Retirement Flashcards
what is the pension benefit guaranty corporation?
created under ERISA and responsible for insuring plan participants against loss of benefits from plan termination
financed by premiums paid by sponsors of defined benefit plans
insures only defined benefit plans (traditional and cash balance), not defined contribution plans (insures up to $67,284/yr in 2019
employers with 25 or fewer active participants are exempt from PBGC requirements
when can the pension benefit guaranty corporation terminate a defined benefit plan?
minimum funding standards not met
benefits cannot be paid when due
long-run liability of company to PBGC expected to increase unreasonably
what is the difference between a pension plan and profit sharing plan (defined contribution)?
pension plan contributions are mandatory, profit sharing is discretionary
what is a main characteristics of nonqualified plans?
do not have to meet nondiscrimination requirements of qualified plans and benefits can exceed typical qualified limits
not subject to ERISA requirements
funding not required/informal funding possible
provide deferred employer deductions and do not allow an income tax deduction until the employee recognizes the income on his tax return.
entitle the employer to an immediate income tax deduction only if the employee is currently taxed on the benefit.
entitle the employee to defer taxes on the benefit only if the employer’s income tax deduction is deferred.
what are the eligibility requirements for qualified plans?
21 yrs old, one yr of service (1000 hours within a 12mo. period)
The exception to the 21-and-one rule is the 2-year/100% rule (not 3 years) that allows up to a 2-year service requirement if the employee is immediately 100% vested in employer contributions upon becoming a participant.
must be permitted to enter within 6 mo. of eligibility
important because this is when employer begins to make contributions on behalf of participant
define a highly compensated employee
meets one of following criteria:
- greater than 5% owner of employer during current or preceding year
- had compensation above $125k for preceding year from employer
what are qualified plan coverage requirements?
employer-sponsor of plan must cover at least 70% of nonhighly compensated employees (safe harbor percentage test)
covered employee means they’re eligible to defer part of their compensation
plans not meeting safe harbor percentage test must pass:
ratio test - (avg benefits % non HCEs / avg benefits % HCEs) >= 70%
OR
average benefits percentage test - (avg benefits % non HCE / avg benefits % HCE) >= 70%
what is the 50/40 test?
defined benefit pension plans must meet (in addition to coverage tests)
all defined benefit pension plans must benefit no fewer than the lesser of: 50 employees or 40% of all eligible employees
what is employee compensation capped at for covered compensation?
$280,000
what is the annual additions limit for defined benefit pension plans?
cannot exceed lesser of:
100% of participants compensation averaged over 3 highest consecutive years of compensation
OR
$220k/yr
what is the annual additions limit for defined contribution plans?
cannot exceed lesser of:
100% of participant’s annual compensation
$56k annually
additions include employee and employer contributions, forfeitures allocated to defined contribution plan on behalf of employee
per source of income (employer), but total contribution by participant aggregated between all plans (except Section 457)
what is a noncontributory plan?
employer pays all - most pension and profit-sharing plans
what is the limit on employer contributions made of behalf of an employee and the employer tax deductions taken for these contributions?
100% covered compensation
25% covered comp
define a top-heavy defined benefit plan
provides more than 60% of aggregate benefits to key employees
- must provide accelerated 3 yr cliff or 2 to 6 yr graded vesting
- key employee = 5%+ owner
- SIMPLE IRA and 401k are exempt from top heavy requirements
- must provide minimum benefit accrual of 2% x # yrs of service up to 20% for all non-key employees
- must make minimum contribution of 3% annual compensation (or equal contribution for all employees)
what is the permitted disparity limit for integration of defined contribution plans?
lesser of
2x base percentage
OR
based percentage + 5.7%
what plans are prohibited from social security integration?
ESOP, SARSEP, SIMPLE, 401(k), employer matching contributions
under the pension protection act, an eligible investment advice arrangement exists where either:
investment adviser’s fees are neutral
unbiased computer model certified by independent expert to create recommended portfolio is used
what is the penalty for prohibited qualified plan transactions?
