Retirement And Employee Benefits

Question 1

What are the two types of pension plans (Are they defined benefit or contribution) and 6 types of profit sharing plans

Answer 1

Question 2

What is the difference between a defined benefit and defined contribution plan

Answer 2

Defined benefit is a guaranteed payout, employer assumes investment risk, covered by teh pension benefit guaranty corp and are comingled with investment accounts.

Defined contribution is when you select what you contribute and your payout is based on that (annual contribution limit of 25% of total employee covered comp or 20% if for self-employed), employee assumes risk,

Question 3

What are advantages of a qualified plan

Answer 3

Advantages of Qualified Plans
• “Qualified plans” under Section 401(a), provide employers with: (1) current income tax deductions and (2 payroll tax savings. They provide plan participants with (1) income tax deferrals, (2) payroll tax savings al federally provided creditor asset protection.
• The trade-offs for the tax advantages of qualified plans are the cost of the plan (both the operational expense contributions) and compliance, including vesting, funding, eligibility, nondiscrimination testing, IRS report and employee disclosure.
• Taxation of Plan Contributions
- Income Tax
• Employers receive a current income tax deduction for contributions made to plans; they are an ordinary and necessary cost of business.
• Employers are limited to a maximum of 25 percent (or as actuarially determined for defined ben plans) of the total of covered compensation paid to its employees as a contribution to a qualifie plan.

Question 4

What are the advantages of a qualified plan for employee? for employer?

Answer 4

Employer contirbutions are tax deductible and not subject to payroll tax

Employee
Availability of pretax contributions for employees
Tax deferral of earnings and contributions, ERISA protection, lump sum distribution options

Question 5

Qualified plan eligibility

Answer 5

later of 1 year of service or turning 21

Question 7

What are the coverage tests for qualified plans

Answer 7

An employee is covered under a qualified retirement plan when he receives a benefit from the plan. The word benefit means an employer contribution, an accrued benefit, or simply the right to participate in the case of a 401(k) plan.
Nondiscriminatory Classification
While all “eligible” employees must be considered, not all must be covered by the plan for it to maintain its qualified status.
• However, the selection of nonexcludable employees who will benefit under a qualified retirement plan must be reasonable and established based on the facts and circumstances of the business under objective business criteria.
Coverage Tests
• The general rule for coverage is that the plan must cover at least 70% of nonhighly compensated employees (defined below). However, there are exceptions (ratio percentage test an average benefits percentage test).
Therefore, to be qualified, the retirement plan must meet at least one of the three following tests:
(1) the general safe harbor test, (2) the ratio percentage test, or (3) the average benefits test.
• In addition, Defined Benefit plans must ALSO pass an additional coverage test, know as the 50/40 test (discussed below).
Highly Compensated Employees (Very Important Definition)
• For purposes of several retirement plan test calculations, all of the “eligible” employees are further segregated into two classifications: Highly Compensated (HC) and Non-Highly Compensated (NHC). The definition of a highly compensated employee provided by the IRC is an employee who is either: a 5%+ owner or makes 155k+ (or those above this AND in the top 20%—useful for high comp firms )

Question 8

What are the three tests a qualified retirement plan must just pass one of.

Answer 8

General safe Barbour: %of NHX covered is >= 70% (NHC is non-highly compensated )

Ratio % test: % of of NHC covered / % of HC covered >= 70%

Average benefit test
Non discriminatory and AB% of NHC / AB% of HC >= 70%

Question 9

In addition to the 3 passing one of the 3 tests, what must a defined benefit plan also pass

Answer 9

50/40 coverage… it’s 50 non-excludible employees or 40% of all employees each day of the year must be covered

Question 10

3 ways to be a key employee

Answer 10

: (1) a greater than five percent owner, or (2) a greater than one percent owner with compensation in excess of $150,000, or (3) an officer with compensation in excess of $220,000 (2024).

Question 11

What is the minimum contribution of an employees salary must a defined contribution top heavy plan provide for NHC? For a DB?

Answer 11

3%

for a DB plan, it’s 2.5% x years of service

Question 12

Maximum employee + employer + forfiture contribution per participant for qualified plans

Answer 12

For each, it is the lesser of any choices:
DC: 100% of salary or 69k (incl. 7.5k catchup for 50 years or older)

DB: 275k or 100% of average of the employees 3 highest years of service

Question 13

How to be a HC employee

Answer 13

Salary >155k (this year or 150K last year), own 5%+

Question 14

What is a profit sharing plan

Answer 14

A profit-sharing plan allows employers to contribute to the plan through cash or employer stock on a year-to-year basis. This plan is one of the most flexible defined contribution plans that allow the company to make annual changes to contributions based on company profits or cash flow.

Question 15

What is a pension plan (describe the differences between the two types)

Answer 15

A defined benefit Pension plans: promises a specific monthly benefit amount upon retirement, traditionally based on factors including salary and years with the company.

A defined contribution pension plan: is funded by a specified amount contributed to the plan, with benefits based on how the investments of the amounts contributed have performed.

