Retirement Planning

Question 1

A person is fully insured under Social Security if he/she has worked _____ quarters.

Answer 1

40 quarters (approx. 10 years); does not have to be consecutive

Question 2

Employment Categories not covered by Social Security

Answer 2

Notable ones include:
-Railroad employees
-Ministers, members of religious orders if they claim an exemption
-Members of tribal councils
-Child under age 18 and employed by parent in an unincorporated business (may not have to withhold taxes either if child is under standard deduction)

Question 3

Social Security: Eligibility for Disability Benefits

Answer 3

If under 65: disabled for 12 months, expected to be disabled for at least 12 months, or has disability which is expected to result in death and has completed 5-month waiting period.

Retired, Insured Worker 62+: filed for disability benefits and completed 5-month waiting period.

Question 4

When is a surviving spouse eligible for Social Security Payments?

Answer 4

The surviving spouse (including the surviving divorced spouse) of a deceased insured worker qualifies for SS if the widow(er) is 60+.

NOTE: divorced spouse must have been married to the worker for at least 10 years and must not be remarried.

Question 5

When is a surviving dependent, unmarried child of deceased, disabled, or retired insured worker eligible for SS?

Answer 5

-Child is under 19 and full-time elementary or secondary school student.
-Child is 18+ but has disability which began before age 22.

Question 6

When is the spouse of a retired or disabled worker eligible for SS?

Answer 6

-Spouse is 62+ (and worker is receiving benefits)
-Spouse has child under age 16 in care
-Spouse has child age 16+ but disabled before age 22

Question 7

A spouse/divorced spouse may be entitled to a primary insurance amount (PIA) of _____% or more of the worker’s PIA.

Answer 7

50%

NOTE: for current spouse to receive benefits based on worker’s PIA, worker must be receiving benefits. However, a divorced spouse can receive benefits at 62 based on worker’s PIA whether worker is receiving benefits or not.

Question 8

If you are younger than Full Retirement Age (FRA) and you take benefits while still working, gov’t will deduct from your benefits ____ for each _____ you earned above $22,320

Answer 8

$1 for every $2

Question 9

If you are working in the year you reach Full Retirement Age and you take benefits while still working, gov’t will deduct from your benefits _____ for each _____ you earned above $59,520.

Answer 9

$1 for every $3

Question 10

Taxation of SS Benefits: Single

Add income + Tax Exempt Interest (i.e. muni bond interest) + 1/2 of SS benefits= MAGI (or provisional income)

Answer 10

< $25k MAGI: 0% taxable income.
$25k-$34k: up to 50% taxable income.
> $34k: up to 85% taxable income.

Question 11

Taxation of SS Benefits: MFJ

Add income + Tax Exempt Interest (i.e. muni bond interest) + 1/2 of SS benefits= MAGI (or provisional income)

Answer 11

< $32k MAGI: 0% taxable income.
$32k-$44k: up to 50% taxable income.
> $44k: up to 85% taxable income.

Question 12

Are Social Security disability insurance benefits subject to the same tax rules (i.e. the 50% and 85%) that apply to retirement benefits?

Answer 12

Yes, these rules apply to Social Security retirement, disability, and survivor benefits.

Question 13

Permanent Reduction for Taking SS Early

Primary Insurance Amount (PIA) is reduced by _____ for each of the first _____ months that the worker is younger than the FRA when the benefits start.

Answer 13

1/180

36 months

Question 14

Defined Benefit Pension Limit for Projected Annual Benefit:

Max life annuity benefit is the lesser of _____ or _____% of the participant’s comp averaged over his/her three highest-earning consecutive years.

Answer 14

Lesser of $275,000 (See tax tables)
OR
100%

NOTE: only the first $345,000 of annual compensation is taken into account in figuring the highest-earning years.

Question 15

Qualified plans are subject to creditor protection under _____, whereas SIMPLEs and SEPs are protected under _____.