15% amount involved if corrected
if not corrected, 100% amount involved, included personal liability of party in interest
DOL regulates actions of plan fiduciaries and ensures compliance with ERISA plan reporting and disclosure requirements
what vesting schedules must a defined contribution plan provide?
3 yr cliff
two to six yr graded
what is the purpose of ERISA
federal law established to enforce equitable standards, deter retirement plan abuse, and set legal guidelines for most private retirement, health, and welfare benefit plans
reports defined benefit plan info to PBGC, participants, IRS, and DOL
what is considered in complying with max annual additions limit?
employee after-tax contributions
employer qualified non-elective contributions
employer qualified matching contributions
what is an advance determination letter?
received from IRS by companies with qualified plans to avoid risk of disallowed deductions, ensures plan is qualified according to IRS regulations
which organizations can provide pension plan services?
trust companies commercial banks investment firms asset management groups insurance companies
define leased employee rules
aggregation rules that pertain to the leasing of individuals on a long-term, full-time basis and treating such individuals as employees for purposes of the coverage requirements.
define affiliated service group rules
aggregation rules that address situations in which related businesses work together to provide goods and services to the public.
when can qualified plans impose a 2 yr waiting period?
if employer contributions are 100% vested immediately upon entering
the employer’s promise to pay the employee at some predetermined point in the future is characteristic of what type of plan?
nonqualified
what is the section 415 limit on the projected annual benefit the plan can provide to the employee-participant at age 65
lesser of
$220,000 of annual compensation
OR
100% of participant’s compensation averaged over participant’s highest 3 consecutive years of earnings
what are the 3 methods to calculate participant’s promised benefit in defined benefit plan?
flat amount
flat percentage
unit benefit
what is a DB(k) plan?
hybrid plan designed to address shortfalls in 401(k) and decline in establishment of defined benefit pension plans
employer with no more than 500 may offer
must include auto enrollment feature
fully vested 50% match on first 4% of compensation deferred by employee
what is a cash balance pension plan?
defined benefit pension plan where investment decisions are made by plan fiduciary and credits a guaranteed return (interest rate credit), cost savings from traditional pension plan
subject to minimum funding requirements and guaranteed by PBGC
3 year cliff vesting requirement
most appropriate with younger, middle income workforce who’s concerned with retirement income security and has enough participants to spread admin costs across
what is a fully insured pension plan (section 412 plan)?
funded exclusively by cash value life insurance or annuity contracts
guarantees payment of death benefit to plan beneficiaries
exempt from minimum funding standards, unless there is an outstanding loan against insurance policy
typically with newly, designed plan, but less common now with limited growth
best for employer with stable cash flow
how are forfeitures treated with defined contribution plan?
offset plan expenses or future employer contributions
count against remaining participants’ annual addition limits
reallocated amount remaining plan participants increasing potential individual account balances
what are the 4 important pension plans?
Be My Cash Target traditional defined Benefit (older) Money purchase plan (younger) - DC Cash balance plan (younger) Target benefit plan (older) - DC
what are the main principles of a target benefit plan?
employee benefit not guaranteed by employer (employee bears investment risk)
separate employee accounts, projected retirement benefit
plan requires actuarial assumptions upfront, but no ongoing
max deductible employer contribution is 25% of covered payroll and are mandatory
participant’s max addition is lesser of 100% compensation or $56k
how are target benefit and money purchase pension plans similar?
PBGC insurance not required actually dollar benefit not guaranteed employee bears investment risk lower contributions for younger and lower-paid employees each employee has individual account
what are main characteristics of a money purchase plan?
plan sponsor’s costs are predictable and plan is easily administered
participant can easily understand simple design and contributions are based on salary for each year of career, rather than salary at retirement
mandatory funding requirement
no actuary or PBGC insurance required
no held to ADP testing (only applies to 401k
additions to participant accounts are limited to lesser of 100% compensation or $56k
deductible employer contribution of up to 25% aggregate covered compensation
employer securities held by plan cannot exceed 10% of FMV of plan assets
to remain qualified, what contribution requirement must be made?
substantial and recurring - contribution must be made in 3 of every 5 yrs
limited to lesser of 100% employee compensation or $56k
what tests must be met to qualify for hardship withdrawal of profit sharing plan in-service distribution?
