Retirement Flashcards
Social Security Coverage
- Full = 40 quarters (credits), 10 yrs
- Currently insured = at least 6 quarters during the full 13-qtr period
- NOT COVERED:
1) Railroad employees (separate retirement system.. Medicare okay)
2) Child, under 18, employed by a parent in an unincorporated business
3) ministers, members of religious orders
4) tribal council (native Americans)
Social Security Disability
- Can take before 65 if :
1) disabled for 12 months
2) expected to be for 12 months
3) disability expected to result in death - 5 month waiting period applies
Spouse Social Security
- Spouse of a retired or disabled worker qualifies if:
1) Age 62 or over OR
2) Has a child in care under age 16, or age 16 and over if disabled - If surviving spouse, widower need only be 60!
- Divorced spouse must have been married for 10 years, not remarried. (Must be 62), if divorced for two years.. can receive retirement benefits even if ex-spouse not taking!
- Surviving spouse, if cares for child under 16, can take regardless of age.
- Spouse (while alive) can take greater of their PIA or 50% of spouse’s. Then, at death, can take greater of their benefit or 100% of spouse.
Dependent Social Security
- surviving, dependent unmarried child of a deceased insured worker qualifies for Social Security payments if the child is:
1) under 19 and a full-time elementary or secondary school student or
2) age 18 or over but has a disability which began before age 22
Lump Sum Death Benefit
$255 to spouse in same household OR
Dependent child
(Not both)
Money Purchase Pension
- Defined Contribution!
- Qualified under ERISA
- up to 25% employer DEDUCTION
- Fixed contributions (no employee)
- Benefit Is KNOWN, return is not
- Stable cash flow NEEDED
Target Benefit Pension Keys
- DC Plan
- Qualified under ERISA
- up to 25% employer DEDUCTION
- Fixed contributions (employer only)
- Stable Cash Flow Needed
- Favors OLDER employees
- Actuary INITIALLY determined amount of funds needed but will not change
Profit Sharing Plan
- DC Plan
- Qualified under ERISA
- up to 25% employer DEDUCTION
- FLEXIBLE contributions (must be recurring and substantial) - employer only
- 401(k) provisions, hardship withdrawal
- SIMPLE 401(k) exempt from creditors
- Can wait until October to fund
Stock Bonus Plan
- DC plan
- Qualified under ERISA
- up to 25% employer DEDUCTION
- FLEXIBLE contributions
- 100% of contributions can be company stock
- ESOP CANNOT be integrated with S.S.
SIMPLE IRAs
- Less than 100 employees
- Not qualified/ NO ERISA
- Requires match (up to 3%), no vesting
- Salary reduction up to $16k
- Company can’t have another plan
- Not integrated w/ SS
- no salary cap of $345k
SEP IRAs
- NO SALARY DEFERRALS, EMPLOYER ONLY
- up to 25% CONTRIBUTION (w-2) and up to 18.59% CONTRIBUTION if self employed
- Immediate vest
- CAN be integrated with Social Security
- ELIGIBILITY: must be 21+, $750, work 3 of 5 years
SARSEP
- may have up to 25 employees and 50% of the eligible employees must defer
-must exist before December 31, 1996 - Salary deduction limit of $23,000
- new employee may participate if established before January 1, 1997
403B/tax deferred annuity/tax sheltered annuity
- for 501(c)(3) organizations (church, hospital,private school or college) or public schools
-Not qualified but acts like it
-subject to ERISA only if employer contributes
-Salary reduction limit up to 23,000
-employer contributions MAY be subject to vesting schedule - ADDITIONAL catch-up of $3.5k if 15 years @ non profit
IRA Basics
- no loan
- no life insurance
- immediate vesting
- May not be creditor protected
- 59 1/2 not 55 for 10% penalty
- RMD’s at 73
Defined Benefit Plan
- OLD AND STABLE
- guaranteed specific benefit at retirement
- needs stable cash flow
- max benefit of the lesser of $275,000 or 100% of the participants compensation over three highest earning consecutive years (begin 65)
- Only first $345k comp considered
KEY FACTORS that impact EMPLOYER contributions:
1) proximity to retirement age (older more)
2) investment return assumptions (lower more)
3) salary scale assumptions (experienced more)
4) Forfeitures MUST reduce employer contribution (less)
- Insured by PBGC
Cash Balance Plan
- Defined Benefit
- Qualified under ERISA
- Employer guarantees BOTH contribution and return… damn.
- Insured by PBGC
401(k)
- Also known as CODA or “cash or deferral arrangement)
- Deferral subject to FICA/FUTA
- 50 or older get extra contr of 7.5k
- If “deferral” = $23,000
- If “contribution” = $30,500 (deferral and catchup)
Hardship Withdrawal
- for 401k plans and 403b (but not others!!!)
