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CFP Exam: March 2013 > Retirement > Flashcards

Retirement Flashcards

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1
Q

What is the 401(k), 457, & 403(b) Employee Deferral Limit?

A

$17,000

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2
Q

What is the Social Security Wage Base?

A

$110,100

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3
Q

Name the Seven Profit Sharing Plans

A
  1. Profit Sharing - DC
  2. Stock Bonus - DC
  3. Employee Stock Ownership Plan (ESOP) - DC
  4. 401(k) - DC
  5. Thrift - DC
  6. New Comparability - DC
  7. Age-Based Profit Sharing - DC
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4
Q

Name the Four Types of Pension Plans and if they are Defined Benefit or Defined Contribution

A
  1. Defined Benefit -DB
  2. Cash Balance - DB
  3. Money Purchase - DC
  4. Target Benefit - DC
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5
Q

What is the Legal Promise of a Pension Plan?

A

Pay a pension at retirement

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6
Q

What is the Legal Promise of a Profit Sharing Plan?

A

Deferral of compensation and taxation

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7
Q

Are In-Service Withdrawals Permitted in a Pension Plan?

A

No, except for DB plans if you are 62 or older

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8
Q

Are In-Service Withdrawals Permitted in a Profit Sharing Plan?

A

Yes, after 2 years, if plan document permit

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9
Q

Are Pension Plans Subject to Mandatory Funding Standards?

A

Yes

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10
Q

Are Profit Sharing Plans Subject to Mandatory Funding Standards?

A

No

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11
Q

What Percent of a Pension Plan’s Assets are Available to be Invested in Employer Securities?

A

10%

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12
Q

What Percent of a Profit Sharing Plan’s Assets are Available to be Invested in Employer Securities?

A

Up to 100%

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13
Q

Must a Pension Plan Provide Qualified Joint and Survivor Annuity and a Qualified Presurvivor Annuity?

A

Yes

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14
Q

Must a Profit Sharing Plan Provide Qualified Joint and Survivor Annuity and a Qualified Presurvivor Annuity?

A

No

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15
Q

What is the Annual Contribution Limit for a DB Plan?

A

Not less than the unfunded current liability

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16
Q

What is the Annual Contribution Deduction Limit for a DC Plan?

A

25% of total employee covered compensation

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17
Q

Who Assumes the Risk with a DB Plan?

A

Employer

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18
Q

Who Assumes the Risk with a DC Plan?

A

Employee

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19
Q

How are Forfeitures Allocated in a DB Plan?

A

Reduced plan costs

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20
Q

How are Forfeitures Allocated in a DC Plan?

A

Reduce plan costs or allocate to other participants

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21
Q

Are DC Plans Subject to Pension Benefit Guaranty Corporation Coverage?

A

No

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22
Q

Do DB Plans Have Separate Investment Accounts?

A

No, they are commingled

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23
Q

Do DC Plans Have Separate Investment Accounts?

A

Yes, they are usually separate

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24
Q

Can Credit be given for Prior Service for the Purpose of Benefits in a DB Plan?

A

Yes

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25
Q

Can Credit be given for Prior Service for the Purpose of Benefits in a DC Plan?

A

No

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26
Q

How do Sponsor Contributions to a Qualified Plan Affect Payroll Taxes?

A

The contribution is exempt from payroll taxes for both the employer and employee. But not for employee elective accounts (401k, 403b, SIMPLE, SARSEP, 457)

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27
Q

How do Sponsor Contributions to a Qualified Plan Affect Income Taxes?

A

Employers: Deductible up to 25% of total payroll for DC plans, actuary determines limit for DB plans
Employees: Exempt from income and deferred growth

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28
Q

What is ERISA Anti-Alienation Protection?

A

Qualified accounts have unlimited protection from bankruptcy. IRA’s have limited protection up to $1 million

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29
Q

What are the Minimum Eligibility Rules for a Qualified Plan?

A

One year of service and attaining age 21

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30
Q

How does the IRC Define One Year of Service?

A

Work at least 1,000 hours in the span of one year

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31
Q

Once an Employee is Eligible to Participate in a Qualified Plan, How Long May the Employer Make them Wait?

A

Up to 6 months, the employer can make the newly eligible employee wait until the next entrance date

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32
Q

What is the Eligibility Rule Exception?

A

The employer may require 2 years of service, but contributions must be fully vested to make this election

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33
Q

What are the Coverage Tests for a Qualified Plan?

A

General Safe Harbor Test
Ratio Percentage Test
Average Benefits Test
Just one needs to be met

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34
Q

What is a Highly Compensated Employee?

A

Either a five percent owner of the company’s entire stock during the current or previous year, or compensation of $115k the previous year

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35
Q

How Can Relatives Owning Stock Affect Your Status as an HCE?

A

Any stock owned by your spouse, children, grandchildren, or parents is considered as if you own it

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36
Q

If a Company has Too Many HCEs to Meet Test Requirements, What Can it do?

A

Select only the top 20% compensated employees for the test, but all 20% must be HCEs

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37
Q

What is the General Safe Harbor Test?

A

If the plan benefits >= 70% of Eligible NHCEs

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38
Q

What is the Ratio Percentage Test?

A

If the percentage of Eligible NHCEs is >= 70% of the percentage of Eligible HCEs

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39
Q

What is the Average Benefits Test?

