Retirement Flashcards
DB Benefit Formula: Final Avg. Method
- Avg. comp 3-5yr pre -R-
- Compensation considered capped at $345k
- Benefit still capped at $275k
(Sec 415 Limit)
Sec 415 Limit DB
Maximum annual benefit DB can provide
LESSOR:
$275k
or
Avg. of Highest 3 consecutive yrs. of comp.
$345k salary cap considered
ESOP Keys
- Company Stock is primary investment
- No Partnerships
- Employee ≥55yo. and 10yr in plan can diversify 50% of assets in plan (must be given min. 3 alternative options)
- Dividends may be employer deductible if paid out to employee or applied to plan
Safe Harbor 401k Contribution Choices
Elective Deferral:
100% of 3%; 50% of next 2%
Non-elective Deferral:
Flat 3% to all employees
Money Purchase Suitability
- Stable workforce
- Simple admin.
- Young, high-comp employees
- Risk is mandatory contribution, need stable cash flow
Money Purchase Keys
- Employer contribution only
- Mandatory fixed % cont. to all
- Cont. limit LESSOR:
100% Comp./ $69k
Defined Benefit Suitability
- Max. contribution for older employees
- Good for owner to max. own benefits
- Risk is mandatory contribution, need stable cash flow
Defined Benefit Keys
- Guaranteed benefit at -R-
- Employer bears investment risk
- Must add $ if benefit falls short
- Insured by PBGC
Cash Balance Pro/Con
Pro
- Cheaper/Simpler DB Plan
- Favors older, high-comp employees
Con
- Smaller benefit to older employees than DB Pension (uses avg. salary of all years, not highest earning)
- Risk is mandatory contribution, need stable cash flow
Cash Balance Keys
- Employer funded
- Guaranteed contribution and interest growth
- Act like pension, but has individual accts.
- Insured by PBGC
Profit Sharing Suitability
- Profits/Finances vary year to year
- Incentivize profitability
- Young employees
Profit Sharing Keys
- Discretionary Employer contributions (recurring and substantial)
- NO Employee contributions
- Cont. limit LESSOR:
100% Comp./ $69k - CAN be age-weighted
Target Benefit Keys
- Fixed employer contribution only
- Benefit NOT Guaranteed
- Investment risk is on the employee
- Cont. limit LESSOR:
100% Comp./ $69k - Forfeitures can reduce employer cont.
Target Benefit Suitability
- Cheaper, simpler than DB
- Adequate (not guaranteed) benefits to older employees
- Risk is mandatory contribution, need stable cash flow
85% SS Benefit Taxation MAGI
Single = > $34k
MFJ = >$44k
MAGI = Gross + muni int. + 1/2 SS benefit
50% SS Benefit Taxation MAGI
Single = > $25k
MFJ = >$32k
MAGI = Gross + muni int. + 1/2 SS benefit
PIA Reduction Formula, Early claim
(Months Early / 180) = % Reduced
Divorced Spouse SS Eligibility
- ≥ 62yo
- Married 10yr min.
- Divorced 2yr min.
- Not remarried
Spouse SS Eligibility: Deceased Worker
≥ 60yo
or
Has child in care:
- <16yo
- +16yo, disabled < 22yo
Spouse SS Eligibility: Retired/Disabled Worker
≥ 62yo
or
Has child in care:
- < 16yo
- +16yo, disabled < 22yo
DB Contribution Factors
↑
Older
Low Returns
Higher Salary
↓
Younger
High Returns
Lower Salary
Forfeitures
Sec 415 Limit DC
LESSOR:
100% comp.
or
$69,000** TTL*
$345k Salary cap considered
*employee+employer+forfeiture
**per employer if unrelated
NUA Taxation
DISTRIBUTION:
Cost basis = ord. inc. (phantom)
SOLD:
NUA taxable at LTCG (no matter holding period), additional growth subject to STCG or LTCG
NUA = FMV - Cost basis at distribution
Must be lump sum distribution in one tax year to qualify!
KEOGH/SE SEP Contribution Formula:
25% Plan (Aka Max Plan)
NET Income x 18.59%
KEOGH/SE SEP Contribution Formula:
15% Plan
NET Income x 12.12%
SIMPLE Vesting/Dist. Keys
- 100% Vested, always
- 25% early withdrawal penalty for 1st 2yr
SIMPLE Keys
- ≤ 100 Employees
- Employee defer. cap: $16k
- $3,500 catch up
- Mandatory employer contribution
- No discrimination testing
SEP Keys
- Employer cont. only
- No annual cont. required
- NO LOANS
- Cont. limit LESSOR:
25% comp. or $69k
Roth Distribution Order
1 - Contributions = Tax free always
2 - Conversions = 10% penalty if <5yr OR no special circumstance
- 5yr clock separate per conversion
3 - Earnings = Tax & penalty if <5yr AND no special circumstance
IRA Early Withdrawal Penalty Exception
- Death/TTL Disability
- S.E.P.P.
- Med. > 7.5% AGI
- Health ins. premiums (unemployed)
- 1st Home ($10k limit)
- $5k Birth/adoption
- Higher EDU
Qualified Plan Early Withdrawal Penalty Exception
- Death/TTL Disability
- S.E.P.P.