financial needs test
resources test
unreimbursed medical expenses or funeral costs, primary residence purchase, higher ed expenses for immediate family, payment to prevent foreclosure on primary residence
distribution is taxable and 10% penalty applies (if below age 59.5)
amount withdrawn before retirement/termination of employment cannot exceed participant’s vested account balance
***pension plans do not generally permit in-service withdrawals before age 62
what are the two requirements by which the new comparability plan will satisfy nondiscrimination rules?
eligible non-HCEs must receive allocation of at least 5% of compensation
if less than 5%, minimum allocation rate is 1/3 of highest allocation rate under plan
what tests must a 401k plan satisfy in addition to general nondiscrimination tests (avg benefits %, ratio, percentage coverage)?
actual deferral percentage ADP for non-HCE: less than 2%, max ADP for HCE is 2x 2-8%, max HCE is 2% above 8%, max HCE is 1.25x - if test fails, employer either makes corrective distribution or additional qualified matching to non-HCEs actual contribution percentage same rules as ADP test above, just applicable when employer matching and employee after-tax contributions present
what is the safe harbor 401k plan?
permit high level of elective deferrals by employees without discrimination testing
max waiting period for eligibility of 1 year
not subject to top-heavy plan provisions or meet the ACP and ADP tests
mandatory minimum employer contribution required, immediately 100% vested
2 contribution methods:
1. nonelective contribution of 3% of compensation for all eligible employees
2. employer matching contribution of 100% on first 3% for non-HCE compensation, 50% match on next 2% of non-HCE compensation for those actually deferring salary into plan
what are main characteristics of SIMPLE 401k?
used by employers w/ 100 or fewer employees earning $5k+ during preceding year
employer may not maintain any other qualified or sponsored plan (except 457 plan)
exempt from nondiscrimination testing (ADP test and top-heavy rules)
max employee deferral is $13,000 w/ $3k catch-up after 50 (so total could be $13k + employer match)
employer-sponsor may match elective deferrals up to 3% of compensation or make a flat 2% contribution for all employees, regardless of whether elective deferrals are made
employee is always 100% vested in contributions made by employer
what are the 2 tests that must be met for the distribution of earnings from a roth 401k to be tax free?
distribution must be made after 5 yr period from date of first regular contribution to plan
distribution is made after date on which participant has attained age 59.5 or becomes disabled, or is made to beneficiary of deceased participant
what are the 2 main differences between Keogh plan and other tax-advantaged plans?
individuals must calculate retirement plan contribution based on earned income, or net earnings from self-employment, rather than W-2 income
individuals must use a net contribution rate in determining their allowable contribution to a Keogh defined contribution plan (plan contribution percentage / 1 + contribution percentage)
what are top-hat plans?
nonqualified plans that supplement qualified plans, may defer taxes for participants, and a generally discriminatory in favor of highly compensated employees
what type of contributions do thrift plan arrangements require by employees?
after-tax
A qualified automatic contribution arrangement (QACA) will automatically satisfy Section 401(k) nondiscrimination testing if it:
- Provides for an automatic deferral percentage (ADP) of between 3% and 10% of employee compensation.
- Provides an employer contribution to non-HCEs of either an employer match of 100% of the first 1% deferred plus 50% of the next 5% or a 3% non-elective profit-sharing contribution in lieu of the matching contribution.
- Provides that employer contributions become 100% vested after the employee has completed no more than 2 years of service.
- Requires that, within 30 days before the start of the plan year, participants receive written notice of their right to opt out.
what are main characteristics of stock bonus plans?
defined contribution
not required to have contributions based on profits
allow portion of stock appreciation to be deferred until stock is sold and lump sum distribution taken
provides employer a deduction for contributions
costly and administratively cumbersome
create market for employer stock
income tax owed on value of stock distributed to plan participants
what is the exception to the compensation limit of $280k?
SIMPLE IRA limit of $416,667 ($12,500 / 3%)
what are the main restrictions of a SIMPLE IRA?
