Retirement Planning & Employee Benefits Flashcards

Question

List the entities which may establish a 401(k) plan.

Answer 1

Entities Which May Establish a 401(k) Plan * Corporations * Partnerships * LLCs * Proprietorships * Tax-exempt entities * *TIP: “401(k)'s are for CPP's & LLC's & TEE's”** * *"Corps, Partners, Proprietors, LLC's and Tax Exempt Entities"**

Answer 2

_Characteristics of a Roth IRA_ * Contribution Limit - $6,000 (2021) * Catch-Up Contribution Limit - $1,000 (2021) * Income Limit - Married: $198k - $208k, Single: $125k - $140k, Married filed separately: $10,000 modified AGI (2021) * Conversion from a traditional IRA account allowed? - Yes * Available for loans? - No * Qualified Distributions (not subject to tax or penalty) - To be qualified, the account must be held for at least 5 years **AND** the distribution must be made on account of a first time home purchase, disability, death, or on or after the attainment of age 59½. * Distributions that are not qualified - Specific Ordering Rules: contributions first, conversions second, and earnings third * Required Distributions - Not subject to minimum distributions during owner’s lifetime Note: There is no income limit to convert to a Roth.

Answer 3

_Characteristics of a Roth 401(k) Account_ * Contribution Limit - $19,500 (2021) * Catch-Up Contribution Limit - $6,500 (2021) * Income Limit - **No income limits.** However, participant must have income for the deferral. * Conversion from a traditional IRA account allowed? - No * Available for loans? - Yes * Qualified Distributions (not subject to tax or penalty) - To be qualified, the account must be held for at least 5 years and the distribution must be made on account of disability, death, or on or after the attainment of age 59½. * Distributions that are not qualified - Distribution is determined under Section 72. Each distribution will consist of basis and earnings. * Required Distributions - **Follows minimum distribution rules** (i.e., distributions must begin by April 1 in the year following the year in which the participant reaches 72 (those 70 1/2 after 12/31/19). Those 70 1/2 by 12/31/19 follow old RMD rules.

Answer 4

**"HAD 5 YEARS"** * *_5 year holding period AND_**: - **H**ome purchase ($10k lifetime) - **A**ge 59.5 (on or after attainment) - **D**eath & Disability Consequences are that **_earnings_** are TAXABLE. Early withdrawal penalties can be applied to CONVERIONS & EARNINGS. Non-qualified distributions are distributed in order: 1. Contributions (basis) 2. Conversions (basis) + penalties 3. Earnings (taxable) + penalties

Answer 5

**ADP Schedule** If the ADP for NHC Employees is \> The Permissible ADP for HC Employees is: NHCEs ADP is: **0% to 2% = 2 x ADP** of NHCEs for HCEs NHCEs ADP is: **2% to 8% = 2% + ADP** of NHCEs for HCEs NHCEs ADP is: **8% plus = 1.25 x ADP** for NHCEs for HCEs * *If HCE's Avg. ADP is over the permissible ADP (as calculated above), then the plan fails the ADP test.** * *See pg. 61 for example**

Answer 6

1. Corrective distributions - Requires a return of contributions to the highly compensated. 2. Recharacterization - Requires excess deferrals to be recharacterized as after tax contributions. 3. Qualified non-elective contributions (QNEC) - The employer makes a contribution to all non-highly compensated employees’ accounts. 4. Qualified matching contributions (QMC) - The employer contributes to the non-highly compensated employees who made a contribution.

Answer 7

If the employer elects to use a match rather than the non-elective contribution, the standard safe harbor match formula requires the employer to match 100% of the first 3% of employee elective deferrals and 50% of employee elective deferrals contributing more, up to 5% max. Safe Harbor plans need a plan election, not simply making the appropriate match. **Ex: Employer elects to use match vs. non-elective contribution under the Safe Harbor Provision. Employer matches using the above amounts.** * *Employee's elective deferral is 5%. What is the Employer Safe Harbor Match amount?** * *It will be 3% + 50%(2%) = 4%**

Answer 8

Loans are funds that are distributed from a qualified plan or 403(b) with the expectation of repayment * **_A plan may permit loans with a limit_**: * Lesser of 50% of vested account balance or $50,000. This amount is further reduced by the highest outstanding loan amount within the last 12 months. * De minimis loans, up to $10,000 can be made without adhering to the 50% limit. * **_Repayment is generally over 5 years_**: * Loans cannot be repaid early, must be paid ratably through the term * Loans from home mortgage may be longer than 5yrs as long as they are defined as reasonable. * Unpaid loans upon termination are usually treated as a distribution subject to ordinary income tax and possibly early withdrawal penalty (10%).

