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Retirement Flashcards

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1
Q

Wage Replacement Ratio

(top-down approach)

A
  • Subtract payroll tax (7.65%)
  • Subtract savings amount
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2
Q

Wage replacement ratio

(bottom up approach)

A
  • Budget for actual needs.
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3
Q

Capital Preservation Model

A
  • Preserve capital at the beginning of retirement to have the same amount at death.
  • N = Number of years of retirement
  • i = interest rate
  • FV = amount needed at death (from previously calculated amount needed at retirement)
  • PMT = 0
  • PV = ? Amount needed at retirement to create FV at death.
  • Add FV (amount needed at retirement for life needs) + PV (amount needed at retirement to leave that amount)
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4
Q

Purchasing power preservation model

A
  • Amount needed at death = inflation-adjusted amount necessary at retirement.
  • Capital preservation model adjusted for inflation.
    • N = number of years of retirement
    • i = inflation adjusted rate ((1 + interest rate)/(1 + inflation rate) - 1) * 100
    • PV = ? amount needed at death/retirement
    • PMT = amount needed at first year of retirement.
    • FV = amount needed at retirement without capital preservation.
  • OR use: inflation-adjusted rate with the capital preservation model instead of regular interest rate.
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5
Q

Sensitivity Analysis

A
  • Changes the variables toward increased risk.
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6
Q

Qualified Plan Compensation Limit

A
  • $265,000
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7
Q

Work life expectancy

A
  • Period during which one earns, saves and accumulates for retirement.
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8
Q

Retirement life expectancy

A
  • How long someone will be retired until death.
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9
Q

Annuity Method of Capital Needs Analysis

A
  1. Determine WRR
  2. Determine gross dollar needs in today’s dollars.
  3. Reduce by expected SS
  4. Inflate dollar needs by inflation rate (or CPI) - BEGIN MODE
  • N = remaining work life
  • i = inflation rate
  • PV = retirement needs in today’s dollars
  • PMT = 0
  • FV = ?
  1. Determine present value at retirement:
  • N= years of retirement
  • i = inflation adjusted rate )(1 + interest/1 + inflation) - 1)) * 100
  • PV = ? Amount needed at retirement
  • PMT = FV from last step (inflated need)
  • FV = 0
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10
Q

Monte Carlo Analysis

A
  • Randomized generator of variable outcomes.
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11
Q

Calculate retirement needs

A
  • BEGIN MODE
  • Use cash flow to determine NPV of necessary amount adjusted for inflation
  • Inflate that amount by interest rate to determine future value of that amount at retirement.
  • N = number of years to retirement
  • i = interest rate (not inflation-adjusted
  • PV = NPV from last step
  • PMT = 0
  • FV = ?
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12
Q

Types of Pension Plans

A
  • Defined contribution plans: money purchase pension plans, target balance pension plans.
  • Defined benefits plans: defined benefit pension plan, cash balance pension plan.
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13
Q

Profit sharing plan

A
  • All defined contribution plans
    • Stock bonus plans
    • ESOPs
    • 401Ks
    • Thrift Plans - after-tax
    • Age-based profit sharing plans
    • New comparability plans
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14
Q

Defined benefit pension plans

A
  • Defined benefit pension plan and cash balance pension plans
  • annual contribution limit is not less than the current liability to pay out benefit (actuary determines) - amount contributed depends on investment performance, etc.
  • Employer assumes investment risk
  • Subject to Pension Benefit Guaranty Corp. (insurance with caps)
  • forfeitures cover plan costs
  • no separate accounts
  • credit can be given for prior service from prior to plan set up.
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15
Q

Defined contribution pension plans

A
  • Money purchase pension plans
  • Target benefit pension plans
  • Contribution amount is defined in plan document.
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16
Q

Pension plan

A
  • pays pension at retirement - legal promise
  • no in-service withdrawals (can take lump sum if leave company and can take partial if 62 or over)
  • mandatory funding
  • 10% can be invested in employer securities (if defined contribution plan, participants can diversify investments)
  • Qualified Joint Survivor Annuity & Qualified Pre-retirment Survivor Annuity - surviving spouse gets paid
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17
Q

Profit sharing plan characteristics

A
  • Deferral of compensation
  • in-service withdrawals allowed after 2 years
  • no mandatory funding for employer- funding only has to be substantial and recurring.
  • use a predetermined formula for funding, but it is not a fixed amount
  • can fund from 0 - 25%
  • must be nondiscriminatory or meet a mathematical formula that allows discrimination
  • can invest up to 100% in employer securities
  • can be contributory or noncontributory (by employee)
  • no Q joint survivor Annuity or QPSA
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18
Q

Defined Contribution Plan

A
  • includes all profit-sharing plans and
  • includes money purchase plan and target benefit pension plans
  • employer’s annual contribution limit is up to 25% of covered compensation
  • employee assumes investment risk - controlled by employee
  • forfeitures (unvested money) are allocated to employees or offset plan costs
  • not subject to Pension Benefit Guaranty Corp. benefit
  • Separate investment accounts
  • no credit for prior service.
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19
Q

Qualified plan advantages

A
  • income tax deferred
  • payroll taxes avoided for employer contributions
  • ERISA creditor protection (protected from bankruptcy)
  • Special tax treatment for lump sum distributions
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20
Q

Qualification requirements for qualified plans

A
  • must have plan document
  • must have eligibility requirements
  • must have coverage requirements
  • vesting requirements
  • special qualification requirements when plans get top-heavy (key employees)
  • there are limitations on benefits and contributions
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21
Q

Plan document

A
  • terms of the plans
  • must be consistent with IRC qualification requirements
  • must be in writing and signed for plan year
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22
Q

Qualfied plan eligibility

A
  • employees who are 21 and over and have 1 year of service (1,000 hours in one plan year) must be eligible
    • special election to require 2 years of service, but 100% vesting is required immediately (not available to 401K’s)
    • tax-exempt educational institutions can require 26 years old
  • plan must have at least 2 entrance dates per year. (can’t make ppl wait more than 6 months)
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23
Q

Qualified plan coverage can exclude

A
  • can exclude
    • ineligible employees
    • unionized employees
    • nonresident alien employees who do not perform services in the US
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24
Q

Qualified plan coverage discrimination tests

A
  • plans must be nondiscriminatory
  • must meet 1 test:
    • Safe harbor test:
      • must cover at least 70% of non highly compensated employees
    • Ratio % test:
      • % of NHC covered/% of HC covered is at least 70%
    • Average benefits test:
      • avg. benefits of NHC covered/ avg. benefits of HC covered is at least 70%
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25
Q

Defined benefit plan add’l coverage requirement

A
  • In addition to 70% test, DB plan must pass:
  • 50/40 test: people first, % second
    • plan must cover the lesser of:
      • 50 non-excludable employees
      • 40% of non-excludable employees
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26
Q

Highly compensated employee

A
  • owner-employees: who own at least 5% of company this year or last year and attributed shares to his/her family (even if not actively involved)
  • owner or non-owner employees with salaries over $120K last year and,
  • if elected, in top 20% of employees ranked by salary. “20% election” (instead of 120K - owners always included)
    • ineligible or noncovered employees not included in this
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27
Q

Vesting Defined Contribution Plan

A
  • 2-6 year graduation (starts in year 2)
  • 3 year cliff (100% vested after 3 years of service)
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28
Q

Vesting Defined Benefit Plan

A
  • 3-7 year graduated (begins in year 3)
  • 5 year cliff (0% vested until 5 years, then 100% vested)
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29
Q

Top heavy definition

A
  • Defined Benefit plan - present value of accrued benefits of key employees exceeds 60% of accrued benefits for others.
  • Defined contribution plan - aggregate account balances of key employees exceeds 60% of aggregate accounts of all
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30
Q

