Retirement Plans Flashcards
Defined benefit vs defined contribution
DB: employer assumes risk
DC: employee assumes risk
Defined benefit: pension plans
1) Defined benefit pension plan
2) Cash balance pension plan
Defined Contribution: pension plan
1) money purchase pension plan
2) target benefit pension plan
Profit sharing plans
No mandatory funding
All are defined contribution plans
Ex: profit sharing, stock bonus plan, ESOP, 401k, thrift plan, age based profits sharing
Qualified plan eligibility
Age 21 and 1 year of service
Qualified plan coverage tests (ACP test)
Needs to pass 1 of 3 tests to qualify
1) average benefits test
2) ratio test
3) safe harbor test
Average benefits test
Avg benefits of NHC / avg benefits of HC
Needs to be at least 70%
Safe Harbor Test
More than 70% of NHC are covered
Ratio % test
% of NHC covered / % of HC covered
Needs to be at least 70%
Highly compensated employee
At least 5% owner OR
comp in excess of $150k (unless top 20%)
Key employee
At least 5 % owner
At least 1% owner and comp over $150k
Officer and comp over $215k
Top heavy plans
60% of benefits attributable to key employees
Top heavy
Defined contribution plans
Employer must provide non key employees a contribution of at least 3% of comp
Top heavy
Defined benefits
Employer must contribute 2% per years of service (20% max) x annual comp
Vesting schedule must increase
Defined contribution plan
Vesting
Deferrals 100% vested
Noncontributory: 2-6 graduated or 3 year cliff
Defined benefit plan
Vesting
3-7 year graduated
Or 5 year cliff
Covered comp for Qualified plans
$330k
Defined benefit plan limits
Lesser of $265k or 100% of 3 year avg salary
Plan limits
Defined Contribution
Lesser of $66k or 100% of comp
Total: employer, employee and forfeitures
Stock bonus plan
Profit sharing plan
Employer contributes stock to plan
Net unrealized appreciation
Nonqualified retirement plans
Benefit to group of employees without limitations of qualified plans
No tax advantages
Deferral of income
Phantom stock
Fictional shares, later stock is valued and receives increase in value as compensation
Stock options
The right to buy stock at specified price for specified time period
Option price = FMV at date of grant
Incentive Stock Options (ISO)
Ties employe s benefit to a stock
Up to $100k per year
Qualified: hold for 2 years from grant and one year from exercise
Taxation of ISO
Grant: no taxable income
Exercise: no regular tax, AMT adjustment
Sale: LTCG on appreciation, AMT adjustment
83B election
Employee elects to include value of stock in taxable income at date of grant instead of vesting date
Gain over grant price is capital gain
Actual Deferral Percentage (ADP test)
Limits employee elective deferral for HC based on elected deferrals of NHC
Failed ADP test
1) corrective distributions
2) recharacterize contributions (pre to after tax)
3) qualified non elective contribution
4) qualified matching contribution
Rabbi Trusts
NonQualified Deferred Comp Plan
Funds not available to employer but available to employers creditors under bankruptcy
Not currently taxable due to Forfeiture risk
Actual Deferred Percentage (ADP) test
ensures highly compensated employees are not contributing too much more than NonHighly Comp
if NHC contribute 0-2%, HC are able to do 2x
If NGC contribute 2-8%, HC are abe to do 2% +
If NHC contribute 8% +, HC are able to do 1.25%
Defined Benefit 50/40 test
defined benefit plan must satisfy 50/40 test
DB plan must benefit lesser of 50 eligible employees or 40% of all eligible employees
Advantages of Qualified Plans to Employer
- Employer contributions are tax deductible
- Employer contributions not subject to payroll tax
Advantages of Qualifies Plans to Employees
- Pre tax contributions
- Tax deferral of earnings
- ERISA protection
- Lump sum distribution options
457 Plan
NQ plan
allows employees of state, local Gov & NonGov TaxExempt employees ability to defer comp free from tax
Allows for Final 3 year catchup of $22,500
Fringe Benefits
form of comp where benefit other than taxable wages is provided by employer
used to increase employee total compensation without increasing taxable income
taxation of Fringe Benefits
taxable as wages unless specific provision IRC excludes OR employee pays fair value for it
Fringe Benefits: Adoption Assistance
$15,950 benefit
Phase Out: $239,230 - $279,230
Fringe Benefits: Education Assistance Program (Amount)
$5,250
Fringe Benefits - Group term Insurance (Amount)
$50k excluded from taxable income
Net Unrealized Appreciation (NUA)
NUA = FMV at date of distribution - Value of securities at date of Employer Contribution
Distribution: taxed on employers contribution
Sale of securities:
LTCG on NUA (if taken as Lump sum)
recognize additional growth above NUA
403(B) Plan CatchUp Contributions
1) Age 50 Catch-up Provision: Additional $7,500 contribution if over 50
2) 15 Year Rule Exception: $3k additional contribution for business in Health, Education or Religious Org (HER)
Able to defer max $33k
457 Catch Up Contributions
Final 3 Year: for Public & Private 457 Plans- 3 years before normal retirement age able to contribute additional unused Max deferal amounts
Age 50 Catchup: not available for private 457s, only public 457s
SEP
Simplified Employee pension
- no salary deferrals, employer contributions ONLY
- can be integrated with SS
- max contribution: 25% or $20k per employee
Simple IRA max contribution
100% salary up to $15,500
Company match up to 3% of salary
