Retirement

Question 1

Social Security Coverage

Answer 1

Fully Insured: eligible for SS retirement benefit. Has 40 credits. Can start receiving benefits at age 62 at the earliest

Currently Insured: eligible for survivor benefits. Has around 15 credits

Question 2

Social Security (taxation)

Answer 2

If a persons income plus half of their SS Benefit is more than the following base amounts, up to 50% of the benefit will be included in taxable income. Base amounts are $25k for a single taxpayer and $32k for MFJ.

Same as above but up to 85% of benefit will be included. Base of $34k for single and $44k for MFJ.

• muni bond interest counts as income

Question 3

Section 401k Plan (CODA)

Answer 3

Qualified profit sharing or stock bonus plan that allows participants to defer salary into plan. Limit on contribution is 19.5k (6.5k catch up).

Appropriate: Employer wants to provide qualified plan but can afford only minimal extra expense, when employees want to increase savings on tax-deductible basis.

Question 4

Keogh Contribution Rules

Answer 4

• only for sole proprietor and partnership*
• DB (no contrib max), Money Purchase, and Profit Share, SEP*

Self employment tax must be computed and a deduction of one-half of the self employment tax must be taken before determining the contribution

Special contribution rules. Max contribution is:

• If 15% Plan for employee - multiply profit by 12.12% for employer
• If 25% Plan- multiply profit by 18.59%

Question 5

IRA Keys (Simple, SEP, SARSEP)

Answer 5

• no loans
• no life insurance
• immediate vesting
• may not be creditor protected (state specific)
• 59.5 not 55 for no 10% penalty
• must take RMD’s at 72(even if not an owner)

Question 6

Highly Compensated (HC) Employee

Answer 6

• A greater than 5% owner or

- An employee earning in excess of $130k during the preceding year

Question 7

Key Employee

Answer 7

An individual is a key employee if at any time during the current year he/she has been one of the following:

• A greater than 5% owner, or
• An officer and compensation > $185k, or
• Greater than 1% ownership and compensation>$150k

Question 8

Vesting - Fast/Slow

Answer 8

Fast: DB Top-Heavy Plans/ All DC Plans
- 3 year cliff or 2-6 year graded or 100% vested after 2 years

Slow: Non-Top-Heavy DB Plans only
- 5 year cliff or 3-7 year graded or 100% vested after 2 years

Question 9

Multiple Plans 2020

Answer 9

If there is more than one plan, amounts are always aggregated. Aggregate when plans are with separate employers and separate when different employers

Question 10

Rollovers NOT Permitted

Answer 10

• transfers to another 457 plan remain the only options for non-governmental tax exempt organizations
• hardship distributions cannot be rolled into any other qualified plans
• required minimum distributions

Question 11

Required Beginning Date (RBD) for : IRA/SEP/SARSEP/SIMPLE

Answer 11

RBD is April 1st of the year following the year in which the covered individual attained age 72. Subsequent distributions must be made by December 31st of each year thereafter
- failure to pay will result in 50% penalty on amount short of RMD (also applies to Q Plans)

Question 12

Required Beginning Date (RBD) for :

Qualified Plans/403b/ 457 Plans

Answer 12

RBD, with exception of 5% owners, is the later of April 1st of the year following the year in which the covered individual attained age 72 or retired. Subsequent distributions must be made by December 31st of each year thereafter
5% Owner RBD is same as IRA

Question 13

Roth IRA

Answer 13

• no age restriction
• need earned income
• can be in employer plan
• investments grow tax free and qualified distributions
• spousal rules (like a traditional)
• same contribution limits as traditional
• phase outs will be given
• NO RMD’s to owner (only beneficiary)

Question 14

Inherited Roth IRA RMD’s

Answer 14

• distributed within 5 years of owners death or 10 years with named beneficiary
• where sole beneficiary is owner’s surviving spouse, the spouse may delay distributions until the Roth owner would have reached 72, or may treat the Roth as his own (rollover)

Question 15

Non-Qualified Deferred Compensation Plans

Answer 15

• salary reduction plan: uses some portion of employees current compensation to fund the ultimate compensation benefit (pure deferred)
• salary continuation plan: uses employer contributions to fund ultimate benefit
• May discriminate, No ERISA
• Appropriate when employer is trying to provide additional deferred comp benefits to executive who is already maxing out plan
• S Corps cannot offer these*

Question 16

Rabbi Trust

Answer 16

Merger, Acquisition, Change of Ownership

• An informally/unfunded plan where company promises pay and benefits regardless of employment factors
• assets in rabbi available for creditors
• participant has greater rights than unsecured creditors
• fear than ownership/management may change before deferred compensation is paid

Question 17

Section 457 Deferred Compensation Plans

Answer 17

Non-Qualified deferred compensation plan. Contributions (deferrals) are lesser of $19,500 or 100% salary. Catch up of $6,500 for 50+. There are also special catch up contribution rules.

