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Retirement Overview Flashcards

0
Q

Excess Method of SS Integration

Defined Contribution Plans

A
  1. The Excess Method provides higher contributions above the integration level than below the integration level.
    a. The benefit below the integration level is called the base percentage; the benefit above the integration level is called the excess percentage.
    b. The excess percentage is limited to the lesser of 1)two times the base percentage or (2) the base percentage plus 5.7%
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1
Q

What are the excess and offset methods of SS Integration?

A

Excess Contribution - uses a level of compensation called the SS integration level. This method provides a higher level of benefits for compensation above the SS integration level.

Offset Method - the plan benefit formula is either reduced by a fixed amount, or a formula is used that is designed to represent SS benefits.

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2
Q

Which individuals are NOT covered under SS

A
  1. Fed Workers hired before 1984
  2. Some State/Gov Workers
  3. Children under age 18 who are employed by a parent in an unincorporated business.
  4. Railroad Retirement Workers with more than ten years of service
  5. Ministers who choose not be covered
  6. American citizens working abroad for foreign affiliates of US ER’s
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3
Q

Vesting guidelines for TDA/403b plans

A

EE always 100% vested in all amounts contributed to the TDA plan and in any plan earnings

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4
Q

Treatment of future distributions to a spouse beneficiary if the participant has died after the RMD beginning date

A
  1. Spouse can receive distributions over her life time. Distributions must begin in the year following the year of death
  2. Roll over balance and wait until she is 70.5 to begin taking w/d’s
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5
Q

Keogh Plan

A

Lump sum distributions may be eligible for favorable ten year averaging

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6
Q

What is the exception to the Minimum Distribution Requirements

A
  1. If 70.5 and still working, you may defer the required beginning date for RMD until April 1 following the year in which you retire.
    a. The deferral of the RMD is only allowed if:
    - Participant is less than 5% owner
    - The plan is the ER’s qualified plan (not the participant’s IRA or other qualified plan)
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7
Q

SIMPLE Plans IRA and 401k

A
  1. SIMPLE IRA, the plan is not subject to non discrimination rules including Top Heavy Rules
  2. SIMPLE 401k - plan does not have to meet special actual deferral percentage (ADP) tests and is not subject to top-heavy rules. Other qualified plan rules apply.

***SIMPLE 401k plans MAY PERMIT LOANS to EE’s

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8
Q

Characteristics of an age based profit sharing plan

A
  1. Age based profit sharing plan is a discretionary defined contribution profit-sharing plan
  2. Allocations to EE’s are made in proportion to each participant’s age adjusted compensation.
  3. EE’s compensation is age adjusted by multiplying the participant’s actual compensation by a discount factor, based on participant’s age and an interest rate elected by ER. The interest allowed by IRS is from 7.5% to 8.5%
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9
Q

Difference between being currently insured and fully insured under SS

A
  1. Currently Insured - person has 6 credits of coverage in the 13 quarter period ending with the quarter of death.
  2. Fully Insured - person has 40 credits of coverage during his life time.

**Person can received a maximum of four credits of coverage per calendar year

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10
Q

Are Roth IRA’s subject to minimum distribution rules?

A

Roth IRA’s not subject to minimum distribution rules

Beneficiaries of Inherited Roth IRA’s are required to receive minimum distributions

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11
Q

Stock Bonus Plan

A

Major difference between stock bonus plan and profit sharing plans is that in a stock bonus plan, benefits are usually distributed in the forms of ER stock not cash.

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12
Q

Exceptions to early distribution penalty for IRA’s

A
  1. Part of substantially equal, periodic payments made at least annually, over the life expectancy of the participant and participant designated beneficiary. The Participant NEED NOT SEPARATE FROM SERVICE before beginning the substantially equal distributions.
  2. For Higher Education costs for the taxpayer, spouse, child or granchild.
  3. To pay certain acquisition costs of a first time home buyer up to a $10,000 lifetime maximum
  4. To pay health insurance premiums for unemployed individuals
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13
Q

What acts can cause a reduction in, or a loss of, Social Security

A

Conviction of treason, sabotage or subversive activities, does not include fraud
Deportation or working in a foreign country
Divorce, Marriage, Adoption
Refusal of rehabilitation by disable recipient
Earning disqualifying income

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14
Q

Prohibited transactions occur when a party in interest causes a retirement plan to engage in one of the following:

A
  1. Sale, exchange, or lease of any property between the plan and a party in interest
  2. Loan between plan and any party in interest
  3. Transfer of plan assets to or use of plan assets for the benefit of a party in interest
  4. Acquisition of ER securities or real property in excess of legal limits
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15
Q

What are forfeitures and how are they allocated in a profit sharing plan

A
  1. Non-vested account balances of terminated EE’s which revert back to the plan
  2. Forfeitures normally allocated on a nondiscriminatory basis to remaining plan participants based on the participant’s percentage of payroll
  3. In DC plan, forfeitures may also be used to reduce future contributions by ER
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16
Q

How is the Department of Labor (DOL), through it’s Office of Pension and Welfare Benefits Plans, involved in retirement plans?

