Retirement Planning Flashcards
Social Security, Full vs. Currently Insured
Fully is 40 credits
Currently if 6 quarters in the most recent 13 quarter period.
Those not covered by Social Security
- Railroad Employees (still get Medicare)
- Child <18 employed in unincorporated parent business
- Ministers, christian science practitioners, etc. if the CLAIM AN EXEMPTION
- Members of tribal councils
RCMT
SSDI Eligibility
- Under 65
- Disabled for 12 months, is expected to be disabled for 12 months, or has a disability which is expected to result in death
- 5 month waiting period.
Spousal Benefits
- Spouse of a retired or disabled worker qualifies if:
(1) age 62
(2) has a child in care under 16, or >16 and disabled
Spousal Benefits (if widow or divorced)
Widow Benefits:
- Eligible at age 60
- If caring for an entitled child who is <16, or disabled before 22
Divorced Benefits
- 10 Years married
- Has been divorced for 2 years
- Not remarried
- Can claim, whether ex-spouse claims or not.
Dependent Social Security Benefits
The Surviving dependent, unmarried child of a deceased insured worker, qualified for payments if:
- <19 and FT Elementary or Secondary School student
- Age 18+, but has a disability which began before 22
Ex-Spouse and Widow Benefits at Death
If qualifying spouses, they get 100% of their spouses’s benefit (ex or widow)
Who is eligible for the $255 lump sum DB?
Spouse living in the same HH as the deceased at death, or a dependent child (NOT both)
How to reduce benefits if taken early (2 ways!)
(1) Reduce by (#of months)/180 (as a percentage)
(2) Reduce by $1 for ever $2 over the current year thresholds (given in tables) - This comes back to you at FRA
Kids can also reduce benefits with earned income, however, their taxation, etc is calculated separately from parents.
How to determine benefit taxation?
MAGI + 1/2 of SS = Provisional Income
50% Threshold: (not in tables)
- 25K Single
- 32K JNT
85% Threshold:
- 34K Single
- 44K JNT
Social Security base for tax calculation, if you have widow benefits, and two kids under 16 receiving childrens’ benefits
Just use widow benefits (1/2) and MAGI for mom in the calculation
Retirement Plans: MUST REMEMBER
DC/DB Salary Cap: $275,000
Simple IRA Salary Cap: $416,667
DC Max Contributions: $55,000 (+6K catchup >50)
DB Max Contributions: NONE
DB: Benefit Cap (Section 415): 220K (2018) or 100% 3 highest years (lesser of the two)
Tandem is WRONG
Deferrals always FICA (also always aggregated)
IRA Keys (Retirement plans, right side)
- No loans
- No Life Insurance
- Immediate vesting
- No guarantees on creditor protection
- 59.5 for 10% penalty, not 55 (qualified)
- RMDs at 70.5, even if you’re not an owner.
Kate has 3 years of compensation (highest)
220K, 250K and 300K
What is max benefit calculation for her DB pension?
(220+250+275K) / 3 = $241,667
220 is Lower so, $220K is the max.
Factors that impact amount of DB employer contributions:
- Proximity to retirement age (closer = more)
- Investment return assumptions (state sets) (lower = more)
- Forfeitures must be applied to reduce contributions (always less)
- Salary scale assumptions (less for younger and inexperienced workers)
Pension Distinction
Spousal consent for benfit options.
Unit Benefit Formula:
1.5% for each year of service
30 Years of service
100K Average Annual comp
45K pension pay-out.
(1.5*30=45%) *100K = 45K
What guarantees come with a Cash Balance Pension?
- Guaranteed earning rate
- Guaranteed contribution amount
AND PBGC!
Money Purchase Pension Keys
- Fixed benefit formula, requiring flat % of employee compensation
- Can be paired with a profit sharing plan
- Simple to administer and explain
- 25% total payroll deduction limit
- 55K max annual additions
- 275K max wage base
Target Benefit Plan
Similar to Defined Contribution due to 55K limit, risk assumption, forfeitures allocated to employees or used to reduce employer contribs.
Similar to DB:
- Benefits older employees
- Actuary determines initial contribution level (with fixed mandatory contributions)
When can 61K be added to a DC plan?
