Retirement Planning Flashcards
Retirement needs analysis:
Step 1:
Step 2:
Step 1: Inflate the need by the inflation rate. Straight forward FV calculation to see what the inflated need will be.
Step 2: BEG mode. Use the real rate of return to see the full amount needed to fund all retirement years. Step 1 becomes PMT. Solve for PV.
Same first two steps as education!
What does “In todays dollars” mean?
Inflation adjusted interest rate (real rate).
Calculator steps to follow: WRITE THIS OUT. DONT MISS THESE.
periods I BEG/END // N, I/YR, PV, PMT, FV
Should a financial planner over estimate a clients’ retirement period?
Yes. Add 5-10 years. This is because of poor health, or lengthened retirement periods.
What is an alternative to buying health LTC?
Selling residence and buying into a life-care community.
Monte carlo
What is a Pension max?
Typically used when one’s spouse is younger.
Pure life payout provides for highest payout, but payout ends at death with nothing to spouse.
Pension max application is taking the pure life rather than the lower JT and survivor payout, and then using the difference to fund life insurance to provide for the surviving spouse.
Wicked Smaht.
Alternatives to compensate for retirement cash-flow shortfalls
- Save more
- Increase risk for higher returns
- Retire later, this also allows to save more*
- Work part-time in retirement years
What is Social Security?
Old Age Survivor and Disability Insurance
What does the Social Security Act cover?
Social Security, Medicare, Federal Unemployment, Supplemental Security Income
Fully Insured vs Currently Insured
40 quarters of coverage vs. 6 quarters of coverage.
No more than 4 credits per calendar year.
Fully insured workers are eligible for both survivor benefits and retirement benefits.
Currently insured workers are eligible for lump sum DB of $255 (spouse or dependent), surviving spouse benefit if caring for a child under 16, and a Dependent benefit.
RBD for Qualified plan/403(b)/457
Later of April 1st following attainment of 73, or RETIRED.
If GREATER than 5% owner, must begin distributions by April 1st following attainment of 73. Same as IRA.
Although greater than 5% owners must take RMDs the year after turning 73, they may continue to contribute to their plan until they retire.
IRA exceptions to 10% penalty for early distributions before 59.5 (9)
- Death
- Disability
- SUBSTANTIALLY EQUAL PAYMENTS
- FIRST HOME PURCHASE expense up to $10,000 (not primary)
- QUALIFIED EDUCATION EXPENSE
- Medical expense greater than 10% AGI
- Distribution used to pay insurance premium after separation from employment (subject to 10% AGI unless received unemployment comp for 12 weeks)
- $5,000 withdrawal for birth/adoption of child
- Federally declared disaster (limited)
Main differences from QP:
- SUBSTANTIALLY EQUAL PAYMENTS
- FIRST home purchase expense up to $10,000 (not primary)
- Qualified education expense
QUALIFIED PLAN exceptions to 10% penalty for early distributions before 59.5 (9)
- Death
- Disability
- Substantially equal periodic payments FOLLOWING SEPARATION FROM SERVICE
- DISTRIBUTION FOLLOWING SEPARATION FROM SERVICE AT AGE 55.
- DISTRIBUTION IN ACCORDANCE WITH A QDRO.
- Medical expenses in excess of 7.5% AGI OR health insurance costs while unemployed
- Distribution used to pay insurance premium after separation from employment (must file for unemployment)
- $5,000 withdrawal for birth/adoption of a child
- Federal declared disaster (limited)
Main differences from IRA:
- Substantially equal periodic payments FOLLOWING SEPARATION FROM SERVICE
- Distribution following separation from service at age 55
- Distribution in accordance with QDRO
Types of retirement plans (Right side of roadmap) 6
- SIMPLE
- SEP
- SARSEP
- 403(b)/TSA/TDA
- 457 (operates as NQ deferred comp)
- Thrift or saving plan
SEP:
- Fixed or flexible contributions?
