10% penalty will apply
A key person qualified loan is never deductible, is a non-key person able to deduct the loan interest?
Only if the loan is for a primary residence and the residence is securing the loan
A qualified plan is not required to provide loans. What qualified accounts can give loans and which can’t?
Cannot take loans from IRA, SEP, SIMPlE and Roth accounts
Qualified plans loans can occur is 403bs, tsas, dbs and dcs, esops but are not required
Qualified account loans for hce must be what?
Non-discriminatory in nature, can’t offer a greater amount to hce than to nhce
What is A corporation profit sharing max for the owner?
The 415 limit of $69k, not the 25% rule
An s corp owner salary is $24k. He wants to do a money purchase plan. How much can the company. How much is the max the company can give
Under section 404 the max is 25% of salary
Section 415 limit can contribute 100% compensation
Business meals are what % deduction?
50%
Someone that is self employed and has business expenses how should you figure the amount for a profit sharing plan?
Use the keogh rules. 25% is 18.59%
15% is 12.12%
The employee catchup 55 and older is what?
It’s not an employer contribution, it’s an additional amount of employee deferral that does not count towards the adp/acp test
Loan interest on qualified accounts purchasing a home if
The home is collateral and the person isn’t a key employee
Interest on the loan if the payments are the collateral is considered consumer debt, consumer debt is not deductible
Contribution to IRAs must be
Earned income, either the lessor of the limit or 100%
Investment income would not count
Deferred compensation wouldn’t count
S corp distributions wouldn’t count
Spousal Ira requirements
If a married person does not work or has limited compensation, they can contribute to a spousal Ira as long as the couple has enough compensation that equals or exceeds contributions to both iras
Ira eligibility requirements
Anyone receiving compensation can contribute to an IRA, it may or may not be deductible
Keys to Ira deduction details
If neither spouse is an active participant or a single person is not an active participant, then IRA contributions are deductible (not subject to agi
Plans that affect active participant status include participation and qualified plans simple plans , SEPs, TSAs and union plans (but not 457 government and non-government plans
Activity that results in active participation status includes annual additions to define contribution account or benefits, accrued for the tax year to define benefit plan. Annual additions include employer, contributions, employee contributions and forfeitures
If a profit sharing plan does not provide “ANNUAL ADDITIONS”
Then a deductible contribution to an traditional Ira can occur
A spousal Ira with one spouse as an active participant can contribute a deductible Ira if
Agi is less than $230k
Phase out of $240k
Phase out numbers are provided
Early distribution penalty taken before 59.5, what are the exclusions
Death
Total disability
Qualified education expense
Distribution used to pay medical insurance premiums subject to a 10% agi floor unless unemployment compensation has been received for at least 12 weeks
Substantially equal payments
First home expense up to $10k
Medical expense greater than 7.5% agi
$5k for qualified birth/adoption
Federally declared disaster
Ira as collateral is considered
A distribution is considered for all or part of the Ira depending on the amount collateralized
Can you rollover a 401k to a Roth IRA?
Yes
A non-spousal who inherits a qualified plan can do what with this in regards to a ROTH IRA?
Direct transfer to an inherited IRA
The same is not true for a IRA, that cannot be direct transferred or rolled over to a ROth iRA
For a ROTH 401k is there the $10k first home purchase tax free exception?
No
How is a distribution tax free from a Roth 401k?
Need to be 59.5, death, held for 5 years, or becomes totally disabled
Roth 401k, 403b and govt 457b plan have RMDs t or f
False
What are similarities between qualified plans and traditional iras?
They both have rmds
Can a person that is active in a 457 plan open and fund a deductible Ira?
Yes, the participation in the 457 does not count therefore he can make a deductible contribution
What are the basics of a Sep?
They are employer sponsored plans
Only employers can fund
Easy to adopt, only submit form 5305-SEP
What are SEP employer contributions?
Limited to the lesser of 25% of compensation ($345k max salary and $69k max contribution)
For self-employed owners only, limited to keogh rules 25% =18.59%
Are SEP contributions required?
No, it’s like a profit sharing plan
Contributions are immediately vested
When would an employer use a Sep?