25% withdrawal penalty if taken within first 2 yrs, then reverts to 10% penalty
may not purchase life insurance as funding vehicle
participant loans unavailable
not subject to nondiscrimination rules
max contribution of $13k w/ $3k catchup (over 50)
allowed to match only 1% in 2/5 yrs (typically 3% contribution match or 2% nonelective contribution by employer)
applicable to those who have earned $5k+ in any 2 previous years and expect to receive the same or greater in the next year
what are the major SEP plan requirements?
- must cover all employee at least 21 yrs old and have worked for employer 3 out of 5 yrs
- contributions must be made on behalf of employees over 60% or with compensation at least $600
- contributions only made by employer and contribution percentage is the same for all participants in the plan
- may exclude union employees if they already have separate plan
- contributions limited to lesser of: $56k OR 25% of employee’s compensation
eliminates admin complexity, lengthy reporting, numerous discrimination tests, and restrictive contribution formulas w/ many retirement plans
form of IRA (no investment in life insurance or loans allowed!)
very portable because funding an IRA for the employee
ALWAYS fully vested
contributions can vary year to year (i.e. NOT mandatory), just have to be uniform across all employees
benefits younger employees
EMPLOYER contributions to SEP are not subject to FICA, FUTA, or income tax withholding and are excluded from employee’s current income
20% max contribution for self-employed person
accounts can be opened and funded up to the tax return filing deadline (file form 5305-SEP)
what must be done if a SEP plan is determined top-heavy (over 60% of all contributions made to HCEs)?
employer must make minimum contribution of 3% of employee’s compensation for each non-key employee plan participant
what is the tax-sheltered annuity?
AKA 403(b) plan
typically public schools, nonprofit hospitals, church employees
must be universally available to all eligible employees
funded either by mutual funds or annuity contracts
similar limits to 401k
in-service withdrawals permitted
special catch-up provision for employees who have worked for 15+ years for qualified employer: lesser of $3,000, $15,000 reduced by amounts previously deferred under special catch-up, or $5,000 multiplied by employee’s years of service with employer less sum of all prior salary deferrals (max saved in 1 yr is $28k (19+6+3))
generally not subject to 401k special nondiscrimination testing (only ACP if employer matching contributions are present)
not eligible for NUA treatment
not subject to ERISA reporting and disclosure requirements (if sponsored by church or governmental organization)
what is a section 457 plan?
non-qualified deferred compensation plan established by private tax-exempt employer (other than church) or state/local government for benefit of its employees
one time in-service withdrawal permitted, does not impose 10% penalty if distribution before 59.5
deferral cannot exceed lesser of $19k or 100% of employee’s compensation
$6k catch up contribution permitted at age 50
special catch-up provision - during last 3 yrs of employment before normal retirement age, limit increased to lesser of: twice regular deferral limit OR sum of otherwise applicable limit for year + amount by which applicable limit in preceding years exceeded the participant’s actual deferral
typically above to have this plan in conjunction with other retirement plan
must meet similar RMD rules as non-qualified plans
not factored into traditional IRA deductibility rules
what are the 3 rules for deductibility of contributions made to a traditional IRA?
- if neither MFJ spouse is active participant in employer-sponsored retirement plan, contributions are deductible without regard to MAGI
- both MFJ spouses are active participants in employer-sponsored retirement plan, deductions phased out based on MAGI:
single 64-74k, MFJ 103-123k, MFS 0-10k - one spouse is active, the other is not, two phaseouts: active - 103-123k; nonactive - 193-203k
when an traditional IRA nondeductible contribution is made, what is the better alternative?
roth IRA
what happens if IRA holder engages in prohibited activity?
not treated as IRA as of first day of the year of violation
individual must include the FMV of all IRA assets in gross income for that yr
what is not allowed for traditional IRA investments?
collectibles (U.S. coins permitted)
life insurance policies
any form of participant note/obligation (no loans to participants - if borrowing, entire interest in account is taxable distribution)
define stretch IRA
IRA extending the tax deferral of earnings within IRA beyond lifetime of person who originally established IRA through multigenerational beneficiary designations
what are the rollover IRA rules?
entire rollover contribution must be made by 60th day after participant receives distribution
only 1 IRA-to-IRA rollover permitted per year (unlimited for roth conversions and trustee-trustee rollovers)
any amount not rolled above basis is distribution and taxable as ordinary income in year of distribution, subject to 10% premature distribution penalty
what is the formula for the nontaxable portion of traditional IRA distributions?