- Separation of service ≥ 55yo
- QDRO
- Med. >7.5% AGI
- Health Ins. Premium (unemployed)
- $5k Birth/adoption
LI Premium Limit “Incidental test”
DB
Death benefit < 100x Expected monthly retirement benefit
LI Premium Limit “Incidental Test” DC
Premium % limit of TTL. contribution to participant:
- Whole = 50%
- UL = 25%
- Term = 25%
What plans CAN’T integrate with Social Security?
(Discriminate based on wages)
- ESOP
- SIMPLE
- 401k SIMPLE
- 403b/457
ADP Deferral Threshold
(Actual Deferral Percentage)
Still capped at $69k ttl
NHCE HCE
0-2% x2
2-8% +2
ISO Qualified Holding Requirement
“EGG”
≥ 1yr from exercise
≥ 2yr from grant
*Non-qualified ISO treated as comp to employee (employer can deduct)
ISO Annual Exercise Limit
$100k
Social Security Earned Income Reduction
earned income
Before FRA:
(-)1 per $2 over limit
Year of FRA:
(-)1 per $3 over limit
Unit Benefit Formula
(% x YRS Service) x Avg. Comp
HCE/Key Employee Defintion
> 5% owner
- Key employee also officer >$220k comp
(+ Related employees: Spouse, parent, child, grandparent; NO SIBLING)
Qualified Plan Service Eligibility Req.
- 1 Year
- 1,000hr Min.
500hr/yr for 3 consecutive years qualifies
Age & Service Requirment
21 and 1
- Max age requirement is 21
- Max service requirement is 1yr*
*May require 2yr but then 100% vested day 1
RSU Taxation
VESTING:
FMV taxed as comp. = ord. inc. + FICA
SOLD:
Sale Price
(-) Vest Price
= ST/LT CAP Gain
Average Benefit Test
(ADP Discrimination)
Avg. NHCE Benefit ≥ 70% of HCE Benefit
Must pass if Ratio % Test failed
Ratio % Test
(ADP Discrimination)
% of NHCE covered ≥ 70% of HCE covered
If failed, must pass Avg. Benefit Test
Top-Heavy Minimum Benefit/Contribution to Non-key employee
DB → Benefit 2% min.
“B2”
DC → Contribution 3% min.
“C3”
When is a plan top-heavy?
h-E-avy = k-E-y
> 60% TTL Benefits/Account Balance allocated to Key Employees
Key / (Key + Other) = >60%
Top-heavy DB / All DC Vesting
- 3yr Cliff
- 2-6yr Graded
- 100% @ 2yr service
Non top-heavy DB Vesting
- 5yr Cliff
- 3-7yr Graded
- 100% @ 2yr service
Rabbi Trust Keys
- Protects deferred comp. from merger/acquisition/hostile employer
- Tax deferred comp. to employee
- Assets vulnerable to creditors due to employer insolvency
Secular Trust Keys
NON - QUALIFIED
- Protects deferred comp. from employer AND creditors
- Employee pays tax when funds contributed (funded)
- Cont. irrevocable - employer can’t reclaim
Sec. 162 LI Taxation/Keys
- Employer own policy/is beneficiary
- Premiums not deductible
↓
- Premiums not deductible
- DB Pays to employer tax-free
↓ - Employer pays DB to employee survivors
- Deductible to employer, taxable to survivors as ord. income
Unfunded Plan Keys
- Can be naked promise: no current assets allocated to benefit
- Can be informally funded: assets held for employee benefit, but owned by employer & subject to creditors
Salary Reduction v Salary Continuation
Salary Reduction (“pure deferred”) = Deferred benefit funded from employee comp/salary
Salary Continuation = Employer funds ultimate benefit to employee
Required Beginning Date for RMD
IRA, SEP, SARSEP, SIMPLE, >5% Owners of all plans:
April 1st, year after turning 73
Qualified Plan, 457, 403b if still working: Can delay RMD until April 1st, year after -R-
403b Keys
AKA Tax-deferred Annuity, Tax-sheltered Annuity
- 501(c)3, Public Schools
- Employee deferral limit $23k
- If employer contributes, subject to ERISA & $69k TTL cont.
- YES Loans
403b Catch Up
+ $7,500 if >50yo
+ $3,000 if 15yr with same company
Can take both catch up if meeting both req.
Qualified Plan Loan Keys
- LESSOR:
50% vested balance or $50k - Repaid within 5yr, unless principle home purchase
- Repay quarterly at min. or entire dist. is taxable
Elective Deferral Aggregation
$23,000 +$7,500 catch up:
401k
403b
SIMPLE
SARSEP
$16,000 +$3,500 catch up:
SIMPLE
and another
SIMPLE
Sec. 404c Employer Deduction Limit
Employer deductible contribution limited to:
25% of ALL eligible comp.
DB SS Integration
Base Deferral %
+
LESSOR OF (Base% or 26.25%)
=
Excess Deferral %
DC SS Integration
Base Deferral %
+
LESSOR OF (Base% or 5.7%)
=
Excess Deferral %
TTL Contribution CAP is still $69k
DB Minimum Participation Requirement
LESSOR:
50 employees
or
40% of eligible employees
When is a Non-qualified DC plan appropriate?
