Retirement Flash Cards Flashcards by Jeff Davidson

ERISA

Employee Retirement Income Security Act
• Sets up rules for qual and non-qual plans
• PBGC created by ERISA
• PBGC does not insure 100% of benefits

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Section 415 Annual Additions Limit

(2014) Lesser of 100% of comp or $52k

* Includes employer contrib, employee salary reductions, plan forfeitures

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Qualified Plans

• Code Section 401(a)
• No discrimination
• ERISA
• Tax deduction immediate
• Earnings accrue tax deferred
• Distribs taxable as ordinary income(except 10 yr avg* & NUA in stock/ESOP)
• 10% penalty for distribution before 59 ½, except sep from service after 55
* Lump sum is subject to tax rate 10 years prior – no long use)

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Non-Qualified Plans

May discriminate
Non-ERISA
Tax deductable by employer only after employee is taxed
Plan earnings taxable to employer
Distributions taxed at ordinary rate

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Defined Benefit Pension Plan (DB)

Qualified Plan / ERISA
• Subject to PBGC
• Vesting Schedule
• Admin Costs
• Exempt from creditors
• Integrate with SS
• Favors older employees
• Certain retirement benefit
• Must have stable cash flow
• Past service credits allowed
• Forfeitures MUST be applied to reduce employer contrib
• Min participation - 50 employees or 40% of all employees
• Contribs can be > $52k – depends on actuary assessment
• QPSA/QJSA required

Section 415 limit
• Max life annuity benefit is lesser of $210k or 100% of average comp over highest 3 years
• Can retire at 62 with no bene decrease

Unit Benefit Formula
• Most popular formula for DB plans
• Percentage-of-earnings-per-year-of-service

Final Average Method
• Average earnings over last 3-5 years
• Only first 260k considered

Past Service
• When setting up new plan for current long-serving employees
• Takes into consieration past service

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Cash balance pension plan

Qualified DB plan
Employer guarantees min rate of return
Used to save costs for employer
Simple defined contribution
Not good for older employees
QPSA/QJSA required

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Defined Contribution (DC)

Qualified Plans/ERISA
vesting sked, admin costs, exempt from creditors, SSI
May NOT allow for past service credits
Money Purchase 
Target Benefit
Profit Sharing
Stock Bonus Plan

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Non-qualified DC Retirement Plans

SEP No vesting schedule
SIMPLE Limited Admin Costs
SARSEP
Thrift / Savings
403(b)

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Defined Contribution - Factors that effect benes

Years to retirement - the more, the better
Employees bear investment risk
Contribs based on salary for each working year, not salary at retirement
Employer can contrib 3%+
Forfeitures can be reallocated to participants or used to reduce employer contributions

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Money Purchase Pension

Fixed Contributions - flat percentage of comp
Lesser of 100% of salary or 52k
Up to 25% employer tax deduction of eligible payroll (Section 404c)
Stable cash flows
Only takes the first 260k of salary into consideration
Use: Retain key employees, simple to admin and explain, used for young and well-paid employees
Employee bears investment risk
Employer must make min funding of 3%
Forfeitures go back to employer or employees
QPSA/QJSA required

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Target Benefit Pension

Features of both DC and DB
Fixed Contributions actuarialy determined
Up to 25% employer tax deduction
Stable cash flows
Only takes the first 260k of salary into consideration
Lesser of 100% of salary or 52k
Favors older employees
Employee assumes risk
QPSA/QJSA required

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Profit Sharing Plan

Contributions must be substantial and recurring
Up to 25% employer tax deduction
Lesser of 100% of salary or 52k
FLEXIBLE
SIMPLE 401(k) is exempt from creditors
401(k) provisions (Hardship provision)
Employee pays FICA/FUTA
Forfeitures allocated to plan participants
For young, well-paid employees
Employee bears risk

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Stock Bonus Plan

• Up to 25% employer tax deduction
• FLEXIBLE
• 100% MAY be in company stock
• MAY invest plan in company stock
• Benefits distributable in company stock
• Employers may deduct dividends. Dividends:
Paid in cash directly to participants
Must be distributed 90 days after plan EOY
Used to paydown loans used to acquire shares
Paid to plan and reinvested in comp stock

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ESOP

• MUST invest plan in company stock only
• No SS integration or cross-testing
• Benefits distributable in company stock
• However, can ‘put’ to company within 60 days, diversify 25% at ___ age or 50% at _____.
• Employers may deduct dividends. Dividends:
Paid in cash directly to participants
Must be distributed 90 days after plan EOY
Used to paydown loans used to acquire shares
Paid to plan and reinvested in comp stock
• LESOP - Leverage ESOP. Used by employer to borrow