Answer 9

* The retirement, death\*, or separation of service of the participant and attainment of age 55\*; * The termination of the plan without the establishment of another plan; * Certain acquisitions of the company or company assets; * The attainment of age 59½ by the participant\*; or * Certain hardships. * Distributions on account of any of these items are taxable as ordinary income to the extent the participant does not have an adjusted basis in the 401(k) plan and may also be subject to a 10 percent penalty. \*Note: Not subject to 10% penalty.

Answer 10

_Characteristics of Stock Bonus Plans_ * Plan Establishment - December 31 * Date of Contribution - Due date of tax return plus extensions * Type of Contributions - Generally stock * Deductible Contribution Limit - 25% of covered compensation * Valuation - Generally needed annually * Eligibility - Same as other Qualified Plans (age 21 and 1 year of service or 2 years with 100% vesting) * Allocation Method - % of compensation or formula based on age, service of classification

Answer 11

_Characteristics of Stock Bonus Plans (continued)_ * Vesting - Same as other Defined Contribution Qualified Plans (3-year cliff or 2 to 6 year graduated vesting)\*\* * Portfolio Diversification - No\*\*\* * Voting Rights - Generally yes * Type of Distributions - Generally in stock * In-Service Withdrawals - May be allowed after two years * Loans - May be allowed (but not usually) * Taxation of Distributions - Lump-sum distributions will qualify for NUA treatment. Other distributions are treated as ordinary income. * \*\*Effective for plan years after 2006 under the Pension Protection Act of 2006.* * \*\*\* Diversification may be required as a result of the PPA 2006.*

Answer 12

_Characteristics of Profit Sharing Plans_ * Plan Establishment - December 31 * Date of Contribution - Due date of tax return plus extensions * Type of Contributions - Generally cash * Deductible Contribution Limit - 25% of covered compensation * Valuation - Generally unnecessary * Eligibility - Same as other Qualified Plans (age 21 and 1 year of service or 2 years with 100% vesting) * Allocation Method - % of compensation or formula based on age, service of classification

Answer 13

_Characteristics of Profit Sharing Plans (continued)_ * Vesting - Same as other Defined Contribution Qualified Plans (3-year cliff or 2 to 6 year graduated vesting)\*\* * Portfolio Diversification - Generally yes\*\*\* * Voting Rights - Generally no * Type of Distributions - Generally in cash * In-Service Withdrawals - May be allowed after two years * Loans - May be allowed (but not usually) * Taxation of Distributions - Generally full distribution is ordinary income * \*\*Effective for plan years after 2006 under the Pension Protection Act of 2006.* * \*\*\* Diversification may be required as a result of the PPA 2006.*

Answer 14

* The ESOP must own at least 30 percent of the corporation’s stock immediately after the sale. * The seller or sellers must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale and hold such securities three years. * Qualified replacement securities are securities in a domestic corporation, including stocks, bonds, debentures, or warrants, which receive no more than 25 percent of their income from passive investments. The qualified replacement securities can be in the form of stock in an S Corporation. * The corporation that establishes the ESOP must have no class of stock outstanding that is tradable on an established securities market. * The ESOP may not sell the stock acquired through the rollover transaction for three years.

Answer 15

_Stock Bonus Plans_ * Plan Establishment - December 31 * Date of Contribution - Due date of tax return plus extensions * Type of Contributions - Generally stock * Deductible Contribution Limit - 25% of covered compensation * Valuation - Generally needed _ESOPs_ * Plan Establishment - December 31 * Date of Contribution - Due date of tax return plus extensions * Type of Contributions - Generally stock * Deductible Contribution Limit - 25% of covered compensation plus interest paid on loan * Valuation - Generally needed plus dividends (in certain circumstances)

Answer 16

_Stock Bonus Plans_ * Eligibility - Same as other Qualified Plans (21 and 1 year of service or 2 years with 100% vesting) * Allocation Method - % of compensation or formula based on age, service of classification * Integration with Social Security - Yes * Vesting - Same as other Defined Contribution Qualified Plans (3-year cliff or 2 to 6 year graduated vesting)\* _ESOPs_ * Eligibility - Same as other Qualified Plans (21 and 1 year of service or 2 years with 100% vesting) * Allocation Method - % of compensation or formula based on age, service of classification * Integration with Social Security - No * Vesting - Same as other Defined Contribution Qualified Plans (3-year cliff or 2 to 6 year graduated vesting)\*

Answer 17

_Stock Bonus Plans_ * Portfolio Diversification - No\* * Voting Rights - Generally yes * Distributions - Generally stock * In-Service Withdrawals - May be allowed after two years of participation * Loans - May be allowed (but not usually) * Taxation of Distributions - Ordinary income with NUA treatment available _ESOPs_ * Portfolio Diversification - No * Voting Rights - Generally yes * Distributions - Generally stock * In-Service Withdrawals - May be allowed after two years of participation * Loans - May be allowed (but not usually) * Taxation of Distributions - Ordinary income with NUA treatment available *\* Diversification may be required under PPA 2006.*