Key employee

A
  • greater than 5% owners
  • greater than 1% owner with salary of 150K or more
  • officer with compensation in excess of 170K
  • a key is top heavy - have the keys to executive bathroom.
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31
Q

Top Heavy DC Plan funding

A
  • Must provide non-key employees with a contribution of at least 3% of comp (except if key employee contribution is less than 3%)
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32
Q

Top heaving DB plan funding

A
  • must provide non-key employees with a benefit equal to 2% per year of service (limit 20%) time annual comp
  • must use 2-6 graduated funding or 3-year cliff (same as all DC plan funding)
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33
Q

Covered Compensation Limit

A
  • for both DB and DC plans, compensation of $265,000 or less can be considered when determining benefits.
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34
Q

Defined benefit annual payout limit

A

For DB plans, the benefit that can pay out is the lesser of:

  • $210,000
  • 100% of average annual salary for 3 highest consecutive years
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35
Q

Defined contribution plans contribution limit

A

Lesser of:

  • 100% of employees comp
  • 53K plus catch-ups (must have sufficient earned income for catch-ups)

Includes:

  • employer contributions
  • employee contributions
  • forfeitures allocated to employee

(265K covered comp limit)

AKA Annual addition limit

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36
Q

Multiple plan contribution limits

A

The greater of:

  • 25% of employee covered compensation
  • the required minimum funding standard of the DB plan.
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37
Q

Life insurance investment in pension plan

A
  • employer gets deduction
  • “pure economic value” is taxable to participant
  • must be convertible to cash or annuity/
  • must be incidental investment. Pass either:
    • 25% test:
      • Term/Univ. LI premiums can’t exceed 25% of employer contrib.
      • Whole LI premiums can’t exceed 50% of employer contrib.
    • 100 to 1 ratio test
      • death benefit limited to 100 times monthly accrued benefit in the plan.
      • usually only used for DB pension plans
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38
Q

412 (e)(3)

A
  • specific type of DB plan that is funded entirely by a life insurance contract or annuity.
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39
Q

Actuary

A
  • determines how much funding is necessary for defined benefit plan
  • required annually:
    • defined benefit pension plan
    • cash balance pension plan
  • required once:
    • target benefit pension plan
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40
Q

Investment risk holder

A
  • Defined benefit plans: employer assumes risk
  • Defined contribution plans: employee assumes risk.
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41
Q

Allocation of forfeitures

A
  • Defined benefit plan: used to decrease future funding requirement
  • Defined contribution plan:
    • used to pay plan costs
    • allocated to existing employees (nondiscriminatory)
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42
Q

Pension Benefit Guaranty Corporation

A
  • Federal corp that insures benefits for lower paid employees
  • Plan sponsor pays premiums into PBGC
  • Max annual benefit: $60,136
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43
Q

Accrued benefit vs. Account balance

A
  • Defined benefit plan: present value of the vested future payments
  • Defined contribution plan: vested account balance
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44
Q

Credit for prior service

A
  • Defined benefit plans: may give credit for service provided before the plan start
  • Defined contribution plans: no credit for prior service.
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45
Q

Social Security Integration Excess Method

A
  • Funding formula
  • Excess method: provides an excess benefit (addition of benefit for amount of comp. over max SS comp)
  • can be 2 times regular contribution up to 5.7% on comp over 118,500) to those participants whose earning are in excess of SS wage base (integration level)
  • Can be used for both DB and DC plans
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46
Q

Social Security Integration Offset Method

A
  • Plan funding formula
  • Reduces the benefit to those employees whose earnings are below the SS wage base
  • Used only by DB plans
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47
Q

Plans with no SS integration

A

Plans with elective deferral portions

444 STRES

  • 401K
  • 457
  • 403b
  • Sarsep
  • Trad IRA
  • Roth IRA
  • ESOP
  • SIMPLE
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48
Q

Plans with SS integration

A
  • All other QP’s
  • SEP’s
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49
Q

Defined Benefit Pension Plan

A
  • Mandatory funding
  • Pension benefit based based on defined funding formula
    • flat amount
    • flat percentage
    • unit credit formula - Years * % * salary
  • Commingled accounts
  • Favors older plan entrants
  • Eligibility/vesting (3-7; 5 year)/coverage - based on qualified plan
  • Top heavy: 2-6; 3 year cliff; minimum funding = 2%
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50
Q

Cash balance pension plans

A
  • DB plan hybrid
  • Mandatory funding
  • Benefit is based on annual guaranteed contribution rate and guaranteed earnings on contribution.
  • Actuary
  • commingled accounts
    • participants can see hypothetical account balance
  • Favors younger plan entrants (need longer timeline in the plan)
  • Vesting: 3-7 year graded; 3-year cliff
  • DB plans can convert to cash balance plans
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51
Q

Money purchase pension plans

A
  • Defined Contribution pension plan
  • mandatory annual funding
  • fixed contribution of comp. up to 25%
  • investment choice made by employee/separate accounts
  • favors younger plan entrants (longer timeline to grow) - no prior service
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52
Q

Target benefit pension plan

A
  • special type of money purchase plan
  • determines contribution ased on the employee ages
  • participant bears investment risk
  • separate accounts
  • favors older plan participant
  • pension vesting
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53
Q

Profit Sharing Plans Contribution Employer Contribution Limit

A
  • per employer: 25% of total employer covered compensation (max $225K)
  • per employee limited to the lesser of 100% of comp or $53,000 for contribs. plus catch up. Employer, employee, and forfeitures.
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54
Q

Profit Sharing Plan Contribution Deadline

A

Income tax return due date with extensions.

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55
Q

Profit sharing plans standard allocation

A

Equal percentage to all participants

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56
Q

Profit sharing plans SS integration

A
  • Provides higher allocations for comp over SS max level.
  • PSPs can only use excess method.
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57
Q

Age-based profit sharing plan

A
  • Uses a combination of age and compensation to allocate the plan contribution per employee
  • Can discriminate as long as it’s based on actuarial assumptions or mathematical formulas
  • Based on the present value of $1 at presumed retirement age.
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58
Q

New Comparability Plan

A

Classification by job position: e.g owner, long-time employee, rank-and-file

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59
Q

401K

A
  • Cash or Deferred Arrangements (CODA)
  • Have to be tied to profit sharing plan or stock bonus plan
  • Employee deferrals of up to 18K or 24Kfor 55 or over
  • Employee contributions are subject to payroll tax
  • NOT eligible for SS integration
  • covered comp: 265K
  • additions limit: 53K
  • Can’t be established by gov’t entities
  • Age 21 and 1 year of service max. for eligibility
  • No deferred eligibility (2 years)
  • Employer contribs: max of 2 to 6 year or 3 year cliff
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60
Q

CODA nondiscrimination Testing

Actual Deferral Percentage Test/Actual Contribution Percentage Test

A

Negative elections: employee is deemed to be in the plan unless opts out.

Limits HCE deferrals to percentage of NHCE deferrals.

(greater than 5% owner or comp in excess of 120K)

If Avg. elective derferral of of NHCE’s is:

  • 0-2%, HC’s can only defer 2 X that %.
  • 2-8%, HC’s can only defer that % plus 2%
  • 8% or over, HC’s can only defer 1.25 X that %.