(nondeductible contributions prior to CY + all contributions for CY) / (balances at end of CY + distributions received in CY)
x total distributions during CY
penalty not imposed: after age 59.5 disability death unreimbursed medical expenses higher ed first home ($10k) health insurance premiums if unemployed
what are the 3 methods for calculating substantially equal periodic payments and why used?
used to avoid distribution penalty
life expectancy method
amortization method
annuity method
what are the Roth IRA phaseout limits?
single: MAGI of $120-135k
MFJ: 189-199k
MFS: 0-10k
what is the absolute requirement for a qualified roth IRA distribution?
5 yr holding period (initial basis extends to beneficiary and starts at the beginning of the related tax year) + one other condition (i.e. first time home purchase, 59.5 yrs old, death, disabled, etc)
what is the acronym “3D IRS MEAL at home when 59.5”?
used to determine when a roth IRA has qualified distributions
death disability divorce insurance (health) reservist substantially equal periodic payments medical expenses above 10% AGI education annuitized distributions levy by IRS home purchase (first) 59.5 yrs old
what is the order of amounts distributed from a roth IRA?
- from regular contributions
- from conversion contributions (FIFO basis)
- from earnings generated by plan investments
what are qualified charitable distributions?
made from Roth / Traditional IRAs
allow owners 70.5+ yrs old to donate up to $100k/yr (200k MFJ) tax free and not reported as income
must be paid directly to organization w/ no constructive receipt by owner
considered when satisfying RMDs for yr
what is the penalty for excess IRA contributions?
6% excise tax
what is the general rule about IRA contribution compensation?
II.As a general rule, if compensation is income for which the taxpayer worked in a given year, the IRA contribution can be made; whereas, if income is derived from investments or retirement income, it is not eligible income for IRA contribution purposes.
what are the 3 basic distributions options available for a qualified retirement plan?
lump sum
annuity
rollover/direct transfer
what conditions must be met in order for lump-sum distribution to qualify for favorable income tax treatment?
- represent entire amount of employee’s benefit in plan
- election must be made by participant without one year of receipt of the distribution
- must be due to one of following: death, age 59.5, disability, separation from service
what is the timeframe by which a rollover must be executed to be tax free?
60 days from receipt of distribution
what are the limitations on rollovers and direct transfers
direct - no limit
rollovers - one per year
under which plans may RMDs be deferred until April 1 of the year following actual retirement (rather than age 70.5) if participant keeps working?
qualified plans, section 403b, and section 457
if not more than 5% owner in business
50% penalty if taxpayer does not begin RMDs by required beginning date
following RMD must be made by 12/31 of same yr
what are the 3 RMD tables?
- single
- married if 10 yrs age difference between spouses
- married
what are the main differences between exceptions to qualified plan / 403b distributions and IRA distributions to avoid 10% early withdrawal penalty?
403b allows distribution for separation from service after age 55
IRA allows distribution for higher ed, first time homebuyer, and health insurance premiums
if allowed under the plan, what are the typical loan allowances for qualified / 403b plans?
max of $50k or 50% of vested account balance if above $20k, if < $10k = can loan fully vested balance, if between $10-20k = can loan up to $10k
must be repaid within 5 yrs (unless used for home purchase)
must be adequately secured, reasonable rate of interest, and in accordance with specific plan provisions
permissible to 100% owner if not discriminatory
deemed distribution - accelerated time frame employee must pay back loan due to separation from employer or retirement program ending, otherwise subject to income tax and penalty
typically paid back via payroll deduction, so paid w/ after-tax dollars (ultimately double taxed)
if participant defaults, typical 10% penalty imposed
max loan amount also reduced by other amounts loaned within the previous yr
interest on loan is nondeductible
what is the net unrealized appreciation rule?
upon distribution to participant, adjusted basis of stock is included in income, however, appreciation of stock is not included until stock is sold (then taxed as LTCG) - e.g. ESOP
how can qualified plan and 403b/401k plan distributions avoid 20% withholding requirement?
direct trustee-to-trustee transfer
what are main rules that apply to all rollovers?
