Retirement

Question 1

Calculate the reduction in social security benefits if they take it 36 months early. FRA amount is $1000.

Answer 1

(36 x 1/180)$100

Question 2

How are SS benefits taxed?

Answer 2

If income plus 50% of SSI is greater than $25k, 50% are taxed.

If greater than $44k, 85% is taxed.

What if only SSI of $3k a month. 50% of $36k is $18k and under $25k limit. No tax

Question 3

Define contribution plans

Answer 3

Money purchase
Target benefit
Profit sharing
Profit sharing 401k
Stock bonus/ ESOP

Question 4

Retirement Plans

Answer 4

SEP
SIMPLE
SARSEP
TSP
403b

Question 5

Money Purchase Plan

Answer 5

Uses a benefit formula requiring an annual ER contribution of each EE comp.

Need stable cash flow

First $275k is used in call nothing more.

Max contribution is $55k can be 100% of income if less.

Good for young well paid employees that you want to retain.

Question 6

Target Benefit Plan

Answer 6

Unique because it includes features of both DB & DC plans.

100% of income up to $55k

Benefit determined by acct balance

Forfeitures can reduce expenses or go to participants

Usually benefits older EE

Fixed mandatory contributions

Lower cost and more simple than DB

Question 7

ESOP and stock bonus plans

Answer 7

25% ER contribution maximum

Stock bonus MAY invest in stock, ESOP must invest in company stock.

ER can deduct dividends.

Good for broadening ownership, create market for their stock, provide sense of ownership.

Not cross tested

Question 8

Explain cross testing

Answer 8

Measure plan contributions for non discrimination

Question 9

Cash Balance Pension Plan

Answer 9

Type of DB

Guaranteed contribution AND min ROR

Allow for past service credits

Question 10

Top heavy plan & DC Plan vesting options

Answer 10

3 yr cliff

2-6 yr graded

100% vested w/ 2 yr eligibility

DC plans have to use one of these schedules

Question 11

Non top heavy DB plans only vesting schedule - slower

Answer 11

5 yr cliff

3-7 yr graded

100% vested w/ 2 yr eligibility

Question 12

HCE

Answer 12

Greater than 5% owner and must be employed, not retired.

Excess of $120k comp in PRIOR year

Question 13

Key EE

Answer 13

Greater than 5% owner

Officer who made more than $175k

Greater than 1% owner w/ comp greater than $150k

Question 14

ADP/ACP Testing

Answer 14

Actual deferral percentage

Actual contribution percentage

$275k is max income to be used for calcs

Question 15

Pension unit benefit calc

Salary is $4800/mo. W/ 25 years of service and a benefit of 1.25%?

Answer 15

1.25(25) x 4800 = $1500

Question 16

Permitted disparity - excess method

Answer 16

DB Plan base percentage is 30% then permitted disparity is 26.25%

If base is 20% the. Permitted disparity is 20%

If you made $150k and base is 20%, what is permitted disparity contribution?

$128,400 x .20 = $25,680 base contribution
$150k - $128,400 = $21,600
$21,600 x .20% = $4,320 perm disparity contr.

Total contribution = $25,680 +$4,320=$30k

Question 17

DC plans permitted disparity

Answer 17

This is 5.7% unless base amt is lower

Question 18

Self employed Contribution short cut for 15% & 25% Plan.

What is contribution max of business profits are $50k

Answer 18

15% = $50k x .1212 = $6060

25% = $50k x .1859 = $9,295

Question 19

SEP IRA

Answer 19

ER contributions only - flexible

Limited to 25% of comp up to $55k max

Low admin costs

Must cover those who are 21 & employed for 3 of past 5 yrs

No contr. If comp is less than $600.

Integrated with SS & can’t be age weighted.

Question 20

SARSEP

Answer 20

415 limits apply - 25% of comp up to $55k.

New EE can be added up to 25 total EE

Max deferral is $18,500

Contributions are 100% vested

Question 21

Salary reduction plan vs salary continuation plan

Answer 21

Uses a portion of EE contributions to help fund the benefit

Vs

ER contributions fund the benefit.

Question 22

Clarify “unfunded” deferred comp plan

Answer 22

To maintain deferral NQDC must remain unfunded

Considered unfunded if Inv remains assets of Er at all times

Could be a naked promise or

Informally funded with life ins, annuities, MF, or other investments.

Informally funded the company owns the asset and it’s subject to their creditors.

ER tax deduction does not occur until EE is taxed on the benefits.

Question 23

NQDC life insurance

Answer 23

ER owner and bene

Premiums not deductible

DB paid to ER tax free

Benefits paid to EE beneficiaries is considered deferred comp and taxable income

Pmts to bene is included in gross estate

Question 24

Section 162 life insurance plan

Answer 24

Section 162 is a cash bonus to fund LI & taxable income to EE

EE is the owner and can name beneficiaries

Question 25

Rabbi trust

Answer 25

Subject to ER creditors

Main use is for fear of ownership change or merger

Question 26

Secular trust

Answer 26

Considered a funded NQDC plan

Irrevocable trust

Taxation occurs in year assets are placed into the trust.

Question 27

Constructive receipt

Answer 27

Income is taxable during year in which there is no longer a substantial risk of forfeiture (creditors)

Question 28

Exercise price

Answer 28

Stated price EE pays for company stock

Question 29

Option expiring

Answer 29

If it is out of the money then EE would let option expire and not receive the benefit.

Question 30

ISOs - incentive stock options

Answer 30

Limited to $100k a year, anything above is NSO.

Must hold for 1 yr after exercise date and 2 yrs after grant date to avoid disqualifying disposition

No tax deduction for ER

Right to purchase specified # of shares of ER stock at given time and price

Only taxed when sold not when granted or exercised.

No tax at grant date

Vesting

Question 31

Nonqualfied stock options - NSO

Answer 31

As soon as they are exercised income tax is due on the gains

Taxed again when EE sells the stock

Primary diff to ISO is taxation on date of exercise

No tax at grant date

No vesting

Question 32

Restricted stock (not options)

Answer 32

Sale of stock to EE at a bargain price.

No taxation if substantial risk still exists

Question 33

Stock appreciation rights - SAR

Answer 33

Right to be paid $ equal to difference of value of shares on grant date vs value on exercise date

Uses when:

1. Owners want to share economic value of equity but not ownership
2. Division of another company
3. Non profit gov’t agency

Question 34

Employee stock

Purchase plan

Answer 34

Can discount stock up to 15% for EE

Taxes paid at the sale of the stock