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401(k)

Also called Cash or Deferred Arrangement (CODA)
Qualified profit-sharing or stock bonus plan
FUTA/FICA due on deferral amounts
Hardship withdrawal allowed without penalty
10% penalty for distribution before 59 ½, except sep from service after 55

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Solo 401(k)

• Also known as Uni-401(k)
• Allows catch-up contribution for 50+
(unlike Keogh/SEP)

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Safe Harbor 401(k)

100% match on first 3%, 50% 3 – 5% OR 3% to all employees
EXEMPT FROM ADP/ACP TESTS
Requires employer match (immediate vest)

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Roth 401(k)

• Must be rolled into Roth IRA or withdrawals subject to tax/penalty

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New Comparability Plan

Can discriminate on AGES and WAGES

* Tested under cross-testing rules

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Cross Testing Plan

Sometimes referred to as age-weighted
Designed to provide max to HCEs and min to NHCEs
NHCEs get lesser of 1/3 of HCE with highest alloc. or 5% of NHCE’s comp
Works if NHCEs are on avg 15 years younger than HCE
Self-employed with qual plans CAN use cross-testing
Cannot be used by ESOPs

Traditional IRA

• Max contrib $5500 or $6500 if 50+, same for spouse for both IRA and Roth IRA
• Combined total earned income must be equal or greater to IRA contrib
• May pay as late as 4/15 of next year, but filing extension does not extended contrib date
• No contribs past 70 ½
• 10% penalty for distribution before 59 ½
• NO LOANS
• If too much is paid, 6% non-deductable excise tax every year $ stay in IRA
• Deductable if not covered by plan at work (Single) or neither spouse covered (MFJ)
• If spouse works, deduction phases out at:
181K – 191k AGI MFJ
• If covered by plan at work:
60K – 70k AGI (Single)
96K – 116k AGI (MFJ)
0 – 10k AGI (MFS)
• Non-deductable amounts come out as return of capital

Roth IRA

• Max contrib $5500 or $6500 if 50+, same for spouse for both IRA and Roth IRA
• Combined total earned income must be equal or greater to IRA contrib
• NOT DEDUCTABLE
• No RMDs
• Bankruptcy protection up to $1m
• May pay as late as 4/15 of next year, but filing extension does not extended contrib date
• Can contribute regardless of age as long as there is matching income
• Thresholds:
114K – 129k AGI (Single)
181K – 191k AGI (MFJ)
0 – 10k AGI (MFS)
• Distributions are tax-free if money has been in Roth 5 years and trigger event:
59 ½ or older
Death, Disability
First time home purchase up to $10k
• Otherwise, contribs come out first tax-free, then conversions, tax-free and possibly 10% early withdrawal, earnings taxed as ordinary income

Traditional IRA to Roth IRA rollover

No AGI limitations
Ordinary income taxes must be paid in year of conversion
Taxes must be paid from outside IRA
Can go back to traditional IRA with no penalty if done before tax return filed
If then want to go back to Roth again, must wait 30 days or until end of next tax year

SIMPLE IRA

For small employers < 100 employees
Requires employer match (immediate vest)
Salary reduction limit - $12,000 (FICA) + 2,500 catch-up for 50+
ERISA
COMPANY CANNOT HAVE OTHER PLAN
EXEMPT FROM CREDITORS
EXEMPT FROM ADP/ACP TESTS
NO LOANS
Employer must match up to 3% or 2% to ALL employees, can do 1% in 2 out of 5 years
Eligible if ……
25% penalty if dist made in first two years, then 10% after

SIMPLE 401(k)

For small employers < 100 employees
Employer must match up to 3% or 2% to ALL employees, 1% in 2/5 years
Immediate vest
Salary reduction limit - $12,000 (FICA) + 2,500 catch-up for 50+
EXEMPT FROM ADP/ACP TESTS
CAN HAVE LOANS if in plan
Eligible if ……
Premature distribution within first two years is 25%, then 10%

SEP IRA

No salary deferral
Max: Lesser of 100% of comp or 52k
Up to 25% deduction from total payroll
Can be integrated with SS
Must cover all employees 21+ y/o, makes $550, worked for 3 out of 5 years.
NO LOANS
No annual requirement – can make payment only once if you want!
10% penalty for distribution before 59 1/2