Answer 18

* Taxpayers who receive a lump-sum distribution of employer securities (such as stock) may benefit using a special tax treatment on the distribution. This tax treatment allows the more favorable capital gain tax treatment instead of ordinary income tax treatment on the NUA portion of the distribution as well as a deferral of recognition of the gain on the NUA portion until the distributed employer securities are sold. * Net unrealized appreciation (NUA) is defined as the excess of the fair market value of the employer securities at the date of the lump-sum distribution over the cost of the employer securities at the date the securities were contributed to the qualified plan. Fair Market Value at Date of Distribution - Value of Securities Used at the Date of the Employer Contribution = Net Unrealized Appreciation

Answer 19

To avoid the _10% penalty exceptions for_ **_IRA's_**, remember: What does a "**BAT**" say? "**HIDE ME**" * **_B_**irth or legal adoption ($5K within 12 months) * **_A_**ge (59.5) * **_T_**ax Levy * **_H_**ome purchase (first time up to $10K lifetime limit. "First" time home purchase = a home purchase in 2/5 years. Still lifetime limit) * **_I_**nsurance (health) * **_D_**eath and Disability * **_E_**ducation (higher) * **_M_**edical expenses above 7.5% AGI * **_E_**qual periodic payments (do not need to be separated from service) BAT's avoid 10% IRA penalties by saying: HIDE ME!

Answer 20

_"Birth MES AT DQ"_ = 10% Penalty Exceptions for Qualified Plans a **_BIRTH_** will make a **_MES AT Dairy Queen_** * **_B_**irth & legal adoption ($5K) * **_M_**edical expenses above 7.5 AGI * **_E_**qual Periodic Payments _(must be separated from service in QP)_ * **_S_**eparation of Service **after** age 55 * **_A_**ge 59.5 * **_T_**ax Levy * **_D_**eath & Disability * **_Q_**DRO

Answer 21

* Death * Attainment of age 59½ * Disability * Substantially equal periodic payments (Section 72(t)) * Medical expenses that exceed 7.5% of AGI * Qualified Domestic Relations Order (QDRO) – as long as share is moved to a Rollover IRA/qualified plan * Qualified public safety employee who separates from service after age 50 * Attainment of age 55 and separation from service * Birth or Legal Adoption ($5,000 within 12 months of event) **Exam Tip: Sometimes questions will say “X individual turned 55 _today_ and made a distribution from their plan _last_ year. Will the be subject to the early withdrawal penalty." Answer would be yes because the participant was not 55 last year.**

Answer 22

**Eligible Designated Beneficiary** * Surviving spouse for the employee or IRA owner * Child of employee or IRA owner who has not reached majority * At age of majority becomes a designated beneficiary * Disabled or Chronically ill individual * _Any other individual who is_ **_not_** _more than ten years younger than the employee or IRA owner_ * Hint: A twin brother/sister **Designated Beneficiary (non-eligible)** * Any individual designated as a beneficiary by the employee (not meeting the definition above) * Any beneficiary greater than 10 years younger. **Non-Designated Beneficiary** * Non listed Beneficiary, Charities and some trusts.

Answer 23

**Options prior to account depletion\*** **Eligible Designated Beneficiary\*\*** _Ex: Surviving Spouse, Child of employee/IRA owner not yet age of majority, Disabled or Chronically ill, individual who is NOT more than 10 years younger than owner (e.g. a twin)_ 1. Beneficiary can receive distributions over their remaining single life expectancy. 2. Spouse only: Rollover plan balance to their own IRA. 3. Minor child must use Designated Beneficiary rules upon reaching the age of majority. **Designated Beneficiary (non-eligible)** _Ex: Any beneficiary greater than 10yrs younger or not meeting the definition for an Eligible Designated Beneficiary, Child who has reached the age of majority._ 1. Account balance distributed by the 10th anniversary of owner’s death **Non-Designated Beneficiary** (follows pre-SECURE Act Rules) _Ex: Non-listed beneficiaries, charities and some trusts_ * **Before RMD -** Distribute participant’s account within 5 years. * **After RMD** - Distributions must continue over the remaining distribution period of the deceased owner (uniform life table). The decedent’s remaining distribution period is reduced by one each year. * \* In all cases, the beneficiary can take more than the minimum distribution (or faster than required).* * \*\* Upon the death of the Eligible Designated Beneficiary, the account must be distributed per the Designated Beneficiary rules.*

Answer 24

* **92.35%** (Multiply by _Net_ Self-Employment income = Earnings subject to tax) * **12.4% and 2.9%** (12.4% x up to $142,800, 2.9% x all income = Self-Employment tax) * **½** (Net Self-Employment income minus ½ of Self-Employment tax = Adjusted Net Self-Employment Income, AKA Earned Income) * **Maximum of 20%** (Multiply by Earned Income above = Self-Employed individual's plan contribution