- Contribution percentages?
- Max contribution?
- Integrated with Social Security?
Employer sponsored plan where only the employer makes contributions to each participating employees IRA. Super easy to adopt. 5305-SEP.
- No employee salary deferrals - EMPLOYER CONTRIBUTIONS ONLY.
- Easy to adopt, flexible contributions.
- Contributions for employees must be the same percentage as the owners contribution percentage, but the “recurring and substantial” requirement does not apply.
- 25% contribution for Owner under a W-2.
- 18.59% contribution for self-employed under a 1099 (Keogh). Take net Sched. C which is less deductions, and then multiply by 18.59%.
- Maximum contribution of $66,000 of compensation ($330k max).
- Immediately vested.
- CAN BE INTEGRATED WITH SOCIAL SECURITY
- Special eligibility: 21 years old, paid at least $750, worked 3 out of 5 prior years. (Christmas tree story).
Employer that provides a SEP gains simplicity, but loses flexibility with regard to the participation requirement. Contributions for employees who qualify must be the same percentage as the owners contribution percentage.
A business of any size, even self employed can set up a SEP.
SIMPLE:
- For what type of employers?
- contribution required? If so, how is it satisfied?
- Salary reduction limit?
- Pros and Cons
- For small employers with fewer than 100 employees.
- REQUIRES mandatory employer contribution ie. employer match (immediate vesting)
- Salary reduction limit up to $15,500 (FICA) + $3,500.
- Employer cannot maintain any other plan.
- Easy to administer and funded by employee salary reductions and an employer match.
- Employer can EITHER match up to 3% of compensation, or can make a nonelective contribution of 2% of compensation for all eligible employees.
- An employer can elect a lower percentage match, not less than 1% in no more than 2 out of the 5 years ending with the current year.
- SIMPLE plans must cover any employee who earned $5,000 in any two previous years and is reasonably expected to earn $5,000 in the current year. The employee has a 60-day election period.
403(b)/TSA/TDA:
- Who’re they for?
- Can employer contribute?
- Max salary reduction and catch up?
- What are the eligible investments?
- For 501(c)(3) organizations and public schools.
- Employer can make matching contributions, employee salary deductions are subject to FICA and FUTA.
- Subject to ERISA only if EMPLOYER contributes, but if employer contributes, there could be possible vesting.
- Salary reduction limit of $22,500 + $7,500 catch-up if 50+. If employee has 15+ years of service with the same employer, can defer an additional $3,000.
- Investments are limited to annuity contracts, mutual funds and incidental life insurance. NO INDIVIDUAL SECURITIES.
Section 457 Deferred Comp Plan:
- What are they
- What is the deferral limit and catch-up?
- Can they be rolled-over?
- NQ deferred comp plans of governmental agencies and non-church controlled tax-exempt organizations (United Way).
- Deferral limit of $22,500 or 100% of comp + $7,500 catch-up if 50+ FOR GOVERNMENTAL PLANS ONLY, NOT NON-PROFITS.
- Salary deferrals NOT aggregated with 401(k), 403(b), or a SARSEP.
- Non-governmental plans can ONLY be rolled over to another 457 plan.
- Subject to QDROs
Special catch-up during the final 3 years before NRA, but cannot be used in the final year of employment. For those eligible years, the limit of deferrals is increased to the LESSER of 2 times the normal limit ($45,000) OR the sum of the otherwise applicable limit for the year + the amount by which the applicable limit in preceding years exceeded the participants actual deferral for those years.
IRA Keys:
- Loans?
- Restrictions on investments?
- Vesting?
- Early withdrawal penalty?
- RMD?
- No loans
- No life insurance
- Immediate vesting
- 59.5 not 55 for no 10% penalty
- Must take RMDs by April first after 73!
- May or may not be creditor protected depending on state.