Question 16

What is the maximum benefit a defined benefit pension plan that can be paid to an employee

Answer 16

the lessor of the max from the tax table or 100% of the average of highest 3 years of salary

Question 17

What are the names of the formulas to calculate the employee benefit for a defined benefit plan

Answer 17

1) Unit benefit formula
2) Flat-percentage formula
3) Flat-amount formula

Question 18

What is a cash balance pension plan? what is its vesting schedule? When is this strategically useful?

Answer 18

A DB pension plan that shows employees a calculated indicative cash balance of their qualified plan account balance.

better for younger people because they have more time to spend in the plan

vesting: 3 year cliff

Can convert a defined benefit plan to this. A good way to get rid of expensive DB plans (that benefit older people)

Question 19

What is a money purchase pension plan? What type of employee is this plan better for and why?

Answer 19

A DC plan where the contribution to the plan is based on a fixed % of the employee’s compensation

All DC plans benefit younger participants (they have more time in the plan for more contributions and compounding to occur)

Question 20

Excess rate with respect to social security is generally how much higher than the base rate

Answer 20

5.7%

Base rate + permitted disparity = excess rate

Question 21

Who can make a 401k plan

Answer 21

Corporations
partnerships
LLC
proprietorships
tax-exempt entitites

Question 22

What does ADP mean

Answer 22

Actual deferral percentage (how much each employee defers for retirment. Typically used in teh ADP test where you compare the total average employee actual deferral rate of HC vs NHC

Question 23

How much higher is the average ADP of HC than NHC be

Answer 23

2%

Question 24

What is the limit on loans from qualified plan

Answer 24

The lessor of
1) Greater of $10k or 50% of vested plan balance.
2) $50k

At any point in time.

Question 25

what are the names of the two DB plans

Answer 25

Defined benefit and Cash balance pension plan

Question 26

What is the least generous vesting schedule

Answer 26

3 year cliff or 2 to 6 year vesting (year 2 is 20%, year 6 is 100%)

Question 27

Salary above what amount are considered excess comp when looking at pension plans when integrating social security

Answer 27

$168,600

Question 28

How is appreciation of distributed stock treated

Answer 28

As long or short term capital gain depending on how long it is held after distribution. Note Net Unrealized appreciation at distribution can be considered long term

Question 29

What is the tax penalty on a distribution and when

Answer 29

10% of the gain (not the adjusted basis portion) (TBD when, I think before 59.5) and

Question 30

How to avoid the 10% qualified retirement plan distribution penalty

Answer 30

Other exceptions to the 10 percent early withdrawal penalty are plan rollovers and p Exam Tip For Qualified Plans to avoid the 10% penalty, they make a "MESS AT D°O" (medical expenses, equal periodic payments, separation from service, age, tax levies (and terminal illness), death, disability, disaster, and QDRO). Exam Tip For IRAs to avoid the 10% penalty, they say "HIDE ME" (first time home purchase, health insurance, death and disability, domestic abuse, higher education, medical expenses, equal periodic payments, and of course, age.

Question 31

When do you have to take a RMD

Answer 31

When you get to age 73 after 12/31/22 and before 1/1/33. Will get hit with a 25% excise tax on underdistribtued amount (reduced to 10% if take within correction window). Unless the participant is still in service (employed by the company the plan is with--RMD starts after April 1st of the year after being terminated--this does not apply if you own 5% of the company)

Question 32

What retirement plans do RMDs not apply to

Answer 32

Roth

Question 33

When must the RMD be taken by

Answer 33

For the first time, by April 1st of the following year the participant turns 73; for subsequent years by Dec 31st. If you have multiple qualfied accounts, can calc a combined number and take from 1 account

Question 34

How is RMD calculated?

Answer 34

Account balance as of Dec 31st prior year divided by number in the uniform lifetime table (unless the spouse is more than 10 years younger, than use a joint table). Use the age of the person by the year end (dec 31st) of the year the distribution must by taken in

Question 35

What happens to RMDs for the spouse

Answer 35

The younger spouse (say pre-73) can take a taxable lump sum distribution, can carry on with the same RMDs (pretending they didn't die) or roll it into their IRA

Question 36

Eligible beneficiary

Answer 36

Can distribute the assets over their life; An eligible bene is a surviving spouse child bene disabled or chronically ill individual anyone not 10 years younger than the plan owner upon death the eligible beneficary, the new bene must take all the assets in the plan within 10 years

Question 37

What is a designated bene and when must they take all the assts

Answer 37

anyone that is not an eligible bene and must take the assets within 10 years

Question 38

What happens when quail plan owner dies prior to entire distribution

Answer 38

Question 39

What is a target benefit pension plan?

Answer 39

A DB plan that provide a base monthly pension at retirement that may change based on the plan's performance (thus not distributions are not guaranteed) Benefits older entrants. Employee has investment risk

Question 40

What is a money purchase pension plan?

Answer 40

A contribution percentage from employer is required (and an excise tax has to be paid if not done). For example, let’s say that your money purchase plan has a contribution of 5% of each eligible employee’s pay The investment risk is with the employee

Question 41

What is a thrift plan?

Answer 41

A defined DC profit sharing retirement plan that offers Federal employees the same type of savings and tax benefits that many private corporations offer their employees under 401(k) plans. Benefits savers and younger persons

Question 42

What is an age based profit sharing plan?

