Retirement Planning

Question 1

How much compensation is covered for retirement contributions?

Answer 1

$265,000

Question 2

How much is the defined benefit limit that can be received?

Answer 2

$210,000

Question 3

How much is the defined contribution annual limit?

Answer 3

$53,000

Question 4

How much is the employee deferral limit for 401(k), SARSEP, 457, and 403(b) plans?

Answer 4

$18,000

Question 5

What is the income threshold to be considered a highly compensated employee?

Answer 5

$120,000

Question 6

What is the income threshold to be considered a key employee?

Answer 6

$170,000

Question 7

How much is the Social Security wage base?

Answer 7

$118,500

Question 8

PENSION PLANS vs. PROFIT SHARING PLANS

Legal promise of the plan

Answer 8

Pension
Paying a pension at retirement

Profit-Sharing
Deferral of compensation and taxation

Question 9

PENSION PLANS vs. PROFIT SHARING PLANS

Are inservice withdrawals permitted?

Answer 9

Pension Plans:
No (Under the Pension Protection Act of 2006, defined benefit plans can provide for in-service distributions to participants who are age 62 or older.

Profit-Sharing Plans:
Yes (after two years) if plan document permits

Question 10

PENSION PLANS VS. PROFIT SHARING PLANS

Is the plan subject to mandatory funding standards?

Answer 10

Pension Plan:
Yes

Profit Sharing Plan:
No

Question 11

PENSION PLANS VS. PROFIT SHARING PLANS

Percent of plan assets available to be invested in employer securities.

Answer 11

Pension Plans:
10%

Profit-Sharing Plans:
Up to 100%

Question 12

PENSION PLANS vs. PROFIT SHARING PLANS

Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity?

Answer 12

Pension Plan:
Yes

Profit-Sharing Plans:
No

Question 13

DEFINED BENEFIT vs. DEFINED CONTRIBUTION PLANS

What is the Annual Employer Contribution Limit?

Answer 13

Defined Benefit:
Not less than the unfunded current liability.

Defined Contribution:
25% of covered compensation.

Question 14

DEFINED BENEFIT vs. DEFINED CONTRIBUTION PLANS

How are forfeitures allocated?

Answer 14

Defined Benefit Plans:
Reduce plan costs

Defined Contribution Plans:
Reduce plan costs or allocate to other participants

Question 15

DEFINED BENEFIT vs. DEFINED CONTRIBUTION PLANS

Is the plan subject to Pension Benefit Guaranty Corporation coverage?

Answer 15

Defined Benefit Plans:
Yes (except professional firms with less than 25 employees).

Defined Contribution Plans:
No

Question 16

DEFINED BENEFIT PLANS vs. DEFINED CONTRIBUTION PLANS

Can credit be given for prior service for the purpose of benefits?

Answer 16

Defined Benefit Plans:
Yes

Defined Contribution Plans:
No

Question 17

How are payroll taxes treated regarding plan contributions?

Answer 17

• 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 employees elective deferrals to retirement plans such as 401(k), 403(b), SIMPLEs, and 457 plans.

Question 18

What are the standard eligibility requirements for qualified plans?

Answer 18

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).

Question 19

What is the standard exception to the special eligibility rules?

Answer 19

• 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 service. This exception is not available to 401(k)s.

Question 20

Characteristics of highly compensated employees.

Answer 20

Owner Employees:
An owner of > 5% for current or prior plan year or Compensation in excess of $120,000 for 2015 for the plan year.

Non owner Employees:
Compensation in excess of $120,000 for 2015 for prior plan year.

Question 21

What is the Defined Benefit 50/40 Test?

Answer 21

• The 50/40 coverage test require the defined benefit plan to benefit the lesser of 50 non excludable (eligible) employees or 40 percent of all non excludable (eligible) employees on each day of the plan year.

**To remember that it’s 50 employees or 40%, remember “people come first”.

Question 22

Characteristics of a Key Employee

Answer 22

• A key (decision-makers as opposed to just highly paid) employee is any employee who is any one or ore 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 offer with compensation in excess of $170,000 for 2015

Question 23

TOP HEAVY DEFINED BENEFIT PLAN

Definition

Answer 23

More than 60% of the total accrued benefits f the defined benefit plan are for the benefit of key employees.