ONLY when the plan allows for employee deferrals (MP and TB plans aren’t qualified because employers don’t get a catch-up)
What is a CODA and what plans can have it?
It’s a 401(k) plan, and only Profit Sharing and Stock Bonus can have the provisions .
Contribution Vs. Deferral. WATCH OUT
Deferrals are specifically the $18,500. Catch-up is NOT included in “Deferral”
Employee contributions include both Deferrals and Catch-up contributions.
Both pay FICA
Company Contribution Limits (DC Plans)
25% is the limit for employer contributions (using pre-contribution salary for calculation).
E.g. George has 100K salary, and gets a 50% match on the first 10% he contributes. He puts 10K in a deferral away, and 6K in a catch-up (he’s 50). The company matches the deferral at 5K. What is the total employer contrib allowed? 20K (25K is the 25% limit, and they kicked in 5K already. R-11 questions
Section 415 Visual
- Deferral
- Match (25%)
- Co. Contribution (25%)
- Forfeitures
__________________________________
$55K
+ Catch-up Contrib (if deferral)
Annual Additions limit vs. Contribution Limit
Annual Additons is 100% or 55K
Contribution Limit is 25% of Pre-contrib payroll
Hardship Withdrawals
For 401k Plans:
- “Immediate and Heavy”
- Can withdrawal total elective deferrals and vested profit-sharing contributions
- 6 months after withdrawal, elective deferrals suspended
- Subject to 10% penalty and ordinary income tax (no penalty for certain circumstances)
- ONLY applies to 401(k) and 403(b) plans. Other types can have loans, but not Hardship.
- Hardship Withdrawals CAN NOT come from profit sharing plans, unless it has 401(k) provisions
Uni-401k (or Solo 401k)
- Not subject to coverage testing and non-discrimination rules
- 18,500 deferral limit, plus 6K if 50+
- Cap of 55K
- For you and spouse, or two partners
Defined Contribution definition of qualifying workers?
1000 hours!
SEP Different, 600 bucks, part time included
How are Stock Bonus plans / ESOP Plans different from profit sharing?
- They are variations of Profit Sharing
- Primarily invest in employer stock (employee has option to diversify)
- Accounts stated in shares of employer stock
- Benefits are distributable in form of employer stocks (NUA Situation)
How does NUA work?
- Stock in a Money Purchase, Profit Sharing, can qualify for company stock held
- NUA is gain over FMV of stock and issue price(basis)
- When you take a distribution, Ordinary Income for basis is taxable. LTCG for NUA isn’t due until the asset is sold (always LTCG even if sold immediately)
- Growth from distribution date, to the sale date, can be at LTCG is held for >1 year after distribution date.
What happens if you roll NUA stock into an IRA
It RUINS the NUA treatment. Don’t do it dude!
59.5 vs. 55 Penalty Ages
IRAS are 59.5. Qualified plans are 55.
Don’t forget it. Catch-up contributions are the same at age 50.
Is 20% mandatory withholding required for ESOP or Stock Distributions?
NO!
Required for cash distributions, but not stock.
What if I take a 72(t) withdrawal from a stock plan?
Ruins NUA treatment. Only lump sum withdrawal of all holdings in a taxable year qualifies.
What if both employer stock and other investments are held in an account?
You can roll non-employer stock into an IRA, but if you do that with the stock you will lose NUA treatment.
When do Keogh Plans apply?
Sole Proprietorships or Partnerships ONLY.
What is a Keogh? How and when do you use the calculation?
Qualified plan with special contribution limits for owner employees (need to specify which type). They can be DB, Money Purchase, or Profit Sharing. (no calculations for DB plans)
ALSO used for Self-employed SEP calculations!
Calculation (weird due to write off on front of 1040):
15% plan - (business profit) * .1212
25% plan - (Business Profit) * .1859
EMPLOYEES STILL GET FULL 15% of 25%!
SIMPLE plan keys:
- Mandatory match
- 275K Salary Cap DOES NOT apply (416,667)
- Cannot have another plan
- Available to Sole Props, Tax-exempt orgs, and government entities with 100 or fewer employees
Limits:
- 12,500 max employee contribution (3K catch-up over 50)
- Employers can match dollar-for-dollar up to 3% of compensation.