A

The average benefit % of eligible NHCEs >= 70% of the average benefit % of eligible HCEs
(benefit % = employee’s benefit / employee’s compensation)
Must also be Nondiscriminatory

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40
Q

What Type of Plan Must Meet the 50/40 Test in Addition to one of the Coverage Tests?

A

Defined Benefit

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41
Q

What is the 50/40 Test?

A

Must benefit the lesser of either 50 eligible employees or 40% of eligible employees on EACH DAY of the plan year

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42
Q

What are the Approved Vesting Schedules for a Defined Contribution Plan?

A

The 2-to-6 year graduated or 3 year cliff

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43
Q

What are the Approved Vesting Schedules for a Defined Benefit Plan?

A

The 3-to-7 year graduated or 5 year cliff

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44
Q

What are the 2-to-6 & 3-to-7 Year Graduated Cliff Schedules?

A

2-to-6: yr 1=0%, yr 2=20%, yr 3=40%, yr 4=60%, yr 5=80%, yr 6=100%

3-to-7: same as above, except vesting starts at year 3

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45
Q

If an Employer Opts for a Faster Vesting Schedule, What Must He Keep in Mind?

A

The vested benefit must always be comparatively better than one of the approved schedules, and cannot compare one schedule for some years and another for others

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46
Q

How are the Vested Earnings Determined?

A

Ignore the employer matching percentage and divide the employers total contribution into the total contribution

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47
Q

What Determines a Key Employee?

A

One of the three:

  1. > 5% ownership
  2. > 1% ownership & earns > $150k
  3. An officer with compensation > $165k
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48
Q

What is an Officer in a Company?

A

Generally an administrative executive

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49
Q

How many Employees may be Treated as Officers?

A

50, if more than that the rules only apply to the top 50 paid for key employees

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50
Q

What is a Top Heavy Plan?

A

When > 60% of total benefits are going to key employees

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51
Q

If a Defined Benefit Plan is Top Heavy, How Does it have to Change its Vesting Schedule?

A

Must accelerate the vesting schedule to the 2-to-6 year graduated schedule or the 3 year cliff schedule

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52
Q

If a Defined Contribution Plan is Top Heavy, How Does it have to Change its Funding?

A

Minimum contribution of 3% of compensation to all eligible non key employees

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53
Q

If a Defined Contribution Plan is Top Heavy, How Does it have to Change its Vesting Schedule?

A

Must accelerate the vesting schedule to the 2-to-6 year graduated schedule or the 3 year cliff schedule, for plans after 2006 these are already the required schedules

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54
Q

If a Defined Benefit Plan is Top Heavy, How Does it have to Change its Funding?

A

Minimum of: 2% of compensation x years of service x average compensation over testing period for all eligible non key employees

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55
Q

What is the Covered Compensation Limitation?

A

$250k. Any plan funding formula that uses the employee’s compensation cannot consider any compensation above this limit.

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56
Q

What is the DB Plan Retirement Benefit Limitation?

A

Employer is generally limited to paying the employee the lesser at retirement: $200k or 100% of average pay of highest 3 years (considering covered compensation limit)

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57
Q

What is the Maximum Contribution Per Participant in a DC Plan?

A

The lesser of: 100% of salary or $50k

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58
Q

What is the Typical Formula for the Payout of a Pension Plan?

A

% x years of service x average of 3 highest years pay = Payout up to $200k

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59
Q

What Does the Government Require for Qualified Pension Plans?

A

Mandatory Funding
Disallows In-service Withdrawals
Limited Investment in Company’s Securities
Limited Investment in Life Insurance

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60
Q

Is a Loan from a Pension Plan considered an In-service Withdrawal?

A

No, because it must be paid back. But most plans don’t allow loans because they are funded by the employer.

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61
Q

What is the Limit on the Amount of the Sponsoring Company’s Securities Held in a Pension Plan?

A

10% of FMV of the whole plan at time of purchase

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62
Q

What are the Requirements for a DC Pension for Diversification?

A

Must provide participants at least 3 investment choices, other than their securities

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63
Q

Are Premiums to an Insurance Policy Within a Pension Plan Taxable to the Employee?

A

Yes

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64
Q

What are the Limitations to Purchasing Life Insurance in a Pension Plan for it to Stay Qualified?

A

Must meet either the 25% or the 100-1 tests:
25% Test: If term or universal, aggregate premiums paid cannot exceed 25% of aggregate contribution to the employee’s plan. If whole life, then 50%.
2. The death benefit cannot exceed 100 times the plans monthly benefit

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65
Q

Which Pension Plans Use Actuaries?

A 
Defined Benefit & Cash Balance (annually)
Target Benefit (once at inception)
Money Purchase (no actuary)
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66
Q

Who takes on the Risk of Pension Plans?

A

Defined Benefit & Cash Balance = The sponsor (funds are commingled)
Target Benefit & Money Purchase = Participant (individual accounts)

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67
Q

How are Plan Forfeitures Handled by Pension Plans?

A

DB pension plans must use the funds to reduce costs

DC pension plans can use funds either to reduce costs or allocate among participants

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68
Q

How Much Will the PBGC Pay in the Case of an Unfunded or Underfunded Liability?

A

$4,653/mo

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69
Q

Which Type of Pension Plans Does the PBGC Not Cover?

A

DC pension plans, or DB pensions for professional corporations with <= 25 participants

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70
Q

How are Premiums for the PBGC Determined?

