Retirement & Employee Benefits Flashcards
Advantages of Qualified Plans
Employer:
- contributions tax deductible
- contributions not subject to payroll taxes
Employee:
- pretax contributions for employees available
- tax deferral of earnings on contributions
- Lump-sum distribution options
*Both Employers and Employees are exempt from payroll taxes on employer contributions providing up to 15.3% (12.4% OASDI & 2.9% Medicare) savings on taxes.
Employee is subject to Additional Medicare 0.9% tax if income exceeds thresholds (provided tax table)
HC vs NHC Employees
HC:
- Greater than 5% owner during current or prior year (as well as family - attribution rules apply!)
- Compensation exceeding $150,000 (2023)
Coverage Tests
General Rule: > 70% NHC employees must be covered
To be qualified, retirement plan must meet 1 of 3:
1) General Safe Harbor
2) Ratio % Test
3) Average Benefits Test
*Defined Benefit plans must ALSO pass 50/40 Test
Key Employee Requirements
1) Greater than 5% owner
2) Greater than 1% owner & salary exceeding $150,000
3) Officer with compensation exceeding $215,000
Top-Heavy Plan
- If > 60% of benefits/contribs go to Key Employees, then THINK Top-Heavy
Defined Benefit 50/40 Test
Extra test for Defined Benefit plans:
- 50 people or 40% eligible employees must be covered at all times
**Exam Tip: People come first
Years of Service
- FT: 1,000 hours and 12 consecutive months
- PT: (starting 2021) 3 consecutive years of service (500+hrs)
PBGC - Pension Benefit Guaranty Corporation
Pays the “promised pension” for defined Benefit plans
- $6,750 per month or $81,000 per year
2 Defined Benefit Pension Plans
All Pension Plans:
- REQUIRE min contributions
1) Defined Benefit Pension Plan
- Actuary required annually
- Favors older entrants but more expensive
2) Cash Balance Pension Plan:
- Actuary required annually
- Account employee sees is merely a hypothetical account.
- Offers a guaranteed min investment return
- Must use 3-yr Cliff vesting schedule
- Conversion to Cash Balance plans are popular to get rid of old, more expensive traditional DB Plans
- benefits younger and less expensive
2 Defined Contribution Pension Plans
3) Money Purchase Pension Plan:
- Fixed % contribution of salary
- no actuary needed
- benefits younger and less expensive
4) Target Benefit Pension Plan:
- type of Money Purchase Plan where contribution is determined by the benefit that WILL be paid at retirement.
- Actuary required initially (but not annually)
- benefits older but more expensive
*For both, Contribution Limit:
- Employer cannot deduct contributions > 25% of total employer contributions they provide
- Employer contributions limited to Lesser of:
100% of employee’s salary -OR-
$66,000
Permitted Disparity - Profit Sharing Plans
- Permitted Disparity equals: LESSOR of 2x Base Rate
or 5.7% higher than Base Rate.
**Exam Tip:
Base rate + Permitted disparity = Excess rate
BP = Exxon
*Excess Method applies to both Defined Benefit & Defined Contribution Plans. Offset Method is ONLY for Defined Benefit
7 Profit-Sharing Plans
Profit Sharing Plans:
- Employee generally cannot contribute unless CODA
- Employer contribution amounts are discretionary.
1) Profit Sharing Plans:
- can have CODA attachment but still allows employer to contribute. Limit contributions still subject to $66,000 ($73,500 if 50 or over for Catch-up)
2) Stock Bonus Plans: employers contribute stock on behalf of their employees
3) ESOPs: special form of stock bonus plan. Rewards employees with ownership in corp and significant tax advantages.
Key feature: trust may borrow $ from bank to purchase employer stock. Allows owners of closely held businesses to sell their interest and defer recognition of capital gains
4) Cash or Deferred Arrangements (CODA - 401K Plans):
- allows employees to defer salary pre-tax
- no eligibility requirement for employee contribution. Any employer matching must vest at least as generous as 2-to-6yr.
- Employee Deferral limits: $22,500 (trad or Roth), $7,500 Catch-up (age 50 or older)
5) Roth Thrift Plans (TSP): Roth 401(k), governments version of a Roth IRA - after-tax contributions.
6) Age-based Plan: both age and compensation
- Cross Test
7) New Comparability Plan: contributions based upon employee’s classification in the company
- Cross Test
ADP & ACP Tests (CODA)
2 Additional Nondiscrimination Tests plans with CODA provisions MUST meet.
1) ADP Test - Actual Deferral % Test:
ensures NHC employees are not discriminated against. Goal is to either limit HC’s from deferring significantly more than NHCs -OR- raise amount being received by NHCs
*ADP chart in Dalton flashcards
2) ACP Test - Actual Contribution % Test:
solely to determine if NHCs are discriminated against.
Tests the sum of both employee and employer contributions.
*Calculate same way as ADP.