Answer 25

1. **Calculate the self-employed individual’s contribution rate:** * *REMEMBER: THE MAX RATE IS 20%** Self-Employed Contribution Rate = _Contribution Rate To Other Participants_ 1 + Contribution Rate to Other Participants 2. **Calculate Self-Employment Tax:** Net Self-Employment Income _Times: 92.35%_ Net Earnings subject to Self Employment Tax _Times: 12.4% up to $142,800 + 2.9% on all net earnings_ Equals: Self-Employment Tax 3. **Calculate the self employed individual’s contribution:** Net Self-Employment Income _Less: 50% of Self-Employment Tax_ Equals: Adjusted Net Self-Employment Income (Earned Income) _Times: Self-Employed Contribution Rate_ Equals: Self-Employed Individual’s Qualified Plan Contribution

Answer 26

* A fiduciary of the plan. * A person providing services to the plan. * An employer, any of whose employees are covered by the plan. * An employee organization, any of whose members are covered by the plan. * Any direct or indirect owner of 50% or more of any of the following: * The combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation that is an employer or employee organization described in (3) or (4). * The capital interest or profits interest of a partnership that is an employer or employee organization described in (3) or (4). * The beneficial interest of a trust or unincorporated enterprise that is an employer or an employee organization described in (3) or (4). * A member of the family of any individual described in (1), (2), (3), or (5). (A member of a family is the spouse, ancestor, lineal descendant, or any spouse of a lineal descendant.

Answer 27

* Transfer of plan income or assets to, use of them by, or for the benefit of a disqualified person. * Self dealing by a fiduciary. * Receipt of consideration by a fiduciary for his own account when working with a party dealing with the plan (e.g. attorney, accountant). * Selling, exchanging, leasing, buying as well as lending or borrowing between a disqualified person and the plan.

Answer 28

* Traditional IRA - $1,000 * Roth IRA - $1,000 * SEP – N/A * SARSEP - $6,500 * SIMPLE - $3,000

Answer 29

* W-2 income * Schedule C net income * K-1 income from an LLC (SE income) * K-1 income from a partnership where the partner is a material participant (general partner) * Alimony payments from divorces finalized and not modified by 12/31/2018

Answer 30

* Earnings and profits from property, such as rental income, interest income, and dividend income * Capital gains * Pension and annuity income * Deferred compensation received (compensation payments postponed from a past year) * Income from a partnership for which you do not provide services that are a material income producing factor * Any amounts excluded from income, such as foreign income and housing costs * Unemployment benefits * Investment returns as a limited partner in a partnership * Income flowing from an S-corporation via Schedule K-1 * Social Security benefits * Worker’s compensation * Alimony received from divorces finalized or modified after 12/31/2018

Answer 31

Taxpayer (**and** spouse) are NOT active participant(s): - No AGI phase out limit Taxpayer **IS/ARE** active participant(s): - $66,000 to $75,000 single - $105,000 - $125,000 MFJ One spouse is active. **Non-active spouse** uses: - $198,000 - $208,000

Answer 32

**_Traditional IRA_ VS. _Roth IRA_** * *Earned Income** YES YES * *Contributions** YES YES * *Deductions** YES **NO** * *Investment Choices** YES YES * *RMD Rules** YES **NO (UNLESS: Bene Roth IRA)** * *Prohibited Transactions** YES YES

Answer 33

* A qualified distribution is a distribution from a Roth IRA that satisfies **both** of the following tests: 1. The distribution must be made after a **five-taxable-year period**. 2. The distribution **satisfies one of the following four requirements (triggers)**: * Made on or after the date on which the owner attains the age **59½**; * Made to a **beneficiary** or estate of the owner on or after the date of the owner’s death; * Is attributable to the owner being **disabled**; or * For first time **home** purchase (lifetime cap of $10,000 for first time homebuyers includes taxpayer, spouse, child, or grandchild who has not owned a house for at least 2 years).

Answer 34

**Contributions** Subject to taxation? - No Subject to 10% penalty? - No **Conversions** Subject to taxation? - No Subject to 10% penalty? - Yes or No\* No if conversion was OVER 5 years ago **OR** No if distribution meets 10% penalty exception **Earnings** Subject to taxation? - Yes (non-qualified distribution) Subject to 10% penalty? - Yes or No\* (No if distribution is for a 10% penalty exception) *\*Penalty will not apply if the distribution falls within the 10% penalty exceptions.*