What makes a QP a QP? (5)
- ERISA
- Vesting
- Admin costs
- Exempt from creditors
- Integrate with Social Security
Types of Qualified Plans (Top and left side of roadmap)
- Defined BEnefit Pension Plan
- MoneY Purchase Pension Plan
- CASH balance Pension Plan
- TARGET benefit Pension Plan
- Profit Sharing Plan
- Profit Sharing 401(k)
- PF SIMPLE
- Stock Bonus
- ESOP (NOT integrated with SS or cross-tested)
- KEOGH
Check roadmap on this
Defined BEnefit Pension Plan - QP:
- What is it?
- Older or younger?
- Fixed or flexible?
- Past service credits?
- Forfeitures?
- max benefit
- What else?
- Specific retirement benefit, Max $265,000.
- Favors older employee/owner.
- Fixed contribution. Company needs stable cash flow.
- Past service credits allowed.
- Forfeitures MUST be applied to reduce employer contributions.
- PBGC insured. Integrated with SS.
Cash Balance Pension Plan - QP
- Type of DB plan that provides for annual employer contributions at a specified rate to Hypothetical individual accounts for each participant.
- Employer guarantees contribution level and minimum rate of return.
MoneY Purchase Pension Plan - QP:
- How do these work?
- Max ER deduction?
- Max consideration? Max contribution?
- Fixed or flexible?
Follows a benefit formula requiring an annual employer contribution that is a flat percentage of each eligible employees comp. Only the first $330k is taken into consideration, but the max contribution is $66,000.
- Up to 25% employer deduction.
- Fixed contribution. Company needs stable cash flow.
- Maximum annual contribution is LESSOR of 100% of salary or $66,000.
Target Benefit Pension Plan - QP:
- What is it?
- Max ER deduction?
- Max contribution?
- older or younger?
- Who assumes investment risk?
DC plan where the final retirement benefit is determined by ACCOUNT BALANCE. Employee assumes investment risk like all DC plans.
- Up to 25% employer deduction.
- Fixed contribution. Company needs stable cash flow.
- Maximum annual contribution is LESSOR of 100% of salary or $66,000.
- Favors older workers.
- Employee assumes investment risk like all other DC plans.
Profit Sharing Plan - QP:
- What is it?
- Max ER deduction?
- Max contribution?
- Provisions?
- Up to 25% employer deduction.
- Flexible contributions (substantial and recurring).
- Max annual contribution is LESSOR of 100% of salary or $66,000.
- Can have 401(k) provisions. $22,500.
- Can have SIMPLE provisions (exempt from creditors).
Traditional profit sharing plans consist of employer contributions, investment returns and forfeitures. Only when a PS plan adopts 401k provisions will the employee be able to defer comp into the plan.
Stock Bonus/ESOP - QP:
- Max employer deduction?
- Fixed or flexible?
- Max contribution?
- What else?
- Up to 25% employer deduction
- Flexible contributions.
- Max annual contribution lesser of 100% of Salary or $66,000.
- 100% of contribution can be invested in company stock.
- ESOP CANNOT be integrated with Social Security or cross-tested.
- ESOP: E for Entirely invested in employer stock (almost).
Section 401(k) plan:
- What is it?
- Max deferral and ER contribution? Catch up?
- Max $22,500 deferral for participants under 50 (subject to FICA and FUTA but not federal withholding).
- Additional $7,500 catch-up for age 50 and over.
- The above limits only pertain to employee deferrals. The Employer can also contribute to the plan, but combined contributions between EE and ER are capped at $66K.
401(k), also known as a CODA, is a provision that is added to a qualified profit sharing or stock bonus plan. Participants have the option to defer compensation into the plan, or to receive the same amount as taxable cash compensation.
Keogh - QP:
- Who is it for?
- How do they function?
- What are contributions based on?
- Shortcut?
- QP only for sole proprietor and partnerships.
- May operate as a defined benefit, money purchase or profit-sharing type plan for sole props or partnerships.
- The owner employee contribution is based on net earnings ( after all deductions, including the deduction for non0owner employee plan contributions. Net Schedule C).