- Required minimum distributions (RMDs) may not be rolled over.
- The distribution to the participant must be rolled over within 60 days of distribution receipt.
- Both the existing plan and the rollover plan must be legally eligible retirement plans or IRAs.
- If the distribution is not rolled over within the required time frame, the distribution becomes taxable.
- one rollover allowed/yr
how are a designated beneficiary’s interest distributed?
over longer of:
- minus one method: beneficiary’s life expectancy, beginning in year following participant’s death, reduced by one for each subsequent year
- five-year rule / remaining life expectancy of participant owner: determined as of date of death, reduced by one for each subsequent year (depending on whether RMDs have occurred yet)
if no designated beneficiary is determined by 9/30 of the year following the year of the participant’s death, how is interest distributed?
death before beginning RMD date: lump sum distribution or no longer than 5 yrs
after: remaining life expectancy of participant-owner, reduce by one for each subsequent year
how is a spousal beneficiary interest distributed?
death before required beginning date of RMDs: distributions received over surviving spouse’s own remaining life expectancy, beginning in year owner would have attained age 70.5
OR plan balance can be rolled over and defer distributions until surviving spouse is age 70.5 (only if spouse is sole beneficiary)
OR can elect to distributed entire account balance within 5 yrs after owner’s death (5 yr rule)
after required beginning date: distributions over spouse’s life expectancy, beginning year following year of death. can also be rolled and deferred until spouse is age 70.5 (only if sole beneficiary)
what are the conditions a qualifying trust must satisfy to be designated beneficiary?
value
irrevocable
beneficiaries identifiable on trust statement
appropriate documentation provided to plan admin
what is the payout for a qualified charity as beneficiary?
5 yr payout
no tax due and unlimited deduction if charity is sole beneficiary upon death
why is it typically not prudent to name the estate as a beneficiary?
highest estate tax bracket reached only after $12,500 of income as opposed to $500k of income for single taxpayer
if a trust is designated as beneficiary, what time period is used for distributions?
life expectancy of oldest trust beneficiary
what automatic survivor benefits must be offered in all defined benefit plans and those define contribution plans subject to minimum funding requirements?
qualified joint and survivor annuity
qualified preretirement survivor annuity
what is a qualified domestic relations order?
decree, order, or property settlement under state law relating to child support, alimony, or marital property rights assigning all or part of a participant’s plan benefits to alternate payee
payments still subject to tax, but avoid premature 10% distribution penalty
when must designated beneficiaries must be determined?
9/30 following year after death
If no designated beneficiary is determined by the required date the IRA balance must be distributed …
over the longer of 5 years or the remaining life expectancy of the owner-participant, reduced by one for each subsequent year.
what is the distribution for an inherited IRA?
must start taking RMD by 12/31 following year of donor’s death (if non-spouse)
taken typically over beneficiary’s lifetime
if a participant dies before the RMD date and does not have a beneficiary, when must all proceeds be distributed from a retirement account?
5 years following end of year of death
what are social security taxes paid on?
taxable wage base of up to $132,900… 6.2% for employee
what is fully insured coverage for social security?
consists of 40 credits of coverage (10 working years under the system) or one credit for each year over age 21.
one credit earned for every $1,360 of compensation earned, maximum of 4 credits per year
work is fully insured for life once 40 credits of coverage earned
what is currently insured coverage for social security?
more limited than fully insured
achieved if worker earned 6 credit of coverage during 13 calendar quarters ending with the calendar quarter in which individual died, became disabled, or entitled to retirement insurance benefits
limited set of benefits (qualified after a death): surviving spouse caring for dependent child
dependent benefit
lump-sum death benefit
how are social security benefits reduced if taken early?
born after 1959: max reduction of 30%
born before 1960: reduce by 5/9 of 1% per month for first 36 months, then 5/12 of 1% for additional months, max reduction of 20%
what is the purpose of the windfall elimination provision under social security?
check in place to not allow a worker whose primary employment did not pay social security taxes, but qualifies for SS and is eligible for an employer pension, does not receive excess SS benefit as if they were a low income earner
what purposes do the WEP and GPO serve in regards to social security?