A

PBGC requires all participants pay a flat rate

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71
Q

What is the Accrued Benefit of a DB Pension?

A

The present value of future benefits determined by an actuary

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72
Q

What is the Benefit of a DC Pension?

A

The account balance

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73
Q

What is Credit for Prior Service?

A

If a new pension plan is established, the sponsor may grant prior years service to the benefits. But must be nondiscriminatory.

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74
Q

Name the Three DB Plan Benefit Formulas

A
  1. Flat Amount
  2. Flat Percentage
  3. Unit Credit
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75
Q

What is the Flat Amount Formula?

A

All participants receive the same amount regardless of salary or years of service

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76
Q

What is the Flat Percentage Formula?

A

All participants receive the same percentage of their final salary or average salary regardless of years of service

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77
Q

What is the Unit Credit Formula?

A

Utilizes the participants salary and years of service to determine their benefit

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78
Q

What is a Cash Balance Pension Plan?

A

A DB pension plan that has a quasi-separate account appearance, but is commingled and has a guaranteed earnings. Popular choice when companies want to get out of a traditional DB pension plan.

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79
Q

What is a Money Purchase Pension Plan?

A

A DC plan where the employer pays a % of the employees salary to a separate account but doesn’t guaranty earnings.

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80
Q

What is a Target Benefit Pension Plan?

A

A DC pension plan that an actuary determines the amount necessary to fund the plan at inception and is no longer needed. Otherwise very similar to a money purchase pension plan.

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81
Q

What is the Latest a Profit Sharing Plan can be Established for a Year?

A

The last day of the fiscal year, or 9.5 months if all extensions are filed

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82
Q

What is an Age Based Profit Sharing Plan?

A

Both age and compensation are factored in to favor the allocation of contributions to older employees

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83
Q

When Can an Employee take Distributions from a Profit Sharing Plan?

A

Usually only upon termination, hardship, disability, or retirement

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84
Q

What Types of Entities Can Establish a 401k?

A 
Corporations
Partnerships
LLCs
Proprietorships
Tax-Exempt Entities
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85
Q

What is the Eligibility Difference Between Qualified Plans and 401k Plans?

A

A 401k can only require one year of service for eligibility, not two years and 100% vesting

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86
Q

What are the 5 Types of Contributions that can be made to a 401k Plan?

A
  1. Employee pre tax deferral
  2. Employee after tax deferral
  3. Employer matching
  4. Employer profit sharing contributions
  5. Employer contributions to solve ADP/ACP
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87
Q

Which Type of Tax is an Employee Pre Tax Deferral Subject To?

A

Payroll taxes are still paid

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88
Q

Which Type of Accounts are Subject to ADP/ACP Tests?

A

Any DC plan with CODA

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89
Q

If ADP is 0-2% for NHCEs, then the Permissible ADP for HCEs is…

A

2 times ADP of NHCEs

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90
Q

If ADP is 2-8% for NHCEs, then the Permissible ADP for HCEs is…

A

2% plus ADP for NHCEs

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91
Q

If ADP is >=8% for NHCEs, then the Permissible ADP for HCEs is…

A

1.25 times ADP for NHCEs

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92
Q

Which Limits Don’t Apply to Catch Up Contributions?

A

Plan limits, annual accumulations limits, or ADP/ACP limits

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93
Q

What is a Corrective Distribution?

A

A remedy to failing the ADP test by distributing the excess HCEs funds out of the plan to the HCEs. The plan has 2.5 months after year end or 10% penalty

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94
Q

What is Recharacterization?

A

A remedy for failing the ADP test by recharacterizing the excess HCEs deferrals into after tax contributions. Plans have 2.5 months to do this after year end or 10% penalty

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95
Q

What is a Qualified Nonelective Deferral in Relation to the ADP Test?

A

A remedy for failing the ADP test by treating qualified nonelective contributions to ALL NHCEs as deferrals to raise their ADP to the necessary level. Vesting is treated as an elective deferral.

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96
Q

What is a Qualified Matching Contribution in Relation to the ADP Test?

A

A remedy for failing the ADP test by treating qualified nonelective contributions to PARTICIPATING NHCEs as deferrals to raise their ADP to the necessary level. Vesting is treated as an elective deferral.

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97
Q

What is the ACP Test?

A

The same as ADP, except it measures employee after tax contributions & employer matching contributions instead of pretax deferrals

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98
Q

What does the Safe Harbor Provision Accomplish?

A

Avoids ADP/ACP & top heavy testing

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99
Q

What is Required of the Plan Sponsor if it Uses Safe Harbor?

A

100% immediate vesting on either a minimum of 3% nonelective contribution, or matching 100% for the first 3%, then 50% up to 5%

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100
Q

What is Negative Election?

A

When an employee becomes eligible, they are automatically enrolled and the employer will contribute a specified deferral unless the employee elects a different amount

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101
Q

How Much Can One Borrow From Their 401k?

A

The lesser of 50% of vested benefit or up to $50k. A vested benefit of <= $20k has a limit of the lesser of $10k or 100% of the balance

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102
Q

How Long Can Plan Loans Last?

A

Generally 5 years, unless the loan is for purchase of a residence

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103
Q

What is a Stock Bonus Plan?

A

A profit sharing plan that employers make contributions in company stock rather than cash

104
Q

What Provision is there for Non Publicly Traded Stock in a Stock Bonus Plan?