A
  1. Reporting and disclosure, insuring compliance with plan reporting and disclosure rules
  2. Defining the prohibited transaction rules and issuing Prohibited Transaction Exemptions (PTE’s)
  3. Governing the actions of plan fiduciaries
  4. Issuing communications that interpret the existing laws
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17
Q

What is the 50/40 Test

A

The 50/40 Test is an additional coverage test that must be satisfied by all defined benefit plans
For each day of the plan year, all defined benefit plans require coverage for lesser of:
-50 EE’s
-40% or more of all eligible (nonexcludable) ee’s

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18
Q

What is a Target Benefit Plan?

A
  1. A DC Pension Plan in which contributions are made for each participant in level annual contributions to fund the participant’s target benefit at retirement.
  2. The plan must specify a target benefit formula and define the funding assumptions to accumulate the necessary cash at retirement
  3. The result is that contributions on behalf of older participants are much higher than for younger participants
  4. A target benefit plan requires the use of an actuary at inception.
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19
Q

What does a participant’s cost basis in a qualified plan include?

A

First step in determining the tax on any plan distribution is to determine the participant’s cost basis in the plan.

  1. The participant’s cost basis includes:
    a. The total after tax contributions made by the EE to a contributory plan
    b. The total cost of life insurance actually reported as taxable income on federal income tax returns by the participant
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20
Q

If participant dies before RMD starts, what is the treatment of future distributions to the spouse as beneficiary?

A
  1. Surviving spouse can receive distributions over their remaining single life expectancy, recalculated each year. Distributions must begin in the year in which the owner would have turned 70.5
  2. Surviving spouse can roll the plan balance over, and wait until they reach age 70.5 to begin taking minimum distributions. This election may only be made if the surviving spouse is the sole beneficiary.
  3. The surviving spouse can elect to distribute the entire account balance within five years after the year of the owner’s death (five year rule). This election can only be made if the plan provisions allow the five year rule.
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21
Q

IRA is not a

A

Qualified Plan! It’s a Tax Advantage Plan!

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22
Q

What tax deferred retirement plans not allowed to be integrated with SS?

A
  1. ESOP
  2. SIMPLE’s
  3. SARSEP’s
  4. Elective deferrals and matching contributions of 401k and 403b
  5. Traditional IRA/Roth IRA’s cannot be integrated with SS because they do not allow ER contributions.
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23
Q

Average Benefits Percentage Test

A
  1. ADP- Average Benefits Percentage Test is a coverage test for qualified plans.
  2. Average benefit percentage test is found by dividing the actual benefit percentage of the NCE’s by the Actual Benefit Percentage of the HCE’s.
  3. Example: If the actual benefit percentage is 6% for the NCE’s and 8% for the HCE’s, the average benefit percentage is 75% (6% divided by 8%). Therefore in this example the plan passes the test.
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24
Q

Advantages of an ESOP

A
  1. EE’s receive ownership in the company
  2. Market created for ER stock
  3. EE’s are not taxed until shares are distributed
  4. ER receives a deduction
  5. The cost of corporate borrowing can be reduced
  6. A shareholder can obtain tax benefits by selling stock to the plan
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25
Q

Types of investments that can be held in 403B, tsa/tda

A
  1. Mutual funds held in custodial accounts

2. Annuity contracts purchased by the ER from Insurance Company

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26
Q

When it a traditional IRA appropriate…

A
  1. Tax deduction is beneficial
  2. Tax deferral on investment income is desired
  3. Long term savings, especially for retirement purposes
  4. Supplemental income desired for Retirement years
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27
Q

List Tax Advantaged Plans

A

SEP
IRA’s - Trad & Roth
SIMPLEs
403b/TSA/TDA

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28
Q

What are spousal survivorship benefits required for qualified plans?