Other:
- Participants fully vested at all times
- 10% penalty is actually 25% for the first 2 years!
401(k) Simple
Traditional 401(k) that adopts SIMPLE provisions. Becomes ERISA (exempt from creditors).
Max employer contribution is 3% of 275K (8,250). Employee deferral rules are the same.
Keough Calc Eligiblility:
- Business Types
- Plan Types
Business Types:
- Sole Prop
- Partnership
Plan Types:
- DB (no calc)
- Profit Sharing
- Money purchase
- SEP also (curveball)
MUST QUALIFY IN BOTH WAYS
SEP IRA Keys
- No Salary deferrals
- 25% limit, not 100% of compensation or 55K
- For self-employed owners, calculated like Keough
- 100% vested (like all IRAs)
- RBD 70.5 , but OWNERS can keep contributing (like QP)
FLEXIBLE contributions (not required)
CAN BE INTEGRATED WITH SOCIAL SECURITY
Robert Dunbar owns RD Inc.
He earns 200K / year, and the company offers a 25% SEP plan. What is maximum amount RD Inc. can contribute?
Max that Robert can defer?
What if Robert was owner of RD Partnership?
He can’t defer anything.
Max, RD Inc. can contribute 50K (not 100% compensation). If he made more, he would cap at 55K.
If partnership, Keough applies. .1859*200K = 37,180
SEP Unique Participation Rules
Recurring and Substantial doesn’t apply
- Must cover all employees who are 21, worked 3/5 prior years, PT employment counts
- Contributions need not be made if you make
SARSEP Plans
If the plan was adopted before 1/1/97, grandfathered.
- No new plans can be created, but new employees can be added to grandfathered plans.
- 18,500 salary deferrals, + 6K catch-up contribution.
- Deferrals FICA and FUTA
- No financial hardship required, treated the same as an IRA early withdrawal
TDA / TSA / 403(b) Keys
- Only by 501c3, and public school systems.
- Special Catch-up provision for 403(b) plans
- Sames as 401(k) limits (100% or 55K total contribution limit)
Great case questions
R-17
Under ERISA, Who is a plan fiduciary?
Anyone who touches the plan. Trustees, advisors, directors, administrators, members of IC, investment advisors.
What can a trustee be eld liability for under ERISA rules?
All of it. All losses to plan, or to restore all profits made through improper use of plan assets. Applies to all fiduciaries.
What does ERISA fiduciary rules prohibit?
Can’t double dip / accept additional fees from investment product providers.
For ERISA plans, what is the “Age and Service” rules
- 21 and 1 rule (21 age, and 1 year of service)
- OR, 2 year, 100% vested rule (not for 401k)
1000 Hours = a year of service. (includes vaca, holidays, sick)
Need both 1 year and 1000 hours to qualify.
After conditions met, must be allowed to participate in 1st day of next plan year, or 6months from qualification (whichever is earlier)
HIghly Compensated Employee vs. Key Employees? Why do they matter?
hIghly = dIscrimination
Key = Vesting
Two non-descrimination / alternative coverage tests (in additon to 21/1 rules)
- Ratio Percentage Test
- Plan must cover NHCE employees at a % that is at least 70% of the rate that HCEs are covered - Average Benefits Test (if Ratio Test doesn’t work, must satisfy benefits test)
- Average benefits for all NHCE emploees must be at least 70% of the average benefits for the HCE employees.
BOTH USE 70%
WATCH-OUT for Coverage Testing
Sometimes they substitute Key Employee for HCE and NHCE for HCE.
READ very very carefully.
Defined Benefit minimum participation (long shot)
Must benefit at least the LESSER of:
1) 50 employees
(2) Greater of 40% of all employees or two employees (or if there’s only one, that employee
HCE Employee Definiton / Purpose
Discrimination Testing (ratio/average benefits) and ADP/ACP testing.
- > 5% owner or
- Any employee earning $120,000 in prior year
Children, Chrandchildren, parents and spouses are subject to ownership attribution for this test (rolled together) NOT siblings.