A

The employee must have the right for the employer to repurchase the shares

105
Q

What is the Disadvantage to an Employee in a Stock Bonus Plan?

A

Non-diversification

106
Q

How is a Lump Sum Distribution Taxed on a Stock Bonus Plan?

A

The FMV at the time of contribution is taxable as ordinary income, but the appreciation since is deferred until the stock is sold

107
Q

Using an ESOP to Defer Recognition of Capital Gains From the Sale of a Closely Held Business Requires that the ESOP Owns a Minimum of…

A

30% of the corporation’s stock

108
Q

Using an ESOP to Defer Recognition of Capital Gains From the Sale of a Closely Held Business Requires that the Seller Buys What Type of Securities and for How Long?

A

Qualified replacement securities (domestic corp w/ <= 25% in passive income) within 12 months and hold them for 3 years

109
Q

Using an ESOP to Defer Recognition of Capital Gains From the Sale of a Closely Held Business Requires that the Corporation Doesn’t Have Any Outstanding…

A

Shares publicly traded

110
Q

Using an ESOP to Defer Recognition of Capital Gains From the Sale of a Closely Held Business Requires that the Sellers Relatives can’t receive…

A

Allocations of stock from the ESOP

111
Q

Using an ESOP to Defer Recognition of Capital Gains From the Sale of a Closely Held Business Requires that the ESOP Owns the acquired stock for…

A

3 years

112
Q

Using an ESOP to Defer Recognition of Capital Gains From the Sale of a Closely Held Business Requires that the Seller had Owned the Stock a Minimum of…

A

3 years prior to selling to the ESOP

113
Q

What is the Difference Between a Distribution and a Loan from a Qualified Plan?

A

Distributions are disbursement of assets without the intent to return it. Loans are not distributions because they are intended to be paid back.

114
Q

What is a Forced Payout?

A

A pension plan may distribute the balance if vesting is < $5k and the participant doesn’t make a timely election after employment is terminated. DOL requires it to go directly to an IRA if between $1k and $5k.

115
Q

What is a Qualified Preretirement Survivor Annuity?

A

Provides a benefit to the spouse of a participant if dies before reaching retirement age. Required for qualified pension and profit sharing plans

116
Q

What is the Mandatory Withholding for Distributions from Qualified Plans?

A

20%

117
Q

What is a Direct Rollover?

A

The balance of the plan is paid directly to the rollover account’s trustee and no 20% withholding is required

118
Q

What is an Indirect Rollover?

A

The balance of the plan, minus the 20% witholding, is paid to the participant who then has 60 days to fund the full balance to the rollover account. The withholding will be refunded at the end of the year by the IRS.

119
Q

What are the 4 Requirements for a Lump Sum Distribution to Receive Special Tax Treatment?

A
  1. Must be full accrued benefit of pension or total account balance for profit sharing
  2. Must be because attained age 59.5, separation from service, death, or disability
  3. Must have participated in the plan for 5 years prior to tax year of distribution
  4. Must file form 4972 in tax return
120
Q

What are the Special Tax Treatments One May Obtain for a Lump Sum Distribution?

A

10 year forward averaging
Pre-1974 capital gains treatment
NUA treatment

121
Q

What Year Must a Participant be Born by to Use the 10 year forward averaging?

A

1936

122
Q

How does the 10 Year Forwarding Average Work?

A

Take a tenth of the taxable portion of the lump sum and apply the 1986 rates to that. Then multiply it by 10. This is due in the year of distribution.

123
Q

What is Pre-1974 Capital Gains Treatment?

A

If born before 1936, the portion of the lump sum from contributions prior to 1974 are eligible to be treated as LTCG at 20% rather than ordinary income. The remainder is eligible for 10 year forwarding

124
Q

What is Net Unrealized Appreciation?

A

When a taxpayer takes a lump sum of employer stock and is required to pay ordinary income tax on the basis and the appreciation is allowed to remain deferred until it is sold.

125
Q

What is a Qualified Domestic Relations Order?

A

An exception to ERISA anti-alienation laws that allows a third party by order, judgement, or decree benefits to the qualified plan

126
Q

What are the Seven Exceptions to the 10% Early Withdrawal Penalty for Qualified Plans?

A
  1. Death
  2. Attainment of age 59.5
  3. Disability
  4. Substantially Equal Payments (72t)
  5. Qualified Domestic Relations Order
  6. Qualified Public Safety Employee who Separated from Service after 50
  7. Attainment of Age 55 and Separation From Service
127
Q

Can a Participant in a Qualified Plan Use Rule 72t if Still Employed by the Sponsor?

A

No, must be separated from service

128
Q

How Long Must 72t Payments Go On?

A

The greater of 5 years or until age 59.5

129
Q

What is the Tax Treatment if Payments From Rule 72t are Changed?

A

Distribution of the full account balance will be considered to have taken place the first year of SES payements

130
Q

Which Kind of Roth Retirement Plans Must Pay RMDs?

A

Both a 401k and 403b

131
Q

How Long Can Someone Wait to Pay their First RMD?

A

April 1st of the year after turning 70.5

132
Q

What is the Exception to the RMD Rule?

A

If the participant is still employed and not a >5% owner when turns 70.5, then will have to start paying by April 1st of the year after employment is terminated.

133
Q

If Multiple Retirement Accounts, Which Type Can you Combine the Totals and Take from One Account, and Which Type Must Each Account Take an RMD?

