Retirement Planning - Administration of Qualified Plans

Question 1

What are the distribution reasons for Pension Plans?

Answer 1

• Pension Plan Distributions Subject to Ordinary Income Tax
  1. Early Termination: Receive lump sum distribution, roll over funds to IRA or Qualified plan , leave vested balance in the plan.
  2. Normal Retirement Age:
• generally pays a single life annuity, married couples must be offered a qualifying joint and survivor annuity

Question 2

What are QPSA & QJSA?

Answer 2

Qualified Joint Survivor Annuity:

• must be provided to married participants of a pension plan or profit sharing plan, unless the benefit is payable to the surviving spouse upon the participants death.
• as long as either lives they receive the benefit, Surviving spouse can waive this benefit if they sign a waiver 90 days before start date of annuity.

Qualified Pre-retirement Survivor Annuity:

• Must be provided to married participants of a pension plan or profit sharing plan, unless the benefit is payable to the surviving spouse upon the participants death.
• provides a benefit to surviving spouse if partcipant dies before attaining normal retirement age.
• benefit can be waived within 90 days before start date, subject to both estate and ordinary income tax.

Question 3

What is the mandatory withholding requirement?

Answer 3

-Qualified Plan’s are generally required to withhold a mandatory 20% from most distributions made to the participant other than hardship distributions or loans.

NOT for IRA’s or if a Rollover election is made.

If a 60 day rollover is done, the mandatory withholding will be credited back to the client on their tax return.

Question 4

Rollover of After-tax contributions?

Answer 4

• can be rolled over into qualified plan or into a traditional IRA, results in a basis in the plan. Only through a direct rollover
• participant will have an adjusted basis in distributions received from a qualified plan if either of the following have occurred:

participant made after-tax contributions to a contributory qualified plan, or

participant was taxed on the premiums for life insurance held in the qualified plan.

Question 5

What requirements must be met for a distribution to be considered a lump sum distribution?

Answer 5

1. distribution must represent the employees entire accrued benefit in the case of a pension plan or defined contribution plan.
2. must be due to death, age 59 1/2, disability, separation of service.
3. employee must have participated in the plan for at least five taxable years prior to tax year of distribution.
4. taxpayer must elect lump sum distribution treatment by attaching form 4972 to the income tax return.

Question 6

What is 10 year forward averaging?

Answer 6

• unlikely to be tested, but know what it is.
• participant born prior to January 2, 1936 may be eligible for 10 year forward averaging when taking a lump sum distribution from a qualified plan.

Question 7

What is pre-1974 capital gain treatment?

Answer 7

• unlikely to be tested, but may appear in an answer set.
• participants born prior to January 2, 1936 may be eligible to receive capital gain tax treatment on a portion of a lum sum distribution that is attributable to pre-1974 participation in a qualified plan,.
• Capital gain is treated at 20% rate.

Question 8

What is Net Unrealized Appreciation?

Answer 8

• Taxpayers who receive a lump-sum distribution of employer securities (such as a stock) may benefit on NUA.
• at date of the sale of the employer securities, the participant will be required to recognize the long-term capital gain deferred since the date of the distribution.
• any subsequent gain after the distribution date will be treated as either short-term capital gain or long-term gain based on the holding period beginning at the date of the distribution.
• If someone inherits NUA securities, there is no step up in basis. They receive the basis of the securities at the time of the NUA.

Question 9

what are things to consider for NUA?

Answer 9

1. participant must qualify for lump sum distribution
2. NUA portion must be relatively high in comparison to the cost basis portion, otherwise, the recipient may be paying too much immediate ordinary income tax for the benefit of future long term capital gain treatment.
3. Risk of holding a concentrated position.
4. Cash flow considerations, do they need cash or is it better to hold onto the security.

Question 10

What are the exceptions to distributions before age 59 1/2?

Answer 10

*Distributions prior to age 59 1/2 is generally given a 10% early withdrawal penalty unless it meets one of the exceptions.

Exceptions are listed in the image of the chart.

Question 11

What are section 72(t) distributions?