An alternative to a profit sharing plan that is easy and inexpensive to install
What are sep contribution requirements?
Employer contributions must match the percentage for all qualifying employees
Covers employees who are at least 21 and have worked 3 to 5 years, must have made $750 or more to count
A Sep can be integrated with social security but you cannot do the following features
Take a loan
There is no age-weighting or cross testing
What are simple Ira details ie contribution limits and how are contributions taxed
$16k (indexed $10k) is the max with a $3500 catch up
There is no discrimination testing
Salary deferrals are subject to fica and futa
Sep matches
Up to 3% but not less than 1% 2 out of 5 years
The match depends on deferrals, no deferral no match
Employers may do non-elective contributions of 2% for all employees
What form adopts a simple and does it get filed with the IrS?
Form 5304 or 5305 SIMple. It’s provided to the employees
The form is not filed with the irs
Can a simple be terminated mid year?
No, it must occur on Jan 1 of the year following notification of the employees.
What are limitations of a simple?
Employer cannot have another qualified plan
Any employee making $5k in any of the previous two years and is expected to make $5k needs to be covered
The employer must let the employee know that they have a 60-day election period just prior to the calendar year to make deferral elections or modify elections
Employers of household worker can
Make simple Ira contributions but it’s not deductible. Can’t be made in connection with a trade or business. Ask Jeeves
Distribution from a Simple penalty within the first two years, is it 10%
No, 25%!
Why do a simple 401k?
It adopts the simple provisions so no top-heavy, ADP or acp is required. Extremely rigid. Most employers would simply just pick a simple, think simple
Also has a catchup of $3500
A person who is turning 50 or is older in a 403b can make what additional contributions?
$7500 catchup and if over 15 years of service an additional $3k
Section 457 provides for the following?
Oh no qualified, deferred compensation plans of government units, governmental agencies, and non-church controlled tax exempt organizations
The 457 plan deferral is
the lesser of $23,000 or 100% of compensation
What is the catch-up provision for a 457 plan?
Before normal retirement age , typically 65, a participants final three years but not the last year of participation can contribute $46k or the sum of applicable limit for the year
457 plan catchup provision at age 50
$7500
Only the greater of the catchup provision can be used preceding normal retirement
What are the 457 coordination of benefits?
None, can contribute max to two plans
Only a government employee would be able to get the catchup, not an executive director
What are the 457 inclusion of income?
Distributions must include deferred compensation in gross income for the tax year in which the deferred comp is paid
Is section 457 subject to RMDs?
Yes
Can any 457 plan be rolled over to an IRA, Roth IRA, or qualified plan?
No, only govt 457s can be rolled over
Nongovt 457s can only be rolled over to other nongovt 457s
Are 457s subject to qdros?
Yes
457 is non- qualified deferred compensation, how is this taxed?
There is no constructive receipt. Taxed when received
No taxes at the time of deferral
Subject to forfeiture
Deferred comp when received is subject to withholding and social security taxes
Keogh plan can operate in what qualified plan capacity?
It can operate as a db, money purchase or profit/sharing
A 457 can cover the following organizations
A state government
A municipal government
Non profit outside of a church
A person owns a company, two full time people a few part-time people working 400 hours a year. What should she do if she wants to make the full-time people happy and not give benefits to part-time peeps?
Group health (typically have to work 30 hours a week to satisfy requirements)
Profit sharing plans and SIMPLE 401k (500/1000 year service eligibility requirements.
Not acceptable: SEP has a 3 year eligibility then would satisfy eligibility
A person, 55, has a consulting business and has no employees. What plan can he contribute the most to?
Db
If db is not an option a
Uni 401k $23k $$7500 catchup
Add employer profit sharing $38500 totaling $69k. Protected from creditors
A Sep would only be $69k but no catchup
What plan does not have fica or fuca?
SEP, since all contributions are employer provided there is no FICA or Fuca
In deferral-type plans fica and futa are taken out because they are employee contributions
The anti-kickback rule is
A fiduciary cannot control its own plain assets for its own interest or own account or from receiving any consideration for its own personal account from any part of dealing with the plan and connection with the transaction of following asset
A plan is invested in all fixed income and conservative assets. What can the participants do?