A

ALL QUALIFIED PLANS must provide two forms of survivorship benefits for spouses (EXCEPTION: PROFIT SHARING PLANS)

  1. Qualified Preretirement Survivor Annuity - once EE is vested, spouse acquires the right to a pre-retirement survivor annuity payable to the spouse, if EE spouse dies first.
  2. Qualified Joint and Survivor Annuity - a post retirement death benefit for the plan participant’s spouse.
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29
Q

What is a KEOGH Plan/ HR-10 Plan

A
  1. Qualified Retirement Plan covers one or more self employed individuals.
  2. Like any other qualified plan. The EXCEPTION is that the self employed individual’s earned income takes the place of compensation when determining the plan contributions.
    a. Earned INCOME - Defined as the self employed individuals net income from the business after all deductions, including the deductions for the KEOGH plan contributions and a deduction for one half of the self-employment tax.
  3. Self-employed are permitted to RECEIVE LOANS from KEOPH plans in similar fashion as EE’s.
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30
Q

Qualified Automatic Contribution Arrangements - QACA

A
  1. Started under Pension Protection Act of 2006
  2. To increase EE’s participation in Self-Funded Defined Contribution Plans (401k, 403b, 457)
  3. Beginning Jan 1, 2008, companies that use QACA’s automatically enroll in the plans at a negative deferral rate, unless they specifically opt-out.
  4. The minimum deferral amount per EE is 3% of his compensation for years 1 & 2, increasing 1% each year.
  5. The QACA cannot exceed 10% of his compenation.
  6. QACA require a minimum ER contribution which can be either matching or non matching.
  7. EE’s must be given adequate notification about the QACA, as well as they ability to opt out completely or to participate at a different, specific contribution level.
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31
Q

What requirements must be met to satisfy the ACP test?

A
  1. The ACP for HCE’s is no more than 1.25 times the ACP for NCE’s
  2. The ACP for HCE’s is no more than twice the ACP for the NHCe’s and must not exceed the ACP for NCE’s by more than 2%
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32
Q

What is the Wage Replacement Ratio

A

The WRR is the percentage of pre-retirement income needed to maintain one’s lifestyle during retirement

Retirement needs tend to be 6-80% of pre-retirement income in order to maintain the same lifestyle during retirement.

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33
Q

How is the maximum contribution/deduction for a Keogh plan calculated?

A
  1. Determine net income from Schedule C or Schedule K-1.
  2. Subtract half of the self employment tax
  3. Multiply the result by the net contribution rate. The net contribution rate is determined by the following formula:
    {CP / (1 + CP)} = Maximum contribution percentage (25% for Profit Sharing Plans and Money Purchase Plan)
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34
Q

Vesting requirements for a QACA?

A

A QACA must provide that a participant with 2 or more years of service will be 100% vested in ER contributions made as part of QACA

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35
Q

What formulas are used to determine the benefits under the Defined Benefit Plan?

A
  1. The Flat Amount Formula - No differentiation among EE’s with varying compensation
  2. Flat Percentage Formula - provides retirement benefit equal to a percentage of the EE’s average earnings.
  3. Unit Credit Formula - (Unit Benefit Formula) - takes into account years of service and salary to determine the retirement benefit
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36
Q

What are the distribution provisions for Defined Contribution Plans

A
  1. Some DC plans provide annuity benefits like those in DB plans
    a. Money Purchase Plans, Target Benefit Plans, and TDA (403b) plans subject to ERISA must meet the Pre-retirement and Joint/Survivor Annuity rules. (for these purposes these plans are pension plans as opposed to profit sharing plans)
  2. If certain conditions are met, other DC plans may offer a wide variety of distribution options including lump sums and qualified rollovers.
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37
Q

Advantages of Target or Age Weighted Plans

A
  1. Retirement benefits can be made adequate to EE’s who enter plan at older age
  2. More of the total ER contributions in the age-weighted plan will likely allocated to owner’s and key EE’s who are older
  3. Age-weighted plan provides a tax-deferred retirement savings medium
  4. Age weighted plan is relatively simple and inexpensive to design, adm, and explain to ee’s
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38
Q

Methods in Terminating a Defined Benefit Plan

A
  1. Standard Termination - Sufficient asset must be available to cover accrued benefits through the date of termination
  2. Distress Termination - Requires either the ER be liquidated or that the termination is necessary for the company’s survival. If a defined benefit plan is terminated due to insufficient assets, the PBGC is liable for the balance (limited)
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39
Q

What is the minimum distribution penalty?

A

Distributions from qualified plans, TDA, SIMPLE’s, IRA’s, SEPs, Section 457 Gov. Deferred Comp. Plans must generally begin by April 1st of the calendar year following the year the participant reaches age of 70.5.