Answer 35

* IRAs have a wide selection of investment choices, BUT certain types of investments are prohibited and are not allowed to be held within an IRA, mainly life insurance and collectibles. * If either life insurance or collectibles are purchased within an IRA, the purchase is deemed as distributions, the value of the purchase is subject to tax and/or penalty. * Collectibles include all of the following: * any work of art, antiques, metal or gems, stamps or coins, wines etc. * An EXCEPTION to the collectibles rule exists for certain US minted coins and bullion, such as American Gold, Silver, and Platinum Eagle coins, are permitted to be held in an IRA account (can be purchased, not transferred in). However, coins of most foreign countries, such as South African Krugerrands, are considered collectibles and are therefore not permissible investments for an IRA. * Note: In addition, investments in gold, silver, platinum, or palladium bullion are permitted. * *EXAM TIP: “IRA's allow you to invest in _Gold_ and _Silver_ **_P_**recious **_P_**lating"** * ***_G_**OLD** * ***_S_**ILVER** * ***_P_**LATINUM** * ***_P_**ALLADIUM**

Answer 36

* If an individual or beneficiary of an IRA engages in any of the following transactions, then the account will cease to be an IRA as of the first day of the current taxable year: * Selling, exchanging, or leasing of any property to an IRA; * Lending money to an IRA; * Receiving unreasonable compensation for managing an IRA; * Pledging an IRA as security for a loan; * Borrowing money from an IRA; or * Buying property for personal use (present or future) with IRA funds.

Answer 37

* C Corporations * S Corporations * Limited Liability Companies (LLC) * Partnerships * Proprietorships * Government Entities

Answer 38

* Employees who earned $5,000 or more from the employer in any two preceding calendar years * Employees who are expected to earn $5,000 during the current calendar year

Answer 39

_SIMPLE IRA_ * Application - Small employers (limit of 100 employee’s with compensation \> $5,000) * Style - Self-reliant employee elective deferral contributions and employer match * Established by What Date - Generally, October 1 of the year the plan starts _SIMPLE 401(k)_ * Application - Same as SIMPLE IRA * Style - Self-reliant employee elective deferral contributions and employer match * Established by What Date - Same as SIMPLE IRA _401(k)_ * Application - Most employers * Style - Self-reliant employee elective deferral contributions and employer match * Established by What Date - By date of tax filing with extentions

Answer 40

_SIMPLE IRA_ * Ability to have Other Plans - _Must not have another retirement plan_ * Filings and Costs - No annual filing requirement, minor costs * Annual Testing - None required if meet contribution requirements starts _SIMPLE 401(k)_ * Ability to have Other Plans - Same as SIMPLE IRA * Filings and Costs - Same as 401(k) * Annual Testing - None required if meet contribution requirements _401(k)_ * Ability to have Other Plans - There may be other plans * Filings and Costs - Annual filing required and administrative costs * Annual Testing - Required

Answer 41

_SIMPLE IRA_ * Vesting - All contributions are fully vested * Employee Elective Deferral Contribution Limit - $13,500 for 2021 * Catch-Up Contribution for Age 50 - $3,000 for 2021 _SIMPLE 401(k)_ * Vesting - All contributions are fully vested * Employee Elective Deferral Contribution Limit - Same as SIMPLE IRA * Catch-Up Contribution for Age 50 - Same as SIMPLE IRA requirements _401(k)_ * Vesting - Vesting schedules allowed * Employee Elective Deferral Contribution Limit - $19,500 for 2021 * Catch-Up Contribution for Age 50 - $6,500 for 2021

Answer 42

_SIMPLE IRA_ * Employer Contribution - The employer must generally make: A dollar-for-dollar match up to 3% of pay or a 2% nonelective contribution (based on covered comp limit for nonelective contributions) for each eligible employee. * Loans Permitted - No _SIMPLE 401(k)_ * Employer Contribution - Same as SIMPLE IRA except for the employer-match cannot be reduced to as low as 1% for no more than 2 out of 5 years, including the year of election. * Covered compensation limits apply. * Loans Permitted - Same as 401(k) _401(k)_ * Employer Contribution - Employer may contribute * Loans Permitted - Yes

Answer 43

25% - The increased penalty is to encourage participants to save for their retirement

Answer 44

_Characteristics of 403(b) plans for 2021_ * Application - Not-For-Profit institution (large universities) * Style - Self-reliance plans; employee only contributions * Subject to ERISA - Maybe (if organized as a qualified plan) * Established By What Date - End of year * Characteristics - Self-reliant savings plan * Elective Deferral Contribution Limit - $19,500 + $6,500 catch-up contribution * Available Contribution - $58,000 or 100% of compensation including elective deferrals * Additional After-Tax Contributions Permitted - Permissible by plan document