The plan calls for prudent investments, and a producer is not required to be successful managing the plan assets.
Under the prudent person rule if a fund had a range of funds from money market to aggressive, highly volatile gross stocks what would the responsibility be for the employer?
They could be liable because they offered a highly vile volatile stock neutral fund out of their selection. It may not be considered prudent to offer it.
A distress termination for a defined benefit can only occur when?
The employer is in a bankruptcy liquidation proceeding
Employer is in a bankruptcy reorganization proceeding
Employee can prove to the PBGC that plan termination is necessary to pay debt
The PBGC can require an involuntary termination of a pension plan due to the following
The plan isn’t funded, perhaps legal standards.
The plan is not able to meet its benefits.
The plan has a long run portfolio loss that may get significantly
worse overtime.
Failing to pay PBGC premiums would not trigger termination of the plan
What factors go into selecting a plan design?
Both employer employee objectives have to be analyzed
Maximizing the proportion of playing contritions that benefit owners, highly compensated or older employees
Maximizing or minimizing employer contributions
Maximizing, employer, contribution flexibility
Vesting to minimize turnover
Allowing employee to make before tax salary, referrals
How do you establish a qualified plan?
The plan document must be executed within the tax year for which the employer wishes to take the tax deduction for its contributions
Safe Harbor must generally be adopted before the beginning of the plan year
Standard 401(k) plans with the referrals must be established before the first referral can be made
New simple form K plans must be adopted anytime on or after January 1, but not later than October 1 of the year in which is adopted
How do you establish a separate IRA?
The sep does not have to be until the employer taxes are due, including extensions to establish and make contributions to accept for the tax war year in noteworthy advantage
A defined contribution plan that holds publicly traded employer security must allow purchases to diversify employer contributions after how long?
3 years
Unrelated business taxable income is income from a living partner or dividends from a margin account. What is taxable?
If unrelated business taxable income exceeds $1000 the qualified plans UBTI is subject to income tax in the current year
Life insurance in qualified plans must be incidental to the primary purpose of the plan, namely to provide retirement benefits. What the rules for having life insurance in a plan?
The aggregate premiums paid are at all times less than the following Ordinary whole life 50%
Term 25%
Ul 25%
The insured benefit must be no more than 100% times the expected monthly benefit
Defined contribution used 25%/50% and db uses the 100 times limit
Life insurance in a qualified account tax consequences
The pure insurance life protection is generally taxed to the partipant at the table 2001 cost
The cash value is taxed as ordinary income and the remainder db is tax free
What plans can provide life insurance db?
ESOPs
403b
Profit sharing 401k
If a db has funded too much what are their options?
Fully fund with whole life db, the employer can use the actuarial assumptions with the whole contract. The actuarial assumptions of the cash value insurance policy are normally lower than most other plain assumptions, allowing for additional contributions.
When using whole life in a qualified plan to provide death benefits, the current cost of the pure insurance protection is subject to taxation. The cost of tributable to this pure life protection will be lower of which of the following?
The actual cost as provided by the carrier and table 2001
Can a SEP have life insurance in it?
No a sep or simple can’t have life insurance in it
Which plans can have a second to die life insurance contract in it?
Only private chair plans can hold second to die insurance pension plans cannot cash, balance, plans, and money purchase plans or pension plans
Which type of qualified plans can offer disability insurance?
Qualified plans are eligible to hold disability insurance such as DB pension plans esops, 401K profit sharing plans
What is a 412 i?
412 I is a fully funded insurance plan. This would allow for large contributions even if it was rated life insurance would be charged to him at standard rate base on table 2001 it would build upon a tax-free basis until retirement. In addition should he die before retirement Kathy would receive the pure death benefit, income tax free at retirement he could buy this policy from the plan and keep it in his retirement years however, if he dies within the next few years, there is not much in the plan.
What is the rmd age?
73 for years 2024-2032, RMD will increase to 75 for 2033 and beyond
Rmd penalty has been lowered to what?
50% to 25% or 10% if the rmd is taken by the end of the second year following the year it was due
Secure 2.0 allowed what on employer matches?
ROTH(after-tax) basis
Secure 2.0 allowed what to SIMPLE and SEP IRAs?