PLUS CATCH-UP Contribution

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61
Q

Failing the ADP test

A
  • Decrease ADP of HC - corrective distribution
  • Recharacterize contributions from pre-tax to post-tax
  • Increase ADP of NHC - non-elective contributions by NHC
    • 100% vested to all elgible employees
  • Matching contributions to NHC
    • 100% vested to employees who elected to defer in current year
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62
Q

Actual Contribution Percentage test

A
  • Percentage NHC contributions of all contributions
  • takes into account: employer after-tax contribs and matching contribs
  • same scale as ADP test and same corrective procedures except recharacterization may not help (since after-tax contribs accounted for)
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63
Q

Safe Harbor 401K

A
  • not required to pass ADP or ACP
  • employer must provide 100% vested:
    • 3% nonelecitve contribution to all eligibile employees
    • Matching contrib:
      • 100% up to 3% and
      • 50% from 3-5%
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64
Q

Qualified Automatic Contribution Arrangement (QACA)

A
  • Plans that contain qual. automatic enrollment meets ADP, ACP and top heavy rules.
  • Must have:
    • automatic deferral: EE in unless opt-out, not excess of 10% and at least:
      • year 1: 3%
      • year 2: 4%
      • year 3: 5%
      • year 4 and after: 6%
    • matching (similar to Safe Harbor schedule) or nonelective contribution
    • notice to employees
  • employees w/at least 2 yrs service must be 100% vested.
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65
Q

Proft Sharing Plan hardship distribution

A
  • To pay:
    • Medical expenses
    • Purchase of principal residence
    • Tuition and fees
    • Preventing eviction
  • No other sources of funds available
  • Taxed at OI but usually no penalty (sometimes 10% penalty)
  • Suspended from making contribs for 6 months
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66
Q

Catch-up contributio

A

6K if 50 or older

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67
Q

Stock Bonus Plans

A
  • DC plan (eligibility, vesting, top heavy)
  • Employers contribute stock to the plan
  • Contributions are discretionary
  • Can be non-contributory or contributory by employee
  • Allocations must be non-discriminatory
  • Pass-through voting rights to employees
  • Employees have the right to demand employer securities when taking a distribution
  • Employees have right to sell securities back to employer upon distribution (put option) - assumes non-public co.
  • Distributions must start within one year of retirement and must be completed within 5 years.
  • Private companies generally need to be valued annually to determine share value.
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68
Q

Stock Bonus Plan advantages/disadvantages

A
  • Value of employer stock contributed is tax-deductible to employer
  • Give employees vested interest in company performance.
  • Employee has risk of non-diversified portfolio
  • Put option could represent cash-flow problem for employer
  • Valuation is expensive
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69
Q

Stock Bonus Plan/ESOP Portfolio Diversification in public companies

A
  • Employee elective deferrals have the right for immediate diversification (treated like 401K)
  • Can diversify employer contributions for participants with 3 or more years of service
  • No requirement to allow diversification for employees with less than 3 years of service.
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70
Q

Net Unrealized Appreciation

A
  • Must be a lump-sum distribution of employer securities to qualify for this tax treatment.
    • usually from a stock bonus plan or ESOP
  • Only available if coming out of qualified plan
  • Basis is FMV at employer contribution date. Gain is FMV at distribution date plus gain/loss between distribution and sale date.
  • Amount up to basis treated as Ordinary Income and taxed in year of distribution.
  • Gain (NUA) between contribution and distribution treated as LT Cap Gain.
  • Amount of gain or loss AFTER distribution normal LT or ST gain/loss - holding period begins at distribution.
  • If distribution before 59.5, penalty tax on basis.
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71
Q

Employee Stock Ownership Plans (ESOPs)

A
  • DC profit sharing plan/type of stock bonus plan
  • Participants receive shares of employer stock through ESOP/trust.
  • Employer received tax dedcution for amount of stock contributed to the plan or principal/interest payments for loan used to purchase company stock (leveraged ESOP)
  • Often used in case of company difficult to sell.
  • Employer can sell shares to ESOP and employees then own company through plan.
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72
Q

Leveraged ESOP

A
  • Bank loans the money to ESOP Trust
  • Trust buys stocks from primary shareholder (owner usually)
  • Company contributes cash to the Trust every year to pay loan.
  • Stock of company stays within ESOP and is allocated to employees.
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73
Q

ESOP Employer Advantages

A
  • creates market for closely held stock
  • helps retain employees
  • improves employee performance
  • employer-owners can diversify portfolio w/out capital gain.
  • corp can borrow against stock
  • corp can improve cashflow by taking deduction on stock contributions
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74
Q

ESOP Employer Disadvantages

A
  • dilutes company ownership
  • adminitrative costs (valuation)
  • may strain cash flow with put options
  • personal liability for ESOP trustees
  • uncertain cash flow for future.
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75
Q

ESOP employee advantages/disadvantages

A
  • improves morale
  • favorable tax treatment - NUA
  • Put option available
  • employee bears risk of employer insolvency
  • stock not liquid
  • value subject to fluctuation
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76
Q

ESOP Non-recognition of gain for owner requirements

A
  • ESOP must own 30% of corp’s stock immediately after sale
  • seller(s) must use proceeds to purchase qualified replacement securities w/in 12 months of sale and hold such securities for 3 years
  • Cannot be publicly traded stock (any class)
  • Sellers/family/more than 25% owners can’t receive stock allocation inside ESOP
  • ESOP can’t sell the stock for 3 years (holding period)
  • must be common or convertible stock and have been held by owner for at least 3 years prior to sale.
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77
Q

ESOP Voting Rights

A
  • Privately held corps: Participants can vote in major corporate decisions; small decisions handled by trustee (who also sits on Board)
  • Publicly traded corps: Voting rights just like other shareholders’ voting rights.
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78
Q

Contrubutions to ESOPs

A
  • can be cash or stock
  • tax deduction up to 25% of total covered comp
  • if leveraged ESOP, can go above 25% if the extra is an interest payment.
  • For C-Corp dividends paid are deductible to employer
  • For S-Corp dividends not deductible
  • Dividends are included in OI of employee.
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79
Q

ESOP employee allocations

A
  • can be age-based
  • can’t use SS integration
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80
Q

ESOP Distributions

A
  • Employee can demand distribution
  • Participant can elect substantially equal periodic payments elected by participants for no longer than 5 years (more time for amounts larger than $1,070,000 for up to 10 years)
  • Can elect lump sum (distribution within 1 year) for NUA treatment.
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81
Q

ESOP Put Option

A
  • If employee elects for employer to buy back stock but happen within 60 days of distribution or within a 60 day period the following plan year.
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82
Q

ESOP Diversification Requirement

A
  • A qualified participant - 55 years or older and 10 years plan participation can force diversification within his account.
  • Qualified election period - 6 plans years after becoming qualified participants
  • may 25% diversify post-1986 stock balance for first 5 years of qualified election period.
  • 50% in 6th year.
  • Based on number of allocated shares less any distribution, past diversification, etc.
  • Diversification can be satisfied thru distribution, transfer to another qualified plan, or within ESOP.
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83
Q

ESOP Trustee

A
  • Must act in best interest of participants and beneficiary
  • Fiduciary duty
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84
Q

ESOPs and S Corps

A
  • Pass-thru entities allowed to create ESOPs in 1996.
  • ESOPs only count as 1 shareholder
  • Not required to make distributions in the form of securities bc may lose S Corp status (if more than 100 shareholders or held by non-resident alien, etc.)
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85
Q

Qualified plan selection

A
  • Employee status: Looks at employee age, compensation, tenure in company, HC employees, key employees.
  • Cash flow considerations: cash flow problems = profit sharing plan
  • Administrative costs - actuary, valuation expert, testing, etc.
  • Owner’s business and personal objectives
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86
Q

Pension plans distributions

A
  • No in-service withdrawals
  • QPSA if participant dies before retirement, surviving spouse - annuity
  • QJSA - annuity payment for lifetime of surviving spouse
  • At disability, distributed to participant
  • If terminate employment before retirement, lump-sum possible.
  • Rollovers possible to IRA or other qualified plan
  • Some must be taken as annuity
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87
Q