There is an annual minimum distribution required. If the distribution is less than the minimum required, there is a penalty of 50% of the amount not distributed that should have been distributed to the participant

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40
Q

Advantages of 401k Plans

A
  1. Tax deferral
  2. EE’s choose how much they want to contribute
  3. Can be funded entirely salary reductions
  4. Plan distributions my be eligible for ten year forward averaging
  5. In service w/d’s by EE’s for hardship are permitted.
  6. Loans may also be permitted by the plan
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41
Q

Distributions for Simple IRA’s are taxed…

A
  1. Like all other IRA’s
  2. 10% Penalty applies
  3. 25% Penalty substituted for 10% Penalty if distributions occur within two years of initial participation.
  4. SIMPLE 401k’s taxed under same rules as Qualified Plans
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42
Q

PBCG (Pension Benefit Guaranty Corporation)

Who funds the PBGC?

A
  1. PBGC premium consists of base premium plus a variable premium and is paid by the sponsors of a Defined Benefit Plan.
  2. PBGC premiums are used to finance the payment of benefits by the PBGC
  3. PBCG Insurance may not cover all plan beneifts. No coverage is provided for benefits that were added during the five years precedeint
    a distress termination.
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43
Q

What are included in annual additions to retirement plans

A
  1. ER contributions
  2. EE contributions
  3. Forfeitures
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44
Q

Types of individuals (other than fiduciary) can assume fiduciary responsibilities for a qualified plan?

A 
Corporate Officers/Directors
Plan Administrators
Bank Trustees
Members of a plan sponsor's investment committee
Investment Adviser's
Any person who selects the fiduciaries
45
Q

ERISA imposed obligations on Qualified Plan Fiduciaries

A
  1. The Fiduciary must exercise the care, skill, and diligence of a prudent person acting solely in the interest of plan participants and beneficiaries
  2. The Fiduciary has an obligation to diversify plan assets to reduce the risk of loss
  3. The Fiduciary mush also act in according with plan provisions and must refrain from acts prohibited by law
46
Q

Differences between ESOP and Stock Bonus Plan

A

ESOP must invest primarily in ER securities

ESOP may borrow from ER or Financial Institution

47
Q

What are the coverage requirements for qualified plans?

A

A qualified plan must satisfy one of the three tests:

  1. Safe Harbor Test (Also called the Percentage Test)
  2. Ratio Percentage Test
  3. Average Benefits Percentage Test

In addition, Defined Benefit plans must pass the 50/40 test

48
Q

What plans are included when determining if an individual is an active participant in a qualified plan?

A

The following plans are included in determine whether a person is an active participant in a qualified plan:

  1. Qualified Retirement Plans
  2. Seps/Sarseps
  3. Simples
  4. Section 403b
49
Q

What is a Thrift Plan

A
  1. Qualified DC plan, similar to profit sharing plan, with features that provide for and encourage after-tax EE contributions to the plan.
  2. A typical savings plan combines after-tax EE contributions with matching ER contributions.
  3. Pure savings plans, feature only after tax EE contributions, have generally been replaced by the Section 401k plan, which also permits after tax contributions.
50
Q

What is the scope of a fiduciary’s responsibilities?

A

One fiduciary may be held responsible for the acts or omissions of another if the fiduciary participated ini the breach of duty, knowingly concealed it, or imprudently allowed it to occur

51
Q

What is the 3-7 year graded investing?

A 
For the 3-7 yr graded schedule, defined benefit plan participant's must at least become:
20% Vested after 3 years of service
40% vested after 4 years of service
60% vested after 5 years of service
80% vested after 6 years of service
100% vested after 7 years of service

**IF plan is TOP HEAVY - the 3-7 yr graded minimum vesting requirement is shortened to a 2-6 yr graded vesting.

52
Q

Requirements for electing the ten year averaging on distributions from qualified plans?

A
  1. A participant is eligible to elect the ten year averaging provision if he reached age 50 by Jan 1, 1986, (born before 1936)

Ten year forward averaging is only available for lump-sum distributions.

53
Q

What is a Section 401k

A
  1. Known also as a Cash or Deferred Arrangement (CODA) is a Profit Sharing Plan under which plan participants have an option to contributed pretax money to the plan or receive taxable cash compensation.
  2. Amounts contributed to the plan are not taxable to the participants until withdrawn.
  3. 401k must satisfy the Ratio-Percentage Test or the Average Benefits-Percentage test, and must also satisfy the Actual Contribution Percentage (ACP) Test and Actual Deferral Percentage (ADP) Test
54
Q

Safe Harbor Coverage Test

A

To pass the Safe Harbor Test, the ER must cover 70% of all Nonhighly Compensated EE’s (NCE’s)

**Safe Harbor Test also Known as the Percentage Test

Plans that Do Not Meet the Safe Harbor Test must satisfy either the ratio percentage test or the average benefits percentage test

55
Q

What are the regular and top-heavy vesting requirements for a qualifed plan?

