Retirement and Income Planning Flashcards
defined benefit pension plans
traditional DB plan
Cash Balance pension plan
DBk
Defined contribution pension plans
Money Purchase plan
Target benefit plan
defined contribution profit sharing plan
traditional Profit sharing plan
Stock bonus plan
401k/SIMPLE 401k
New comparability plans
Age based profit sharing plan
Thrift
ESOP
HINT: PS4 NATE
tax advantaged plans
SEP
SARSEP
IRA
Roth IRA
403b
SIMPLE IRA
Non qualified plans
Deffered comp plan
Section 457
Highly compensated employee
greater than 5% owner
OR
compensation greater than $130k
can make a “top-paid” group election - 20% of compensation earners are considered HC, 5% owners would still be considered HC
key employee
greater than 5% owner
OR
officer with more than $185k compensation
OR
greater than 1% owner with more than $150k compensation
SS integration wage base
$142,800
qualified plans testing
50/40 defined beenfit
ratio test
average benefits test
ACP
ADP
qualified plan eligibility
age 21 and 1 year of service (1,000 hrs)
exception: can require two years of service if 100% vested upon entry (cannot be used by 401ks)
two entrance dates per year
safe harbor test (ERISA coverage req)
70% of eligible NHC must be covered by the plan
Ratio test (ERISA coverage req)
% of NHC covered / % of HC covered >= 70%
average benefits test (ERISA coverage req)
average benefits % of NHC/ average benefits % HC >= 70%
50/40 test
additional coverage test for DB plans
must benefit at least 50 employees or 40% or more of all eligibile employees
defined benefit plan vesting
5 year cliff or 3-7 year graded
EEs always vested in thier own contributions
defined contribution vesting
3 year cliff or 2-6 year graded
EEs full vested in their own contributions/earnings associated with those contributions
top heavy
top heavy = when more than 60% of its aggregate accrued benefits or account balances to go key employees
when a plan is top heavy, must provide non-key emplyees with minimum contributions
- DB plans - minimum benefit of 2% x number of years of service up to 10 yrs
- DC plans - 3% contribution of total compensation
ADP testing (actual deferral percentage)
for 401k plans
ADP = actual deferrals/eligible employee compensation
deferrals = employee contributions (includes Roth)
if ADP for NHC…
- Less than or = to 2%, then max ADP for HC is 2 x ADP of NHC
- More than 2%, but less than or = 8%, then max ADP for HC is 2% + ADP of NHC
- More than 8% then max ADP for HC is 1.25 x ADP of NHC
ACP testing (actual contribution percentage)
applies to all qualified DC plans
ACP = actual contributions/eligibile EE compensation
contributions = ER match, EE contributions (excludes Roth)
if ACP for NHC…
- Less than or = to 2%, then max ACP for HC is 2 x ACP of NHC
- More than 2%, but less than or = 8%, then max ACP for HC is 2% + ACP of NHC
- More than 8% then max ADP for HC is 1.25 x ACP of NHC
Safe Harbor Rule
can avoid ACP/ADP testing if the plan meets the safe harbor provisions
safe harbor contributions are 100% vested at all times
methods:
- Matching contributions for NHC: 100% match up to 3% contribution + 50% for contributuions 3%-5% of compensation (matching % of HC cannot exceed those for NHC)
- non elective contribution: 3% or more of comp for all eleigible NHC participants
annual additions limit for DC plans
$58k
includes:
- ER: $19,500 + catchup (may be over $58k if catchup available)
- EE: 25% limit: profit sharing, match, QNEC/QMC
- forfeitures
Defined benefit pension plan
DB pension plan
mandatory ER contributions
ER assumes risk
actuarial assumptions
benefits older employees
costly to administer
cash balance pension plan
DB pension plan
mandatory ER contributions
ER assumes risk
benefits younger employees
quasi-seperate accuoints
benefit - certain % plus guaranteed interest rate credit
target benefit pension plan
DC
mandatory ER contributions
EE assumes risk
age weighted
actuary needed at inception
money purchase pension plan
DC pension plan
mandatory ER contributions
EE asumes risk
fixed % between 0-25%
used to retain key employees and when EEs are young with higher income
easy administration
thrift plan
after tax EE contribution
profit sharing plan
profit sharing DC
EE assumes risk
funding flexibility
used to attract and retian EEs
contributions may be made with company stock
can be integrated with SS
stock bonus plan
profit sharing DC plan
EE assumes risk
deduction for noncash contribution
EEs can vote stock in plan
distributions generally in stock
valuation issues
ESOP
stock bonus
EE assumes risk
ER can sell stock to plan with no tax
leverage
no integration
put option
401k plan
ADP/ACP testing
EE assumes risk
CODA
SEP
nonqualified plan
discretionary ER contributions, NO EE contributions. contributions are not subject to FICA and FUTA
contributions 100% vested
can be adopted and funded up until taxes are due including extensions
employer can deduct contributions
- eligibility: must cover all EEs (including part time) who are 21+ and worked during 3 out of the 5 prior calender years and have at leas $650 in compensation
- contribution limit: 25% of comp (covered comp $290), MAX contribution $58k
Qualified plans
subject to ERISA
subject to non discrimination
tax benefits: EE deferral, ER deduction
funding: due by date of return (including extensions)
must be established by end of annual tax filing (including extensions)
nonqualified plans
not subject to ERISA or nondiscrimination testing
tax benefits: EE deferral only, EE gets deduction when deferral ends
can be established and funded at any time
IRAs
individuals at any age with earned inome can make contributions (income limits, and limitations if you are covered by a plan)
earned income = wages, tips/bonus/fees, alimony(pre 2019 divorce), separate maintenace accounts
distributions before 59.5 are subject to 10% penalty
exceptions to penalty:
- Medical expenses in excess of 7.5% AGI
- Equal payments
- Age 59.5
- Death
- Disability
- Heath insurance premiums (if unemployed)
- Education expenses
- first time Home buyer (max $10k)
- Birth or adoption (up to $5k per parent
- Qualified disaster (up to $100k)
HINT: ME ADD HE HBQ
cannot have: collectibles, life insurance, S corp stock, or foreign coins in an IRA