Allowed for simple roths and SEP roths
What are qlac limits?
$200k adjusted for inflation
Secure 2.0 added additional 10% exception added to what?
Federally declared disaster withdrawals?
Qualified charitable distribution can now be?
Indexed for inflation
One-time $50k allowed for crat or charitable gift annuity
Secure 2.0 allowed for IRA catch up to be
Indexed for inflation
If funds aren’t used for 529 purposes what can be done with those funds?
Can be converted up to $35k. The plan must have existed for 15 years
The amount converted cannot be more than the aggregated amount contributed to the 529
Must go to the beneficiary’s benefit
Any amount placed in the account, plus earnings on those contributions, cannot be converted
Secure 2.0 allows Student loan payment
To be employer matched
When can there be premature distributions from an in-service qualified plan?
A specific age or years of services reached
Hardship
Attain the age of 62 for defined benefit plans
For qualified plans distributions what are specific ages or years of service?
Distributions must generally occur after attainment of normal retirement age in the case of money purchased pension plans or age 59 1/2 for 401(k) referrals. There are no hardship requirement for this type of distribution.
A hardship withdrawal is allowed at any age in any type of profit-sharing plan. What are the two hardship test?
Financial needs test due to Media and heavy financial need
Resource test the amount of withdrawal cannot exceed in amount needed to satisfy need and participant has no other resources to satisfy the need
What does the pension protection act provide for for in-service withdrawals?
It allows for distributions as early as age 62 the distributions will be treated as retirement income
If someone is facing a hardship, withdrawal is their penalty
Yes, unless they are 50 1/2 or disability qualified, plan exemptions exist
What is 72T
A part of a series of substantially equal periodic payments from an Ira that avoids the premature penalty of 10%
Must meet all of the following:
Paid not less frequently than annually
Pain without changing out for the longer of five years or until the pay reaches 59 1/2
Based upon the life expectancy of the recipient or recipients
Based upon a reasonable rate of interest
If applicable based upon reasonable mortality assumptions
An example of 72 5 year-old
If five year-old starts at 52 then they must continue to age 59 1/2 if they start at 58 they must continue to 63
What is 72T is broken?
A 10% penalty is retroactively made to all payments received before 59 1/2
An exception to the 72T amortization method is what
The RmD method with no penalty the RMD greatly reduces amount of payout it will preserve retirement funds
What is a qualified joint in Survivor annuity?
In short, Q JSA is a post retirement death benefit for the plan. Purchase and spouse qualified pension plans are required to provide a QJSA option. Currently the survivorship annuity must be not less than 50% nor greater than 100% of the annuity people during the joint lies of the participant and spouse
What is the qualified optional survivor annuity?
The pension protection act requires a second joint and survivor annuity option, and country plans. It is called a qualified optional survivor annuity at a minimum the QOSA must be a 50% joint and survivor annuity many plans specify 75% joint and survivor duty, the participant can elect out of this benefit, only with written spousal consent. To elect out during the 180 day. Period prior to the annuity start date in addition, the participant must receive notice explaining his or right to defer and explain the consequences
A qualified pre-retirement survivor annuity is an annuity that is paid to the spouse of the participant. What is a stipulation of this annuity?
The survivorship annuity must not be less than what would be payable under the plans Q JSA
A simple can accept rollovers from what plans?
403b and government 457 plans but had to be established for two years
The difference between a qualified 60 days and a 60 day rollover
Funds coming from a qualified plan is a qualified 60 days distribution and once funds are in an account a person can roll that out to another Ira within 60 days only once a year
Conduit Ira
Holding qualified account to get it to another qualified account
Rmd required beginning date for Ira’s, seps, Sarah’s, and simples
April 1st of the year after you turn 73
Subsequent distributions must be made by dec 31
Owners of 5% or more of the equity of a corporation sponsoring qualified plan are subject to this rule
Participants in qualified plans this includes 401(k) plans government 457 plans and 403 bees are still working and not 5% or greater owners can do what?
Delay RMD’s until April 1 the year following retirement
Regarding government 457 plans and service distributions
If someone is working, they cannot take in-service withdrawals until 70 1/2. Once a person separates from service, they can take a distribution 457s are not subject to mentor withholding rules because they are not qualified plans
Regarding figuring RMD’s for spouses, what if a spouse is 10 years younger than the spouse that is turning 73?