WEP - reduces worker’s own SS benefits
GPO - reduces spouse and survivor SS benefits
what is full retirement age?
before 1960 - 65
after 1959 - 67
which employer-provided retirement plans come with mandatory annual contributions by the employer?
be my cash target
definited benefit
money purchase
cash balance
target benefit
what is the incidental benefit rule of life insurance investment in a qualified retirement plan?
rule over amount of life insurance that may be held inside a qualified plan
Must meet one of two tests:
1. percentage test - aggregate contributions paid for life insurance policy owned by plan on lives of plan participants may not exceed certain percentage of employer contributions to plan as follows:
- whole life - no more than 50% of employer contributions to plan may be used
- other life insurance - no more than 25% of employer contributions may be used (typically defined contribution plans use this)
2. 100 times test - life insurance limit based on ratio of death benefit paid by policy to expected monthly benefit of employee-participant payable by the plan
Death benefit payable from life insurance policy cannot exceed 100x expected monthly benefit for employee participant (typically defined benefit plans use this)
Which of the qualified plans must provide qualified joint and survivor annuities (QJSAs) and qualified preretirement survivor annuities (QPSAs)?
pension plans
which type of plans offer employers greatest contribution flexibility?
profit-sharing plans, most helpful with inconsistent cash flows (favorable compared to money purchase plan)
how much employer stock can be contributed to an employee’s pension
10% or less
what is the social security death benefit
$255
4 Characteristics of private annuities
The transfer of property under a private annuity does not trigger immediate recognition of all gain to the seller.
If the present value of the annuity payable to the seller is at least equal to the fair value of the property transferred, there is no gift and, as a result, no gift tax due.
Each annuity payment will generally consist of a partial return of basis, capital gain, and ordinary income.
Private annuities cannot be secured by collateral.
The maximum annual benefit under a traditional defined benefit pension plan is
the lesser of $225,000 (2019) or the average of the participant’s compensation over the 3 consecutive highest earning years
best option to benefit highly-compensated, older employee group as contribution limits are much higher than defined contribution plans (i.e. lesser of 56k or 100% comp)
benefit does not need to be provided to part-time employees
what are the 4 titles of ERISA?
Way To Replace Pay
Worker’s rights
Tax Code treatment
Regulatory and Administrative Framework
PBGC
who is a key employee?
5% owner
1% owner with compensation >$150k
officer of employer with compensation >$180k
number of officers that may be key are lesser of:
- 50 employees
- 3 employees or 10% of all employees
what are the vesting requirements for the following plans?
Defined benefit
Defined contribution
both must vest at least as favorably as follows:
DB - 5 year cliff, 3-7 yr graded
DC - 3 yr cliff, 2-6 yr graded
what are the max contribution limits for a defined contribution plan?
lesser of:
- 100% of employee’s annual compensation
- $56k
what is the aggregation rule for traditional IRA deductible and non-deductible contributions?
taken into account together, so the individual cannot preference the tax-favored distributions.
non-taxable portion = total distribution for yr * (nondeductible contributions / balance at EOY and distributions made throughout yr)
return of basis portion is not included in income
when is social security income taxed?
50% benefits taxed when provisional income exceeds:
$32k - MFJ
$25k - all others
85% taxed when provisional income above:
$44k - MFJ
$34k - all others
in order to qualify for the following types of insurance within social security, what type of insurance is needed?
retirement
disability
survivorship
fully insured
if < 24yrs, 6 credits; if < 31yrs, half credits available since 21; if > 31yrs, fully insured and 20 credits in last 40 quarters
currently insured (benefit provided to noncitizen spouses as well!)
how is disability defined for social security benefit purposes?
inability to perform any substantial gainful activity and the disability is expected to last at least 12 months or result in death.
Workers who delay applying for retirement benefits until after full retirement age are eligible for an increased benefit of up to ___.
8%
A worker who is fully insured is eligible to receive monthly retirement benefits as early as age __.
62
what is form 5500 used for?
