Retirement Planning Flashcards
Important Numbers for 2022
- Covered Compensation
- Defined Benefit Maximum Limit
- Defined Contribution Maximum Limit
- 401(k), SARSEP, 457, 403(b) Employee Deferral Limit
- Highly Compensated Employee
- Key Employee
- Social Security Wage Base
Important Numbers for 2022
Covered Compensation - $305,000
Defined Benefit Maximum Limit - $245,000
Defined Contribution Maximum Limit - $61,000
401(k), SARSEP, 457, 403(b) Employee Deferral Limit - $20,500
Highly Compensated Employee - $135,000
Key Employee Officer - $200,000
Social Security Wage Base - $147,000
Key Employee 1% Ownership - $150,000
Pension Plans vs. Profit-Sharing Plans
Legal Promise of the Plan
Are in-service withdrawals permitted?
Is the plan subject to mandatory funding standards?
Percent of plan assets allowed to be invested in employer securities
Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity?
Pension Plans
Legal Promise of the Plan - Paying a pension at retirement
Are in-service withdrawals permitted? - No*
Is the plan subject to mandatory funding standards? - Yes**
Percent of plan assets allowed to be invested in employer securities - 10%
Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity? - Yes
Profit-Sharing Plans
Legal Promise of the Plan - Deferral of compensation and taxation
Are in-service withdrawals permitted? - Yes (after two years) if plan document permits
Is the plan subject to mandatory funding standards? - No
Percent of plan assets allowed to be invested in employer securities - Up to 100%
Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity? - No
Defined Benefit vs. Defined Contribution Plans
What is the annual employer contribution limit?
Who assumes the investment risk?
How are forfeitures allocated?
Defined Benefit Plans
What is the annual employer contribution limit? - Not less than the unfunded current liability
Who assumes the investment risk? - Employer
How are forfeitures allocated? - Reduce plan costs
Defined Contribution Plans
What is the annual employer deductible contribution limit? - 25% of covered compensation
Who assumes the investment risk? - Employee
How are forfeitures allocated? - Reduce plan costs or allocate to other participants
Defined Benefit vs. Defined Contribution Plans (continued)
Is the plan subject to Pension Benefit Guaranty Corporation (PBGC) coverage?
Does the plan have separate investment accounts?
Can credit be given for prior service for the purpose of benefits?
Defined Benefit Plans
Is the plan subject to Pension Benefit Guaranty Corporation (PBGC) coverage? - Yes (except professional firms with less than 25 employees)*
Does the plan have separate investment accounts? - No, they are commingled
Can credit be given for prior service for the purpose of benefits? - Yes
Defined Contribution Plans
Is the plan subject to Pension Benefit Guaranty Corporation (PBGC) coverage? - No
Does the plan have separate investment accounts? - Yes, they are usually separate
Can credit be given for prior service for the purpose of benefits? - No
How are payroll taxes treated regarding plan contributions?
Employers and employees are exempt from payroll taxes on contributions to a qualified retirement plan, providing up to a 15.3 percent (12.4 percent OASDI and 2.9 percent Medicare tax) savings on taxes for employer contributions into a qualified plan.
This payroll tax exclusion does not apply to employee elective deferrals to retirement plans such as 401(k), 403(b), SIMPLEs, SARSEPs, and 457 plans.
What are the standard eligibility requirements for qualified plans?
An employee is considered eligible to participate in the plan after completing a period of service that extends beyond the later of either the employee’s attaining age 21 or the completion of one year of service (defined as a 12 month period in which the employee works at least 1,000 hours).
Under the SECURE Act, part-time employees will be eligible to participate if they have completed at least 500 hours of service each year for three consecutive years and are at least 21 years of age by the last day of the same three-year period.
For eligibility purposes, 12-month periods beginning before January 1, 2021 are not taken into account. Therefore, for a calendar year plan, if a part-time employee meets the above requirements for 2021, 2022 and 2023, they will be eligible to enter the plan effective January 1, 2024.
What is the standard exception to the special eligibility rules?
As an exception to the eligibility rule, a qualified retirement plan may require that an employee complete two years of service to be eligible for participation in the qualified retirement plan.
If the employer elects this special exception for its qualified retirement plan, then plan participants are immediately vested in their accrued benefit or account balance upon completion of two years of service. This exception is not available to 401(k)s.