A
  1. EE contributions and their earnings must remain 100% vested (Nonforfeitable)
  2. DB Plans - ER contributions must be vested under a specified vesting schedule that is at least as favorable as one of the two alternative standards (5 yr cliff or 3-7 year graduated vesting).
  3. Top-Heavy Defined Benefit Plan - 5 year cliff vesting is replaced with 3 year cliff vesting, and 3-7 yr graded vesting is replaced with 2-6 yr graded vesting.
  4. Defined Contribution Plans - All ER contributions must use either 3 yr cliff or 2-6 yr graded vesting schedule, regardless of whether or not the plan is top heavy.
  5. Cash Balance Plan must use 3 yr cliff vesting
56
Q

When is a SEP appropriate?

A
  1. ER seeks an alternative to a Qualified Profit Sharing Plan that is easier and less expensive to established and administer
  2. ER wants to install a tax deferred plan, and it is too late to adopt a qualified plan for the year in questions.
  3. SEPs can be adopted and funded as late as the tax filing date (including extensions), for the year in which they are to be effective.
57
Q

Duties of IRA regarding the Qualified Plan System, and to a lesser extent, the Nonqualified Plan System

A
  1. Supervises the creation of new retirement plans and monitoring and auditing the operation of existing plans.
  2. Interprets Federal Legislation, especially with regard to the tax consequences of certain pension plan designs
  3. Administers the qualified plan system
58
Q

What is a Prohibited Transaction Exemption (PTE)?

A
  1. A PTE is an exemption issued by the DOL for an activity or transaction that would normally be prohibited in the administration of a qualified plan, such as:
    a. Payment of reasonable compensation for services rendered that are necessary for the operation of the plan.
    b. Loans to ESOPs if specific conditions are met
59
Q

What is a Cash Balance Pension Plan?

A
  1. A Cash Balance Pension Plan is a qualified plan with predetermined, guaranteed ER contributions that earn a minimum guaranteed rate of return.
  2. Cash Balance plan best suited for larger workforces comprised of younger, middle income wage earners.
  3. Cash Balance Pension Plan is a DB plan covered by PBGC
60
Q

What are the ER contribution requirements of a plan featuring a QACA?

A
  1. ER must make either a nonelective contribution or a matching contribution on behalf of each NCE who is eligible to participate in the plan.
  2. The Nonelective contribution must be at least 3% of compensation for each NCE eligible as participate in the plan.

Elective Deferral Minimum Contribution %
0-1% 100% Match
Between 1-6% 50% Match

61
Q

What is a Qualified Automatic Contribution Arrangement (QACA)?

A
  1. A QACA is a feature that may be offered with a Section 401k
  2. With this feature, unless an EE elects otherwise, they must have a Qualified Percentage of Compensation Deferred on their behalf under the plan.
  3. The Actual Deferral Percentage (ADP) Test and the Actual Contribution Percentage (ACP) test will not apply to Section 401k plans with a QACA.
62
Q

What is the Ratio Percentage Test

A
  1. The Ratio Percentage Test is a coverage test applicable to Qualified Plans.
  2. Ratio Percentage Test is satisfied if the plan covers a percentage of nonhighly compensated EE’s (NCE’s) that is at least 70% of the percentage of highly compensated EE’s (HCE’s) covered.
  3. Example: If 9 out of 10 HCE’s and 139 out of 190 NCE’s benefit from a plan, the Ratio Percentage of the plan for the year is 73.2% (139/190), divided by 90% (9/10) equaling 81%, and satisfies the ratio percentage test
63
Q

What tax advantages do Stock Bonus Plan Participants receive?

A
  1. Recipient of a stock distribution will have an adjusted tax basis equal to the ER’s tax deduction. Any excess of FMV is unrealized appreciation and subject to Capital Gains when sold.
  2. Participants can defer the NUA on their share of ER securities if they receive the distribution in stock as a lump sum. The NUR appreciation is taxed as Capital Gains when the participant or beneficiary sells the stock.
  3. Upon distribution, the participant recognizes ordinary income equal to the extent of the deduction that the ER took at the time of contribution. Any further appreciation is subject to capital gains if stock is taken as a distribution. If the distribution is in cash, the entire distribution is subject to ordinary income tax. Normal rollover rules and withholding rules apply.
64
Q

Exceptions to the early distribution penalty to all qualified plans and Section 403b plans?