You will have to use the joint life expectancy table, tables tables
If someone is still working and they have an IRA and simple plan and they still contribute to their simple plan, are they required to take an RMD?
Yes, they are required to take an RMD from both simple and IRA
A qualified charitable distribution components
AQCD can be made at 70 1/2 not 73 or older
Up to $100,000 annually index
Amount is excluded from taxable income
Satisfies RMD requirements without causing dollars to be taxed
Although no terrible income tax deduction is available
Money coming from a qualified plan should do a direct transfer into an inherited IRA. Why?
If the money hits the beneficiaries account, then they will owe taxes, even if the non-spouse will spouse quickly deposit the money in an IRA
Always set up inherited IRA if the funds go into an IRA the whole 401(k) balance is taxable
A person between 55 and 59 1/2 can take distributions from a 401(k) and not be taxed. What if this person rolls the 401(k) into an IRA and then takes a distribution ?
They will be taxed ordinary income, and also penalized 10% for an early distribution
What is the special penalty waiver rule for public service employees?
Public safety employees include law-enforcement, customers and border patrol officers firefighters and air traffic controllers if they have a government plan not 457 then they can make early distributions at age 50 and older
What is net unrealized appreciation?
Net unrealized appreciation difference between the employer cost basis and the market value at lump sum distribution to the employee is not subject to taxation until employee sells the stock. The net unrealized appreciation is always tax as long-term capital gains rate, regardless of holding. If the stock appreciates after the distribution, the gain not attribute to NUA will be taxed at favorable capital gains rate if the stock is held long-term. The basis of what is given at retirement to the employee is taxable once given to the employee. This is phantom tax, the fair market value at the time it is given at retirement is long-term gain any amount over the long-term gain will also be taxable and it depends on the holding.
What if someone dies at 53 and they have an ESOP?
If they take securities as part of a lump sum distribution, all of the net unrealized appreciation will be non-taxable at the time of distribution
The anyway constitutes income and respect of a decedent IRD
When you sell the stock after receiving it as part of a lump sum distribution, the NU a portion of the proceeds is long-term capital gains
Who can be the beneficiary of a pension plan if someone’s married?
Only the spouse can be the beneficiary
The 72t penalty for not taking equal payments until 63 would be what?
Only 10% penalty for payments received prior to 59.5
Under a qdro are iras applicable?
No, only 403bs, qualified plans and govt 457s
What are pension plans and who can be named as beneficiaries?
DB, CB, MP, and TB are pension plans, only with spouse consent can anyone else be named as bene
Qualified plans allow for distributions 55 and older without penalty, what situations would include a 10% penalty for early withdrawal?
A hardship withdrawal
A distribution to a ex in conjunction with a qdro
Distribution to purchase principal residence
What’s the difference between a salary reduction plan and a salary continuation plan?
Salary reduction reduces the salary
Salary continuation plan is paid by the employer
What are unfunded non qualified company plans?
Could be a promise, or naked promise, or informally funded
These are the companies assets and could be part of a default
If the employee never received constructive receipt no tax until received
Company can’t deduct until the employee receives the deferred compensation
What are the differences in rabbi trusts and secular trusts?
Rabbi trust protects the deferred comp to honor if the company doesn’t have a bankruptcy or goes out of business. Not taxed until received and company can’t deduct until given
Secular trust is an irrevocable trust that establishes benefits for an employee. Taxed the year funds go into the trust and deduction is taken when given. Considered funded non qualified deferred comp
Substantial risk of forfeiture is what?
The risk of assets are conditioned on performance.
Income is not constructively received if there is substantial risk of forfeiture
There is a substantial risk of forfeiture test:
The employee’s relationship to other stockholders and the degree of their potential control
The employee’s relationship to corporate officers, if these are too close a substantial risk doesn’t exist
Incentive stock options ISO’s are tax favored plan for compensations to executives by granting options to buy company stock. What are stipulations around this?