Characteristics of highly compensated employees
Owner Employees
Either an owner of > 5%* for current or prior plan year
OR
Compensation in excess of $135,000 for 2022** for prior plan year
Nonowner Employees
Compensation in excess of $135,000 for 2022** for prior plan year
* 5% ownership may include ownership by spouse, children, grandchildren, or parents (attribution rules).
** If special employer election is made, add “and in top 20% of employees ranked by salary.”
What is the Defined Benefit 50/40 Test?
The 50/40 coverage test requires the defined benefit plan to benefit the lesser of 50 nonexcludable (eligible) employees or 40 percent of all nonexcludable (eligible) employees on each day of the plan year.
**To remember that it’s 50 employees or 40%, remember “people come first”.
Characteristics of a Key Employee
A key (decision-makers as opposed to just highly paid) employee is any employee who is any one or more of the following:
A greater than five percent owner, or
A greater than one percent owner with compensation in excess of $150,000 (not indexed), or
An officer with compensation in excess of $200,000 for 2022.
Characteristics and Requirements of a Top Heavy Defined Benefit Plan
Definition
Funding
Vesting
Characteristics and Requirements of a Top Heavy Defined Benefit Plan
Definition - More than 60% of the total accrued benefits of the defined benefit plan are for the benefit of key employees.
Funding - Must be at least 2% x years of service x compensation factor.
Vesting - The plan participant’s benefits must vest at least as rapidly as a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule.
Characteristics and Requirements of a Top Heavy Defined Contribution Plan
Definition
Funding
Vesting
Characteristics and Requirements of a Top Heavy Defined Contribution Plan
Definition - More than 60% of the total account balances of the defined contribution plan are for the benefit of key employees.
Funding - 3% minimum to all eligible employees or less if less provided to the key employees.
Vesting - The plan participant’s benefits must vest at least as rapidly as a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule.
Defined Benefit Maximum Plan Limitations
Covered Compensation
$305,000 for 2022
Maximum Benefit
Lesser of:
$245,000 for 2022 or
Average of 3 highest consecutive years of compensation (or as defined in the plan summary document).
Defined Contribution Maximum Plan Limitations
Covered Compensation
$305,000 for 2022
Maximum Benefit
Lesser of:
100% of compensation or
$61,000 for 2022 (not including catch-up provision for taxpayers 50 +)
What is the 25 Percent Test?
The 25 percent test consists of two tests, a 25 percent test and a 50 percent test. The test used depends upon the type of life insurance provided by the plan.
If a term insurance or universal life insurance policy is purchased within the qualified plan, the aggregate premiums paid for the life insurance policy cannot exceed 25 percent of the employer’s aggregate contributions to the participant’s account.
If a whole life insurance policy is purchased within a qualified plan, the aggregate premiums paid for the whole life insurance policy cannot exceed 50 percent of the employer’s aggregate contributions to the participant’s account.
Characteristics of Defined Benefit Pension Plans
Actuary (Annually)
Investment Risk Borne by
Treatment of Forfeitures
PBGC Insurance
Credit for Prior Service
Social Security Integration
Separate Investment Accounts
Favors Younger/Older
Characteristics of Defined Benefit Pension Plans
Actuary (Annually) - Yes
Investment Risk Borne by - Employer
Treatment of Forfeitures - Must reduce plan costs
PBGC Insurance - Yes
Credit for Prior Service - Yes
Social Security Integration - Offset or excess
Separate Investment Accounts - No, commingled
Favors Younger/Older - Older
Characteristics of Defined Contribution Pension Plans
Actuary (Annually)
Investment Risk Borne by
Treatment of Forfeitures
PBGC Insurance
Credit for Prior Service
Social Security Integration
Separate Investment Accounts
Favors Younger/Older
Characteristics of Defined Contribution Pension Plans
Actuary (Annually) - No (except target benefit at inception)
Investment Risk Borne by - Employee
Treatment of Forfeitures - Reduce plan costs or allocate to other plan participants
PBGC Insurance - No
Credit for Prior Service - No
Social Security Integration - Excess only
Separate Investment Accounts - Yes, separate (usually)
Favors Younger/Older - Younger
Characteristics of a Pension Plan
Legal Promise of the Plan
Are in-service withdrawals permitted?
Is the plan subject to mandatory funding standards?