Profit sharing plan distrbutions

A
  • May permit in-service withdrawals after 2 yearss
  • 401K’s may permit loans
  • At termination:
    • lump-sum
    • rollover
    • purchase annuity
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88
Q

Taxation of distributions

A
  • Ordinary income tax
  • except:
    • rollover
    • annuity
    • lump-sum option
    • if after-tax contributions had been made
    • QDRO
  • taxable distributions from qualified plan (not rollover) are subject to 20% withholding
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89
Q

Rollovers to IRA’s cause loss of

A
  • ERISA protection - though rollovers are proteted from bkcy
  • 10-year forward averaging
  • NUA
  • Pre-1974 Capital Gain treatment
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90
Q

Direct rollover

A

Distribution from a qualified plan trustee to the trustee of the recipient account

No income tax witholding

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91
Q

Indirect Rollover

A

A distribution to the participant with subsequent transfer to another account

20% tax witholding (when that amount is replaced into account within 60 days, that amount is then refunded as tax refund)

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92
Q

Lump-sum distribution

A
  • distribution of entire account balance within 1 taxable year
  • caused by:
    • death
    • attainment of 59.5
    • separation of service
    • disability
  • employee participated for 5 years
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93
Q

10 year forward averaging

A
  • participant born prior to 1/2/1936
  • tax calculated using 1986 rates
  • must be lump-sum distribution in 1 calendar year
  • divide amount by 10 and apply rates. Then multiply total by 10.
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94
Q

Pre-1974 Capital Gain Treatment

A
  • participant born prior to 1/2/36
  • lump sum distribution
  • pre-1974 portion of capital gains taxed as 20% long-term capital gains.
  • remaining portion eligible for 10-year forward averaging
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95
Q

NUA inheritance treatment

A
  • NUA does not receive a step-to fair market value at death
  • Heirs maintain same NUA treatment - taxed as LT CG
  • any additional gain beyond the NUA gain is stepped to FMV.
  • IF lump-sum distribution has been made prior to death and stock is still held.
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96
Q

Qualified Domestic Relations Order

A
  • Order, judgement, decress set forth for child support or divorce
  • Nontaxable distribution as long as assets are deposited into an IRA or other qual. plan for benefit of the other party.
  • Can be:
    • shared payment - each person get a portion of the distributions - usually DB plan
    • separate interest - account separated into portions
  • To former spouse: If not deposited into qualified plan, then 10% penalty
  • Distribution to child: not eligible to rollover; child is not taxed; participant is taxed
    *
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97
Q

Plan loans

A
  • permissible by all plans, usually only seen with CODA
  • Loan may not exceed lesser of:
    • $50,000
    • 1/2 of participant’s vested account balance
    • if the vested account value is than 20K, max is lesser of:
      • 10K
      • vested account balance
    • reduced by highest loan balance within 12-month period
  • must be repaid w/in 5 years - up 30 years if used to purchase primary residence
  • payments must be at least quarterly and are paid back post-tax and then taxed again at distribution
  • failure to repay is a taxable distribution
  • termination of employment generally causes loan to become due
98
Q

Exceptions to 10% Early withdrawal penalty

A
  • Death
  • Age 59.5
  • Disability
  • Substantially equal payments (like RMDs) 72t
  • Medical expenses in excess of 10% AGI
  • QDRO’s
  • Attainment of age 55 and separated from service (qualified plan)
  • Public safety employee separated from service after age 50 (only QP)
99
Q

72t Distributions

A
  • If take $ out in substantially equal payments over life expectancy
  • greater than 5 years, and at least annually, or at least until 59.5
  • No penalty
100
Q

Minimum distributions

A
  • RMD date - by April 1 of the year after turn age 70.5
  • If still employed by plan sponsor, may delay distribution until April 1 following year of separation. (does not apply to greater than 5% owner)
  • All subsequent distributions must be made by Dec. 31
  • 50% penalty
101
Q

RMD Calculation

A
  • FMV of participant’s account Dec. 31 preceding plan year/age factor for age as of Dec. 31 of distribution year

look back for money, look forward for age

102
Q

Required Minimum Distribution Table

A
  • Uniform lifetime tables - standard tables - assume bene 10 years younger
  • Joint and Survivor table - if SPOUSE is greater than 10 years different
  • Single Life tables - survivor table - any bene other than spouse
103
Q

Decedent death after RMDs begin

A
  • spouse bene:
    • can treat as own and RMD based on own life expextancy
    • treat self as bene - non recalc method - -1 method
  • non-spouse bene
    • non-individual/non qual. trust, use bene’s life factor
    • individual or qual trust: goes to estate - longer of bene’s life expectancy or decedent’s. -1 method
104
Q

Decedent death before RMD’s begin

A
  • spouse bene -
    • treat as own - RMD’s at 70.5
    • treat as bene - use decedent’s life factor
  • non-spouse bene -
    • ind or qual trust: take RMD’s on bene’s life factor (-1 method)
    • non-spouse bene: asset left to estate - 5 year rule. Must distribute entire account within 5 years.
105
Q

Establishing QP date

A
  • Plan must be in writing and adopted within company’s tax year.
  • Funding can be done any time before tax return due date including extensions. (6 months after tax return due)
106
Q

Establishing QP type

A
  • Individually designed plan - Most expensive, plan is written then sent to IRS for permission. Then determination letter sent.
  • Master or prototype plan:
    • Master - single trust used my many employers.
    • Prototype - each plan is separately created based on a prototype plan that complies. Prepackaged plan
107
Q

Eligible Employee Notification, QP

A
  • Must notify all present employees who are eligible
  • All present employees who are not eligible but work in the same location as employees who are eligible.
  • In person - must be notified 7-21 days before request to IRS
  • Mailing notification -
  • Summary plan description within 90 days of after employee becomes participant.
  • Summary of material modification (SMM) - within 210 days of end of plan year when mod was made.
  • Must provide periodic benefit statements:
    • DC plan - quarterly
    • DB plan:
      • accrued benefit statement once every 3 years if remain employee.
      • if not still employee, annual notice of how to get statement.
      • limited to one statement per 12 months.
108
Q

Form 5500

A
  • Filed with Department of Labor
  • due 7 months after tax years ends
  • 5500EZ: if plan only provides benefits for employer and spouse
109
Q

DB plan contributions timing

A
  • Amount determined by actuary must be made quarterly
  • Other contribs can be made end of plan year.
110
Q

Excess annual additions

A
  • 25% of covered comp
  • to fix:
    • corrective contributions
    • hold in future years and reallocate to other employees
    • allocate in future years
111
Q

Self-employed person’s calculation of allowed contribution amount.