Key Employee Definition / Purpose
For Vesting / top heavy determination:
If at any time during the year:
- > 5% owner
- > 1% owner, and compensation >150K
- Officer and comp >175K
5% rule for both HCE and KEY EMployee!
Attribution rules work the same here.
Top Heavy Rules (2 of them)
2:
#1: - Plan is top-heavy is >60% of aggregate benefits or account balances are allocated to KEY employees
- Minimum benefits and contributions for non-key employees (in TOP HEAVY PLANS)
- DB: Benefit must be at least 2% of compensation
- DC: Minimum employer contribution must be no less than 3%
Vesting Schedule Use
Faster:
- Top-heavy DB Plans
- ALL DC plans
Slower:
- Non-top heavy DB plans
Both subject to 2 year eligiblity / 100% vested requirements.
(perfect question R-23)
When does the vesting clock start?
Based on employee date of HIRE (not eligiblity for the plan) (R-23 perfect question)
Vesting with the 21 / 2 rule
After 2 years of service, and the attainment of age 21, 100% vested in balance.
ADP / ACP Testing (yikes)
401k and 403b elective deferrals are subject to non-discrimination testing (that’s where ADP / ACP comes in). Both compare % for NHCE to % for HCE
Shortcut (to get max HCE deferral %):
- If deferral 0-2%, TIMES 2
- If deferral 2-8%, ADD 2%
R-24 example
When questions ask about most “Restrictive” vesting, or to try and “Retain” employees what is best?
When they ask about strictest service requirement, what is best?
Longer vesting option signals restrictive and retention (2-6 or 3-7)
Strictest service = 2 year 100% eligibility
3 Ways that Qualified Plans can Discriminate:
(1) Age (age-weighted plans)
(2) Wages (social security)
(3) Cross Testing (both)
Which plans cannot be integrated with Social Security?
ESOP, SIMPLE, and 401(k) Simple
Three Tests for SS Integration vs. Age Weighted
(1) Age 50 - Older, AW ; Younger, SS
(2) Income 200K - Over, AW ; Under, SS
(3) Rank and file making 90 or less (SS)
Rank and File are younger than owner (AW)
Over 50, Over 200K, and younger - AW
Under 50, Under 200K, and Under 90 (rank and file) - SS
Cross Tested Plans
Most common approach to age weighting. Factors Ages and Wages.
Basically maxes HCE contribution percentages, and give minimum compliant contributions for NHCEs.
Multiple Plan Rules (Deferrals are aggregated)
401(k) and SIMPLE and SARSEP - 18,500 + catchup
Simple & another SIMPLE - 12,500 plus 3K catchup
457 no aggregation!
Unrelated Employer Plan Contributions
Non-employee deferrals can be doubled up! Cannot be:
- Parent-subsidary (one company owns at least 80% of the other company)
- Brother-sister (five or fewer owners own at least 80% of two or more companies)
- Affiliated service group (doctors)
Life Insurance Suitability
Must be merely “Incidental” to retirement benefit purpose of the plan. Considered “Incidental” if it meets either of the following tests:
(1) For DC plans (generally)
- Aggregate premiums paid are at all times less than the following % of the plan cost contributions for that person. Term & Universal = 25%, Whole Life = 50%
(2) Monthly benefit * 100, is maximum death benefit allowable
What defined benefit plan types are insured retirement plans?
412(e)3 or 412(i)
Funding is restricted to life insurance (100 times rule)
What is UBTI
(Unrelated business taxable income)
Taxable income generated by a tax exempt entity by means of certain passive activities (usually Limited Partnerships, or anything that uses debt). The return attributable to Debt is taxable within a retirement plan! (RE can sometimes trigger it as well)
Avoid these in retirement plans!
What rollovers are prohibited?
(1) Non-gov 457 to anything but another Non-gov 457 plan
(2) Hardship Distributions
(3) RMDs
60 Day Rollover Limit
You get unlimited direct rollovers, but you’re limited to one 60 day rollover inside your 401(k), and one rollover in your IRA for each 12 month period (you can do both in 12 months).