- Must be “immediate and heavy”
- No other resources available
- ordinary income and 10% penalty
Solo(k)
- You, your spouse, or two partners
- PT workers are not employees
- catchup allowed
- protected from creditors
Net Unrealized Appreciation
- the difference between the employers cost basis and market value at lump sump distribution to the employee
- The NUA gain is always taxed at long-term capital gains rate regardless of the holding period
- Taxation due to subsequent growth from the distribution date to sale date can be at a favorable capital gains rate only if the stock is kept long-term (otherwise, ordinary income)
- BASIS taxable at retirement.. (phantom income)
Self-Employed, Sole Prop & Partnership Contribution % Formulas (SEP, Keogh, HR10)
- 15% plan multiply business profit by 12.12%!!
- 25% plan multiply business profit by 18.59%
- Only works under $168,600 SS max. No net profits above that
- Employee receives same
Age & Service Rules - ERISA
- 21 and 1 yr of service
- Special rule allows 2 yr service requirement but then employee immediately vested (2yr/100%) NOT ALLOWED FOR 401k
- Employee who works 1000 hours during the initial 12 month period after being hired will earn a year of service
- Additional coverage rules:
1) Ratio Percentage Test= plan must cover a percentage of non-highly compensated (NHCE) employees that is at least 70% of highly compensated employees covered (HCE)
2) Average Benefits Test= average benefit for all non-highly compensated employees (NHCE) must be at least 70% of that for highly compensated employees (HCE)
SAME 70% RATIO!!! Noice
Highly Compensated Employees (HCE)
- DiscrIIIImination = HIIIIIghly Comped
- affects the ADP or ACP test and the ratio average benefits test
- greater than 5% owner OR
- any employee earning more than 155,000 in the previous year
Key Employee
- affects whether top-heavy
- three pronged (like key)
1) greater than 5% owner OR
2) an officer AND compensation > $220k
3) greater than 1% owner and compensation > $155k
Minimum Benefits
DB: 2% of compensation
DC: 3% contribution
Vesting Schedules
FASTER:
1) Top heavy DB plans
2) ALL DC plans
- 3 yr cliff,
- 2 to 6 yr graded
- 100% vested w/ two years
SLOWER:
1) Non top heavy DB plans
- 5 yr cliff
- 3 to 7 graded
- 100% vested 2 yr eligible
Controlled Group/Related Employers
1) Parent Subsidiary: one entity owns at least 80% of one or more of the other entities
2) brother sister: five owners of two or more entities on 80% or more of each entity
3) affiliated service group: a service organization, and a professional organization
Life insurance suitability
- must be incidental
1) aggregate premiums paid for a participants death benefit are at all times less than the following percentages of the plan cost contributions: - Whole life = 50%
- universal life = 25%
- term life = 25%
2) “100 times” limit - ensure death benefit must be no more than 100 times the expected monthly benefit
Unrelated business taxable income (UBTI)
- Passive activity
- taxable income generated by a tax exempt entity by means of certain passive activities
Qualified Plan (& TSAs) - Penalties & Exceptions
Distributions before 59.5 of 10% penalty except:
• Death or total disability
• substantially EQUAL periodic payments, following separation from service
• distribution following separation from service at age 55 or later
• distribution under a QDRO
• medical expenses in excess of 7 1/2% of AGI
• $5000 for birth or adoption of child
• federally declared disaster (limited)
72(t)
- Substantially equal payments
- subject to recapture if modified before:
1) 5 yr holding period OR
2) attainment of 59.5
10% Penalty tax + interest (only above 59.5)
RMDs
- IRA: April 1st of yr following age 73
- Qual Plan: April 1st following age 73 or RETIRE (if later)… if 5% owner, MUST take at 73.
- 25% penalty for amount not taken unless RMD is taken by end of 2nd year (then 10%)
- If spouse is more than 10 years younger, can elect to use the joint life expectancy table, smaller distributions
IRA Distributions - Penalties & Exceptions
- If before 59.5, 10% penalty unless:
• death
• substantially equal payment (72t)
• disability
• *first home expense up to 10,000
• *qualified education expense
• medical expense above 7 1/2% adjusted gross income
• *distribution used to pay for medical insurance premium after separation from employment
• 5000 for birth adoption of a child
• federally declared disaster
Salary Reduction Plan (like 457 plans)
- Also called pure deferred comp arrangement
- defer some portion of the employees current compensation to fund the ultimate compensation benefit
Salary continuation plan
The plan uses additional employer contributions to fund the ultimate compensation package
Not reduced from employee
Unfunded (informally owned by company)
- plan has assets; life insurance, annuities, mutual funds, or general investments make the plan seem “funded”
- assets are owned by the company and are subject to the creditors of the company
- No tax deductions for contributions until the employee is taxed
- employee is taxed when they have constructive receipt or an economic benefit
Rabbi Trust
- unfunded (informally funded) plan
- Irrev Trust with a trap door!
- assets in a rabbi trust must be available to all general creditors of the employer, if the company files for bankruptcy or becomes insolvent
- Participants must not have greater rights than unsecured creditors
Keywords: merger, acquisition, or change of company ownership
457 Plan
- subject to lesser of $23k or 100% of comp. If government employee, can do $7.5k catchup
- Cannot be rolled into IRA unless a government plan
- subject to minimum distribution rules