A
  1. CHECK THIS
  2. calculate contribution rate: contribution to other participants/ 1 + contribution to other participants e.g. .25/1.25
  3. Calculate 92.35% of net self-employment income
  4. Take 15.3% of first $118,500 of that number
  5. Then 2.5% of the rest of number 2
  6. to calculate total SE tax owed.
  7. Subtract 1/2 of SE ( #3+#4) tax from net income
  8. Take that amount and multiply it by #1.
112
Q

Forfeitures

A
  • DB plan - reduces future funding costs
  • DC plan - can be allocated to participants or reduce plan costs.
113
Q

qualified plan prohibited transactions

A
  • transactions between plan and disqualified person
  • transfer of plan assets to disqualified person
  • self-dealing/receipt of consideration by fiduciary
  • selling, leasing, buying between disqualified people
  • 50% penalty if corrected within tax year
  • 100% penality if not corrected within tax year
114
Q

QP investment advice

A
  • fees must not vary based on chose investments or
  • recommendations are based on computer models
  • fiduciary responsibility
115
Q

Department of Labor

A
  • oversees plan compliance with ERISA
  • enforces rules governing: plan managers, investments,
116
Q

Pension Benefit Guaranty Corporation

A
  • DB plans
  • Does not cover DC plans or or professional service corps with 25 or fewer employees
  • Employers pays premium
  • pays penalties on plan underfunding
  • max annual PBGC benefit: $60,136
117
Q

Terminating QP

A
  • All plan participants become fully vested
  • must not have been established as a temporary program.
  • DB plan:
    • Standard termination - voluntary
    • Distress termination - voluntary when employer is in financial difficulty. usually bankruptcy filing
    • Involuntary termination - initiated by PBGC when plan is unable to fund accounts.
  • DC plan:
    • terminate contributions after annual mandatory funding is finished.
  • Plan freeze - not terminated but sponsor no longer makes contributions; participants must meet vesting requirements.
118
Q

Traditional IRA’s and Roth Contrib Limits

A
  • lesser of $5,500 or earned income combined contributions (alimony received is earned income)
  • catch-up contrib of 1K at age 50
  • No contributions to Trad. IRA’s after age 70.5 (Roth ok)
  • Spousal IRA - working spouse earned income counts.
  • Contribs must be made by due date of tax return (April 15)
119
Q

Trad IRA/Roth IRA RMD

A
  • Only RMD’s for Trad IRA.
120
Q

Trad IRA/Roth IRA Excess Contribs

A
  • Contributions in excess 6% penalty for each year that contribution remains in account.
  • Must withdraw excess by April 15 following year.
121
Q

Nondeductible IRA contributions

A
  • tax-deferred growth
  • creates adjusted basis
  • file form 8606 to track taxable basis
  • not limited for active participants in QP.
122
Q

Active participant status

A
  • Limits deductibility of Trad. IRA
  • Active participant:
    • DB: meets eligibility requirement or participates
    • DC: make elective deferral or receive contrib to account (forfeitures, corrective actions for ADP, QNEC etc)
    • 457 and other deferred comp plans don’t trigger active participant status.
123
Q

Deductibility of TIRA contribs

A
  • Not an active participant = 100% deductible to the extent of earned income
  • Phased out ratably
  • Single = $61-71K phase-out
  • Both spouses AP’s = $98-118K phase-out
  • One spouse AP = $183-193K phase-out:
    • applies to non-AP spouse
    • AP spouse must use MFJ limits
  • Deductible amount =(upper limit - AGI)/Phase-out spread (10K or 20K)
124
Q

Distributions from TIRAs

A
  • Must take RMD’s, even if still working after 70.5 (unlike QP’s)
125
Q

TIRA and Roth exceptions to 10% penalty

A
  • Death
  • 59.5 attainment
  • Disability
  • Substantially equal payments
  • Med expenses in excess of 10% AGI
  • Higher education expenses (unlike QPs)
  • First time home purchase up to 10K (unlike QP’s)
  • Payment of health insurance premiums by unemployed (unlike QPs)
126
Q

Roth IRA’s

A
  • nondeductible contributions
  • distributions tax free
  • may continue to fund after 70.5
  • no RMD’s (except if inherited)
  • $5,500 limit; 1K catch up after 50 (earned income)
  • Limited by AGI
  • Roth conversion - no limit on AGI
  • allow contributions to be recharacterized (by due date of tax return)
127
Q

Roth IRA phase-out

A

Single: $116-131K

MFJ: $183-193K

MFS: $0-10K

128
Q

Non-qualfied distributions from Roth IRAs

A

If meets exception (not held for 5 years, but is excepted from 10% penalty, then no penality but earnings are taxed)

Order of distribution:

  1. Contributions - tax-free, penalty-free
  2. conversions - tax free, 10% penalty if within 5 years of conversion (unless exempted b/c of 59.5, death, disability, first-time home)
  3. earnings - taxable, subject to 10% penalty (unless exempted b/c of 59.5, death, disability, first-time home)
129
Q

Qualified distributions from ROTH IRA’s

A
  • tax free, not subject to penalty
  • must be made after a 5-year period which begins at first contribution
  • and:
    • 59.5 attainment
    • death
    • disability
    • 1st time home purchase (up to 10K)
130
Q

Inherited Roth IRA’s

A
  • accumulate tax-free growth but are subject to RMD’s.
131
Q

IRA investment options

A
  • cash, stocks, bonds, options, US gold, silver, and platinum coins, real estate
  • Not permitted: life insurance, collectibles, other coins.
132
Q

Rollovers from QP’s to IRA’s

A
  • lose special tax treament (10-year forward, NUA, pre-1974 cap gains)
  • no loans
  • may be rolled back if QP permits
  • Lose ERISA (have some bankruptcy protection)
133
Q

Simplified Employee Pensions (SEPs)

A
  • Small business retirement plan
  • tax-deferred growth
  • Not QP
  • Can be established as late as the extended due date of tax return (procrastinator plan)
  • Established using TIRA accounts
  • generally not covered by ERISA
134
Q

SEP coverage requirement

A
  • Must provide coverage for ALL employees:
  • 21 or over
  • performance of services for 3 of the last 5 years and
  • received compensation of at least $600
135
Q

Establishment of SEP

A
  • complete formal written agreement
  • give eligible employees notice
  • Open SEP-IRA account for each eligible employee
136
Q

Contributions to SEP’s

A
  • employer-funded only
  • discretionary
  • must be to all employees who was eligible during the year even if dead or separated from service
  • limited to lesser of:
    • 25% of covered comp
    • 53K
  • can use SS integration
137
Q

SEP vesting and withdrawals

A
  • employees are 100% vested
  • withdrawals are treated as withdrawals from IRA
138
Q

Salary Reduction Simplified Employee Pensions (SARSEP)

A
  • can’t be established anymore
  • employee elective deferral retirement plan
  • established with TIRA
  • Deferral limit: 18K plus catch-up
  • nonelective employer contributions
  • ADP of HC less than or equal to 125% ADP of NHC.
139
Q

Savings Incentive Match Plan for Employees

SIMPLE Plans

A
  • employer must have 100 or fewer employees who each earned at leadt $5K in the preceding year.
  • Must be a calendar-year plan
  • Must be created by 10/31 and employees have 60 days notice to electively defer.
  • employer cannot have an additional QP
  • 100% vesting in SIMPLE IRA
  • designed for employee contributions
  • SIMPLE IRA - uses IRA account as funding vehicle - not QP
  • SIMPLE 401K - uses 401K account as funding vehicle (QP) - tax filing necessary
140
Q

SIMPLE IRA’s

A
  • Max contribution for elective deferrals is $12,500 for 2015
  • Catch up contribution $3,000 for 50 and over.
  • Must do 1 of:
    • Matching contribution of 100% up to 3% (mandatory match)
      • never less than 1%
      • must not be less than 3% for more than 2 out of 4 years.
      • covered comp limit not applicable to match
    • nonelective employer contribution of 2% to every eligible employee.
141
Q

Contributions to SIMPLE IRA’s and 401K’s

A
  • tax deductible
  • tax free growth
  • employer contribs must be made my due date of tax return including extensions
  • employer contribs not subject to FICA or FUTA
  • employee deferrals subject to payroll tax
142
Q

SIMPLE IRAs Distributions/withdrawals

A
  • OI
  • roll over to IRA or QP
  • 25% penalty if you withdraw during first 2 years of participation
  • subject to IRA early withdrawal exclusions
143
Q

SIMPLE 401ks

A
  • similar to SIMPLE IRA’s but allow loans
  • have filing requirements
  • employer contributions are subject to covered comp limits.
  • treated as QP’s
  • file 5500
  • vesting requirements
144
Q