Answer 15

ERISA, state law

Question 16

Qualified Plans: Age and Service Requirements

Answer 16

Either:
-age 21 and 1 year of service (“21&1” rule)

-2 year service requirement (& immediately vested; “2 year/100%” rule)

Question 17

Definition of a year of service

Answer 17

EE works 1,000 hours during the initial 12-month period (one FULL year of service) after being employed

Question 18

Coverage for part-time EEs
_____ hours/year for _____ years

Answer 18

500 hours per year for 3 years

Question 19

Coverage Requirements:
-Ratio Percentage
-Average Benefit Test

Answer 19

Ratio Percentage: % of NHCEs covered is at least 70% of HCEs covered.

Average Benefit Test: Average benefits for all NHCEs must be at least 70% of that for HCEs.

Question 20

Definition of Highly Compensated Employee (HCE)

(hint: think ownership, earnings)

Answer 20

An HCE is
-Greater than 5% owner OR
-EE earning in excess of $155k in preceding year

Question 21

Definition of Key Employee

(hint: think ownership, rank, and earnings)

Answer 21

A key employee is
-Greater than 5% owner, OR
-Officer and comp > $220k, OR
-Greater than 1% owner and comp > $150k

Question 22

Definition of Top Heavy

More than _____% of _____ or _____ are allocated to _____.

Answer 22

More than 60% of aggregate accrued benefits or account balances are allocated to key employees.

Question 23

When do attribution rules apply?

Answer 23

If you are an EE and the spouse/parent/child/grandparent of an individual who is >5% owner, then you are deemed to be a >5% owner yourself (i.e. affects who is a key EE or HCE).

Question 24

What are the faster vesting schedules, and which plans do they apply to?

Answer 24

3 year cliff
2-6 year graded*
100% vested with 2-yr eligibility

These schedules apply to top-heavy DB plans and all DC plans.

*For vesting schedule questions, this is the general correct answer.

NOTE: if the exam asks about a schedule to retain EEs, use the graded schedule.

Question 25

Examples of Control Groups

Answer 25

Parent-Subsidiary: 1 owns at least 80% of 1 or more others.

Brother-Sister: A few owners of 2+ entities own 80% or more of each.

Affiliated Service Group: Usu. involves professional services (health, law, accounting, engineering)

EE Leasing: lease EEs from an independent leasing org.

Question 26

Why are control groups important?

Answer 26

For an individual with multiple accounts, the limits ($69k for company contributions) apply as follows:

In the aggregate- where plans are offered by single employer or 2 or more related employers.

Separately to each account- for unrelated ER plans.

NOTE: EE deferrals are always in the aggregate no matter how many companies you work for.

Question 27

Purpose of plan integration with Social Security

Answer 27

Equalize the ER’s contributions to retirement plans for higher and lower-paid EEs (i.e., add’l contributions are provided for higher-paid EEs whose comp exceeds the SS wage base).

Question 28

Which plans can be integrated with Social Security? Which cannot?

Answer 28

CAN: DB, cash balance, money purchase, target benefit, profit sharing, stock bonus, and SEP.

CANNOT: ESOP, SIMPLE, 401(k) SIMPLE

Question 29

Catch up contributions do not affect…

Answer 29

Deferrals, company contributions, or the $69k max contribution.

Question 30

Nonqualified Deferred Compensation
-Definition
-Rules
-Taxation
-Earnings

Answer 30

-Definition: Any ER retirement, savings, or deferred comp plan for EEs that does not meet tax and labor law (ERISA) requirements.

-Rules: May discriminate; exempt from ERISA

-Taxation: No tax deductions for (ER) contributions until EE is taxed.

-Earnings: The fund’s earnings may be taxable to the ER (depending on investments).

Question 31

Employee Stock Options:
Funded vs. Informally Funded (Unfunded)

Answer 31

Informally Funded (Unfunded): either a mere promise to pay or informally funded with life insurance, annuities, mutual funds, or general investments. Informal is unfunded because assets are owned by the company and subject to creditors. NO TAX DEDUCTIONS FOR CONTRIBUTIONS UNTIL THE EMPLOYEE IS TAXED.