- Self-employment tax must be computed and a deduction of one-half of the self-employment tax must be taken before determining the Keogh deductible contribution. Shortcut below:
- If contribution 15% - multiply by 12.12% of net earnings.
- If contribution 25% - multiply by 18.59% of net earnings.
Highly Compensated Employee
- > 5%, >$150k
> 5% owner, or,
An employee earning >$150,000 in the previous year.
Second letter in highly is i, second letter in discrimination is i. The concept of HCEs relates to discrimination (ADP/ACP tests).
Key Employee: If at any time during the year.
- > 5% / Officer >$215k / >1% >$150k
If at any time during the year:
- >5% owner
- Officer with compensation of >$215,000
- >1% owner with compensation of >$150,000
Second letter in key is e, second letter in vesting is e. The concept of key employees relates to plan vesting.
Vesting: Fast / Slow
Top-heavy DB & All DC plans:
- 3 year cliff,
- 2-6 year graded
- 100% vested after 2 years participation
Non top-heavy DB plans:
- 5 year cliff,
- 3-7 year graded
- 100% vested after 2 years participation
When you see the word “retained” select a graded schedule. Employees will perceive that it is economically desirable to stay with the company at least until fully vested.
Defined Contribution Plans (Integration with Social Security)
Base % + Permitted Disparity = Excess %
- Integration level- Any dollar amount up to Social Security wage base ($160,200)
- Base % - DC plan contribution for compensation below integration level
- Permitted Disparity = LESSOR of Base OR 5.7%
- Excess % - DC plan contribution for compensation above integration level.
Defined Benefit Plans (Integration with Social Security)
Base % + Permitted Disparity = Excess %
- Integration level- Level of comp above which the excess contribution is made. Any dollar amount up to Social Security wage base ($160,200)
- Base % - DB plan contribution for compensation below integration level
- Permitted Disparity = LESSOR of Base OR 26.25% (B for Bigger)
- Excess % - DB plan contribution for compensation above integration level.
Multiple Plans 2023 Elective Deferrals
Elective deferrals to multiple plans with more than one employer are aggregated.
- 401(k)/403(b)/SIMPLE/SARSEP = $22,500 + $7,500
- SIMPLE and other SIMPLE = $15,500 + $3,500
Note than 457 plans are NOT part of aggregated amounts. Operate as NQ deferred comp.
Also note that for unrelated employers that offer Pension plans, the contributions are not aggregate. Can have 2+ with full limits
Life Insurance as a Funding Vehicle:
- What are the two tests?
- Must be incidental to the primary purpose of the plan, and must meet either of the following to pass that test:
- Ordinary Whole Life: 50%
- Term: 25%
- Universal: 25%
- The participants insured death benefit must be no more than 100 times the expected monthly benefit. DB plans typically use the 100 times limit.
DC plans normally use % test
DB plans normally use 100 times test
RBD for IRA / SEP / SIMPLE / SARSEP
April 1st of the year following the attainment of age 73
Social Security (reduction of benefits)
Age 62-FRA: benefits reduced $1 for every $2 earned over $21,240.
Social Security (Taxation)
- Must include muni bond income to calculate MAGI.
- If income plus 1/2 of social security benefits is:
1. Above $25k for Single, then 50% of the total social security is included in income
2. Above $44k for MFJ, then 85% of the social security is included in income.
Net Unrealized Appreciation (NUA):
- When and how is cost basis taxed?
- When and how is NUA taxed?
- What happens if theres a gain after distribution?
- Cost basis is taxable as ordinary income WHEN DISTRIBUTED!
- NUA (market value at lump-sum distribution MINUS employer cost basis) is NOT SUBJECT TO TAXATION UNTIL THE EMPLOYEE SELLS THE STOCK.
- NUA is always taxed at LTCG regardless of holding period.
- If stock appreciates after the distribution, the gain not attributable to NUA is either LTCG or STCG depending on holding.