For example, if you do a 60 day, then roll the 401K into an IRA, you can do one in the IRA without breaking the rule.
“Distribution” is the word to look out for (communicates 60 day, not direct)
Qualified Plan Withholding requirements:
20% mandatory withholding, if check is issued to recipient (not for direct rollovers). Two exceptions:
(1) Part of substantially equal payments
(2) Made to comply with MRD requirements
If someone dies, and their spouse who is 50 withdraws their balance, what amount will they get?
Amount less 20% withholding (direct distribution). Death means they don’t pay 10% penalty.
10% Penalty Exceptions that apply to Qualified Plans and TSA distributions
- Death or total disability
- SEPP following separation from service
- Distribution following separation from service >55
- Distribution under a QDRO
- Medical expenses > 7.5% of AGI, OR insurance premiums after separation from employment (if you file for unemployment)
What is a 72t Distribution?
What is the SEPP recapture rule?
Substantially Equal Periodic Payments (SEPP)
-You can avoid 10% penalty tax if you don’t break the recapture rule
Recapture Rule: Must pay penalty tax that would have been imposed on all payments received before 59.5 IF plan is modifided before the later of:
- End of the 5 year period OR
- Attainment of 59.5
(basically, you have to be 59.5 AND have been receiving payments for 5 years before modification, or you must pay 10%)
72t Recapture:
Joe starts SEPP at age 57, and after 4 payments he modifies the plan. Is he subject, and if so, for how much?
He did trigger recapture (because he missed the 5 year rule)
However, he only has to pay 10% on payments received before he turned 59.5!
What is the “One-time” election rule for 72t Distributions?
Participants can switch from annuity / amortization method to the RMD method with no penalty.
The election with reduce the payout amounts and tax
(Until 59.5, at which time you can turn it off until 70.5)
Required Beginning Date (RBD) - IRAs vs. Non-IRAs
All IRAs (IRA, SEP, SIMPLE) - 4/1 of year following 70.5
Qualified, 403(b), 457 Plans
- Later of Retirement OR 70.5
- (Unless you’re a 5% owner, which means you have to start at 70.5, but can still add)
How do you determine which age factor to use for RMDs?
If turn 70 in first 1/2 of year, use 70
If your turn 70 in back 1/2 of year, use 71
RMDs at Death of Owner
(Roadmap R-34 is unbeatable)
If the Owner of an IRA dies before RBD, what are your options:
- Roll into spouses’s own IRA, and take RMDs as if it were their own.
- Keep the assets in the deceased’s IRA, take distributions when the owner would have reached RBD
- If you’re not a spouse, do the “Inherited IRA”, starting distributions based on Life Expectancy, using -1 method (Stretch IRA)
- If not an individual (estate, charity, non-qual trust), it’s the 5 year rule
If owner dies at or beyond RBD, what are your options?
- Spouse Only: Roll over IRA to their own IRA and take distributions at their own RBD (can turn them off)
- Spouse Only: Keep the assets in the owners’ IRA and take distributions based on longer of (1) Spouse’s single life expectancy or (2) No beneficiary, uses owners’ life expectancy
- Non-spouse individual: Must use longer of -1 “stretch” method, or use the owners’ life expectancy
- No-beneficiary (estate): Take remaining payments over owners’ original life expectancy
When can you use Joint life expectancy tables to calculate your RMDs?
When you SPOUSE is 10 years or more younger, and that SPOUSE is the beneficiary.
It allows for lower mandatory distributions.
When do you have to have plan documents in place?
Qualified plans, must be executed within the plan tax year that you wish to take the deduction. 401(k) plans with deferrals must be established before the first deferral can be made.
SEP plans can be established anytime, as long as it’s before tax due date (Advantage!)
Qualified Plan Loans
For QPs and 403(b) plans.
Lesser of 50% and 50K (typically)
Small accounts can borrow 10K, without regard to percentage.
Pensions and Annuity Options (limitations)
- For married employee, must be in the form of a QJSA, unless the employee has waived that benefit and the spouse consents in writing.
- Married employee dies before retirement, then the plan must pay a qualified pre-retirement Survivor annuity.