Question 32

Salary Reduction Plan
(aka Pure Deferred Compensation Arrangement)

Answer 32

Uses some portion of the EE’s current compensation to fund the ultimate comp benefit.

Question 33

Salary Continuation Plan

Answer 33

Uses ER’s contributions to fund the ultimate comp benefit.

Question 34

Use of Life Insurance for Deferred Comp

Answer 34

-Premiums are not currently deductible
-Death proceeds paid to ER are not taxable as income to the ER (since the premiums paid weren’t deductible).
-Benefits paid to covered EE are deductible to ER as paid. This creates constructive receipt and is deferred comp (and is income taxable).
-PV of payments to surviving beneficiaries is included in EE’s gross estate for estate tax purposes.

Question 35

Rabbi Trust
-Availability to creditors
-Rules
-Reasons for Use

Answer 35

-assets must be available to creditors if the company files for bankruptcy or becomes insolvent

-Unsecured creditors rights > participants’ rights

-plan must provide clear rules for when benefits will be paid

-Trustee must suspend payment to the beneficiary when a bankruptcy or financial hardship occurs.

-Reasons for use: takeover, acquisition, or merger

Question 36

Informal funding creates taxation to the ER in two ways…

Answer 36

(1) Funds set aside to fund the plan must be taxed at corporate level.

(2) Earnings on the funds set aside can create an additional tax. NOTE: if annuity contract is held by entity who is not a natural person, the income must be treated as ordinary income.

Question 37

Incentive Stock Options (ISO)
-only the first _____ is entitled to favorable tax treatment
-does granting corp receive a tax deduction?

Answer 37

$100,000; no (unless it becomes a disqualifying disposition)

Question 38

Primary difference between ISOs and Nonqualified Stock Options (NSOs)

Answer 38

ISOs are not subject to regular tax when exercised, whereas NSOs are.

Question 39

Two ISO Holding Period Rules

Answer 39

(1) You must hold the exercised ISO shares at least one year from date of exercise before selling them.

(2) You must hold the shares from an ISO exercise at least two years from the grant (issue) date before selling them.

Violation of either rule results in a disqualifying disposition (i.e. ISO becomes an NSO).

Question 40

Keogh Calcs for Defined Contribution Plans:
-15% plan
-25% plan

NOTE: there are no calcs for defined benefit plans.

Answer 40

15% plan: multiply business profit by 12.12%

25% plan: multiply business profit by 18.59%

HINT: think about who is getting paid self-employment income. That’s who the lower %s apply to.

Question 41

Keogh Plan: a _____ plan with special contribution limits for the _____.

Answer 41

qualified; self-employed

Question 42

Elective deferrals are always aggregated if there is more than one ER.

Exception: 457s

Answer 42

For example:

401k/403b/SIMPLE/SARSEP: $23k + $7.5k catch up

SIMPLE and another SIMPLE: $16k + $3.5k catch up

NOTE: 401(k) SIMPLEs follow the SIMPLE rules.

Question 43

Two Main Exceptions to the 20% Mandatory Withholding Rule (Qualified Plans)

Answer 43

1) distributions that are part of series of substantially equal payments (72t)

2) distributions made to comply with minimum distribution requirements

Question 44

72(t) rules
-establish at what age
-penalty?
-subject to recapture if…
-exceptions

Answer 44

-can establish before age 59.5
-no penalty
-subject to recapture if modified before the later of (a) turning 59.5 or (b) end of 5-year period
-exceptions: switching to RMDs, death, disability

Question 45

Traditional IRAs: Deductible or Not?
-1st Rule
-2nd Rule

Answer 45

1st Rule: Active or Not Active Participant in qualified plan, SIMPLE, SEP, or TSA.
-Not Active: it’s deductible (no phase-out)
-Active: it’s deductible, up to phase-outs based on income (this is 2nd Rule)