A

IRAs can be combined & Qualified plans must be treated separately

134
Q

What are the RMD Options for a Spouse if the Participant Dies After RMDs have Begun?

A
  1. Spouse can receive distributions based on their remaining single life expectancy
  2. Rollover the plan balance to their own IRA and wait until they turn 70.5 to take RMDs
135
Q

What are the RMD Options for a Spouse if the Participant Dies Before RMDs have Begun?

A
  1. Distribution over participan’s remaining life expectancy beginning when the participant would have turned 70.5
  2. Roll plan assets to their own IRA and wait until they turn 70.5 to take RMDs
  3. Distribute participant’s account within 5 years
136
Q

What are the RMD Options for a Non-Spouse if the Participant Dies After RMDs have Begun?

A
  1. Take distributions based on the longer life expectancy of either the beneficiary or participant
  2. Roll over into an inherited IRA and the distribution period is the longer of the beneficiary or participant
137
Q

What are the RMD Options for a Non-Spouse if the Participant Dies Before RMDs have Begun?

A
  1. Distribute participants account within 5 years
  2. Remaining single life expectancy of designated beneficiary
  3. Roll plan assets to an inherited IRA and distribute within 5 years or over remaining single life expectancy of beneficiary
138
Q

What Happens if the Participant Dies without a Beneficiary After RMDs Start?

A

Distributions must continue over the remaining distribution period of the deceased, reduced by one each year

139
Q

What Happens if the Participant Dies without a Beneficiary After RMDs Start?

A

Distribute plan over 5 years

140
Q

What are the Five Steps for Sponsors to Selecting a Qualified Plan?

A
  1. Establish the objectives
  2. Prepare an employee census
  3. Identify all plans that meet the quantitative and qualitative objectives
  4. Asses each plans financial characteristics
  5. Select the best plan
141
Q

What are the Possible Objectives of the Sponsor in Selecting a Qualified Plan?

A 
To benefit owners of a small business
To benefit all employees
To benefit select employees
To attract, retain, or reward employees
To encourage early retirement
To provide a tax-advantaged benefit
142
Q

What are the Financial Characteristics that Need to Be Considered By a Sponsor When Selecting a Qualified Plan?

A 
Cost of administration
Cost of contributions
Flexibility of contributions
Burden of investment risk
Necessity of mandatory funding
143
Q

What is the Purpose of an Employee Census When a Sponsor is Selecting a Qualified Plan?

A

To identify each employee, their age, compensation, number of years of service, and ownership interest, turnover, etc. to evaluate who will benefit and how much for each type of plan

144
Q

When Must a New Qualified Plan be Adopted By for the Sponsor to Take a Tax Deduction?

A

By the last day of that particular year

145
Q

What is a Master, or Prototype Plan?

A

A standard plan pre-approved by the IRS that employers can adopt as is

146
Q

When Starting a New Qualified Plan, Who Must the Employer Notify?

A

All eligible and non eligible employees must be notified in person, by email or mail, or posted

147
Q

What Written Documents about a Qualified Plan are Employers Required to Provide for Employees?

A 
Annually:
Summary Plan Description
Summary Annual Report
Upon modification:
Revised Summary Plan Description or Summary of Material Modifications
148
Q

How is the Self Employment Tax Calculated?

A

Earnings x .9235 x (13.3% up to $110,100 + 2.9% over $110,100)

149
Q

How is the Self Employed Individual’s Plan Contribution Calculated?

A

Earnings
- 7.45% x amount up to $110,100
- 1.45% x ((earnings x .9235) - $110,100)
x (contribution rate / (1+ contribution rate)), or .20 max

150
Q

How are Excess Employer Contributions Taxed?

A

10% excise tax on surplus contributions, but is deductible in future years

151
Q

ERISA Requires Plan Administrators for DC Plans Provide Statements How Often?

A

At least quarterly to participants and beneficiaries who have the right to direct the investment assets, annually for any other participant/beneficiary who has an account under the plan

152
Q

What is the Qualified Plan Permanency Requirement?

A

The plan doesn’t have to exist forever, but it can’t be set up as a temporary plan.

153
Q

What are the Three Ways a DB Plan May Be Terminated?

A 
Standard termination (ability to pay all assets at termination)
Distress termination (termination because can no longer afford plan)
Involuntary termination (PBGC initiates termination because sponsor unable to pay benefits)
154
Q

What is a Plan Freeze?

A

For DC plans it means the sponsor will stop making contributions. For DB plans it means participants will no longer accumulate more benefits, but the existing benefits will remain.

155
Q

What are the Contribution Limits on Both IRAs and RIRAs?

A

Both IRAs & RIRAs = Earned income of $5,000 or $6,000 for those >= 50 years old

156
Q

What Is Considered Earned Income?

A 
W2 income
Schedule C income
K1 income from an LLC
K1 income from a partnership where partner is a material participant
Alimony
157
Q

When Must One Stop Contributions to Their IRA?

A

The year they turn 70.5 and after

158
Q

What is the Excess Contribution Penalty for IRAs and RIRAs?

A

6% per year that the excess amount remains. Excess amount + earnings associated must be removed by April 15 to avoid penalty

159
Q

Can an IRA or RIRA be funded with securities?

A

No, must be funded initially with cash.

160
Q

What is the IRA Deduction for someone without a “qualified plan” or other retirement plan?