*Alternative to these is the Safe Harbor 401(k) plan provision
Safe Harbor 401(k) Plan
- Safe Harbor provision can be enacted in lieu of the annual ADP/ACP Tests that CODA plans have to pass.
Two options:
1) Employer makes Non-elective minimum contribution of 3% employee compensation. 100% vested.
2) Employer matches employee Elective deferrals, 100% of first 3% and 50% greater than 3% and less than 5%.
Adv & Disadv of ESOP’s
Stock Bonus vs ESOP
Exceptions to 10% Early Withdrawal Pentalty - Qualified Plans vs IRAs (BOTH Traditional & Roth IRAs)
Roth IRA - Qualified Distributions & 10% Early WD Penalty
Qualified Distributions: must satisfy both..
1) made after 5-yr period
2) One of the other 4 Requirements:
a) When age 59½ or older
b) Made to beneficiary after owner’s DOD
c) Disabled
d) For first time home purchase (lifetime cap of $10,000 for first time homebuyers includes taxpayer, spouse, child, or grandchild who has not owned a house for at least 2 years).
Non-Qualified Distribution (order of withdrawal):
- FIRST from regular contribution ($6,500)
- NEXT from conversion contributions on FIFO basis
- FINALLY from earnings
10% WD Penalty:
- Generally applies to Conversions & Earnings (EXCEPT for exceptions list of both Trad & Roth IRA Early Withdrawals on other flashcard).
**KEY Distinction:
- Non-Qualified Distribution = distribution will be taxable
- 10% Tax Penalty = subject to penalty if does not meet one of the “Exceptions” waving the penalty
One can apply but not necessarily the other has to
SIMPLEs - Savings Incentive Match Plans for Employees
SIMPLEs:
- Incentive to small employers (100 or less). 2yr Grace Period to stay within 100 employee limit.
- Early withdrawal penalty 25%. Requires participant to be in plan beginning 2 yrs.
- Less admin costs and no filing requirements.
- 100% vested immediately.
- Do not have to meet nondiscrimination rules
- CANNOT be established if contribute to any other type of retirement plan (unlike 401Ks)
Important to note
- Eligible if earn $5,000 for 3yrs (or 2 & reasonably expect in yr 3)
- Employee Deferral Limit: $15,500, $3,500 Catch-up (50 or older)
SIMPLE IRA:
- Employer: REQUIRED either
a) 2% non-elective contribution (compensation limit
of $330,000 applies, e.g. 330,000 x 2%) -OR-
b) 3% match salary ($ for $).
If match, then may reduce to 1% match for 1yr…
**EXAM NOTE - not available for SIMPLE 401Ks.
This why SIMPLE IRAs considered “more flexible”-
SIMPLE 401K:
- can take loan out (NOT available for SIMPLE IRA)
457 Plans
457 Plans:
- Non-qualified deferred compensation plan that’s available to SALT gov employees
- employee deferrals don’t count against other deferral contributions (favorable)
- 3 types of plans:
1) 457(b) Eligible Government funded “Public” plan.
For all eligible employees
2) 457(b) Eligible Tax-Exempt unfunded “Private” plan.
For HCE or management.
3) 457(f) “Ineligible” Top-Hat plans
*NOTE main distinction btwn Eligible & Ineligible:
457(f) Ineligible plans allow for greater deferrals
- NOTEhave 2 Catch-up provisions (like 403b):
The 2 provisions are:
1) Age 50 or over $7,500 (public ONLY)
2) Final 3-Yr Addition: $22,500 (but cannot use $7,500 age catch-up simultaneously)
457 (continued)
characteristics of 3 different 457s
Non-Qualified Deferred Compensation
2 Stock Options
1) Incentive Stock Options - ISOs:
right given to an employee to purchase employer’s common stock at exercise price.
- Bargain element: employee is not subject to income tax on the difference between the FMV and exercise price when the option is exercised
- Holding Period for a Qualified sale:
a) 2yrs from date of grant
b) 1yr from date of exercise
2) Non-qualified Stock Option - NQSOs:
- option that does not meet the requirements of an ISO.
- A bonus program of additional compensation
Summary of Available Fringe Benefits
A) Meals:
- Employee: fully exclude if furnished for the convenience of the employer AND on employer’s business premises.
- After 2017, meals for convenience only 50% deductible. Meals for convenience do not include: promoting morale/goodwill OR when employee has choice to accept the meal or bring his own.
B) Lodging:
- Employee exclude if lodging is furnished on the employer’s business premises, is for the convenience of the employer, AND accepts the lodging as a condition of employment.
If one of 3 not met, then employee must include lodging in gross income
B) Adoption Assistance (see Dalton FCs)
C) Cents-per-mile: $0.655 per mile; commute: $1.50
Cafeteria Plans
Employee chooses to either receive cash as compensation or tax-free fringe benefits.
- Flexible Spending Accounts (FSAs):
a type of cafeteria plan that is funded by employee deferrals rather than employer contributions. $3,050 limit. “Use it or lost it” account that must be used by 15th Calendar day after year-end.