Spouse must waive any non-JNT!
QDRO Rules
- One of the exceptions to “Protection” in Qualified and TSA plans.
- QDRO cannot override plan rules, but can “Segregate” plan assets into a sub-trust until they are available under plan rules.
QDRO Rules don’t apply to IRAs! (distributions avoid 10% penalty, and may/may not be taxable)
Early IRA Distribution Penalty Exceptions
- Death
- 72t SEPP
- Disablity
- First time home expense to 10k
- Qualified Education expenses
- Medical espense>10%
- Medical insurance premiums after separation from employment, aftter 12 weeks of unemployment comp.
IRA 10% Exceptions (Home and Education)
- FIRST not principal home purchase qualify
- Education expenses must be “Qualified”
IRA has NO LOANS (so a loan for a home is wrong)
ROTH IRA Phase-out
- Limits for Single and MFJ is given on the exam
- Limits for Married filing separately are between 0 and 10K!
When does ROTH catch-up kick-in?
1,000 additional contribution after the age of 50! (same for IRAs)
50 Catch-up ages same as Qualified Plan!
ROTH Distribution Ordering
- Contributions! (freebie, no penalty or tax)
- Conversion assets! (never tax, can be penalty)
- Earnings! (Likely both tax and penalty, but can avoid penalty)
ROTH RMD Rules
- During life of owner, NONE
- When owner passes,
(1) if spouse, they can leave it in plan and take RMD when owner would reach 70.5, or treat it as their own.
(2) Can take life-expectancy distributions (stretch IRA)
(3) 5 year mandatory rule.
ROTH 401(k) (or other types)
- No income limits!
- Employer contributions can’t go into ROTH, must got into traditional.
Nonqualified Plan Characteristics
- May discriminate
- Exempt from most ERISA
- No tax deductions until the employee is taxed
- Fund’s earnings are sometimes taxable to the employer (life insurance / annuities)
- Distributions taxed at ordinary income tax rates.
FOR REGULAR CORPORATIONS ONLY
Unfunded Nonqualified Deferred Comp
- More like “Informal Funding”.
- Assets are just owned by the company, and subject to creditors of the company.
- Assets are still separate from company’s general operating accounts.
All about creidtor access. Often use Life Insurance / Annuities for this.
Life Insurance (deferred comp usage)
- Employee has no rights or security interest in the life insurance
- Taxation:
(1) Policy is owned by the employer, no deduction, tax free benefit.
(2) Benefits paid to the employee are deductible as long as they represent reasonable compensation for services rendered. (CV can be funding)
(3) PV of Death Benefits paid to surviving beneficiaries are includible in the gross estate of the employee.
Section 162 is different, when the employee owns the policy.
Rabbi Trust (Key Words / Explanation)
“Golden Parachute”
- Funds available to creditors.
- For key employees who have fear that new management might be hostile / change their deferred compensation benefits.
- For situations where litigation to enforce pmt of deferred comp would be too costly to be practical
For Hostile takeovers, mergers, acquisitions, etc.
(still vulnerable to bankruptcy)
Secular Trust
Opposite of Rabbi trust (name)
- Addresses:
(1) Lack of security with informally funded plan
(2) Fear that tax savings will disappear because tax rates will be higher in retirement - Beyond the reach of creditors, irrevocable trust for the employee.
- Funds are taxed in the year funds are placed in the trust, and deductible by employer.
Tradeoff protection for current taxation (no deferral)
2 Ways Employer is Taxed on Informally Funded Deferred Compensation
(1) Accumulated earnings tax applies to funds set aside
(2) Earnings on funds set aside may be subject to additional tax (annuities held by non-natural person pays tax on accumulation)
Substantial Risk of Forfeiture Watch-outs
If family owns the firm, and an employee with an informally funded plan (who would normally not be taxed until receipt), then the informal funding WOULD be currently taxable to the employee.
There’s no real risk of forfeiture in this scenario because family owns and manages the firm.
Two major determinants of Taxation for Deferred Comp plan (Funded, vs. Unfunded)
(1) Free transferability of employee’s interest
(2) Substantial risk of forfeiture, at the time the contribution to the plan is made by the employer.