SARSEP

No longer exists as of 1996
Salary deduction limit $17.5k (FICA)
Up to 25 employees / 50% must participate

403(b)

Also called TDA or TSA
For 501c3 orgs and public schools
ERISA if employer contribs
Employer contribs may vest
Salary deduction limit $17.5k (FICA) catch-up of $5.5k if 50+ y/o
Employee at health, education, religious + 15 yrs service can contrib add’l 3k for the last 5 years of work
Max contrib of 100% of comp or 52k
Contribs can be made as Roth
Annuity contracts, life insurance, mutual funds only
All employees must be eligible
Employer can require each employee to contrib $200
Employee must work 20 hrs/wk and can’t be student at org
LOANS OKAY
10% penalty for distribution before 59 ½, except sep from service after 55

457

For government or tax-exempt/non-religious
Salary deduction limit $17.5k (FICA) catch-up of $5.5k if 50+ y/o
Contribs can be Roth
Final 3 years before retirement, +$17,500 contrib
No 10% early withdrawal if worker separates from service
Doesn’t count as plan for IRA deductability

Keogh Plans (HR-10)

• Qualified plan for self employed – Sole Prop / Partnership
• Can be DC or DB
• DC deduction is 20% of net income (not 25%)
• NOT FOR ANY KIND OF CORP
• FICA MUST BE NETTED OUT OF NET EARNED INCOME.
Shortcuts:
Max contrib for 15% profit sharing – NI x 0.1212
Max contrib for 25% profit sharing – NI x 0.1859

Tandem Plan

No longer in existence
15% profit sharing plan
10% money purchase plan

Highly Compensated Employee (HCE)

Effects ADP/ACP testing
Greater than 5% owner
Earned $115,000 in preceding year and in top 20% of highest paid employees
Employee who is spouse, parent, child, grandparent of >5% owner is considered a 5% owner themselves

Key Employee

Greater than 5% owner
Officer and comp >$170k (2014)
> 1% ownership AND comp > $150k (2014)
If 60% of benefit is going to key employees, vesting rules change. DC plans stay the same, DB is now 3 yr cliff or 2-6 year

Average Benefit Tests

All Qual DC and DB plans must pass one of these 3 tests:
• Percentage Test – 70% of NHCE must be covered
• Ratio test - Plan must cover a percentage of NHCEs covered >=70% of HCEs covered
• Average Benefit test - Avg benefits for all NHCEs must be at least 70% of HCEs

All DB plans must also pass Min Participation Test: Lesser of 50 employees or 40% of all employees

For top heavy plan (60%)
• DB – Non-key employees get avg benefit for last 5 yrs x 2% for each year plan is top heavy, up to cap of 20% (B is 2nd letter = 2%)
• DC – Uses faster vesting schedule
• DC – Employer must contrib up to 3% for all employees, even < 1000 hrs (C is 3rd letter = 3%)

For super top-heavy plan (90%):
DB – 3% for up to 10 years
DC – 4%

ADP / ACP Testing

Actual Deferral Testing / Actual Contrib Percentage Testing
• Shortcut: 0 - 2% is ‘times 2’, 2 - 8% is ‘plus 2’
• HCE not more than 125% of NHCE rate (ADP is 8% or greater)
• HCE not more than 200% of NHCE rate and not more than 2% greater than NHCE rate (ADP is between 1 – 8%)

Integration with Social Security

Integration level (2014): 117,000
Base contrib:  Amount below integration level
Excess contrib:  Amount above integration level

For DC plan:
Permitted disparity: Lesser of base or 5.7%

For DB plan:
Lesser of base or 26.25%

Vesting Schedules

Fast vesting schedule - use if > 60% of aggregate accrued benes or account balances are alloc to key employees
• All DC plans or top-heavy DB
• 3 year cliff OR 2-6 yr graded OR 100% w/2 yr eligibility

Slow vesting schedule - non top heavy DB plans
• 5 yr cliff or 3-7 yr graded OR 100% w/2 yr eligibility

Example of 2-6 yr
Year 1 Not eligible n/a
Year 2 Contrib made 20%
Year 3 40%
Year 4 60%
Year 5 80%
Year 6 100%

Early Withdrawals

QDROs
Qual Medical Expenses (> 10% AGI) – Qual & IRAs
Education – Qual higher edu expenses
First time homebuyer (no home within 2 yrs) - $10k
Return of excess
Hardship withdrawals – Illness, college, mortgages, to prevent eviction – but still has 10% penalty + income tax

