Retirement Planning

Question 1

What is one of the defining characteristics of a pension plan?

Answer 1

Mandatory Funding

Question 2

Which plan has a substantial and recurring funding requirement and what is the requirement?

Answer 2

Profit Sharing

2 out of every 5 years

Question 3

What is the maximum payout for a DB Plan

Answer 3

$215,000

Question 4

What is the maximum contribution for a DC Plan

Answer 4

$54,000

Question 5

What is NUA?

Answer 5

NUA is growth on employer stock while it is in a qualified plan that always receives LTCG tax. The amount is determined at distribution and recognized on the date sold.

Question 6

How is NUA treated at death?

Answer 6

IRD, no step up.

Question 7

How much creditor protection do qualified plans receive?

Answer 7

Unlimited, extends to non Erisa so all employer sponsored are creditor protected.

Question 8

What is the amount of creditor protection on IRA’s?

Answer 8

1,283,025

Question 9

Qualified Plans have contribution limits which means there are deadlines for:

Answer 9

Establishing, funding and measuring the contributions

Question 10

Funding deadline for a qualified plan is:

Answer 10

The due date of the return including extensions.

Question 11

What are the 3 differences of DB vs DC plans?

Answer 11

DB plan focus is on the backend, DC plans are on the front end. DB plans commingle assets, DC plans have individual accounts for each participant. Employer bears risk in DB, Employees in DC

Question 12

When is a person self-employed?

Answer 12

Are: Sole Proprietor or partnership and work for it, (k-1 or 1099’s)
Aren’t: Corporation W-2 income,
Depends: LLC (if taxed as corp, not. If sole prop or partnership are)

Question 13

If a person is self-employed, what is the max contribution that can be made to a DC Plan? Keogh Plan

Answer 13

18.6% is the shortcut if question gives Schedule C net income and asks for what max contribution is.

Question 14

What is the OASDI and Medicare Employer and Employee tax rate?

Answer 14

6. 2%/ 12.4%

1. 45%/ 2.9% 7. 65% each

Question 15

What is the permanent requirement for qualified plans?

Answer 15

The intent has to be that the plan will be setup permanently.

Question 16

Qualified Plan Requirements: Eligibility & Entry Dates

Answer 16

21 and 1 (defined as 1,000 hrs in 12 month period) can be more generous but not less. Except for 21 and 2 can’t have vesting schedule)
Have to have 2 entry dates per year.

Question 17

What is the definition of a highly compensated employee?

Answer 17

greater than 5% owner or greater than $120,000 compensation from preceding year. 5% owner is a title that means greater than 5% owner. census that says 5% is not a 5% owner by title.

Question 18

What is the top 20% election rule?

Answer 18

Allows the top 20% of earners to be considered highly compensated, as long as those not considered highly compensated don’t also own greater than 5% of the company.

Question 19

What is the family attribution rule?

Answer 19

If family owns part of the company, all family is considered to own the total amount owned by the family.

Question 20

What is are the three key employee tests?

Answer 20

1. Officer with comp greater than $175,000
2. Greater than 5% owner
3. A greater than 1% owner with comp greater than $150,000 (1% owner is used as a title and means greater than 1%)

Question 21

What is the rule for top heavy testing

Answer 21

There are three tests and one of the tests has to be passed.

Question 22

Top Heavy Testing: What is the main test, general test, percentage test or safe harbor test?

Answer 22

Number of NHC Employees that are covered/
Total number of NHC Employees >=70% (covered means they are a participant. They are getting a contribution or accruing a benefit)

Question 23

Top Heavy Testing: What is test number two or the ratio test?

Answer 23

%NHC covered(percentage from test #1)/

%HC covered >=70%

Question 24

Top Heavy Testing: What is test number three or the average benefits percentage test?

Answer 24

Average benefits % NHC/
Average Benefits % HC >=70% (benefits will be given)
Average benefit as a percentage of income

Question 25

When is an employee considered covered in a 401k plan?

Answer 25

If they are eligible to defer

Question 26

What are the attribution rules? What do they apply to?

Answer 26

Stock owned by or for a spouse, children grandchildren or parents , estates, partnerships, trusts. HC and Key EE

Question 27

What is the 50/40 test?

Answer 27

An Additional test that DB Pension Plans must meet: lesser of 50 EE’s or 40% of eligible EE’s

Question 28

What is the least generous DB Vesting?

Answer 28

5 year cliff or 3-7 year graded at 20% each year after 2 years of service.

Question 29

What is the least generous DC Vesting?

Answer 29

3-year cliff or 2-6 year graded at 20% each year after 1 year of service.

Question 30

What is the minimum funding for top-heavy DB and DC plans?