**NOT APPLICABLE TO IRA’S

A
  1. The distributions are part of substantially equal, periodic payments made at least annually, over the life expectancy of the participant or the participant and a designated beneficiary. THE PARTICIPANT MUST SEPARATE FROM SERVICE before beginning the substantially equal distributions.
  2. Made after separation from service after reaching age 55.
  3. Made to a qualified family member under a QDRO

** NONE of these EXCEPTIONS Apply to IRA’s.

65
Q

Elective Deferrals for 401k

A
  1. Not currently taxable to EE
  2. Subject to FICA and FUTA
  3. Nonelective ER contributions and ER Elective contributions are deductible by ER for Federal Income Tax up to 25% of total covered compensation.
66
Q

What is the max. disparity of SS integration and a Defined Contribution Plan?

A

The max. disparity between the base amount and the excess amount for SS Integration of DC plan is the lesser of:

1) Twice the Base Amount, or
2) The Base Amount plus 5.7%

Example: If the base amount is 3% the max. excess amount is 6%. If the base amount is 10%, the max. excess amount is 15.7%.

67
Q

ERISA

A

ERISA is the Federal Legislation that governs the nontax aspects of retirement plans and other EE benefits.

ERISA is intended to protect retirement interest of plan participants.

ERISA established equitable standards and curtailed potential plan abuse.

68
Q

What are Non-Qualified Plans?

A
  1. NQ’s are not subject to the same ERISA rules as qualified plans.
  2. Do not benefit from the tax advantages that apply to qualified plans and tax advantage plans
  3. Generally discriminate in favor of the HCE’s
  4. Are used to provide benefits to key EE’s beyond the Section 415 plan limits
69
Q

What is a Section 457?

A
  1. Section 457 is a deferred Compensation Plan of Gov Units and Agencies, and Non church Controlled, Tax Exempt Organizations.
  2. Section 457 plan can be discriminatory and there are no rules regarding minimum coverage.
70
Q

Are distributions from a SEP eligible for 10 year forward averaging?

A

No- SEp distributions are not eligible for ten year forward averagiing because a SEP is not a qualified plan

71
Q

What is a Money Purchase Pension Plan?

A
  1. DC Pension Plan where each participant has an individual account into which the ER makes a mandatory contribution, based on a specified percentage of the participant’s compensation.
  2. With Money Purchase Plans, no withdrawals are permitted prior to retirement, death, disability or termination of employment;
  3. The plans do not require actuarial services.
72
Q

Controlled Groups

A
  1. ER’s that have a significant degree of common ownership will be treated as a single ER for purposes of qualification under IRC Section 401, ER Deduction, Participation (Coverage), Vesting, Limits on Contributions or Benefits, Top-Heavy Rules, and limits of SEPs.
  2. Types of Controlled Groups
    a. Brother-sister
    b. Parent-subsidiary
73
Q

What is a SEP

A
  1. A SEP is an ER sponsored individual retirement account similar to a Qualified Profit Sharing Plan (Requires a Written Document)
  2. SEP combines the simplicity of design with a high degree of flexibility from the ER’s perspective
  3. A SEP is an ER agreement to contribute on a non discriminatory basis to IRA’s opened and maintained by EE’s.
  4. NO EE Elective Deferrals
  5. ER contributions are discretionary
  6. Limits: 25% of compensation limited to $255k or $51k
  7. All Contributions are Fully Vested to EE’s
  8. EE’s can select investments
  9. SEP can be integrated with SS
  10. SARSEP cannot be integrated with SS
  11. SEPS maybe established by: C Corp, S corp, Partnerships, LLCs, and Sole Proprietorships
74
Q

SEP Plan Requirements

A
  1. Cover all EE’s who are least 21 and have worked for ER during 3 out of 5 calendar years
  2. Part-time employment counts in determining service
  3. Contributions need not be made for EE’s whose compensation for calendar year was less than $550.
  4. The plan can exclude EE’s who are members of collective bargaining units is retirement benefits have been the subject of good faith bargaining.
75
Q

SEP with other plans

A

If ER maintains a SEP and also maintains a regular qualified plan, contributions to the SEP plan reduce the amount that can be deducted for contributions to the regular plan.

**Investments in a SEP are limited to same investment in an IRA (NO Collectibles and No Insurance)

76
Q

SEP Participation and Trad IRA’s

A

Participation in a SEP plan counts as an active participant status for purpose of determining the deductibility of separate IRA contributions.

77
Q

Target or other Age Weighted Plans

A
  1. Allows for higher contribution levels (as a percentage of compensation) for older plan entrants.
  2. Traditional Target Plan is an Age Weighted Money Purchase Pension Plan. It’s a hybrid between a DC and DB plan.
  3. The age based profit sharing plan uses an age-weighted factor in the allocation formula. Because the plan allocations are age-weighted, older plan entrants are favored.
78
Q

What is considered earned income for purposes of Keogh plan contribution?

A

Earned income is the self-employed individual’s net income from the business (IRS Form Schedule C or K-1), after all deductions, including the deduction for the Keogh plan contribution.