Age and service rules - QP
- 21 & 1.
- 2 years service, but then immediately vested.
One year of service is 1,000 hours (includes vacations, holidays and illness time) or 500 hours and worked for the company for 3 years.
Non-qualified Deferred Compensation Plans (2)
Salary reduction plan - Uses portion of employee’s current compensation to fund the ultimate benefit.
Salary continuation - Uses employer contributions to fund the ultimate benefit.
Employment categories not covered by social security: There are 7 categories.
- Federal employees continuously employed since 1984.
- Some Americans working abroad.
- Student nurses and students working for a college or college club.
- Railroad employees.
- Child under 18, employed by a parent in an unincorporated business.
- Ministers, members of religious orders and Christian Science practitioners if they claim an exemption.
- Members of tribal council.
- Some state employees and teachers.
Members of the armed services ARE covered under OASDI.
Section 415 annual additions limit: Limit and whats included
- Maximum annual contribution is the LESSER of 100% of compensation, or $66,000.
- Includes employer contributions, employee salary reductions, and plan forfeitures.
- Applies to all defined contribution plans.
- Only time can exceed limit is for 50+ catch-up.
- An individual with two unrelated employers can have two accounts, both having their own $66k limits (not aggregate).
Safe Harbor Nondiscrimination: What two things satisfy nondiscrimination tests?
A safe harbor 401(k) plan automatically satisfies the nondiscrimination tests involving HCEs with EITHER an:
- Employer match, or,
- nonelective contribution
Safe Harbor Match/Vesting
- $1/$1 match on the first 3% employee deferral AND $.50/$1 on the next 2% employee deferral.
- If the employer chooses to use the nonelective deferral method, the employer must contribute 3% of all eligible employees’ compensation regardless of whether the employee is deferring or not (nonelective).
Employer contributions must be immediately vested.
Rollovers NOT Permitted
- Transfers to another 457 plan remain the only option for non-governmental tax exempt organizations.
- Hardship distributions cannot be rolled into any other qualified plan.
- RMDs are not eligible to be rolled over. Obviously.
IRA Deductibility Keys:
- If neither spouse is an active participant in an employer plan.
- If one spouse is an active participant in an employer plan.
- If both spouses are active participants in an employer plan.
- What plans affect active participant status?
- If NEITHER spouse, or single person, is an active participant in an employer plan, the IRA is deductible. Virtually all employer plans affect participation status, EXCEPT 457 plans (NQDC).
- If ONE spouse is an active participant, the other spouse (not active) can do a deductible IRA if combined AGI is less than $218k-$228k.
- If BOTH spouses are active participants, AGI limits apply (given):
- $73k-83k Single
- $116k-$136k MFJ - Qualified plans, SEP, SIMPLE, 403(b)/TSA/TDA, Union Plans (NOT457)
Roth IRA Ordering rules for Distribution
- Contributions
- Conversions
- Earnings
Roth IRA RMD
There is no RMDs for Roth IRAs, only must be distributed after death in accordance to the following:
- Owners surviving spouse can delay distributions until the Roth owner would have reached 73, or may roll it over and treat it as their own.
- Distributed over 10 years to designated beneficiary.
- Distributed within 5 years of owners death if there’s no designated beneficiary.
Rabbi Trust
- Key words: merger, acquisition, or change of ownership
- Assets in trust available for creditors
- Fear that ownership/management may change before deferred compensation is paid.
- Plan must provide clear rules describing when the benefits will be paid
Incentive Stock Option (ISO) Holding Period
- 2 years from Grant to Sale
- 1 year from Ex to Sale
- If either are not met, it results in a disqualifying disposition (NSO).
- First $100k granted is entitled to favorable treatment.
A retired, fully insured worker age _________ is entitled to SS retirement benefits.
A worker is entitled to disability benefits if he/she is under _____ and has been disabled for ____ or is expected to be disabled for at least ____, or has a disability which is expected to result in death, and has completed a _______ waiting period
62
65, 12 months, 12 months, 5 month.