Question 24

TOP HEAVY DEFINED BENEFIT PLAN

Funding

Answer 24

Must be at least 2% x years of service x compensation factor

Question 25

TOP HEAVY DEFINED BENEFIT PLAN Vesting

Answer 25

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.

Question 26

TOP HEAVY DEFINED CONTRIBUTION PLAN Definition

Answer 26

More than 60% of the total account balance of the defined ontribution plan are for the benefit of key employees.

Question 27

TOP HEAVY DEFINED CONTRIBUTION PLAN Funding

Answer 27

3% minimum to all eligible employees or less if less provided to the key employees.

Question 28

TOP HEAVY DEFINED CONTRIBUTION PLAN Vesting

Answer 28

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

Question 29

Defined benefit maximum plan limitations

Answer 29

Covered Compensation: $265,000 for 2015 Maximum Benefit: Lesser of: $210,000 for 2015 or Average of 3 highest consecutive years of compensation

Question 30

Defined contribution maximum plan limitations

Answer 30

Covered compensation: $265,000 for 2015 Maximum Benefit: Lesser of: 100% of compensation or $53,000 for 2015 (not including catch-up provision)

Question 31

What is the 25 Percent Test?

Answer 31

- The 25% test consists of two tests, a 25% test and a 50% 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% 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% of the employer's aggregate contributions to the participant's account.

Question 32

Characteristics of the Pension Benefit Guaranty Corporation (PBGC Insurance)

Answer 32

- The plan sponsors of defined benefit pension plans pay premiums for insurance coverage designed to pay the "promised pension" in the event the plan is underfunded or unfunded. - The PBGC pays only a limited retirement benefit ($5,011 per month or $60,136 per year (2015) in the event of a plan completely or partially terminating with an unfunded or underfunded liability. - The PBGC does NOT insure defined contribution plans or profit sharing plans, AND it does not insure defined benefit plans of professional service corporations with 25 or fewer participants. - The PBCG doe insure all other defined benefit plans and covered plans are required to pay a flat-rate, per participant premium.

Question 33

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

Answer 33

- 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

Question 34

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

Answer 34

- Actuary (Annually) No - Invest Risk Borne by Employee - Treatment of Forfeitures Reduce Plan Costs or Allocate - PBGC Insurance No - Credit for Prior Service No - Social Security Integration Excess Only - Separate Investment Accounts Yes - Separate (Unusually) - Favors Younger/Older Younger

Question 35

What is the legal promise of a pension plan?

Answer 35

Paying a pension at retirement.

Question 36

Is a pension plan subject to mandatory funding standards?

Answer 36

Yes

Question 37

What percentage of pension plan assets is allowed to be invested in employer securities?

Answer 37

10 percent

Question 38

For pension plans, what is the employer annual contribution limit of covered compensation?

Answer 38

25 percent (The plan must meet minimum funding standards. Defined benefit pension plans may exceed 25%.)

Question 39

What is the legal promise of a profit sharing plan?

Answer 39

Deferral of compensation and thus tax deferral

Question 40

Are in-service withdrawals permitted in profit-sharing plans?

Answer 40

Yes (after two years)

Question 41

Is a profit-sharing plan subject to mandatory funding standards?

Answer 41

No

Question 42

What percent of profit sharing plan assets are allowed to be invested in employer securities?

Answer 42

100%

Question 43

For profit-sharing plans, what is the employer annual contribution limit of covered compensation?

Answer 43

25 percent

Question 44

What are the entities that may establish a 401(k) plan?

Answer 44

``` Corporations Partnerships LLCs Proprietorships Tax-exempt entities ```

Question 45

What is the income limit phase outs for Roth IRAs?

Answer 45

Married Filing Jointly - $183k - 193k MAGI Single - $116k - 131k MAGI Married Filing Sep - $ 10k

Question 46

What are the qualified distribution requirements for Roth IRAs?

Answer 46

- Held for at least 5 years. - For first-time home purchase - Death - Disability - On or after attainment of age 59 1/2

Question 47

What are the specific non qualified ordering rules for distributions of a Roth IRA?

Answer 47

Contributions first Conversions second Earnings third