ERISA requirement to file return for employee benefit plan report to the IRS
What are the main distribution rules for qualified plan RMDs?
For lifetime distributions, all single participants will use a uniform life expectancy table.
The amount is determined by dividing the participant’s aggregate account balances as of December 31 of the preceding year by his life expectancy.
To calculate RMD, divide the participant’s aggregate account balance as of December 31 of the preceding year by the joint life expectancy of the participant and designated spouse beneficiary if the spouse is more than 10 years younger that the participant.
what is the qualified plan mandatory withholding upon pre-retirement age distribution?
20%
not an IRA requirement
what does the 10% early withdrawal penalty apply to within a qualified plan?
taxable portion of distribution
Which plans may be eligible for a 10-year forward averaging for tax purposes if a qualifying lump-sum distribution is made?
only qualifying plans for those born before 1936
The law provides that if a qualified plan is terminated, participants under the plan
become 100% vested in the account balance (defined contribution plans) or accrued benefit (defined benefit plans).
how are the excess and offset methods used/permitted for social security integration?
The excess method is allowed for all plans allowing integration, whereas the offset method is only allowed for defined benefit pension plans (because DC do not have promised benefit formula)
The maximum permitted disparity, or the difference between the base contribution percentage and the excess contribution percentage, cannot exceed the lesser of
2x the base contribution percentage or 5.7% (the Social Security tax rate attributable to OASDI).
Under Section 410, the following classes of employees may be excluded from nondiscrimination testing for qualified plans:
Collectively bargained (union) employees.
Part-time employees who work less than 1,000 hours per year.
Employees under age 21.
Employees with less than 1 year of service (2 years of service if the plan offers 100% immediate vesting).
what types of plans are the ADP and ACP tests applicable to?
deferral - plans that allow employee elective deferrals
contributions - plans with employer-matching or employee after-tax contributions
define Permitted disparity
a method of integrating Social Security benefits and qualified plan benefits so that a permissively discriminatory benefit can be paid to the highly compensated workers in a qualified pension plan.
The integration rules are designed to allow a qualified plan to account for the presence of Social Security retirements in the plan benefit formula.
If the integration level is less than the taxable wage base, the permitted disparity amount may be reduced.
Integration can enhance an owner’s and/or key employees’ contribution rate if the compensation is in excess of the Social Security wage base.
A defined contribution plan cannot have integration levels greater than the Social Security taxable wage base.
An integration level below the Social Security taxable wage base allows larger contributions for higher-paid workers and costs the employer more money.
Optimum integration is generally just above the compensation level of the highest paid nonowner employee.
main characteristics of a SIMPLE IRA
A participant can take a distribution from a SIMPLE IRA at any time without separating from service.
must provide 100% immediate vesting of employer contributions, so the entire balance is available for withdrawal.
cannot be rolled into a traditional IRA until the participant has been in the SIMPLE IRA for 2 years.
The entire withdrawal will be subject to ordinary income tax in the year of withdrawal.
The early withdrawal penalty for a SIMPLE IRA is 25% (not 10%) for withdrawals occurring within the first 2 years of participation.
no investments in life insurance or collectibles
$13k limit, $3k catchup
capped at 100 employees
no ADP, ACP, or top heavy testing requirements
Pretax retirement plan contributions can be converted to a Roth IRA by any of 4 methods:
An amount distributed from a traditional IRA can be rolled over to a Roth IRA within 60 days after the distribution.
An amount in a traditional IRA can be transferred in a trustee-to-trustee transfer from the trustee of the traditional IRA to the trustee of the Roth IRA.
An amount in a traditional IRA can be transferred to a Roth IRA maintained by the same trustee.
Amounts in a qualified plan described in IRC Section 401(a) can be converted directly to a Roth IRA.
advantages of ESOP
Increased corporate cash flow.
The ability to borrow money to purchase corporate stock.
A market for employer stock.
Financial resources to expand the business.
what types of plans may invest in 100% employer securities, if desired?
profit sharing
what is the permissible contribution amount for a participant owner of a self-employed retirement plan?
(% / 1+%) = (25% / 125%) = 20%