Substantially Equal Periodic Payments 72(t)

Periodic and equal distribs made longer of 59 ½ or five years
Must separate from service for qual plan/403(b) first
IRA does NOT require sep from service
Payments taken from only 1 account – good idea to split IRA
Amort, Annuity, RMD methods

Normal Distributions

Annuities – Life Annuity, Life Annuity w/period certain, Refund Life Annuity, Joint & Last Survivor Annuity
Non-deductable contribs come out tax free
Use Uniform Lifetime Table to determine RMD
If spouse is 10 years younger, distribs can be spread over joint life
Shortfalls in required distributions get 50% penalty tax unless waiver requested
If there is a basis, it is taken out pro rata
NUA option – If company stock is in distribution, net gain is not taxed to employee, just tax on dollars spent to buy stock (basis). NUA is taxed as LTCG when sold. If not sold, any appreciation after distribution can be STCG or LTCG

Beneficiaries

If client dies before RBD:
No benes or charity as bene – all must be distributed by Dec 31 of the 5th year following year of death
If bene, can be taken out over bene’s lifetime (streach)
If client dies after RBD (already taking RMDs):
Can be distrib over life expectancy of deceased
Or over lifetime of bene (youngest bene best, careful of GST tho)
Name of streach IRA has deceased and bene’s name
Same sex spouses are treated as spouses for distributions

Controlled Groups

Parent-subsidiary - one entity owns 80%+ of other
Brother-sister - Five or fewer owners of 2 or more entities own 80%+ of each entity
Affiliated service group
Employee leasing

Plan Loans

No SEPS and SIMPLE IRAs
Must be paid back within 5 years unless used to buy home, then 30 yrs
Max loan is lesser of $50k or 50% of vested balance with floor of $10k
Interest is paid back to retirement account
Loan must be repaid upon separation of service or considered a distribution subject to tax and maybe penalties

QDRO

Court order from divorce settlement
No early withdrawal penalty
Person receiving settlement can take out money but must pay income tax
Money rolled into IRA can no longer be withdrawn tax free
Cannot override plan rules, however

ISO

ISOs only TOD, can’t be gifted / NSOs can
Only $100k of ISOs that vest in 1 year can be given, balance become NSOs
Company does not generally get a tax deduction
Exercise price is FMV on day of grant
Can use graded or cliff vesting
Must exercise 3 mos after leaving company
At grant, no taxable event
At exercise, AMT income adjustment of bargain element (FMV-strike)
For LTCG, stock must be held 2 yrs from grant, 1 year from exercise, else it’s a disqualifying disposition and bargain at ord income, gain is STCG or LTCG depending on time since exercise, Negative AMT adjustment, company gets tax deduction of bargain element

NSO

Can be gifted, even before they vest, but still responsible for tax on bargain element. Gift valued with Black-Scholes
Employer gets deduction of bargain element
At grant, no tax ramifications
At exercise, bargain element subject to W-2 ord income, FICA/FUTA, etc
At sale, LTCG/STCG depending on holding period
No AMT adjustments

83b Election

Employee can pay tax before options can be exercised

* Good if stock goes up, bad if it goes down

Non-Qualified Deferred Comp Plans

Salary Reduction Plan
Rabbi Trust – Protects benefits in change of owner, not protected against firm creditors
Secular Trust – Creditor protection, ‘funded’
Works best with C-corp, pass-though co’s deferred comp reported on owner’s personal taxes

Plan Selection for Businesses

• Consider owner’s obj’s and company obj’s
• Tax ramifications / capital needs for owner
• Older owner = DB or age-weighted
• SEP and SIMPLE are cheapest
• Stable cash flow gives greater selection of plans – DB, pensions
• Inconsistent cash flows – Profit-sharing, SEP
• Employee demographics – DB = older, DC = younger employees
• Employee’s can contrib –
- 401k employer can match portion, make non-elective contrib, profit sharing contrib, or nothing, vesting schedules/any # of employees. 401K more expensive due to ADP/ACP, can make loans
- SIMPLE – Lower admin cost, <=100 employees, no vesting, no loans
• Owner is older, wants to skew to himself – DB, age-weighted PS plan, target bene
• Discretionary contribs – SEP - Immediate vesting, can do up to filing date, SS integration / PS – vest sked, employes can contrib to 401k feature, SS integration, age weighted features, catch-up contrib to 401k

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Retirement Flash Cards

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