Substantial Risk of Forfeiture tests:
Usually depend on performance of services for a period of at least 5 years (informal).
(1) Employee’s relationship to other stockholders and the degree of their control (family business)
(2) Employee’s relationship to corporate officers
NSO Keys (section 83)
- Right to purchase specified number of shares of stock at given time and price.
- No taxation occurs, as long as there’s substantial risk of forfeiture
- Any ISOs vesting in a calendar year > $100,000, are treated as NSO
ISO Keys
- Tax favored plan, for granting options.
- 100K limit in each year qualifies for favorable tax treatment.
- Corporation granting an ISO doesn’t normally receive a tax deduction for it at ANY TIME.
- Not deferred compensation
- Typical vesting period at least 1 year (before exercise), but not required
WATCH OUT FOR AMT
Primary difference between ISO and NSO
Taxation at the date of exercise:
- ISOs are not subject to regular tax when exercises
- NSOs ARE subject to tax when exercised
- Basically, for ISOs, you can avoid tax when exercised, and only pay capital gains for bargain element when you sell (as long as holding period is met)
R-49 Table is killer
ISO Disqualifying Disposition Taxation (super weird and crazy)
IF SOLD IN THE SAME CALENDAR YEAR AS EXERCISE:
- Bargain element is Taxed as COMPENSATION not just OI (and subject to FICA/FUTA + Withholding)
IF ISO is sold in FOLLOWING calendar year, but within 12 months of exercise:
- Bargain element is ORDINARY INCOME (no FICA / FUTA)
(3 examples on R-49)
When does Corporation get a deduction for an ISO
When it becomes an NSO (through a disqualifying disposition, etc.)
Can ISOs be gifted?
Generally a bad idea, for taxation purposes
If gifted before exercise, generally makes the option a NSO, and it’s taxable as OI to the person doing the gifting.
If the person gifting dies, it maintains it’s ISO treatment
100K ISO Limit (on what)
Amount of options that become exercisable in any given year (vest)
83b Election
Employee elects to be taxed on value of granted stock for NSO and Restricted Stock (not ISOs) at time of grant.
This accelerates taxable event to the grant date, and any future appreciation will be deferred until sale, at LTCG rates. (if you expect the stock to go through the ceiling).
Section 83, is ordinary income at vesting, capital gains from there forward.
Stock Plan Types and Basics
(1) Restricted Stock - Sale of stock to employee at a bargain price. No taxation if Substantial risk of forfeiture exists
(2) SARs (stock appreciation rights) - Rights to be paid an amount equal to difference between value of shares at grant vs. exercise
(3) Phantom Stock - Right to cash (bonus) based on performance of phantom shares of corporation stock over time.
SARs and Phantom Stock Similarities / Differences
Similar:
- Both paid in cash, stock or combination (or any other type of consideration)
Different:
- Phantom stock, usually no choice of exercise date
- Phantom not granted in tandem with options
- Phantom stock carries dividend equivalent rights too. (SAR only appreciation)
Junior Class Shares (JCS)
Junior stock plan. After substantial risk of forfeiuture, the junior class shares (b) are converted into regular shares (a).
Employee Stock Purchase Plan (ESPP)
Section 423 Stock plan.
- Employer can discount price of stock up to 15% of market value
- At time of purchase, no tax consequences. Similar to ISO tax treatment.
Who are 457 Plans for? Other special circumstances?
- For Governenmental agencies etc.
- For non-church tax exempt
- SUBJECT TO CREDITORS
- Age 50 catch-up only for Gov.
- Rollovers only for Gov
NO FICA for Deferrals (deferred comp)
Do ROTH 401(k) or 403(b) accounts require RMDs
YES YES YES. THEY DO!
What types of org. cannot use a 403(b)
Governmental do not qualify!
Must be 501c3
Do QDROs apply to both Qualified and Retirement Plans?
NO. Only to Qualified
Can SEP contributions continue past 70.5?
YES only plan that has owners able to contribute beyond 70.5 (like Qualified Plans)
ROTH Conversions WATCH OUT
You must take RMD (if eligible) before the conversion!