The spouse of a retired or disabled worker qualifies for Social Security if he/she meets any of the following:
- 62 or over
- or any age and has a child under 16, or child disabled before 22.
Divorced spouse benefits: ex-spouse must have been married to the worker for at least _____ and generally must_______..
10 year. not have been remarried.
If at least age 62 and divorced for 2 years, ex-spouse can get retirement benefits based on the workers earnings even if the worker claims no retirement benefits.
The surviving dependent, UNMARRIED child of a DECEASED, DISABLED OR RETIRED insured worker, qualifies for Social Security payments if either of the following:
- Under 19 and a full-time elementary/secondary school student.
- Age 18 or over, but has a disability before age 22.
A spouse/ex-spouse may be entitled to a PIA that is _____ or more of the workers PIA unless his/her own benefit is________
50%. Greator.
10 years, not remarried.
62 divorced for 2 years can receive retirement benefits.
PIA reduced benefit calculation:
PIA - [(#months before FRA/180) x PIA]
T or F:
Workers who have attained their full retirement age may keep all benefits, no matter how much is earned, but there may be taxation if above threshold.
If a worker is younger than FRA, there is a limit to how much that worker can earn and still receive full SS benefits.
Working after retirement: If reach FRA, there is no reduction of benefits if over threshold, but taxation will come into play. If LESS THAN FRA, there is a reduction of benefits if over threshold.
T
Even if the worker has reached FRA, SS benefits are subject to federal income tax if the taxpayer’s provisional income exceeds the applicable threshold.
Working after retirement: If you take benefits and continue working BEFORE FRA, then you can lose benefits if your workplace earnings exceed a threshold.
Income tax of benefits: If you take benefits, you may have to pay income tax on those benefits if provisional income exceeds a threshold.
Dont confuse these
For workers younger than FRA during all of 2023, the government will deduct __________ earned above_____________.
Workers who reach FRA DURING 2023 (or in questions, “during the current year”), will deduct _____________ earned above_______________ UNTIL the month FRA is reached.
$1 from benefits for every $2 earned above $21,240
$1 from benefits for every $3 earned above $56,520
Social Security: Taxation of Benefits
(Earned + Unearned income) + 50% of Social Security + Tax-exempt income
50%
S: If >$25,000 50% of FULL benefit is included in gross income.
MFJ: If >$32,000 50% of FULL benefit is included in gross income.
85%
S: If >$34,000 85% of FULL benefit is included in gross income.
MFJ: If >$44,000 85% of FULL benefit is included in gross income.
Even though 50% of Social Security is included in provisional income, the FULL benefit is taxed at the applicable amount if over the threshold.
Workers are entitled to disability benefits if they meet ALL the following:
- Insured for disability benefits, and under age 65.
- Been disabled for 12 months, expected to be disabled for at least 12 month, or disability expected to result in death.
- Filed for disability, and has completed 5-month waiting period.
When considering the 5 month waiting period on SS disability, when do benefits start?
Its paid in the month following, the 6th month, not on the 5th month.
What is a DB plan?
Qualified plan subject to ERISA, and covered by PBGC.
Vesting schedule, admin costs, exempt from creditors, integrates with Social Security.
DB and Cash Balance.
What is a DC plan?
Qualified plan subject to ERISA.
Vesting schedule, admin costs, exempt from creditors, integrates with Social Security (except ESOP)
Money Purchase, Target Benefit, Profit Sharing, Stock Bonus, Keogh
What is an “other” retirement plan?
A nonqualified plan exempt from most ERISA requirements.
No vesting schedule, LOWER admin costs.
SEP, SIMPLE, SARSEP, 403(b)/TSA/TDA, 457.
SARSEP
- Must have been in existence before 12/31/96.
- May have up to 25 employees, and 50% of the eligible employees must defer.