A

$5,000 or $6,000 if >= 50 years old. No limit.

161
Q

What is the IRA Deduction Phaseout for a Single Person with an active retirement plan?

A

AGI between $58k and $68k

162
Q

What is the IRA Deduction Phaseout for a Married Couple, Both with an active retirement plan?

A

AGI between $92k and $112k

163
Q

What is the IRA Deduction Phaseout for a Married Couple, One of which has an active retirement plan?

A

AGI between $92k and $112k for the one with the active plan, $173k and $183 for the one without the active plan

164
Q

If an IRA Contains Nondeductible Contributions, How are Withdrawals Taxed?

A

Partial return of adjusted basis and ordinary income. Adjusted basis at time of contribution / FMV of account at withdrawal

165
Q

What are the Exceptions to the 10% penalty for IRAs?

A 
Attainment of age 59.5
Death
Disability
Substantially Equal Series (72t)
Medical Expenses > 7.5% of AGI
Higher Education
First time home buyer ($10k max)
Health insurance premiums if unemployed
166
Q

What are the RIRA Contribution Phaseout Limits for a Single Person?

A

AGI of $110k to $125k

167
Q

What are the RIRA Contribution Phaseout Limits for Someone Filing Jointly?

A

AGI of $173k to $183k

168
Q

What are the RIRA Contribution Phaseout Limits for Someone Filing Separately?

A

AGI of $0 to $10k

169
Q

What Date Does the 5 Taxable Year Period Start for RIRAs?

A

January 1st of the first year’s contribution. A contribution on April 15th 2013 for 2012 = January 1, 2012

170
Q

Which Types of Investments Are Not Allowed in IRAs?

A

Life Insurance and Collectibles. US minted collectible coins are acceptable though.

171
Q

What are Tax Free Distributions from IRAs for Charitable Purposes?

A

<= $100k per taxpayer per year can distribute tax free if made directly from trustee to charitable organization.

172
Q

Name the Prohibited Transactions that will Cause an IRA to Cease Being an IRA as of the First Day of the Current Taxable Year

A

Selling, exchanging, or leasing of any property to an IRA
Lending money to an IRA
Receiving unreasonable compensation for managing an IRA
Pledging an IRA as security for a loan
Borrowing money from an IRA
Buying property for personal use with IRA funds

173
Q

How are IRA Transfers Incident to Divorce to Be Handled to avoid ordinary income/10% penalty?

A

Must be transferred directly from the trustee to the new trustee, or have the custodian re-title the account.

174
Q

What are the Eligibility Requirements for a SEP?

A

Age 21
Service for 3 of the last 5 years (PT included)
Compensation of at least $550 during the year

175
Q

What is the Latest a SEP Can be Established?

A 
As late as the due date to file taxes, including extensions:
Sole Proprietor = April 15, October 15
Partnership = April 15, September 15
Corporation = March 15, September 15
S Corporation = March 15, September 15
176
Q

What is the Vesting Schedule for a SEP?

A

100% Immediately

177
Q

What is a SARSEP?

A

Salary Reduction Simplified Employee Pension. Replaced by SIMPLE plans in 1997.

178
Q

What Were the Requirements for an Employer to Establish a SARSEP?

A

At least 50% of eligible employees must choose to defer a portion of their salary
No more than 25 eligible employees
Had to meet the SARSEP ADP test

179
Q

What is the SARSEP ADP Test?

A

The deferral percentage of HCEs cannot be more than 125% of the ADP for NHCEs

180
Q

What is the Salary Deferral Contribution Limit to SARSEPS?

A

$17k, or $22,500 for catch up. Same as 401k, 403b, and 457 plans.

181
Q

What is a SIMPLE Plan?

A

Savings Incentive Match Plans for Employees

182
Q

Who Would Want to Establish a SIMPLE Plan?

A

Small employers with < 100 employees who don’t want to deal with nondiscrimination rules and annual filings. They are also easy/inexpensive to set up and maintain.

183
Q

How are Employee Deferrals in a SIMPLE Taxed?

A

Subject to Payroll tax only

184
Q

What are the Types of SIMPLE Plans?

A

SIMPLE IRA & SIMPLE 401(k)

185
Q

What is the SIMPLE Employee Contribution Limit?

A

$11,500, $14,500 if >= 50

186
Q

What is the Matching Requirement for SIMPLE?

A

The employer must match employee contributions 100% up to 3% or provide nonelective contributions to all eligible employees of at least 2% (up to covered compensation limit)

187
Q

What if an Employer Grows Past the 100 Employee Cap for a SIMPLE?

A

The employer has a 2 year grace period of eligibility

188
Q

Can SIMPLEs be Combined With Other Plans?

A

A SIMPLE can’t be established if the employer contributes to a DC, SEP, or 403b during the same year or if employees accrue benefits from a DB plan in the current year

189
Q

What are the Eligibility Requirements for a SIMPLE?

A

An employee who earned $5k during any two preceding calendar years and are expected to earn $5k in the current year

190
Q

What are the Vesting Requirements for a SIMPLE?

A

All contributions are 100% Immediately vested

191
Q

What are the Conditions that an Employer can Reduce the 100% Matching up to 3% in a SIMPLE IRA Rule?

A
  1. Cannot be less than 1%
  2. Only for one year and can’t total over 2 years in a five year period
  3. Employees must be notified before the 60 day election period for a salary reduction
    SIMPLE 401(k)s have no flexibility
192
Q

What is the Early Withdrawal Penalty for A SIMPLE?