403b plans ERISA

A
  • used by nonprofits, educational institutions, etc.
  • ERISA applies to:
    • 501c3 403b’s (unless minimal employer involvelment)
    • not gov’t or religious
  • When ERISA applies:
    • plan must meet nondiscrimination, ACP test
    • must offer Preretirement Join and Survivor annuities or qualified joint and survivor
145
Q

403b plan eligibility

A
  • Age 21 or 1 year of service
146
Q

Contributions to 403b plans

A
  • Elective deferrals
    • tax deductible
    • subject to payroll taxes
    • 18K plus 6K catch-up (combined limit with all other CODA plans)
  • Non-elective contributions
    • tax deductible
    • employer contributions to all eligible employees
  • Can allow after-tax contributions
147
Q

403b vesting

A
  • employee deferrals 100% vested
  • employer contribs 2-6 year or 3-year cliff
148
Q

403b 15-year catch up provision

A
  • only available to health, education and religious orgs.
  • permits up to an additional 15K - max of $3K for year
  • must have completed 15 years of service
  • can me in addtion to other catch up contributions
149
Q

403b investment options

A
  • insurance annuity contracts
  • mutual funds
  • overfunded contribution that is invested in mutual funds are subject to 6% excise tax (no annuity contract)
150
Q

Loans from 403b

A
  • only permissible from ERISA plans
  • subject to same rules as 401K plans
151
Q

Distributions from 403b

A
  • No penalty if:
    • 59.5
    • death
    • disability
    • separation from service after age 55
    • hardship requirement (only source of funds; 1st time homebuyer, medical expenses)
  • Disctributions from non-elective contributions are not restricted
  • RMD requirement
  • Taxed as ordinary income and can be subject to 10% penalty.
152
Q

457 Plans

A
  • not QP’s and not deferred comp plan
  • Does not count against other elective deferrals - can max out this plan and others.
  • some tax-exempt entities (trade associations, religious, private hospitcals), and states, state agencies, and political subdivisions of state, (state police forces)
  • Eligible 457:
    • funded plan: gov’t or public- like QP
    • unfunded plan: private plan: HCE or mgmt - unlike QP
  • Ineligible 457: top-hat
153
Q

eligible public 457b plans

A
  • government plans
  • 18K contrib limit
  • all employees participate
  • like other retirement plans
  • catch-up available or special catch-up
  • rollovers 401K, 403b, IRA etc.
154
Q

private 457b plans

A
  • excess benefit plan
  • for tax-exempt entities
  • assets not protected
  • 18K max contribution
  • non-QP plan
  • No testing needs: can be for key management and HC only
  • special catch-up only
  • can only be rolled over to other 457b plans
155
Q

457b special 3-year catch-up

A
  • in the 3 years prior to stated retirement age.
  • employee may defer an additional 18K per year
    • limited to prior unused deferral amounts
    • max contribution is 36K
  • cannot include age 50 and over catch up
156
Q

457f (ineligble) plans

A
  • not a retirement plan. is a deferred comp plan
  • for gov’t and tax exempt entities
  • assets not protected by trust
  • no contribution limit
  • key management and HC can participate
  • pre-tax and tax deferral
  • rollovers not permitted
157
Q

457f eligibility

A
  • employees enter into salary agreement before the month compensation is deferred
  • no after tax contributions

employer contribs are not immediately vested.

158
Q

FICA

A
  • 7.65% deducted from paycheck and then matched by employer.
  • 6.2% up to $118,500 for OASDI
  • 1.45% of total comp for Medicare
  • Add’l .9% of wages, comp or SE income in excess of 250K MFJ, 200K Single
159
Q

Social Security Eligibility

A
  • fully insured: 40 quarters of coverage ($1,220 = 1 qtr)
    • 4 quarters per year
  • currently insured:
    • 6 quarters of coverage out of last 13 quarters.
    • provides limited benefit to survivors
    • no retirement benefits
160
Q

Social Security Retirement Age

A
  • full retirement is moving to age 67
  • Increased benefit for taking after full retirement age.
  • Decreased benefit for early retirement
  • Full retirement benefit is limited to $2662
161
Q

Social Security Beneficiaries

A
  • Spouse of retired or disabled workers if age 62 or older or caring for child under age 16 or disabled
  • Divorced spouse if married for at least 10 years
  • Surviving spouse if age 62 or older or caring for child under age 16 or disabled
162
Q

Social Security Early Retirement

A
  • May begin as early as age 62
  • permanent reduction
  • 5/9 of 1% for first 36 months before normal age plus
  • 5/12 of 1% for every month after 36 months.
163
Q

Retirement Earnings Limitation Test for early retirement

A
  • SS benefits are reduced based on earned income from wages/SE income
  • Pensions/investment income/cap gains/rental income do not count
  • Before normal retirement age: $1 reduction for every $2 of earned income over $15,720
  • In the year of retirement age: $1 reduction for every $3 of earnings over $41,880
  • After attaining full retirement age, no reduction.
164
Q

Taxation of SS benefits

A
  • Up to 85% of SS benefits can taxed based on MAGI
  • MAGI = AGI plus + nontaxable interest + foreign earned income
  • Provisional income = MAGI + 1/2 SS Benefit
  • 1st Hurdle MFJ: 32K; S: 25
  • 2nd Hurdle MFJ: 44K; S: 34K
  • If provisional income is between 2 hurdles, taxable benefits are lesser of:
    • 50% of Provisional income + 50% SS
    • 50% of provisional income less hurdle 1
  • If provisional income is greater than hurdle 2:
      • USE MM estimation tool
165
Q

Social Security Taxation Hurdles

A
  • Hurdle 1:
    • MFJ: 32K
    • Single: 25K
  • Hurdle 2:
    • MFJ: 44K
    • Single 34K
  • Between 2 hurdles up to 50% is taxed
  • Over hurdle 2 up to 85% is taxed
  • Can estimate based on proximity to hurdles
166
Q

SS Disability Benefits

A
  • Payable to workers with severe physical or mental impairments regardless of age
  • Must have 20 quarters of coverage in the last 40 to be fully insured (tho sliding scale based on age)
  • Can be paid to participant or beneficiary
167
Q

SS death benefit

A
  • 1-time $255 payment to surviving spouse or minor child
168
Q

Survivors benefits during retirement

A

LOOK over chart

  • Self: 100% of benefits
  • Child under 18: 50% of benefits
  • Spouse age 60 or under 0
  • Spouse age 62: 40% of benefits
169
Q

Survivors benefits fully insured

A
  • LOOK over chart
  • Child under 18: 75%
  • Spouse with child under 16: 75%
  • Spouse age 65: 100%
170
Q

Disability benefits

A
  • Self: 100%
  • Child under 18: 50%
  • Spouse with child under 16: 50%
  • Spouse age 65: 50%
  • Spouse age 62: 40%
  • Dependent parent: 0%
171
Q

Survivors Benefits for currently insured person

A

LOOK up

172
Q

Maximum Family SS benefit

A
  • Usually up to 175% of Primary Insurance Amount
  • 150% of first $1,056
  • 272% of 1,056-1,524
  • 134% of 1,524-1,987
  • 175% of amount over 1,987
173
Q

Effect of marriage or divorce on benefits

A
  • If receiving benefits based on spouse’s earnings:
    • cease at divorce unless 62 or older and married for at least 10 years.
    • widow(er)’s benefits cease at remarriage unless 60 or older
174
Q

Beneficiaries living outside of US

A
  • People may live outside the US, but countries without diplomatic relations may not receive checks.
175
Q