Percent of plan assets allowed to be invested in employer securities
Employer annual contribution limit of covered compensation
Characteristics of a Pension Plan
Legal Promise of the Plan - Paying a pension at retirement
Are in-service withdrawals permitted? - No*
Is the plan subject to mandatory funding standards? - Yes
Percent of plan assets allowed to be invested in employer securities - 10%
Employer annual contribution limit of covered compensation - 25%**
* Defined benefit pension plans may allow in-service withdrawals for participants age 59 1/2 or older as a result of the PPA 2006.
** The plan must meet minimum funding standards. Defined benefit pension plans may exceed 25%.
Characteristics of a Profit-Sharing Plan
Legal Promise of the Plan
Are in-service withdrawals permitted?
Is the plan subject to mandatory funding standards?
Percent of plan assets allowed to be invested in employer securities
Employer annual contribution limit of covered compensation
Characteristics of a Profit-Sharing Plan
Legal Promise of the Plan - Deferral of compensation and thus tax deferral
Are in-service withdrawals permitted? - Yes (after two years)
Is the plan subject to mandatory funding standards? - No
Percent of plan assets allowed to be invested in employer securities - 100%
Employer annual contribution limit of covered compensation - 25%
Characteristics of Permitted Disparity (Social Security Integration)
Permitted disparity is a technique or method of allocating plan contributions to employees’ accounts so that a higher contributions will be made for those employees whose compensation is in excess of the Social Security wage base.
Profit sharing plans only allow the excess method to be used.
The excess rate is limited to the LESSER of twice the base rate or a difference of 5.7 percent. As a result the excess rate is generally 5.7 percent higher than the base rate.
List the entities which may establish a 401(k) plan.
Entities Which May Establish a 401(k) Plan
Corporations
Partnerships
LLCs
Proprietorships
Tax-exempt entities
Characteristics of a Roth IRA
Contribution Limit
Catch-Up Contribution Limit
Income Limit
Conversion from a traditional IRA account allowed?
Available for loans?
Qualified Distributions (not subject to tax or penalty)
Distributions that are not qualified
Required Distributions
Characteristics of a Roth IRA 2022
Contribution Limit - $6,000
Catch-Up Contribution Limit - $1,000
Income Limit - Married: $204k - $214k, Single: $129k - $144k, Married filed separately: $10,000 modified AGI
Conversion from a traditional IRA account allowed? - Yes
Available for loans? - No
Qualified Distributions (not subject to tax or penalty) - To be qualified, the account must be held for at least 5 years and the distribution must be made on account of a first time home purchase, disability, death, or on or after the attainment of age 59½.
Distributions that are not qualified - Specific Ordering Rules: contributions first, conversions second, and earnings third
Required Distributions - Not subject to minimum distributions during owner’s lifetime
Note: There is no income limit to convert to a Roth.
Characteristics of a Roth 401(k) Account
Contribution Limit
Catch-Up Contribution Limit
Income Limit
Conversion from a traditional IRA account allowed?
Available for loans?
Qualified Distributions (not subject to tax or penalty)
Distributions that are not qualified
Required Distributions
Characteristics of a Roth 401(k) Account 2022
Contribution Limit - $20,500
Catch-Up Contribution Limit - $6,500
Income Limit - No income limits. However, participant must have income for the deferral.
Conversion from a traditional IRA account allowed? - No
Available for loans? - Yes
Qualified Distributions (not subject to tax or penalty) - To be qualified, the account must be held for at least 5 years and the distribution must be made on account of disability, death, or on or after the attainment of age 59½.
Distributions that are not qualified - Distribution is determined under Section 72. Each distribution will consist of basis and earnings.
Required Distributions - Follows minimum distribution rules (i.e., distributions must begin by April 1 in the year following the year in which the participant reaches 72 (those 70 1/2 after 12/31/19).
Summarize various permissible levels of ADP for highly compensated employees based on contributions by non-highly compensated employees.
ADP Schedule
If the ADP for NHC Employees is > The Permissible ADP for HC Employees is:
0% to 2% > 2 times ADP for NHCs
2% to 8% > 2% plus ADP for NHCs
8% and over > 1.25 times ADP for NHCs
Section 401(k) plans.
Deferrals include:
Voluntary pretax employee contributions.
Voluntary after-tax Roth 401(k) employee contributions.
