Retirement: 7 Retirement Plan Distributions Flashcards
Retirement: 7-1,2 Retirement plan Distributions
An individual may obtain a distribution while still employed (called an in-service distribution) if the plan permits such a distribution to an active participant. Such distributions are permitted only in _____ and IRA hybrid plans, such as a SEP or SIMPLE.
a. profit sharing plans
b. defined distribution plans
a. profit sharing plans
Retirement: 7-1,2 Retirement plan Distributions
For_____ (SIMPLEs, SEPs, and SARSEPs), the participant controls the account and, as is the case with all IRA plans, may make withdrawals at any time for any reason (taxes and 10% early withdrawal penalty may apply).
a. IRA hybrid plans
b. pension plans
a. IRA hybrid plans
Retirement: 7-1,2 Retirement plan Distributions
For _____ (defined benefit, cash balance, money purchase, and target benefit plans), plan provisions must prohibit in-service withdrawals by employee-participants (individuals who are still employed) prior to the attainment of age 62. Age 62 in-service withdrawal provisions are used to accommodate participants who want to begin a “phased in” retirement rather than terminating all at once.
a. IRA hybrid plans
b. pension plans
b. pension plans
In other words, a pension plan must prohibit in service withdrawals prior to age 62 to retain its status as a qualified plan. If the pension plan’s provisions do not allow in-service withdrawals at age 62 or older, distributions may only be made following death, disability, or separation from service (which includes retirement of the participant).
Retirement: 7-1,2 Retirement plan Distributions
Typically, _____ may include provisions for in-service withdrawals after the plan’s normal retirement age. This creates an option for the employee who elects to continue working past the plan’s retirement age but who would like to begin tapping into his or her retirement benefits. Defined benefit plans are less likely to allow in-service withdrawals due to the complex record keeping required
a. money purchase and target benefit plans
b. profit sharing-type plans
a. money purchase and target benefit plans
Retirement: 7-1,2 Retirement plan Distributions
For _____, plan provisions will specify the portions of the participant’s account that may be available for in-service withdrawal (if any)—usually the vested portion of employer contributions, and only after a specified period of time (e.g., after funds have been in the participant’s account for two years, or after five years of participation). It is important to note that the plan document must specifically allow this type of in-service withdrawal.
a. money purchase and target benefit plans
b. profit sharing-type plans
b. profit sharing-type plans
Retirement: 7-1,2 Retirement plan Distributions
If a traditional profit sharing plan, one that does not include a 401(k) provision, provides for in-service withdrawals, _____ special hardship conditions are required
a. generally
b. generally no
b. generally no
the plan may, however, impose such restrictions
Retirement: 7-1,2 Retirement plan Distributions
Hardship withdrawals from a profit sharing plan, if allowed, may be from _____
a. employee contributions
b. employer contributions
c. employer contributions and earnings
c. employer contributions and earnings
There are no employee contributions
Retirement: 7-1,2 Retirement plan Distributions
Hardship withdrawals from a profit sharing plan, if allowed, may be from employer contributions and earnings. Three requirements must be met before hardship distributions may be made from a traditional ______.
- the term hardship must be defined in the plan
- uniform and nondiscriminatory rules must be followed in determining whether a hardship exists and the amount of the distribution necessary to alleviate the hardship, and
- the amount of the hardship distribution cannot exceed the participant’s vested interest under the plan.
a. 401k plan
b. profit sharing plan
b. profit sharing plan
Retirement: 7-1,2 Retirement plan Distributions
Hardship distributions from a profit sharing plan are taxable to the recipient and _____ be subject to a 10% early withdrawal penalty.
a. may
b. may not
a. may
Retirement: 7-1,2 Retirement plan Distributions
In contrast to the hardship withdrawal rules for traditional profit sharing plans, hardship withdrawals from a 401(k) plan or 403(b) plan are available only from ______, and only when the plan document specifically allows such withdrawals.
a. elective deferrals
b. employer contributions
a. elective deferrals
Amounts attributable to employer contributions, and earnings associated with either employer or employee contributions, are not available for hardship withdrawal. (There is an exception for certain contributions made prior to December 31, 1988.)
Retirement: 7-1,2 Retirement plan Distributions
Section 401(k) plans and 403(b) plans can offer hardship withdrawals, but certain requirements must be met. Plan participants may qualify for a hardship withdrawal from the plan if they demonstrate
- “an immediate and heavy financial need,” and
- a lack of other ______
a. retirement accounts
b. liquid funds of less than $10,000
c. “reasonably available” resources.
c. “reasonably available” resources.
