Retirement Flashcards
Calculate the reduction in social security benefits if they take it 36 months early. FRA amount is $1000.
(36 x 1/180)$100
How are SS benefits taxed?
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
Define contribution plans
Money purchase Target benefit Profit sharing Profit sharing 401k Stock bonus/ ESOP
Retirement Plans
SEP SIMPLE SARSEP TSP 403b
Money Purchase Plan
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.
Target Benefit Plan
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
ESOP and stock bonus plans
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
Explain cross testing
Measure plan contributions for non discrimination
Cash Balance Pension Plan
Type of DB
Guaranteed contribution AND min ROR
Allow for past service credits
Top heavy plan & DC Plan vesting options
3 yr cliff
2-6 yr graded
100% vested w/ 2 yr eligibility
DC plans have to use one of these schedules
Non top heavy DB plans only vesting schedule - slower
5 yr cliff
3-7 yr graded
100% vested w/ 2 yr eligibility
HCE
Greater than 5% owner and must be employed, not retired.
Excess of $120k comp in PRIOR year
Key EE
Greater than 5% owner
Officer who made more than $175k
Greater than 1% owner w/ comp greater than $150k
ADP/ACP Testing
Actual deferral percentage
Actual contribution percentage
$275k is max income to be used for calcs
Pension unit benefit calc
Salary is $4800/mo. W/ 25 years of service and a benefit of 1.25%?
1.25(25) x 4800 = $1500
Permitted disparity - excess method
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
DC plans permitted disparity
This is 5.7% unless base amt is lower
Self employed Contribution short cut for 15% & 25% Plan.
What is contribution max of business profits are $50k
15% = $50k x .1212 = $6060
25% = $50k x .1859 = $9,295
SEP IRA
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.
SARSEP
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
Salary reduction plan vs salary continuation plan
Uses a portion of EE contributions to help fund the benefit
Vs
ER contributions fund the benefit.
Clarify “unfunded” deferred comp plan
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.
NQDC life insurance
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
Section 162 life insurance plan
Section 162 is a cash bonus to fund LI & taxable income to EE
EE is the owner and can name beneficiaries