Medicare

A
  • Federal health plan for age 65 and over and people of any age with kidney failure.
  • Doesn’t cover full skilled nursing services (nursing home)
  • Part A- Hospital plan:
    • deductible based on benefit period
    • 60 lifetime reserve days
    • coinsurance
    • premium of $407 per month if have less than 30 qtrs and not eleigible for reduction.
  • Part B- Medical insurance
    • covers 80% of doctors visits, ambulance etc.
    • deductible of $147/year
    • premium is $104.90 and increases based on income
  • Part D - Prescription Drug plan
    • monthly premium
    • payment for each prescription
176
Q

Medicaid

A
  • for low income people
  • lookback period for assets is 60 months
  • covers full skilled nursing (nursing home)
177
Q

Deferred compensation plan tax deferral requirements

A
  • substantial risk of forfeiture
  • no constructive receipt
178
Q

Deferred compensation plan benefits

A
  • defers taxable income into the future
  • employers avoid the max $1M comp tax deduction limit
  • can be discriminatory
179
Q

Constructive Receipt

A

when income is not subject to limitations or restrictions

occurs when funds are:

  • set aside for taxpayer
  • credited to taxpayers accounts
  • made available to draw upon at any time
180
Q

Substantial risk of forfeiture

A
  • prevents constructive receipt
  • occurs when rights to income are conditioned on a future occurance
  • no income tax consequences
181
Q

Economic benefit doctrine

A
  • employee will be taxed on funds that are set aside for him/her if funds are unrestricted or nonforfeitable
182
Q

IRC Section 83

A
  • Property transferred from employer to employee is taxable to extent that the FMV of the property is greater than the amount paid me employee
183
Q

Taxation of deferred compensation

A
  • employee must pay payroll tax at the time the income is deferred (regardless if income isn’t received until later)
  • usually only 1.45% for Medicare as employees are generally over SS wage base.
  • at the time paid out to employee, taxed as ordinary income.
184
Q

NQDC (non-qualified deferred compensation) Plans

A
  • Contractual arrangement between employer and executive
  • employer promises to pay a specific amount at a specific time in the future.
  • not qualified plans.
185
Q

Unfunded NQDC plans

A
  • unfunded promise to pay (funds are not set aside)
  • no consutructive receipt
  • risk of forfeiture
  • meets requirements for tax-deferral
  • upon funding, taxable to employee and tax-deductible for employer
186
Q

Salary-reduction plans

A
  • executive elects to defer receipt of salary into the future.
  • election to defer must happen before payment is made
187
Q

Funded NQDC Plans

A
  • Plan assets are put into a trust, usually:
    • secular trust
    • rabbi trust
  • to avoid current taxation must have:
    • no constructive receipt
    • substantial risk of forfeiture
188
Q

Secular Trust

A
  • Irrevocable trust
  • holds set-aside funds in NQDC plan
  • funds are not available to employer or employer’s creditors
  • usually no substantial risk of forfeiture unless vesting schedule (or other delayed receipt)
  • if no substantial risk of forfeiture, currently taxable.
189
Q

Rabbi Trust

A
  • irrevocable trust
  • holds funds from NQDC for the employee
  • may be available to employer’s creditors under bankruptcy, therefore
  • substantial risk of forfeiture exists; may also have vesting schedule.
  • not currently taxable
190
Q

Phantom stock plans

A
  • NQDC plan
  • employer gives fictional shares of company to employer (to avoid voting rights, etc)
  • no actual stock issued
  • at a later time, stock is valued and value is distributed to employer
  • employer taxed at distribution, employee takes tax deduction then.
191
Q

SERPs Supplemental Executive Retirement Plans

A
  • to provide retirement benefits over 265K covered comp limit.
  • also known as: top-hat plans or excess-benefit plans
  • may be funded or unfunded
192
Q

401K Wrap plans

A
  • allows exec who max 18K deferrals to defer add’l salary unto wrap plan
  • used inside secular or rabble trust
193
Q

Employer stock options

A
  • gives employee right to buy stock for a specified price at a specified time
  • Option price = FMV at date of grant
  • usually vesting schedule
  • Types of options: Incentive Stock Options, Non-qualified stock options, stock appreciatio rights.
194
Q

Non-Qualified Stock Options

A
  • does not meet requirements of ISO
  • no special tax treatment
  • no statutory holding periods (tho employer may create)
  • at grant date: no taxable income unless exercize price is less than FMV at grant date
  • at exercise:
    • W2 income for the appreciation over exercise price.
    • employer has deduction for same amt.
  • upon sale of stock:
    • capital gain/loss with holding period beginning at exercise date.
195
Q

Cashless exercise

A
  • 3rd party lends cash to exec in order to exercise the option
  • exec repays the lender almost immediately and recognizes W2 income for appreciation amount
  • disqualifying disposition (no favorable tax treatment)
196
Q

Incentive Stock Options (ISO’s)

A
  • Aggregate FMV of ISO’s mut not exceed 100K per year per employee.
  • can only go to employees
  • for special tax treatment, must hold stock for 2 years from grant date, 1 year from exercise. (treated like NQSO)
  • at grant date: no taxable income unless FMV is less than exercise price
  • at exercise:
    • no regular tax
    • AMT adjustment
  • at sale:
    • LT cap gain treatment for amount over exercise price;
    • Basis is exercise price
    • negative AMT adjustment.
  • Employer does not have tax deduction for qualfied ISO
197
Q

Gifting of ISO’s

A
  • unexercised, can’t be gifted
  • can be transferred once exercised
198
Q

Gifting of NQSO’s

A
  • may be gifted if allowed by employer
  • When donee exercises:
    • employee will have W2 income
    • employer will have tax deduction
  • Donee’s basis is FMV at exercise
199
Q

Stock Appreciation Rights

A
  • Grant the holder cash in an amount in excess of FMV of stocks over exercise price
  • essentially a cashless exercise without a right to purchase the stock
  • no taxation at grant (unless section 83b election)
  • W2 income for excess value over exercise price
  • Tax deduction for W2 amount
  • Same as NQSO but don’t actually have to buy the stock.
200
Q

Restricted Stock Plans

A
  • Pay employee with company stock
  • Exec doesn’t pay for stock
  • Restrictions from selling or transferring, usually on vesting schedule
  • increases employee retention
  • no taxable income at receipt (bc of forfeiture risk) unless 83b election
  • when time restriction is lifted, FMV W2 income; employer has tax-deductible.
  • holding period begins at date restrictions are lifted.
201
Q

Section 83b election

A
  • employee can include value of stock in W2 income at grant date
  • all gain is capital gain
  • if employee doesn’t vest, employee SOL
  • holding period is date included in income
  • must file written statement with IRS no longer than 30 days from date stock is given.
202
Q

Employee Stock Purchase Plan

A
  • allows employees to purchase employer stock at a discount of up to 15% of date-determined stock price or an average price
  • purchase limit of $25,000
  • if employee holds stock for 2 years from grant date, 1 year from exercise price
  • gain attributable to discount at date of purchase taxed as ordinary income
  • other gain taxed as capital gains.
  • if disqualfied disposition, all gain is W2.
203
Q

Meals fringe benefit

A
  • Excludible if:
    • on employer’s premises
    • for the convenience of the employer
  • can be discriminatory
204
Q

Lodging fringe benefit

A

Excludable if:

  • employee must live there as condition of employment
  • on the employer’s premises
  • for the convenience of the employer
205
Q

Athletic facility benefit

A

Excludable if:

  • on employer’s premises
  • operated by employer
  • substantially only used by employee, spouse and dependents.