A deduction of half of the taxpayer’s self-employment tax must be taken before determining the Keogh deduction.

79
Q

Guidelines for Loans from Qualified Plans?

A
  1. All loans from qualified plans must be repaid within 5 years, (except mortgage loans)
  2. Loans are limited to one half of vested account balance and cannot exceed $50k. However, when account balance is less than $20k, loans up to $10k are available.
  3. Loans are advantageous because they are not subject to 10% early w/d penalty, unless somehow re-characterized as distributions.
80
Q

What are the minimum deferral requirements of a plan featuring a QACA?

A

The qualified percentage cannot exceed 10% and must be at least equal to the following:

Applicable Period Minimum Contribution Percentage
First Year 3%
Second Year 4%
Third Year 5%
Fourth Year 6%

81
Q

Are distributions from an IRA eligible for ten-year forward averaging?

A

No-

82
Q

Distributions from a 457?

A
  1. The calendar year in which the person turns 70.5
  2. Separation of sevice
  3. Unforseeable Emergency as defined by Treasury Regulations
  4. In-service w/d’s are allowed for accounts less than or equal to $3,500
83
Q

What are the three retirement needs calculation Models?

A
  1. Annuity Model
  2. Capital Preservation Model
  3. Purchasing Power Preservation Model
84
Q

Tax Treatment of converting Trad IRA into Roth?

A
  1. Converted amount treated as a distribution from a Trad. IRA or Qualified Plan and included in gross income for the year in which the distribution occurs.
  2. Converted amounts that are a return of basis are not included in income.
  3. The 10% early withdrawal penalty under the IRC Section 72t does not apply to the taxable conversion
85
Q

What Social Security survivor’s benefits are available if the insured’s status is currently insured?

A
  1. Lump sum benefit of $255 to spouse or children (only one survivor will receive benefit)
  2. A child’s benefit if the child is under the age of 18 (high school student under age 19)
  3. A surviving spouse benefit if children are under age 16
86
Q

What types of individuals can provide services to a plan without being considered a fiduciary?

A 
Accountants
Actuaries
Attorneys
Insurance Agents
Consultants
87
Q

The Three primary assumptions made in any retirement needs Analysis calculation are:

A
  1. Anticipated annual rate of inflation
  2. Projected rate of annual investment return
  3. Client’s age at retirement and anticipated life expectancy
88
Q

What are the eligibility requirements for SS Disability Benefits?

A
  1. If disabled before age 24, an individual must have 6 credits of coverage in the 3 year period ending with the disability.
  2. If 24-30, the individual must have worked 50% of the time since age 21.
  3. If 30+, individual must be fully insured and must have worked 20 of the last 40 quarters.
  4. Individual must meet the ANY OCCUPATION definition of disability, which must be expected to last at least 12 months or result in death.
89
Q

What the Advantages of a SEP

A
  1. Can be adopted by completing a simple IRS Form
  2. EE’s accounts are always 100% vested
  3. SEPs provide as much, or more, flexibility in the amount and timing of contributions as a qualified profit sharing plan
  4. Individual retirement accounts allow participants to select their own investments and benefit from good investment results if chosen wisely.
90
Q

What are the minimum funding requirements for TOP HEAVY Plans?

A
  1. DB Top Heavy plans must provide a minimum benefit accrual of 2% multiplied by the number of years of service up to 20%
  2. DC Top Heavy plans require a minimum contribution (including forfeitures allocated) of at least 3% of compensation for the yeaer(s) in which the plan is top heavy.
  3. A lower minimum contribution is permissible if no key EE is allocated as much as 3% of compensation, and non-key EE’s are allocated a percentage equal to the highest percentage of compensation allocated to any Key EE
91
Q

What is the reduction of SS retirement benefits if the beneficiary continues to work?

A
  1. Has not reached NRA - benefits reduced $1 for every $2 of earnings over the threshold
  2. In the year beneficiary reaches NRA, benefits are reduced $1 for every $3 of earnings over threshold
  3. If beneficiary reaches NRA, benefits are not reduced for earnings.
92
Q

What are parties in interest?

A

Parties in interest are those individuals and entities who are limited in, or excluded from, transactions with qualified plans.

93
Q

What is 5 year cliff vesting?

A
  1. DB plan with 5 year cliff vesting, no vesting is required before 5 years of service. After 5 years of service, 100% vesting is required.
    a. If Plan is Top Heavy, 3 year cliff vesting must replace the 5 year vesting.
  2. DC plan can not use 5 Year Cliff Vesting
94
Q

What is required for a wavier of a qualified plan joint and survivor annuity?