Answer 11

• Equal periodic payments, made at least annually for the life of the participant or the joint lives or joint life expectancies of the participant and his designated beneficiary.
• Not subject to 10% penalty and can only be made after separation from service.
• payments must continue exactly as calculated for the later of five years from the date of the first payment or the participant attaining age 59 1/2.
• Must be made in one of the following three ways:
  1. Required Minimum Distribution Method - payments calculated annually in the same way as the RMD method.
  2. Fixed Amortization Model - Payment calculated over the life if single or joint life expectancy if married. Series of installment payments that remain the same.
  3. Fixed Annuitization Model - Participant takes distributions of the account over their life expectancy as determined by dividing the account balance by an annuity factor using a reasonable interest rate and mortality table.

Question 12

Exam Tip: For Qualified plans to avoid the 10% penalty they make a “MESS AT DQ”

Answer 12

M - Medical Expenses above 7.5 percent of AGI
E - Equal periodic payments, 72(t)
SS- Separation from service

A- Age
T- Tax Levies

D- Death and Disability
Q - QDRO

Question 13

Exam Tip: For IRA’s to avoid the 10% penalty, they say “HIDE ME”

Answer 13

H - first time Home purchase
I - health Insurance
D - Death and Disability
E - higher Education

M - Medical expenses above 7.5 percent of AGI
E - Equal Periodic Payments.

Question 14

What are rules surrounding Required Minimum Distributions?

Answer 14

• Require Individuals to begin taking minimum distributions when the participant attains age of 72 for taxpayers that reached age 70 1/2 after 12/31/2019.
• if not distributed by required date, client will pay a 50 percent excise tax.
• distributions apply to assets in qualified plan, IRA, 403 (b), SEP, SIMPLE, 457, Roth 401k, 403(b), inherited Roth IRA’s.
• First distribution taken by April 1st of year after turning 72. December 31st is the deadline for every year after.

Question 15

What is the exception to the general RMD Rule?

Answer 15

-Exception to general rule if participant is still employed upon attainment of age 72.

If still employed they do not have to start taking the RMD until April 1 of the year they terminate employment.

*exception not available for any participant that owns more than 5 percent of the ownership of the plan sponsor in the year he reaches age 72.

Question 16

What table to use when calculating the RMD?

Answer 16

• Always use the uniform life table, accounts for age of account holder and one person 10 years younger.
• only exception is when the sole beneficiary is the spouse and they are 10 years younger. In this instance you use the Joint life expectancy table.

Question 17

What are the Required Minimum Distribution Rules after an owners death?

Answer 17

• See Chart for breakdown

Eligible Designated Beneficiary :

Surviving spouse
child participant who has not reached age of Majority
Disabled or chronically ill individual
any other individual who is NOT 10 years younger than the participant.

Designated Beneficiary:

Listed Beneficiary who does not meet the criteria for an eligible designated beneficiary.

Non Designated Beneficiary:

Estate, Charity, and some trust.

Question 18

Steps to selecting a qualified retirement plan!

Answer 18

Question 19

What is an Employee Census?

Answer 19

Census will identify each employee, their age, compensation, number of years of employment and ownership interest.

also good to review employee turnover to determine appropriate vesting schedules and how to deal with forfeitures resulting from employee termination.

Question 20

Plan summary chart

Answer 20

Question 21

Plan selection chart!

Answer 21

Question 22

What are Master or Prototype plans?

Answer 22

-plans that have been pre-approved by the IRS and are available for employers to simply adopt.

Question 23

What are determination letters?

Answer 23

used when a retirement plan is adopted, amended, or terminated.

filed in advance of the plan being adopted or immediately thereafter, usually by filing form 5300.

Question 24

What are employer requirements to communicate with Employees regarding plan?

Answer 24

• information regarding the qualified plan must be distributed to employees who might be eligible for the plan and for ineligible employees too.
• employer required to provide a summary of details of the qualified retirement plan, called a summary plan description, to employees, participants, and beneficiaries under pay status.
• employer also required to provide participants notices of any plan amendments or changes.
• Employer must also provide participants a copy of the plans summary annual report each year.