A

25% in the first two years of the employees participation, then 10% after

193
Q

Which Types of Plans Can a SIMPLE Be Transferred To?

A

In the first two years, only another SIMPLE. After two years, an IRA, a qualified plan, a 403b, or 457.

194
Q

Which Two Types of Entities Can Establish a 403b?

A
  1. Tax-exempt organizations

2. Public schools

195
Q

What are the Eligibility Rules for a 403b?

A

Same as qualified plans except for educational institutions who can one year and age 26 for immediate vesting

196
Q

What is the New Rule for 403b Catch Up Contributions?

A

The lesser of $5,500 or includable compensation subtracted by other elective deferrals for the year

197
Q

What is the 15 Year Rule Exception for 403bs?

A

If an employee has worked for a health, education, or religious organization for 15 years, then their deferral limit is increased by the lesser of:

1) $3k
2) $15k reduced by increases to the general limit that were allowed in previous years
3) $5k x number of years worked, subtracted from total elective deferrals in previous years

198
Q

What are the Investment Options for a 403b?

A

Mutual Funds or Annuity contracts

199
Q

What are the Distribution Rules for a 403b?

A 
Age 59.5
Separated from service
Death
Disability
Hardship (deferral contribution portion)
200
Q

Do Employee Contributions to a 457 Plan Affect Employee Contribution Limits for other Plans?

A

No

201
Q

What are the Three Types of 457 Plans?

A
  1. Eligible governmental plans (457(b))
  2. Eligible tax-exempt plans (457(b))
  3. Ineligible plans (457(f), or top hat)
202
Q

What is an Ineligible 457 Plan?

A

A plan for managers or HCEs

203
Q

What are the 457 Deferral Contribution Limits?

A

$17k or 100% of includable compensation

204
Q

What is the 457 Catch Up Provision New Rule?

A

If >=50, Additional $5,500, only available to eligible 457 plans

205
Q

What is the 457 Final 3 Year Rule?

A

The 3 years prior normal retirement age, defined by the plan, a participant may contribute up to an extra $17k, limited to unused maximum contributions from prior years. Can’t be used simultaneously with the “new rule”.

206
Q

How Do Employer Contributions Differ in a 457 Plan than a 401k?

A

The contribution limit for both employee and employer contributions is $17k

207
Q

How do Distributions from a 457 Differ from other Retirement Plans?

A

For a public 457, the 10% early withdrawal penalty doesn’t apply. It does, however, for private 457 plans.

208
Q

How Do Rollovers Differ for 457 plans?

A

Eligible private plans can only be rolled over into another private 457 plan. Governmental 457 plans can be rolled into a 401k, 403b, another 457, or IRA. Ineligible plans cannot be rolled over.

209
Q

What is the Contribution Limit for Ineligible 457 Plans?

A

No limit

210
Q

What is Constructive Receipt?

A

Income in subject to tax by the taxpayer in the tax year that assets are credited to his account, set apart for him, or made available to him

211
Q

Name Three Examples that Avoid Constructive Receipt

A
  1. An unsecure promise to pay
  2. Benefits are subject to substantial limitations
  3. The triggering event is beyond the recipient’s control
212
Q

What is a Substantial Risk of Forfeiture?

A

As long as there is a substantial risk of forfeiture, the taxpayer is not required to include the income as taxable income.

213
Q

What is Economic Benefit Doctrine?

A

An employee will be taxed on funds or property set aside for the employee if the funds or property are unrestricted and nonforfeitable

214
Q

How is the Transfer of Property for Service Taxed?

A

The difference between the FMV and amount paid is taxed as ordinary income

215
Q

What is a Non Qualified Deferred Compensation Plan?

A

A contractual agreement between an employer and an executive whereby the employer promises to pay the executive a predetermined amount of money sometime in the future

216
Q

What is a Secular Trust?

A

A trust designed to hold assets to distribute to employees at a later date. There is no risk of forfeiture so contributions to the trust are taxable

217
Q

What is a Rabbi Trust?

A

A trust designed to hold assets to distribute to employees at a later date. It can’t be accessed by the employer, but can be by the employer’s creditors so there is risk of forfeiture and is not taxable

218
Q

What are the Two Types of Stock Options?

A

Incentive Stock Option

NonQualified Stock Option

219
Q

How are Incentive Stock Option Grants and Exercises Taxed?

A

If granted at FMV, not taxable at the time of granting. Exercise is also not a taxable event, but will cause an AMT adjustment.

220
Q

When is an Incentive Stock Option Taxed?

A

When the owner sells the stock

221
Q

What are the Requirements for Preferred Tax Treatment of an ISO?

A

Must wait 2 years from grant to sell, and 1 year after exercise. Otherwise taxed as a NQSO.

222
Q

What is the Limit to How Much an ISO can Grant?

A

No more than $100k per year. Any excess will be taxed as an NQSO

223
Q

How are NQSOs Taxed at Grant Date?

A

No taxable income if issued at or above current FMV

224
Q

How are NQSOs Taxed at Exercise Date?

A

W-2 Income for the employee of the appreciated value, the employer will have a deduction

225
Q

What is an Employee Stock Purchasing Plan?

A

A nondiscriminitory plan that allows employees to buy company stock at a discount and receive preferred tax treatement

226
Q

What is the Lowest Price an Employee can Purchase Stock with a ESPP?