A

A waiver of a joint and survivor annuity (before or at retirement) requires consent in writing by spouse and must be witness by a notary or Official of the Plan.

The Waiver is IRREVOCABLE

95
Q

Top Heavy Plan

A
  1. A top heavy plan is one that provides more than 60% of it’s aggregate accrued benefits or account balances to key EE’s
96
Q

What is the exception to a QACA?

A

Automatic deferrals may be applied, without taking into account any EE’s eligible to participate immediately before the date on which the automatic deferral arrangement is added to the plan, if the EE:

  1. Had an election in effect on such date to participate at a previously stated amount
  2. Elected not to participate in the arrangment.
97
Q

What are the tax implications of ER /EE contributions to a TDA/403b/TSA

A
  1. EE contributions not currently taxed on either salary reduction amounts or ER contributions under a TSA/403b/TDA
  2. ER contributions are not deductible by ER, because ER is a tax-exempt Org. (tax exempt organizations do not pay taxes or have deductions)
98
Q

What is the difference between a KEOGH and other qualified plans

A

Keogh plans cover self-employed individuals who are not technically EE’s

The concept of earned income takes the place of compensation in applying the qualified plan rules in Keogh planes

99
Q

What are the types of Keogh Plans

A

Profit sharing Plans
Money Purchase Plans
Target Benefit Plans which permits funding based on age
Defined Benefit Plans

100
Q

A New Comparability Plan Description

A
  1. DC Plan that is either a Money Purchase Pension or a discretionary Profit Sharing Plan
    a. More expensive to administer
    b. Type of cross test plan
    c. NHC EE’s receive certain minimum contributions
  2. Common design factors is an allocation or contribution formula that results in one group/class of EE receiving a given contribution level and another group receiving a different level.
  3. Works well when owners are at different ages, thus precluding an aged-based plan.
  4. All features of the plan are aggregated and must pass the nondiscrimination test.
101
Q

Age Based Profit Sharing Plans and New Comparability Plans are tested for…

A

Tested for Discrimination based on benefits as opposed to contributions.

102
Q

Section 401k Plans are tested for discrimination …

A

regarding deferrals

103
Q

ERISA Protection for 403b Plans

A

Section 403b Plans may be protected by EIRSA

104
Q

Tax Reporting Status for Owners of Various Business Entity

A

Types of Entities Owner-Tax System

Sole Proprietor Self- Employed (1099)
Partnership Self - Employed (1099)
Limited Liability Comp LLC W-2 or Self Employed (1099)
C Corporation Employee W-2
S Corporation Employee W-2

105
Q

Establishment and Plan Documents for Qualified Plans

A
  1. Qualified plans must be established by Dec 31
  2. Must be in writing
  3. Plans are often submitted to IRS for determination letter
  4. Plan must be communicated to EE’s
  5. Plan must not allow or have prohibited transactions
106
Q

Qualified Plan Eligibility

A
  1. 21 and 1 (1000 hours in 12 consecutive months)
  2. EXCEPTION: May required 2 years but plan must then have 100% immediate vesting
  3. 401K CANNOT use 2 years of service eligibility requirement
  4. Plan cannot make EE wait more than 6 months
  5. Qualified Plans have at least 2 entrance dates each year
107
Q

Highly Compensated

A
  1. Greater than 5% Owner of ER anytime during the year, or
  2. Compensation greater than $115,000
    a. ER election known as “TOP PAID ELECTION” top 20% compensation considered HCE. (THIS election does not remove EE from HCE group if EE is also greater than 5% owner)
  3. Family attribution rules apply to determine 5% and 1% owners
108
Q

Qualified Plan Coverage Definition

A

For purposes of the coverage test, being covered means an EE is benefiting under the plan.

Section 401k plans - an EE is considered covered as long as he is eligible to defer salary contributions into the plan.

**Big difference between being an Active Participant and Being Covered for determining deductibility of Traditional IRA contributions.

109
Q

The Most Generous Vesting Schedule would be…

The Least Generous Vesting Schedule would be…

A
  1. The most generous Vesting Schedule would be 100%, Immediate!
  2. The least generous Vesting Schedule would be Five Yr Cliff!
110
Q

All of these are true when it comes to TOP HEAVY Plans

A
  1. DB plans must provide non-key EE’s with a minimum benefit of 2% times the number of years of service up to 20%
  2. In a top heavy plan, more than 60% of it’s aggregate accrued benefits or account balances are provided to key EE;s, which may or may not be HCE’s.
  3. Two issues for top heavy plans are vesting and minimum funding
  4. These plans must use either 3 yr cliff or 2-6 yr graded vesting

Retirement Plans (2 decks)

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