- Salary deduction limit is $22,500 (FICA).
- New employees may participate if established before ‘97.
Are BE MY CASH TARGET plans fixed/mandatory contributions?
YES.
Factors effecting employees’ benefits in a DC plan:
Years to retirement (older more, younger less)
Investment returns (lower assumptions more, higher assumptions less)
salary levels
employer contributions
Forfeitures (MAY be applied to reduce employer contributions)
Selecting a money purchase pension plan:
- Wants stable work force
- Simple to administer and explain
- Young/well-paid employees
Selecting target benefit plan:
Alternative to a DB plan that provides adequate retirement benefits to older employees but has the lower cost and simplicity of a DC plan.
T or F: Only way an employer can contribute more than the $66,000 is for DB plans
T
Selecting a profit sharing plan:
- Employer has varying cash flow from year to year.
- Provides incentive for employees to make the company profitable.
- Employees are young, well-paid, and have substantial time to accumulate savings.
What is the 2023 limit on elective deferrals?
$22,500
Selecting a 401(k) plan:
- Employer wants to provide a qualified plan but can only afford minimal extra expense beyond the costs of existing salary and benefit costs.
- Employees want to increase their savings on a tax-deductible basis.
Solo 401(k)
- Not subject to coverage testing and nondiscrimination rules like typical 401(k) plans.
- Allows for two different contributions: $22,500 elective deferral + Employer contribution with a cap of $66,000 + $7,500 catch up if 50+. This differs from Keogh and SEP.
- Generally permitted when only owner and spouse or two partners. “Solo no employees”
- Can take a policy loan.
- Allows for more to be put away than Keogh/SEP because of above.
Safe Harbor 401(k)
- Safe harbor 401(k) plans automatically satisfy the nondiscrimination tests which involve HCEs with either an:
- employer matching contribution, or
- non-elective contribution
- Employer matching contribution would be $1/$1 on the first 3% employee deferral AND $0.50/$1 on the next 2% employee deferral
- Non-elective deferral would be 3% of all eligible employee’s comp REGARDLESS of whether the employee is deferring.
- Employer would pick one to satisfy the safe harbor.
- Immediately vested.
ESOP keys:
- If you use it to borrow money, its a LESOP
- You can’t integrate it with Social Security or cross-test it.
- Primarily in employer stock
- Cannot use it in a partnership
- 55 or older with 10+ years of PARTICIPATION can diversify up to 50% of account balance.
Stock Bonus and ESOP
Variations of profit-sharing plans. Stock bonus may invest assets in employer stock, ESOP MUST invest plan assets primarily in employer stock.
Employers may deduct dividends with respect to stock held in an ESOP. Deductible if paid in cash, distributed as cash no later than 90 days after the close of the plan year, used to make payments on loans to acquire employer stock, or reinvested in employer stock.
New comparability plan
Contribution percentage formula for one category of participants is greater than the contribution percentage for other categories of participants.
Tested under cross-testing rules.
Cross-testing (except ESOPs)
Measures DC plans for nondiscrimination on the basis of benefits, and DB plans on the basis for contributions.
Creates max benefit for HCEs
Selecting a DB plan
- Employer wants to max plan contributions to older employees.
- An older controlling employee wants to max tax-deferred retirement savings for their own benefit.
Section 415 Limit: DB plans
- For a benefit beginning at age 65, the max annual life annuity benefit is the LESSOR of:
- $265,000, or
- 100% of comp averaged over the employees three highest consecutive earnings years.
What is the most frequently used defined benefit formula?
Unit-benefit. Rewards long-service employees.
T or F: Traditional DB and Cash balance plans are the only plans that can consider past service
T
Selecting a cash balance plan:
- Less expensive and simpler DB plan.
- May allow past service credits, which means the plan may cover periods of employment prior to the plan’s inception date.
412(i) plan
DB plan funded entirely with insurance products like Life insurance and annuities. Avoids minimum funding standard.