A

No less than 85% of FMV at a given date, or an average stock price

227
Q

What is the ESPP Limit for Employees Buying Stock?

A

$25,000 per year

228
Q

What is a Qualifying Disposition in an ESPP?

A

Same holding period as an ISO. Gains attributable to the discount price is ordinary income, excess gains are LTCG

229
Q

What is a Disqualifying Disposition in an ESPP?

A

If the holding period is not satisfied, then gains attributable to the discount are W-2 income, the excess is Capital Gains

230
Q

What is a Fringe Benefit?

A

A form of compensation other than wages provided by the employer to the employee

231
Q

How are Fringe Benefits Taxed to the Employee?

A

All benefits are taxable as wages unless specifically excluded by the IRC.

232
Q

How are Fringe Benefits Taxed to the Employer?

A

Benefits are deductible to the employer unless the benefit is excludable from the employees income.

233
Q

What are the Rules for the Meals Fringe Benefit?

A

Must be furnished for the convenience of the employer and must be furnished on the employer’s premises

234
Q

What Meal Scenario is Specifically Not Considered “For the Convenience of the Employer”?

A

Meals to promote morale or attract new employees and If the employer charges the employee for the meal

235
Q

What are the Rules for the Lodging Fringe Benefit?

A

The lodging must be on the employer’s business premises
The lodging must be for the convenience of the employer
The employee is required to accept the lodging as a condition of employment

236
Q

What are the Rules for the Athletic Facility Fringe Benefit?

A

The facility must be operated by the employer
Must be located on the premises of the employer
The use must be “substantially all” for employees and their spouses/dependents

237
Q

What is the Limit for Educational Assistance Programs?

A

$5,250

238
Q

What are the Rules for the Dependent Care Assistance Fringe Benefit?

A

Dependent must be:
Children under 13
Children or spouse physically or mentally incapable of caring for themselves

239
Q

What is the Limit for Dependent Care Assistance?

A

The lesser of $5k or the employee’s earned income

240
Q

What is the “No-Additional-Cost Services” Fringe Benefit?

A

When an employer provides their services to the employee. But cannot forgo revenue or incur substantial costs doing so. Eg: A free standby flight provided by an airline to it’s employee is exempt, but a free reserved flight wouldn’t be.

241
Q

What are the Rules for the Qualified Employee Discount Fringe Benefit?

A

Discounts are excludable from the employees gross income if:
Service max is 20%
Merchandise max is the employers profit margin x the retail price

242
Q

What are the Rules for the “De Minimis Fringe Benefit?

A

Personal benefits so small that it would be impractical to try and account for them

243
Q

What are the Rules for the Moving Expense Fringe Benefit?

A

The employee must move at least 50 miles from his old home
Needs to be FT & stay for at least 39 weeks out of the immediate 12 months or self employed and stay 78 weeks out of the immediate 24 months

244
Q

What are the Limits for Moving Expenses?

A

$0.235 per mile
Any amount not reimbursed can be deducted by the employee
Nondiscrimination rules do not apply

245
Q

What are the Limits for the Qualified Transportation and Parking Fringe Benefit?

A

$125 per month for commuter highway transportation and transit passes
$240 per month for qualified parking

246
Q

What are the Limits for the Adoption Assistance Programs Fringe Benefit?

A

The employer must have a written adoption assistance program and exclusion is limited to $12,650
The child must be under 18

247
Q

What are the Phase Outs for Adoption Assistance Programs?

A

$189,710 to $229,710

248
Q

What are the Limits to Awards and Prizes Fringe Benefts?

A

$400 for nonqualified awards

$1,600 for qualified awards

249
Q

What is a Qualified Award for Fringe Benefit Purposes?

A

Defined by the employee with a written plan that doesn’t discriminate in favor of HCEs

250
Q

What is the Standard Mileage Rate?

A

$.0555 per mile

251
Q

How are Group Medical Insurance Plan Fringe Benefits Taxed?

A

Premiums paid by the employer are deductible to the employer and not included in gross income to the employee

252
Q

How are Group Term Insurance Fringe Benefits Taxed?

A

Premiums paid by the employer are deductible to the employer and not included in gross income to the employee

253
Q

How Many Employees Need to Be Covered to be Considered Group Term Life?

A

At least 10 FT employees
If < 10, then the employer must do the following to receive the benefits of group life:
1. Provide group life to all employees
2. Coverage provided must be based on a % of pay or amount of coverage is based on age, years served, compensation, or position
3. All employees must provide evidence of insurability by filling a medical questionnaire that doesn’t require a physician

254
Q

What are the Nondiscrimination Rules for Group Term Life?

A

The plan must cover 70% of all employees or 85% of non-key employees

255
Q

How are Disability Premiums Taxed?

A

Premiums paid by the employer are deductible to the employer and excluded from the employees gross income

256
Q

How are Disability Benefits Taxed?

A

If the employer paid the premium and is excluded from the employees gross income, then benefits are taxable to the employee. But if the employee either pays the premium with after tax dollars or includes the employer paid premium in their gross income, benefits are tax free

257
Q

What is a Flexible Spending Account?

A

An account funded by employee deferrals, of which are not subject to income or payroll taxes. Some uses are also tax free. But if funds are not spent in a certain period of time, it is reverted back to the employer.

CFP Exam: March 2013 (7 decks)

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