Question 25

Administration of Qualified Retirement Plans:

Answer 25

• Annual coverage testing to ensure non discrimination
• sponsors of pension plans, must contribute enough money into the plan to satisfy the minimum funding requirements as determined by an actuary for each year.

Question 26

What happens when more money is contributed to a defined contribution plan than is allowed?

Answer 26

• Excess amount is called the excess annual addition.
• A plan can correct excess annual additions if the excess was caused by a reasonable error in estimating a participants compensation, determining elective deferrals permitted, or because of forfeitures allocated to participants accounts.
• Excess annual additions can be corrected, by:

Allocate the excess annual additions to other plan participants

hold excess annual additions in a separate account and allocate in future years

make corrective distributions

Question 27

What are the rules for employer deductions from qualified plans?

Answer 27

• Deduction for contributions to a defined contribution plan cannot exceed 25% of the compensation paid or accrued during the year to eligible employees participating in the plan.
• Deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Consequently an actuary must calculate the appropriate amount of mandatory funding.

Question 28

What is the Deduction limit for self-employed individuals (Keogh Plans)?

Answer 28

Calculate Self employed individuals contribution rate as:

Self Employed Contribution Rate=Contribution Rate/ (1+contribution Rate)

See image for how to calculate the self employed individuals contribution.

*Keogh Plan Contributions 25% contribution really equals 20%.

Question 29

Self employment contribution example

Answer 29

Question 30

What are prohibited transactions?

Answer 30

• prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law.
• these actions could have adverse consequences to plan or participants.
• initial penalty is a 15 percent excise tax on the amount involved for each year (or part of year) in a taxable period.
• no excise tax if transaction corrected within 14 days of the date, if not corrected
• if transaction is not corrected within the period, an addiiotnal tax of 100 percent of the amount involved is imposed.

See image for example of prohibited transactions

Question 31

Who is considered a disqualified person for the prohibited transaction rules?

Answer 31

Question 32

ERISA and Filing Requirements

Answer 32

-administrators of defined contribution plans required to provide a benefit statement:

To participant who invest his own account at least quarterly, any other participant at least annually, other beneficiaries upon written request during a 12 month period.

-Department of labor is charged with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of fiduciary provisions of the law, workers benefits rights as regulated by ERISA.

Question 33

Amending a qualified plan?

Answer 33

• Plan changes are common due to tax law changes, business changes, or to solve a plan defect
• changes are implemented by amending the plan document. A new summary description must also be revised when this is done

Question 34

What happens when a qualified plan is terminated?

Answer 34

-presuming sufficient funds are available all if the participants in the plan become fully vested in their benefits as of date of termination

Question 35

What is the permanency requirement?

Answer 35

Plan must not be established as a temporary program.

Goal is to dissuade owners from creating plans that only benefit owners and key employees and the plan vanish before benefits can be accrued by rank-and-file employees

Question 36

What are the rules surrounding Defined benefit terminations?

Answer 36

-Defined Benefit plans must terminate under standard, Distress, or involuntary termination:

Standard Termination - voluntary and employer had assets to pay all benefits at the time of termination

Distress - voluntary and employer is in financial difficulty and is unable to continue with the plan financially

Involuntary - involuntary termination initiated by the PBGC for a plan that is unable to pay benefits from the plan in order to limit the amount of exposure to PBGC

Question 37

How are defined contribution plans terminated?

Answer 37

• employer passes a corporate resolution, all final contributions are completed and assets distributed from the plan
• Plan is already funded and not subject to PBGC,

Question 38

What is a plan freeze?

Answer 38

Employer no longer wants to contribute to the plan but does not want to fully terminate

Question 39

ERISA and Filing Requirements

Answer 39

-Administrator of a defined contribution plan is required to provide a benefit statement

participants who invest their own accounts quarterly, any other other participant or beneficiary at least annually, to other beneficiaries upon written request (one per year)

• Department of Labor is charged with enforcing the rules governing the conduct of plan managers, investment plan assets reporting and disclosure of plan information, enforcement of the fidi