Can be discriminatory

206
Q

Education assistance programs

A

Nondiscriminatory unless it is a working condition benefit (enables someone to perform his job)

  • up to $5,250 excludable
207
Q

Dependent care assistance

A

Nondiscrimintory

Excludable if:

  • is for a dependent child under 13 or unable to care for self or for spouse physically or mentally incapable of caring for self
  • an exmployee must exclude lesser of:
    • 5K (2,500 MFS) or earned income (earned by both spouses)
    • if one spouse is full time student, can exclude monthly amount
    • if one spouse is disabled then also can be excluded.
208
Q

No additional cost service

A
  • an employee can exclude the value of services that are not an additional cost to employer
  • nondiscriminatory
209
Q

Employee Discounts

A
  • must be products or services
  • services: 20% discount
  • Products: gross profit margin time cost of product to nonemployees.
210
Q

De Minimus Fringe Benefits

A
  • So small in value as to not be worth accounting for.
  • de minimus meals - every so often
  • de minumus transportation - every so often
  • Can be discriminatory
211
Q

Moving expense reimbursement

A
  • New job location must be at least 50 miles greater from old home than old job.
  • Employee needs to be full time employee in new location for at least 39 weeks or 78 weeks if self-employed
  • includes reasonable expenses for moving of household goods and personal effects
  • travel and associate lodging for the move
  • Not deductible: meals, storage costs, pre-house hunting costs.
212
Q

Qualified transportation and parking cost

A
  • exclude the value of transportation benefits provided by employer
  • $130/month commuter, $250 parking
  • can be discriminatory
213
Q

Adoption assistance program

A
  • can exclude from gross income adoption expenses up to $13,400 per child
  • must be in writing
  • phased out with AGI - $201-241K
  • nondiscriminatory
214
Q

Awards and prizes

A
  • length of service and presentation awards excluded
  • $400 per taxable year for all nonqualified plans
  • $1600 per taxable year for all qualified plans (plan is written)
  • cannot be disguised compensation
215
Q

Qualified tuition deduction

A
  • free or discounted tuition to education employees
  • excludable
  • nondiscriminatory
216
Q

Group medical insurance deductibility

A
  • Employee cost is deducted, employer cost is deducted unless:
  • greater than 2% owner of S Corp
  • for owner of company, deduction for AGI.
  • C-Corp same as regular employee - W2
217
Q

COBRA

A
  • group health plan coverage continuation 20 employees or more during 50% of calendar days
  • employee can be required to pay total premium plus 2% for admin costs.
  • Normal termination, full to part time: 18 months
  • disabled employee or dependent: 29 months
  • qualified dependent reaches majority age, death of employee, reach medicare age, divorce, plan termintates: 36 months
218
Q

Group term life insurance

A
  • premiums up to 50K excludable
  • premiums for amounts over 50K based on uniform premium table - per month per $1,000 of coverage amount.
  • employee paid premiums are subtracted.
  • prorated by number of months covered.
219
Q

Group disability insurance

A
  • if premiums are excluded from income, then taxable when received by employee
  • if premiums are not excluded from income, then benefits excludable.
220
Q

Cafeteria plans

A
  • Written plans that offer benefit options for different employees in stages of life.
  • Employees can also opt for cash instead.
  • Not subject to payroll tax or fed tax
  • must be nondiscriminatory
221
Q

Voluntary Employees Beneficiary Association

A
  • Trust set up my employer to hold fund for future employee benefits
  • Employer gets tax deduction at the time the money is deposited into the trust.
  • Uses actuarial determination for amount contributed.
  • Must be used for life insurance, survivor benefits, health insurance, vacation and sick pay
  • Cannot be used for retirement funding
222
Q

Salary Continuation Plan

A
  • Deferred comp arrangement
  • Employer agrees to pay for a specified period of time after employee terminates.
  • Can be funded (rabbi or secular trust) or unfunded
  • income taxable to employee at time of payment unless constructive receipt.
223
Q

Group Long Term Care Insurance

A
  • Premium payments are deductible to employer and tax-free to employee.
  • lower rates
  • plan must have guaranteed coverage and guaranteed renewal of coverage.
  • can be discriminatory.
  • if employee pays premium there may be limit to deductibility.
224
Q

Business Disability Plans

A
  • Disability overhead insurance - covers usual and necessary expenses if key emloyee becomes disabled
    • Premiums deductible, benefits taxable
  • Disability buyout insurance: covers the value of an owners interest if the owner becomes disabled.
225
Q

Split-dollar life insurance

A
  • life insurance paid for by employer and employee to provide executives with low-cost LI.
  • endorsement method: employer owns policy and pays premium. Employer holds the rights to be repaid premiums upon death.
  • collateral assignment: employee owns the policy and employer makes a loan to the employee to pay the premiums. Fair market interest rate. At employee’s death, loan is repaid from DB.
226
Q

IRA/Roth Qualified Distributions

A
  • HIDE MEAT
  • Home purchase (1st)
  • Insurance (health)
  • Death/Disability
  • Education (higher)
  • Medical expenses in excess 10% AGI
  • Equal payments (72t)
  • Age (59.5)
  • Tax levies
227
Q

Group Paid-Up Life

A

Increasing whole life and decreasing term are describing group paid-up life benefits

228
Q

Dependent’s Group Life

A

A policy which must cover all eligible dependents if the employer pays the entire premium cost best describes

229
Q

Group Universal Life

A

Employee pays part of the policy premiums.

Expenses are often lower than for individual universal life policies.

Offer the potential for higher returns than whole life policies.

Employee can borrow cash

Coverage continues after employment

230
Q

Group life S-Corps/Sole Props

A

No deductibility for owners of the entities. Employee group life full deductibility.

231
Q

Business-Related Dues paid by employer: Incl/Excl.

A

Dues and licenses are excluded from taxable income if directly related to the employee’s job.

232
Q

Van pool Fringe Benefit: Incl/Excl

A

Excluded

233
Q

Group survivor’s income

A

No named bene; provides benefit for survivor

234
Q

Payroll deduction IRA

A

The Payroll Deducation IRA is probably the simplest retirement arrangement that a business can have. No plan document needs to be adopted under this arrangement. The employer has no filing requirements. Only employees make the contributions. Any size business can provide this.

Under a Payroll Deduction IRA, an employee establishes an IRA (either a traditional or a Roth IRA) with a financial institution. The employee then authorizes a payroll deduction for the IRA. The employer’s responsibility is simply to transmit the employee’s authorized deduction to the financial institution. In general, if this arrangement is offered to any employee then it should be offered to all employees

235
Q

Plan loans by corporation owners

A

Allowed if:

I. Loans are available to all participant/beneficiaries on a reasonably equivalent basis.

II. Have a reasonable rate of interest.

III. Made in accordance with specific plan provisions.

IV. Must be adequately secured.

236
Q

Short Term Disability

A
  • Short-term disability benefits usually start the eighth day of an illness (first day for an accident) and
  • generally last no more than six months.
  • The definition of disability under short-term disability coverage is defined as the inability to perform the normal duties of one’s position.
  • Generally, short-term disability coverage will start after sick pay benefits have been provided to a covered employee
237
Q

Tax-Sheltered Annuities (TSA)

A
  • Salary reductions into a TSA are not exempt from payroll taxes.
  • The annual elective deferral limit may be increased by up to $3,000 for employees of certain organizations who have completed 15 years of service and meet certain other requirements.
  • Tax sheltered annuities must allow participants to invest in mutual fund or annuities
  • To calculate the maximum exclusion allowance for make-up calculation purposes, the participant’s years of service and the amount of total excludable contributions are needed.
238
Q

TIRA contribution age limit

A

70.5

239
Q

Super Top Heavy Qualified Plan

A

90% of benefits to key employees

240
Q

Entities that cannot have ESOP

A

Partnership, Sole proprietorship

241
Q

ACP Measure

A

ACP measures nondiscriminatory employer matching and/or employee after-tax contributions only.

242
Q
A

CFP (8 decks)

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