• No coordination with other Q Plans (can have both)

Question 18

Integrated w/ SS vs Age Weighted Plans

Answer 18

Integrated w/SS: (discriminate based on wage)

1) owners age is 50 or under
2) owners income is under $200k
3) rank and file employees are making under $90k (+1)

Age Weighted Plan: (discriminate based on age)

1) owner is age 50 or older (+1)
2) owners income is over $200k (+1)
3) rank and file employees are younger than owner (+1)

Question 19

Traditional IRA

Answer 19

• limit of $6k contribution ($7k if 50+)
• need earned income (alimony counts)
• if spouse does not work, they can do $6k to spousal
• no age limit on contribution deductibility

Question 20

A QDRO addresses:

A QDRO becomes valid:

Answer 20

• Qualified Plans
• Child Support Payments
• Alimony Payments
• Marital Property Rights
• NOT IRA’s or NQ plans
• In court once signed by judge and approved by plan administrator

Question 21

Qualified Plan Deduction Rule (404c)

Answer 21

Employer can only deduct 25% max of all participants eligible compensation

Question 22

Defined Contribution Plan Limits (415)

Answer 22

All annual additions (employer, employee, forfietures) are limited to lesser of 57k or 100% compensation.

Question 23

Top-Heavy Plans

Answer 23

A DC plan where more than 60% of total $ amount is allocated towards Key Employees. This type of plan must provide minimum benefits for non-key employees:

• DB: benefit must be at least 2% of compensation times years of service (max 10 years)
• DC: employer contribution must be no less than 3% of non-key employee salary

Question 24

Qualified Plan Loans

Answer 24

• loan cannot exceed lesser of 50% vested balance or 50k (special small plan rules allow for 100k)
• max 5 years repayment (unless used for home)
• repayments are at least quarterly

Question 25

Qualified Plan Age and Service Rule

Answer 25

• 21 yo and 1 year of service to participate (21 and 1 rule)

Question 26

Qualified Plan Coverage Requirements

Answer 26

Ratio Test: the plan must cover a percentage of NHCE’s that is at least 70% of the HCE’s covered. If this test is failed, the Average Benefit Test must be passed

Average Benefit Test: the average benefit for all NHCE’s must be at least 70% of those for HCE’s

Question 27

ADP/ACP Testing

Answer 27

These tests compare the % of deferral and contributions of HCE’s to those of NHCE’s.

Basic rule is that HCE’s can only contribute 2% more than the average contribution by NHCE’s

Question 28

Life Insurance in Retirement Plans

Answer 28

The life insurance benefits must be incidental to the primary purpose of the plan (to provide retirement benefits). Tests to prove incidental:

1) the aggregate premiums paid for a participants insured death benefit are at all times less than the following % of the plan for the participant:
- Whole Life 50%
- Term or Universal Life 25%

2) the participants insured death benefit must be no more than 100x the expected monthly benefit.
- 412 Plans are retirement plans using LI

Question 29

In-Service Distributions

Answer 29

Distributions from Q Plans while the participant is working may be allowed for three situations:

1) Attainment of a specific age (usually NRA or 59.5)
2) Hardship (allowed at any age. Financial Need Test and Resources Test)
3) Pension Protection Act allows at age 62 (retirement income)

Question 30

Substantially Equal Payments (Rule 72t)

Answer 30

This rule provides a number of exceptions for early withdrawal of retirement funds (before 59.5). One is the substantially equal payments exception. The penalty will not apply if:

• payment is at lest annually
• paid without changing the amount for the longer of 5 years or when payee reaches 59.5
• based on life expectancy of recipient
• based on reasonable rate of interest
• based on reasonable mortality assumption.

Once started, no increase, decrease, change, or stop of payments.

Recapture rule specifies 10% of the total annual payments received before age 59.5, plus interest

The “one time election” allows the person to switch from annuity/amortization method to RMD method