Answer 42

A Profit sharing plan (DC) that ts allows employers to allocate a greater percentage of profit-sharing contributions to older employees, under the logic that they have less time to save. benefits older, highly compensated

Question 43

What is a new comparability plan?

Answer 43

A Profit sharing plan (DC) that puts employees into two or more groups on the basis of objective standards. An IRS- approved formula allows a greater percentage of profit-sharing contributions to be allocated to one group (e.g., “the owner”) versus the other group(s). benefits owners

Question 44

What makes a 401k plan unique among all retirement plans DB or DC

Answer 44

Only one that does not permit social security integration (can be done with additional profit, but not with base match or employee contirbutions)

Question 45

What are the 4 pension plan types

Answer 45

Defined benefit Cash balance Money purchase Target benefit

Question 46

What does non-contributory mean?

Answer 46

Employees do not contribute to the plan

Question 47

Write out the qualified retirement plan tree

Answer 47

Question 48

What is the maximum % of contributions to a retirement plan made by an employer

Answer 48

25% of employee compensation

Question 49

What is a Keogh plan?

Answer 49

All the retirement plans are renamed this if they are for a self-employed person?

Question 51

What is the calculation for the contribution a self employed individual can make?

Answer 51

Contribution Rate ÷ (1 + Contribution Rate = Self-employed contribution rate

Question 52

What is the difference between earned and unearned income

Answer 52

Earned income is W2, schedule C net income, K1, alimony (pre-2019) Unearned income: Rental, interest, dividend, capital gains, pension, alimony after 2019; unemployment, SS benefits, workers comp, deferred income

Question 53

IRA maximum contribution and penalties

Answer 53

7k +1k catchup if older than 50 by tax filing due date for that year (eg 2015 contribution can be made by april 15th 2016) 6% excess contribution tax on excess portion 10% early withdrawal

Question 54

Who can make an IRA contribution, who can deduct it? (individual, their spouse?)

Answer 54

Anyone with earned income can contribute to an IRA, but Deductions of 8k or 7k Single; starts to phase out at 77k MFJ: starts to phase out at 123k Non-active participant spouse can deduct if the joint income is below 230k

Question 55

When is a Roth distribution taxable

Answer 55

When it is taken within 5 years of a conversion and/or before someone is 59.5

Question 56

What is NQDC

Answer 56

non-qualified deferred compensation. Must have a substantial risk of forfeiture and not have constructive receipt Can use a secular trust (with a condition of employment or vesting to get funds) or rabbi trust (where creditors can access) or a "unfunded promise to pay" Benefits for employer: cash outflow deferred, saves on payroll tax, income tax deferred and may discriminate among employees benefits for employee no current taxable income employee saves on payroll tax (due at time deferred, not distributed) may provide future tax savings if distributed when at a lower tax rate

Question 57

What is the tax treatment of ISO's when they are excercised and when they are sold?

Answer 57

At exercise, no w2 tax implications, but need an AMT adjustment of the "gain," at sale take that same AMT adjustment but make it negative and capital gains tax of full gain (ST or LT) No ordinary income on the basis of the grant. And employer has not expense deductions from this If you sell within 2 years of date of grant and 1 year of exercise, it is a qualifying disposition, the employee has ordinary income and the employer can take a tax deduction

Question 58

What are the holding period requirements of an ISO

Answer 58

If you sell within 2 years of date of grant and 1 year of exercise, it is a qualifying disposition, the employee has ordinary income and the employer can take a tax deduction (for the same amount of the ordinary income)

Question 59

NQSO (non-qualified stock options)

Answer 59

Basically an option to buy a stock at a pre-set price. No holding requirements. Tax: When you exercise an option (you buy the stock at that price). So you pay ordinary income on the gain from the price on the day you buy it to the option price. If the employee has ordinary income, the employer can take a tax deduction (for the same amount of the ordinary income) Anything after that is like any normal stock you have: capital gains based on holiding for when you sell it.

Question 60

Restricted stock plan

Answer 60

Employer pays exec with stock but restricted to hold for X years (with right for company to take back) when substantial risk ends, the Exec has w2 income and employer has deduction

Question 61

ESPP (employee stock purchase plan)

Answer 61

Can purchase stock at least 85% value up to $25k worth. Same qualifying rules (1 years since grant to exercise and 2 years total till sale) to be treated as ordinary income for the "company discount" and LT capital gains after that

Question 62

Vesting schedule if a qualified plan requires 2 years of service

Answer 62

full and immediate (after the 2 years)

Question 63

What are the vesting options for a top heavy plan

Answer 63

1) Immediate, 2) 3 year cliff, 3) 2-6 year graded

Question 64

What is the standard eligibility requirement for a qualified plan

Answer 64

1 year employment & minimum 21 years of age & 1000 hrs per 12 month period

Question 65

Describe situations when NUA applies, and what is its tax treatment

Answer 65

Net unrealized appreciation (NUA) occurs when there is a difference between the average cost basis and the current market value of the shares owned by the employee. but requires a lump sum distribution gets long term capital gains treatment