What are the 4 alternative remedies available if a plan fails the ADP or ACP tests?
Corrective distributions - Requires a return of contributions to the highly compensated.
Recharacterization - Requires excess deferrals to be recharacterized as after tax contributions.
Qualified non-elective contributions (QNEC) - The employer makes a contribution to all non-highly compensated employees’ accounts.
Qualified matching contributions (QMC) - The employer contributes to the non-highly compensated employees who made a contribution.
Requirements of the Safe Harbor Match
If the employer elects to use a match rather than the non-elective contribution, the standard safe harbor match formula requires the employer to match 100 percent of the first three percent of employee elective deferrals and 50 percent of employee elective deferrals greater than three percent and less than five percent. If they choose todo a nonelective then it will be just 3%.
Safe Harbor plans need a plan election, not simply making the appropriate match
Examples of Distributions that are Allowed for CODA Type Plans
The retirement, death*, or separation of service of the participant and attainment of age 55*;
The termination of the plan without the establishment of another plan;
Certain acquisitions of the company or company assets;
The attainment of age 59½ by the participant*; or
Certain hardships.
Distributions on account of any of these items are taxable as ordinary income to the extent the participant does not have an adjusted basis in the 401(k) plan and may also be subject to a 10 percent penalty.
*Note: Not subject to 10% penalty.
Characteristics of Stock Bonus Plans
Plan Establishment
Date of Contribution
Type of Contributions
Deductible Contribution Limit
Valuation
Eligibility
Allocation Method
Characteristics of Stock Bonus Plans
Plan Establishment - December 31
Date of Contribution - Due date of tax return plus extensions
Type of Contributions - Generally stock
Deductible Contribution Limit - 25% of covered compensation
Valuation - Generally needed annually
Eligibility - Same as other Qualified Plans (age 21 and 1 year of service or 2 years with 100% vesting)
Allocation Method - % of compensation or formula based on age, service of classification
Characteristics of Stock Bonus Plans (continued)
Vesting
Portfolio Diversification
Voting Rights
Type of Distributions
In-Service Withdrawals
Loans
Taxation of Distributions
Characteristics of Stock Bonus Plans (continued)
Vesting - Same as other Defined Contribution Qualified Plans (3-year cliff or 2 to 6 year graduated vesting)**
Portfolio Diversification - No***
Voting Rights - Generally yes
Type of Distributions - Generally in stock
In-Service Withdrawals - May be allowed after two years
Loans - May be allowed (but not usually)
Taxation of Distributions - Lump-sum distributions will qualify for NUA treatment. Other distributions are treated as ordinary income.
Characteristics of Profit Sharing Plans
Plan Establishment
Date of Contribution
Type of Contributions
Deductible Contribution Limit
Valuation
Eligibility
Allocation Method
Characteristics of Profit Sharing Plans
Plan Establishment - December 31
Date of Contribution - Due date of tax return plus extensions
Type of Contributions - Generally cash
Deductible Contribution Limit - 25% of covered compensation
Valuation - Generally unnecessary
Eligibility - Same as other Qualified Plans (age 21 and 1 year of service or 2 years with 100% vesting)
Allocation Method - % of compensation or formula based on age, service of classification
31
Characteristics of Profit Sharing Plans (continued)
Vesting
Portfolio Diversification
Voting Rights
Type of Distributions
In-Service Withdrawals
Loans
Taxation of Distributions
Characteristics of Profit Sharing Plans (continued)
Vesting - Same as other Defined Contribution Qualified Plans (3-year cliff or 2 to 6 year graduated vesting)**
Portfolio Diversification - Generally yes***
Voting Rights - Generally no
Type of Distributions - Generally in cash
In-Service Withdrawals - May be allowed after two years
Loans - May be allowed (but not usually)
Taxation of Distributions - Generally full distribution is ordinary income
What are the requirements to qualify for nonrecognition of gain treatment when an owner sells all/or part of a business to an ESOP?
The ESOP must own at least 30 percent of the corporation’s stock immediately after the sale.
The seller or sellers must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale and hold such securities three years.
Qualified replacement securities are securities in a domestic corporation, including stocks, bonds, debentures, or warrants, which receive no more than 25 percent of their income from passive investments. The qualified replacement securities can be in the form of stock in an S Corporation.