Answer 45

_Characteristics of 403(b) plans_ * Investment Risk - Employee has investment choices and risks * Investment Alternatives - Limited to Insurance Annuities and Mutual Funds * Penalties - 10% early withdrawal (if applicable) * Loans Permitted - Yes (regular qualified plan rules on loans if plan permits) * Rollovers - Yes, to IRA, qualified plan, or other 403(b)\* * ERISA Protected - Yes, if ERISA plan. ERISA not applicable if governmental or church TSA * In-Service Withdrawals - Generally no, except hardships, which are plan specific * Vesting - 100% at all times for contributions and earnings *\* Rollovers to Roth IRAs are permitted after December 31, 2007.*

Answer 46

_Public 457(b) Plans for 2021_ * Eligible/Ineligible - Eligible * Employer/Sponsors - Governmental Entities * Assets in Plan - Protected by Trust * Elective Deferral Contribution Limits - $19,500 _Private 457(b) Plans_ * Eligible/Ineligible - Eligible * Employer/Sponsors - Tax-Exempt Organizations under 501(c) * Assets in Plan - Not Protected by Trust; Available to Employer’s Creditors * Elective Deferral Contribution Limits - $19,500 _457(f) Plans_ * Eligible/Ineligible - Ineligible * Employer/Sponsors - Governmental Entities (Rare) & Tax-Exempt Entities under 501(c) * Assets in Plan - Not Protected by Trust; Available to Employer’s Creditors * Elective Deferral Contribution Limits - No Limit

Answer 47

_Public 457(b) Plans for 2021_ * Age 50 and Over Catch-Up Provisions - Yes * 3-Year Catch-Up Provisions - Yes, $19,500 * Rollovers Permitted? - Permitted to 401(k), 403(b), 457(b), or IRA plans\* _Private 457(b) Plans_ * Age 50 and Over Catch-Up Provisions - No * 3-Year Catch-Up Provisions - Yes, $19,500 * Rollovers Permitted? - Not Permitted Unless Rolled Into Another 457(b) _457(f) Plans_ * Age 50 and Over Catch-Up Provisions - No * 3-Year Catch-Up Provisions - No * Rollovers Permitted? - Not Permitted *\* Rollovers to Roth IRAs are permitted after December 31, 2007.*

Answer 48

_Characteristics of 457 Plans for 2021_ * Type of Plan - Nonqualified Deferred Compensation Plan * Application - Employees of state and local government, tax-exempt governmental agencies, and 501 entities * Style - Self-reliant, employee elective tax-deferred savings * Qualified Plan - No * Established By What Date - End of year * Characteristics - Deferred compensation plan * Elective Deferral Contribution Limit - Lesser of $19,500 or 100% of compensation + $6,500 catch-up for age 50 or older (catch-up for public only) Available Employer Contribution - Permitted, but very unusual

Answer 49

_Characteristics of 457 Plans_ * Additional After-Tax Contributions Permitted - No * Investment Risk - Employee selects investments and bears risk * Investment Alternatives - Broad * Penalties - 10% for early withdrawal * Loans Permitted - No * Rollovers - Public 457(b) plans may be rolled over to 457, 403(b), 401(k), or IRA plans permitting. Private 457(b) plans can only be rolled to other 457(b) plans. 457(f) plans cannot be rolled over. * ERISA Protected - No * In-Service Withdrawals - Yes

Answer 50

Tax-Sheltered Annuities (TSA) Examples: 403(b)'s and some 457(b)'s They offer tax-deferred employee payroll deduction.

Answer 51

* A qualified sale requires waiting until 2 years from the date stock was granted and 1 year from the date the stock was exercised. * Sales prior to either holding period being met are disqualified dispositions and terminate most of the tax benefits - it effectively triggers similar treatment as a NQSO.

Answer 52

1. ISOs can only be granted to an employee of the corporation issuing the ISOs. 2. At the date of the ISO grant, the exercise price must be greater than or equal to the fair market value of the stock. 3. An ISO cannot be transferred except at death. 4. The aggregate fair market value of ISO grants must be less than or equal to $100,000 per year per executive. Any excess grant over the $100,000 is treated as a NQSO. 5. To qualify as an ISO, the executive must not dispose of the stock within two years of the grant of the ISO or within one year of the exercise of the ISO. 6. The executive must be an employee of the corporation continuously from the date of the grant until at least three months prior to the exercise. Note: Item #4 above is tested occasionally and Item #5 above is tested often.

Answer 53

_Taxation of NQSO at:_ * Grant Date - No taxable income to holder if issued at the current or greater share price. * Exercise - Executive gives options and exercise price to company. Company issues stock to executive to replace option. * Taxation - At exercise, executive recognizes W-2 income to extent of difference between current stock price and exercise price. _Taxation of ISO at:_ * Grant Date - No taxable income to holder if issued at current or greater share price. * Exercise - Executive gives options and exercise price to company. Company issues stock to executive to replace option. * Taxation - At exercise, executive does not recognize any regular taxable income but will have an AMT adjustment for the appreciation over the exercise price.