Employer wants to provide additional DC benefit to Exec who has already maxed. Qualified benefits
SARs Taxation
FMV Exercise
(-) FMV Grant
= Ord. Inc. Paid to Employee
SARs Keys
- Bonus tied to stock appreciation, paid in cash
- Employee doesn’t own the stock, just benefits from price increase
- Taxed as ordinary income at exercise
NSO Taxation
GRANTED:
No Tax (If SRF exists)
EXERCISED:
FMV (-) Exercise Price
= Ord. Inc.
SOLD:
Sale Price
(-) FMV Exercise
= ST/LT Cap Gain
NSO Taxation (Sec. 83b)
GRANTED:
FMV Grant
(-) Strike
= Ord. Inc.
EXERCISED:
No Tax
SOLD:
Sale Price
(-) FMV Grant
= Cap Gain
ISO Taxation
GRANTED:
No Tax
EXERCISED:
No Tax
Bargain element = FMV at exercise (-) strike price
(Bargain element is AMT add back, AMT paid + to basis)
SOLD:
Sale
(-) Strike
= Cap Gain
Substantial Risk of Forfeiture Keys
- Employee doesn’t own comp./benefit until conditions are met (tenure, performance, etc.)
- Tax on the benefit is deferred until constructive receipt
RSUs Keys
- Company grants stock that vests over time or after meeting conditions
- No upfront purchase needed
- Employee doesn’t own shares until they vest.
- Taxed as ordinary income when vested. (YES FICA)
NUA Keys
- Applies to company stock in Qualified plans (e.g., 401(k))
- Taxes the stock’s cost basis as ordinary income when withdrawn.
- Must be a lump-sum distribution of the entire account.
- Stock must be held after withdrawal to benefit from NUA treatment.
Who is NOT eligible for SS?
- Student nurses
- Student working for college
- Railroad Workers
- <18yo working for parent, unincorporated
- Minister if chooses exclusion
- Tribal leaders
Roth Special Purpose for withdrawal
- > 59 1/2yo
- Death/Disability
- S.E.P.P.
- Med. > 7.5% AGI
- Health ins. premiums (unemployed)
- 1st Home ($10k limit)
- $5k Birth/adoption
- Higher EDU
Surviving DEPENDENT SS eligibility
- Unmarried
- <19 and FT student
- > 18 but disabled before 22yo
SSID Req.
- Insured and under <65
- Disabled 12mo OR expected disabled 12mo
- Filed and completed 5mo wait
401k Keys
- AKA CODA Plan
- Added to profit sharing plan
- Employee deferral cap $23,000
- YES FICA/FUTA
401k suitability
- Add a qualified benefit for minimal expense
- Employees want to save more tax-deductible
457 Keys
- No churches
- No coordination with other plan types
- Deferral LESSOR: 100% or $23,000
- Non-govt only rollover into other non-govt 457
- Gov’t 457 = +$7,500 catch up +5-yo
Hardship withdrawal keys
- Elective deferrals and vested profit-sharing cont.
- Ord. income + 10% penalty
Are ERISA plans exempt from creditors?
YES
72(t) Keys
S.E.P.P.
- Paid LONGER OF: 5yr or 59 1/2yo
- PMT is fixed and at least annual
- Allowed one-time switch from annuity/amortization to RMD
- Penalty recapture is for dist. before 59 1/2yo
412(i) Keys
- DB plan funded 100% with LI
- Exempt from min. funding
- Good for employer who needs LI
- Plan return typically lower than other DBs
NO FICA/FUTA
- Employer HSA, Non-qual DC, 401k match
- Employee FSA
- SS Bene
- IRA Dist.
- Roth earnings
SERP Keys
Supplemental Executive Retirement Plan
- Informally funded - benefits greatly exceed normal -R- plan
- AKA “Top Hat” plan
- Only for mgmt. or HCE
Plans that CAN use SS integration
“4DC - SEP”
- Target Benefit
- Money Purchase
- Profit-sharing
- Stock bonus
- SEP
ESOP/Stock Bonus Suitability
- Business continuity
- Broaden ownership/mkt of stock
- Worker sense of ownership
Keogh Keys (HR-10)
- Sole prop/ Partnership
- May operate as DB, Money Purchase, Profit Sharing
- Contribution based on NET income
- Cont. tax deductible
Roth 401k Keys
- 401k, 403b, Gov’t 457 only
- Max. deferral $23,000 + $7,500 catch up
- Dist. earning tax-free after 5yr AND > 59 1/2yo/death/disabled
ABLE Keys
Disabled <26yo
- Cont. Iimit $18,000/yr (NON DEDUCTIBLE)
- Qual. expenses tax-free
- Exempt from Medicaid test assets
- Rollover from 529 for same bene allowed (counts toward annual cont.)
QCD Limit
$100,000/yr
ESPP
Employee Stock Purchase Plan
- Can purchase stock for up to 15% off
- $25k/yr Max purchase