Retirement: 7-1,2 Retirement plan Distributions
IRS regulations (Reg. Section 1.401(k)–1(d)(2)(iv)) provide the following examples of needs that would be considered “immediate and heavy”:
- medical expenses for a parent, spouse, child, dependent, or any beneficiary;
- purchase of a ____ residence;
- tuition payments for a parent, spouse, child, dependent, or any primary beneficiary;
- payments to prevent eviction from one’s _____ residence;
- funeral expenses for a parent, spouse, child, dependent, or any primary beneficiary; or
- repairs to principal residence that would qualify for a casualty loss income tax deduction.
a. primary
b. secondary
a. primary
Retirement: 7-1,2 Retirement plan Distributions
A _____ is someone who is named as a beneficiary under the plan and has an unconditional right to all or part of the participant’s plan account balance after a participant dies.
a. family member
b. spouse
c. primary beneficiary
c. primary beneficiary
Retirement: 7-1,2 Retirement plan Distributions
In determining if the participant has exhausted other “reasonably available” resources, the IRS requires that the participant first receive any employer plan distributions and loans available from other qualified retirement plans and _____.
a. personal loans
b. home equity loans
c. nonqualified deferred compensation plans
c. nonqualified deferred compensation plans
Retirement: 7-1,2 Retirement plan Distributions
Hardship distribution amounts:
- are subject to the 10% early withdrawal penalty for distributions made before age 59½,
- are not eligible for rollover, and
- _____ subject to mandatory withholding.
a. are
b. are not
b. are not
Retirement: 7-1,2 Retirement plan Distributions
Ownership of a plan participant’s interest may be changed during his or her lifetime through a qualified domestic relations order (QDRO). A QDRO is a legal judgment mandating the distribution, segregation, or attachment of one person’s property for the benefit of another, referred to as the _____. QDROs are a fairly regular feature of divorce settlements that involve spousal interests in qualified retirement plans.
a. primary beneficiary
b. spouse
c. alternate payee
c. alternate payee
Here, the court orders the distribution or attachment of a plan participant’s interest in a retirement plan in favor of an ex-spouse, a child, or another dependent who is recognized by the court order as having rights to a participant’s qualified plan benefits. A QDRO must be presented to the plan administrator, who must confirm the QDRO as a qualified or valid order.
Retirement: 7-1,2 Retirement plan Distributions
QDRO requirements apply to qualified plans, 403(b) plans, and Section 457 arrangements, but do not apply to _____.
a. traditional pensions
b. cash balance pensions
c. IRAs or plans utilizing IRAs, i.e., SEPs or SIMPLE IRAs
c. IRAs or plans utilizing IRAs, i.e., SEPs or SIMPLE IRAs
Plans using an IRA may be awarded to an ex-spouse according to the terms of a divorce decree.
Retirement: 7-1,2 Retirement plan Distributions
QDROs may not require the plan to pay benefits before the earliest retirement age of a participant who is still active and has not separated from service. The “earliest retirement age” is the earlier of
- the date on which the participant is entitled to a distribution, or
- the later of the date the participant attains age __, or the earliest date upon which the participant could, under the plan document, begin receiving benefits if the participant terminated employment.
a. 50
b. 55
c. 62
a. 50
Retirement: 7-1,2 Retirement plan Distributions
Under the QDRO, the former spouse is treated as the spouse for purposes of calculating the required minimum distribution. The participant’s required beginning date is the _____’s required beginning date for the QDRO, and distributions are paid out over the life of the alternate payee.
a. the employee
b. alternate payee
b. alternate payee
Retirement: 7-1,2 Retirement plan Distributions
Example: Plan permits distributions to terminated participants. George Baker is a participant in a plan that permits distributions to terminated participants. George is 48 and his divorce is final. His former spouse’s attorney sends the plan administrator a QDRO requiring the plan to pay the former spouse the benefits awarded by the court in the QDRO when George separates from service or turns age __, whichever occurs first.
a. 50
b. 55
c. 62
a. 50
Retirement: 7-1,2 Retirement plan Distributions
Distributions made to an alternate payee who is a spouse or former spouse will be taxed in the same manner as if the alternate payee were the participant. For example, if the alternate payee so elects, he or she can qualify for 10-year forward averaging tax treatment if the participant is qualified to so elect. The participant’s status is unchanged by the elections of the alternate payee. The distribution, if made to a spouse or former spouse, is eligible for rollover and is subject to the rollover rules, such as the __% mandatory withholding requirement.
a. 20%
b. 25
a. 20%
Retirement: 7-1,2 Retirement plan Distributions
The alternate payee who is a spouse or former spouse may also roll the QDRO distribution directly into his or her qualified plan, TSA, SEP, or governmental 457 plan that accounts for such rollovers separately, if that plan so permits. If not, the proceeds may be rolled to an ___.
a. brokerage account
b. savings account
c. IRA
c. IRA
Retirement: 7-1,2 Retirement plan Distributions
QDRO distributions to someone other than a spouse or former spouse (meaning child or other dependent of the participant) are included in the income of the _____ for the year of the distribution. Withholding requirements will apply unless the participant elects not to have withholding apply. In addition, such distributions are not eligible for rollover treatment.
a. participant
b. other recipient
a. participant
Retirement: 7-1,2 Retirement plan Distributions
John Kim participates in QualCo’s qualified retirement plan. He was recently divorced. The court awarded 42% of John’s benefit to his former spouse, Rose, under a QDRO. His benefit is valued at $167,000; Rose has elected a lump sum. The plan is not contributory, so John has no basis in the benefit. Unless she rolls over the distribution, ____ will be taxed on the full distribution of $70,140 (42% of $167,000). The 10% early withdrawal penalty does not apply, even though both parties are age 42—QDRO distributions are exempt from the 10% penalty.
a. John
b. Rose
b. Rose