Only the first $100k worth of isos granted that vest in one calendar year are entitled to favorable tax treatment
Options granted which exceed that amount are non-qualified
* an ISO program may be called a qualified employer stock option plan, but is certainly not a qualified plan
ISO’s and NSO events. ISO and NSO are taxed based on the following.
Grant: the date the employee is given the shares and the date the shares are typically valued
Exercise: the date the employee chooses to exercise the right to buy the shares awarded. The spread between the exercise price and the market price is known are the BARGAIN ELEMENT.
Sale-the date the employee sells the exercised shares. The amount of time between exercise and sale determines whether the gain or loss is long-term or short-term
What is the Holding period requirements for ISO’s?
The holding. Must be observed from grant to sale and from exercise to sale.
There are 2 ISO holding period rules. Both must be satisfied to prevent disqualifying disposition.
First holding period rule is that the grantee must hold the exercised ISO shares at least one year from the date of exercise before selling
Second, the taxpayer must hold the shares from an ISO exercise at least two years from the grant issue date before selling them
If either RULE is violated the ISO becomes an NSO
If an employer allows for a shorter vesting. The ISO can be exercise without triggering a disqualifying disposition.
The internal revenue code creates numerous conditions for ISO’s if the conditions are followed, what happens with the taxes?
The IRS levy is no income tax when options are granted or exercise to obtain the shares please or text at the 15% or 20% capital gains rate if they hold the shares long-term only when they sell the acquired stock
How are nso taxed?
Upon exercise income tax is due on any gain, the difference between the strike price and the shares current market price. If NSO recipients hold onto the shares, they acquire they are subject to tax game when they sell the stock on the difference between the share price at acquisition and the sale price
What is the main difference with taxation between ISO and NSO?
ISO’s are not subject to regular tax when exercise NSOs are
What are disqualifying disposition, subject, fica, and FUTA?
If I SO are sold in the same counter year as the ISO‘s were exercise, the bargain element is taxable compensation, subject to FICA and FUTA. If the ISO‘s are sold within 12 months of exercise, but in the same calendar year, the bargain element is ordinary income, not subject of FICA and food. If a non-qualifying disposition is triggered by a violation of the two year rule, but the sale occurs in different year than exercise occurred, The bargain element is ordinary income, not subject to FICA and FUTA in both the one year and the two year year rule are violated The bargain element is taxable conversation, subject to FICA and FuTA.
Why are ISO offered?
ISO rewards for employees. They are most often granted to employees to motivate productivity. How are the employee receive no tax deduction when the shares are exercised
ISO and nso taxation example
A non-profit non additional benefits could be what?
Phantom stock and section 162 life insurance, premium is taxed to the employee and deductible from an employer.
What can’t be is iso, not publicly traded and no qualified deferred compensation because of it being a nonprofit
A salary continuation plan is funded entirely by employer contributions what is a pure deferred compensation plan?
It uses a portion of employees current competition
Can a profit sharing plan contribute more than 25%
Yes, as long as the entire plan contributions don’t exceed 25% of total plan compensation, the employer can contribute more up to 100% of salary or $69k
As a sole proprietor under a Keogh plan, what can’t be contributed?
15% is .1212
25% is .1859
A Sep is the simplest most flexible plan. What are the advantages
No required contribution
If employees are part-time minimal match
No employer contributions
3 out of 5 years part-time making $750 a year
A simple IrA can put in 3% max. What is the max employer contribution?
$16k
A person missing their rmd, what should they do and why?
File an amended return and ask for the excess tax to be waived and pay any tax due. The IRS may waive the excess tax if the taxpayer demonstrates the following the missed distribution, was due to reasonable error appropriate steps are being taken to remedy the situation.
Can a qualified plan from a deceased owner, be rolled over to a qualified plan of a spouse?
Yes
If you’re married filing separately, how are capital losses calculated?
You can only claim 50% of the capital losses
When determining AGI for an s corp, what should you include?
Income from a corp
Less capital losses
Less alimony
Less alimony paid for premium of an owned asset of a x spouse
Less health care premiums
A plan that is top-heavy has how many years to correct the issue?
Two years
With group life insurance is the amount over $50,000 taxable if it’s a non-discriminatory group policy?
Yes, it is taxable with whatever death benefit over $50,000