The corporation that establishes the ESOP must have no class of stock outstanding that is tradable on an established securities market.
The ESOP may not sell the stock acquired through the rollover transaction for three years.
Beneficiary’s distribution options: Before RMD
Eligible Designated Beneficiary
Designated Beneficiary (non-eligible)
Non-Designated Beneficiary
BEFORE RMDS:
Spouse beneficiary—if the surviving spouse is the EDB of the plan (meaning the surviving spouse is the sole beneficiary). Note that these are the same rules as before the SECURE Act except the age is 72 and the 10-year rule replaces the five-year rule for deaths prior to RBD.
- ) The surviving spouse can receive distributions over the surviving spouse’s remaining single-life expectancy, recalculated each year.
a. ) Distributions must begin in the year in which the original owner would have attained age 72. - ) The surviving spouse can roll the plan balance over and defer distributions until the surviving spouse attains age 72.
- ) The surviving spouse can elect to distribute the entire account balance within 10 years after the year of the owner’s death (10-year rule). a.) This election can be made only if the plan provisions allow the 10-year rule.
Nonspouse EDB—if the EDB is someone other than the surviving spouse
- ) The distribution period is the remaining life expectancy of the EDB
- ) Life expectancy is calculated using the age of the designated beneficiary in the year following the year of the decedent’s death, reduced by one for each subsequent year.
- The beneficiary can elect to distribute the entire account balance as a single lump sum or in installments but fully distributed before the end of the 10th year following the year of the participant-owner’s death (10-year rule)
Designated beneficiary—if the person inheriting the account is not an EDB (for example, a healthy adult child of the decedent is not an EDB), then the RMD rule is always the 10-year rule. This is true whether the decedent passed before or after the RBD. This provision is expected to raise $15.7 billion of revenue for the federal government between 2020 and the end of 2029. Many state governments will also see increased revenue due to this provision. On the other hand, this is a dramatically easier test question. A person who is not an EDB inherits a retirement account or IRA. The 10-year rule always sets the RMDs
No designated beneficiary—if no designated beneficiary has been named by September 30 of the year following the owner’s death (or the beneficiary is the decedent’s estate, a charity, or certain trusts)
1.) The account must be fully distributed before December 31 of the fifth year following the year of the participant-owner’s death (five-year rule).
KEOGH EXAMPLE
.9235X15.3 and this is the amount you use to get total tax divide that by 2 and that is the durable protection that will get you net SE Income. Schedule C net income is not the same thing as SE net income
Characteristics of Unfunded Promise to Pay, Rabbi Trust, and Secular Trust for:
Funded with assets
Funded (for purposes of ERISA)
Risk of forfeiture without employer financial instability
Risk of forfeiture if employer is insolvent
Taxable
Remember that if you see a question that talks about is it technically funded from ERISAs standpoint, you can say that a rabbi trust is not Since it is subject to the Creditor claims. Remember, the difference between what Funded vs unfunded means:
- Funded: assets are set aside from the claims of the employer’s creditors. Not currently taxable to the employee if there is- Assets are owned by the company and are subject to its creditors.
- Unfunded: informal funding using life insurance, annuities, mutual funds, or general investments. Assets are owned by the company and are subject to its creditors.
From here now that you see the difference you can now apply the Rabbi and Secular trust are an overlay to these rules.
- Rabi: Rabbi trust.
- A trust set up to hold property used for funding a deferred compensation plan where the funds set aside are subject to the claims of the employer’s general creditors. Making it unfunded in the eyes of ERISA - Secular Trust:
- Funds inside the trust are not subject to the claims of the employer’s creditors.
- Provides considerable security of benefits for employees
Disqualifying ISO Position:
Disqualifying dispositions of ISOs
- ) A disqualifying disposition occurs when an employee disposes of ISO stock before the holding period requirement expires. If a disqualifying disposition occurs, the employee will generally recognize as W-2 compensation income the difference between the FMV of the stock at exercise and the exercise price of the option. The gain will not be subject to payroll taxes.
- ) The employee recognizes the income in the tax year during which the disquali-fying disposition occurs. The recognized ordinary income will be added to the ISO stock’s basis to determine the capital gain that must be recognized because of the disqualifying disposition.
- ) If the FMV of the stock on the date of sale is less than the FMV on the date of exercise, there will be no capital gain or loss at sale.
Social Security Taxation