Answer 54

_NQSO and ISO:_ * Adjusted Basis in Stock - Executive’s adjusted basis in stock is equal to the fair market value of stock (exercise price in cash plus the recognition of W-2 income). * Taxation When Stock is Sold - Capital gain or loss treatment. _NQSO and ISO:_ * Adjusted Basis in Stock - Executive’s adjusted basis in stock is equal to the exercise price. * Taxation When Stock is Sold - Capital gain or loss treatment.

Answer 55

* The regulations provide for an exclusion of the value of qualified transportation benefits from an employee’s gross income. This exclusion for transportation benefits is subject to the following limitations: * $270 per month for commuter highway transportation and transit passes combined, and * $270 per month for 2021 for qualified parking. * For any given month, if the value of a benefit is more than the limit, then any excess amount above the limit, less any amount the employee paid, is included in the employee’s income. The excess may not qualify as a de minimis benefit. Note: For years after 12/31/17 the cost of the transportation benefit is not deductible to the employer.

Answer 56

* An employee may exclude from their gross income amounts paid for, or expenses incurred, by the employer for qualified adoption expenses concerning the adoption of a child by an employee if these amounts are furnished according to a written adoption assistance program. * An employer may establish a written adoption assistance program that will pay expenses related to an adoption not exceeding $14,440 for 2021 to an employee. * The amount paid is excluded from the employee’s income, but it is subject to an income phaseout starting at $216,660 of adjusted gross income (AGI) for 2021. * Must adopt a child under the age of 18 to receive the credit. * Nondiscrimination requirements apply.

Answer 57

* Premiums paid by the employer are deductible by the employer and are not included in the employee’s gross income. * When the employer pays the premium and the value is excluded from the employee’s gross income, any disability income benefit received by the employee is taxable to the employee. * If the employee pays the entire premium with after-tax income or the employer pays the premium and the employee includes the premium payment in income, any benefits received will be considered tax-exempt.

Answer 58

* Accident and health benefits (but not medical savings accounts or long-term care insurance). * Adoption assistance. * Dependent care assistance. * Group term life insurance coverage (including costs that cannot be excluded from wages).

Answer 59

* Archer Medical Savings Accounts (see accident and health benefits). * Athletic facilities. * De minimis (minimal) benefits. * Educational assistance. * Employee discounts. * Lodging on employer’s business premises. * Meals. * Moving expense reimbursements. * No-additional-cost services. * Transportation benefits. * Tuition reduction. * Working condition benefits.

Answer 60

* Under a split-dollar life insurance plan using the endorsement method, the employer owns the life insurance policy on the employee and the employer pays the policy premium. * The employer withholds the right in the plan to be repaid for all of its premium either at the employee’s death or the surrender of the life insurance policy. * Usually any death benefit or cash surrender value in excess of the employer’s refund is paid to the policy beneficiaries.

Answer 61

* Under a split-dollar life insurance plan using the collateral assignment method, the employee owns the life insurance policy and the employer makes a loan to the employee to pay the policy premiums. * In this case, at the employee’s death or at the surrender of the policy, the employer loan will be repaid and any excess will be paid to the policy beneficiaries.

Answer 62

_MSA_ Established: Before 2006 Creators: Employer with less than 50 employees or Self-employed individuals Health Insurance Deductible: Single $2,400 - $3,600; Family $4,800 - $7,150 Maximum Out-of-Pocket: Single $4,800; Family $8,750 _HSA_ Established: 2004 and Later Creators: Any individual Health Insurance Deductible: Single is at least $1,400; Family is at least $2,800 Maximum Out-of-Pocket: Single $7,000; Family $14,000

Answer 63

_MSA_ Maximum Contribution: Single is 65% of deductible; Family is 75% of deductible Catch-up Contribution Available: No Penalty for Nonqualified Expenditures: Ordinary income tax and 20% penalty if owner is less than 65 _HSA_ Maximum Contribution: Single is 100% of deductible limited to $3,600; Family is 100% of deductible limited to $7,200 Catch-up Contribution Available: Yes, $1,000 for tax year 2010 and beyond Penalty for Nonqualified Expenditures: Ordinary income tax and 20% penalty if owner is less than 65

Answer 64

**Applies to Distributions From | Exception to 10% Early Withdrawal Penalty** * Both Qualified Plans & IRAs | Death * Both Qualified Plans & IRAs | Attainment of age 59½ * Both Qualified Plans & IRAs | Disability * Both Qualified Plans & IRAs | Substantially equal periodic payments (Section 72(t)) * Both Qualified Plans & IRAs | Medical expenses that exceed 7.5% of AGI * Both Qualified Plans & IRAs | Birth or Legal Adoption * **Only Qualified Plans | Qualified Domestic Relations Order (QDRO)** * **Only Qualified Plans | Attainment of age 55 and separation from service** * **Only Qualified Plans | Public safety employee who separates from service after age 50** * Only IRAs | Higher education expenses * Only IRAs | First time home purchase (up to $10,000) * Only IRAs | Payment of health insurance premiums by unemployed