Answer 30

DB: 2% times the number of years of service up to 20%
DC: 3% of total compensation

Question 31

What is the ADP(Actual Deferral Percentage) test?

Answer 31

If ADP for NHC: Max ADP for HC is:
<=2% 2 x ADP of NHC
>2%, <=8% 2% + ADP of NHC
>8% 1.25 x ADP of NHC

Question 32

What is the ACP designed to test?

Answer 32

Matching contributions

Question 33

What is the ACP Test?

Answer 33

If ACP for NHC: Max ACP for HC is:
<=2% 2 x ACP of NHC
>2%, <=8% 2% + ACP of NHC
>8% 1.25 x ACP of NHC

Question 34

How to correct a failing ACP or ADP test:

Answer 34

1. Corrective distribution (decreases HC doesn’t cost more)
2. Qualified nonelective contribution(increases NHC)
3. Qualified matching contribution(Increases NHC)

Question 35

Safe Harbor:

Answer 35

Don’t have to meet ADP and top-heavy testing, can’t have a vesting schedule and have to make a minimum amount contribution.
Matching 100% of first 3% and 50% of next 2%.
Nonelective contribution of 3%

Question 36

What is another way you can avoid the top heavy, ADP and ACP testing?

Answer 36

QACA: Qualified automatic contribution arrangement. Setup by HR and the contributions start automatically.

Question 37

Why would you recommend a Safe Harbor 401k?

Answer 37

To benefit the high income earners to be able to max out the plan.

Question 38

There needs to be a buzzer that goes off inside of me when I see this***

Answer 38

Covered Compensation Limit=$270,000
Limit to the amount of compensation that counts when it comes to calculating retirement benefit, retirement contributions or anything retirement related in a qualified plan we only get to count the first $270,000 of comp. I would be willing to bet that anytime you see comp greater than $270,000 there’s a reason why.

Question 39

Defined Benefit Limit:

Answer 39

The focus of the plan is on the backend. The max paid out of the backend cannot exceed the the lesser of: 100% of the participant’s compensation averaged over the three highest consecutive years
or $215,000 for 2017

Question 40

Defined Contribution Annual Additions Limit

Answer 40

The lesser of: 100% of annual compensation
or $54,000
Employer contributions, employee contributions(excludes rollovers and catchup contributions) and forfeitures allocated to a participant’s account.

Question 41

Annual additions limit is per:

Deferral limit is per:

Answer 41

Annual Additions Limit: $54,000, per employer basis.

Deferral Limit: $18,000 per taxpayer basis

Question 42

What are the three types of limits for DC Plans?

Answer 42

1. Combined limit EE and ER: Annual Add. Limit $54,000
2. Employee only limit: Deferral limit: $18,000
3. ER only limit: 25%

Question 43

What is the deferral limit and catch up contribution limit for Simple IRA’s and 401k’s?

Answer 43

Deferral Limit: $12,500

Catch up: $3,000

Question 44

Which plan doesn’t aggregate?

Answer 44

Section 457 Plan.
A different plan, does it’s own thing, dances to it’s own tune. Doesn’t play friendly, doesn’t play nice with the other plans. (Government Employees)

Question 45

What is included in the $18,000 limit for 457 plans?

Answer 45

Combined EE and ER contribution. Has regular $6,000 catch up but has Double limit catch-up of $18,000.

Question 46

Advantages to DB Plan:

Answer 46

Tax-deffered retirement savings. Retirement benefits can be provided regardless of age. Benefit levels are guaranteed. For older, highly compensated, allows the maximum amount of tax-deferred retirement savings. May encourage early retirement.

Question 47

Disadvantages to a DB Plan:

Answer 47

Higher installation and administrative costs. Complex to design. Employees who leave before retirement may receive relatively little benefit. Employer is subject to annual mandatory funding obligation, regardless of profit or loss. Employer assumes the risk of poor investments(traditional DB and Cash Balance). Costly actuarial services. Additional nondiscrimination test: 50/40.

Question 48

What are the three versions of DB Plan formulas?

Answer 48

1. Flat amount formula: no preference for comp, may require some minimum service such as 15 years.
2. Flat percentage formula: Percentage of compensation.
3. Unit benefit formula: ex. 2% per year after 30yrs 60%

Question 49

DB Terminations:

Answer 49

Employee benefits are 100% vested when terminated.

Question 50

Cash Balance Plan:

Answer 50

Promises certain benefit at retirement, Employees do not have their own accounts. Employees have a cash balance within the plan. Even though they don’t have their own individual plan, they get a hypothetical statement that shows them their cash balance in the plan. This is required because of the guaranteed rate of accrual.