Retirement Planning

Question 1

Qualified Plan Advantages

Answer 1

Question 2

Retirement Plan Coverage Tests - Must Satisfy at Least One

Answer 2

Question 3

Entities Which May Establish a 401(k) Plan

Answer 3

• Corporations
• Partnerships
• LLCs
• Proprietorships
• Tax-Exempt Entities

Question 4

Actual Deferral Percentage (ADP) Test

Answer 4

• One of the two additional tests 401(k)s are required to pass.

Question 5

How is the ADP Calculated?

Answer 5

1. Separate the eligible employees into HC and NHC groups.
2. Calculate te Actual Elective Deferral Ratio (ADR) for each of the eligible employees by dividing the elective deferral contribution by the employee’s compensation.
3. Once the ADR is determined for each eligible employee, the amount of the ADP is calculated by averaging the ADRs for the employees within each group (HC or NHC).
4. Plug the ADP for the NHC into the chart attached and calculate the maximum ADP allowed for the HC.
5. Compare the “desired/required” ADP to your actual ACP. If the HC are higher, employer failed the ADP test.

Question 6

Exceptions to the 10% Early Withdrawal Penalty

Answer 6

• Death
• Attainment of age 59 1/2
• Disability
• Substantially equal periodic payments (Section 72(t))
• Medical expenses that exceed 7.5% of AGI
• $5,000 per taxpaer for Birth or Legal Adoption
• Qualified Domestic Relations Order (QDRO)
• Qualified public safety employee, firefighter, or correction officer who separates from service after age 50 or with 25 years of service.
• Attainment of age 55 and separation from service
• Terminal illness. Effective for distributions after 12/29/22
• Distributions up to an aggregate amount of $22,000 for qualified individuals in a qualified disaster zone. Effective retroatively for disasters occurrring on or after January 26, 2021.

Question 7

What is considered earned income?

Answer 7

• W-2 income
• Schedule C net income
• K-1 income from an LLC
• K-1 income from a partnership where the partner is a material participant
• Alimony (If divorce agreement was signed prior to or by 12/31/18. TCJA 2017)

Question 8

What is not considered earned income?

Answer 8

• Earnings and profits from property, such as rental income, interest income, and dividend income
• Capital gains
• Pension and annuity income
• Deferred compensation received (compensation payyments postponed from a past year)
• Income from a partnership for which you do not provide services that are a material income-producing factor
• Any amounts excluded from income, such as foreign income and housing costs
• Alimony from a divorce agreement signed after 12/31/2018
• Unemployment benefits
• Investment returns as a limited partner in a partnership
• Income flowing from an S-corporation via Schedule K-1
• Social security benefits
• Worker’s compensation