Answer 65

* The minimum distribution rules require individuals to begin taking minimum distributions when the participant attains the age of 72 (if age 70 1/2 after 12/31/19, if not remain on old rules). * If the funds are not distributed by the required date, a 50 percent excise tax will be levied on the participant for failure to take the required minimum distribution (RMD). * Minimum distributions apply to assets in a qualified plan, IRA, 403(b), SEP, SIMPLE, or 457 plan. While minimum distribution rules do not apply to Roth IRAs, they do apply to Roth accounts in a 401(k) or 403(b) plan. * The first distribution must be taken by April 1 of the year following the year the participant attains the age 72. * However, for each year thereafter, the RMD must be taken before December 31 of the tax year. * If the participant delays taking the first RMD until April 1 of the year following the attainment of age 72, the second RMD must still be taken by December 31 of that same year.

Answer 66

* If a participant is still employed by the plan sponsor of a qualified plan upon attainment of age 72 (if age 70 1/2 after 12/31/19), the participant does not have to begin taking RMD until April 1 of the year after the participant terminates employment with the plan sponsor. * The exception is not available for any participant that owns more than five percent of the ownership of the plan sponsor in the year he reaches the age of 72.

Answer 67

Employers can always be more generous (vest faster) than the standard vesting plans, but not less (vest slower). \*Attach photo

Answer 68

Employers can always be more generous (vest faster) than the standard vesting plans, but not less (vest slower). \*Attach photo

Answer 69

40 credits (quarters of coverage) for workers born after 1929. To earn one credit in 2021, a worker must earn $1,470. Maximum 4 credits earned per year.

Answer 70

_Early Retirement_ (for exam purposes) - 36 months early = 20% reduction - 48 months early = 25% reduction - 60 months early = 30% reduction _Late Retirement_ 8% (simple interest) increase in PIA benefit for each one year delay in retirement from full retirement age up to age 70.

Answer 71

Year Born and Full Retirement age 1937 or earlier: Retirement age 65 1938 - 1942: 65 plus 2 months for each year born after 1937 1943 - 1954: Retirement age 66 1955 - 1959: 66 plus 2 months for each year born after 1954 1960 or later: Retirement age 67

Answer 72

AIME - A worker's AIME is their average indexed monthly earnings. - it is determined by indexing the covered earnings for each year, selecting the 35 highest years, totaling those earnings and divide by 420 (35 years x 12) PIA - The primary insurance amount is the basic unit used to determine the amount of each monthly benefit payable under social security. - The amount the worker will receive if they retire at full retirement age.

Answer 73

Benefits reduced by $1 for every $2 earned over $18,960 in 2021 for workers under social security full retirment age. Benefits reduced by $1 for every $3 over $50,250 in the year the worker reaches full retirement age No reduction in benefits regardless of income for workers at full retirement age or older.

Answer 74

Ernest converted his Traditional IRA to a Roth IRA on Dec 15, 2017. He was 35 years of age at the time and had never made a contribution to a Roth IRA. The conversion was in the amount of $60,000 ($10,000 of contributions and $50,000 of earnings). Over the years he has also made $15,000 in contributions. On May 15, 2021 he withdrew the entire account balance of $100,000 to pay for a 1 year trip around the world. Which of the following statements is true? Solution: The correct answer is A. Roth distributions are tax free if they are made after 5 years and because of 1)Death, 2)Disability, 3) 59.5 years of age, and 4)First time home purchase. He does not meet the five year holding period or one of the exceptions. His distribution does not received tax free treatment. The treatment for a non-qualifying distribution allows the distributions to be made from basis first, then conversions, then earnings. His basis will be tax free. The conversion is also tax free since we paid tax at the time of the conversion on those earnings. The remaining earnings since establishment of the Roth are $25,000 (100,000 - $15,000 in basis - $60,000 in conversions) and will be taxed. The 10% penalty does apply to this distribution since he does not qualify for any of the exceptions to the penalty. The contributions escapes penalty but the conversions and earnings of $85,000 are subject to the 10% early withdrawal penalty. Remember that in order for the conversions to escape the 10% early withdrawal penalty the distribution must occur after a 5 year holding period beginning Jan 1 in the year of conversion or meet one of the 10% early withdrawal exceptions. This may help break it down better than the rationale. $60,000 paid tax at conversion. Subject to penalty $15,000 in contributions no tax, no penalty $25,000 earnings. Taxable and subject to penalty Of the $100,000 withdrawn, 25,000 is taxable 60,000 + 25,000 = 85,000 is subject to penalty. Answer choice b does not take the penalty into account, the account owner is under 59 ½.