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CFP Final > Retirement Plans > Flashcards

Retirement Plans Flashcards

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1
Q

Defined Benefit Plans:

A

Qualified (ERISA/PBGC)

  • Traditional DB Pension Plan
  • Cash Balance Pension Plan
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2
Q

Defined Contribution Pension Plans:

A

Qualified (ERISA/PBGC)

  • Money Purchase Pension Plan
  • Target Benefit Pension Plan
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3
Q

Defined Contribution Profit-sharing Plans (8):

A
  • Traditional Profit Sharing
  • 401(k)
  • Stock Bonus
  • ESOP
  • Simple 401(k)
  • Age Based Profit Sharing
  • New Comparability
  • Thrift Plan
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4
Q

Tax Advantage Plans (6):

A
  • SEP
  • SARSEP
  • Traditional IRA
  • Roth IRA
  • Simple IRA
  • 403(b)
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5
Q

DB Plan items:

A
  • Favors oldies
  • Guarantees retirement benefits
  • Requires stable cash flow
  • Past service credit IS allowed
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6
Q

Money Purchase Pension items:

A
  • Up to 25% ER deduction
  • Fixed ER contributions
  • Stable Cash flows
  • Young/well paid EEs

Only the first $345,000 taken into account

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7
Q

Target Benefit Pension Items:

A
  • Up to 25% ER deduction
  • Fixed contributions
  • Stable cash flows
  • Favors oldies
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8
Q

Profit Sharing Plan Items:

A
  • Up to 25% ER deduction
  • FLEXIBLE contributions (substantial/recurring)
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9
Q

Stock Bonus Plan:

A
  • 25% ER deduction
  • Flexible
  • 100% can be invested in company stock
  • ESOPS CANT be integrated with SS or Cross Tested
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10
Q

Tax Advantage Plans (SIMPLE IRA):

A
  • <100 EE
  • Requires ER match
  • Salary reduction up to $16,000
  • ER CANT have another plan
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11
Q

Tax Advantage Plans (SEP IRA):

A
  • NO SALARY deferrals
  • up to 25% owner and 18.59% SE
  • Immediately vested
  • CAN be integrated with SS
  • 21+ paid at least $750 and 3 of 5 years
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12
Q

Tax Advantage Plans (SAR SEP):

A
  • up to 25 EEs, 50% must defer
  • existence before 12/31/96
  • Limit of $23,000 salary reduction
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13
Q

Tax Advantage Plans (403(b)):

A
  • 501(c)(3) or public schools
  • Subject to ERISA ONLY if ER contributions
  • Limit of $23,000
  • ER contributions may be subject to vesting
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14
Q

ALL defined contributions plans are affected by the following (5):

A
  • Years to retirement
  • Investment returns
  • Salary levels
  • ER Contributions
  • Forfeitures
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15
Q

Target Benefit Plan provisions:

A
  • Max contribution is $69,000 or 100% of comp
  • EE assumes risk
  • No annual actuarial
  • Forfeitures may be reallocated
  • Benefits oldies
  • Fixed contributions
  • Actuarial initial contributions
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16
Q

When to adopt a profit sharing plan:

A
  • When ER profits/stability varies from year to year
  • Wants to motivate EEs
  • When the EE are young, well paid, and have substantial time to accumulate retirement
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17
Q

Solo 401(k):

A
  • NOT subject to coverage testing and nondiscrim
  • Allows elective deferral up to $23,000 and ER contribution up to cap of $69,000S
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18
Q

Safe Harbor 401(K)

A
  • satisfices nondiscrim
  • Safe harbor contribution is $1/$1 on first 3% of EE deferral and $.50/$1 on the next 2%.
    If ER chooses non elective deferral method, ER must contribute 3% of eligible EE comp
    Exempt from top heavy and immediately vested
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19
Q

Stock bonus plans and ESOPS:

A
  • Stock bonus plan MAY invest in ER stock; ESOPS MUST invest in ER stock
  • ER may deduct dividends with respect to stock held in an ESOP
20
Q

Selecting a stock bonus plan or ESOP:

A
  • ER wants to broaden ownership/create liquidity
  • ER wants to provide EE with tax advantage way to acquire company stock
  • ER wants EE to feel sense of ownership
21
Q

ESOP diversification:

A

AGE 55 years or older and having ten years of participation can diversify up to 50%

22
Q

New comparability Plan:

A

Continuation % formulas for one category of EE (managers) is greater than the contribution of other categories of EE

23
Q

Cross Testing:

A

Designed to provide max benefits to highly compensated EEs. While trying to provide minimum benefits under nondiscrimination regulations.

ESOPS can NOT be cross tested

24
Q

Section 415 Limit:

A

Max limit on projected BENEFITS (not contribution) that a DB plan can provide. At age 65, max benefit is LESSER of $275,000 or 100% of EE comp.

Does not require reduction at age 62

25
Q

Most frequently used DB formula?

A

Unit Benefit Formula (or % of earning) uses both SERVICE and SALARY.

26
Q

Final Average Method:

A

Earnings averaged over a number of years (usually 3 to 5). Usually provides a salary that is better matched to an EEs income at retirement.

Only the first $345,000 of comp is considered!

27
Q

Factors affecting DB ER contributions:

A
  • Retirement age
  • Past service
  • Forfeitures
  • Investment Returns
  • Salary scale assumptions
28
Q

412(i) Plan:

A

DB plan funded with insurance products (LI and annuities)

29
Q

Max DB plan contribution:

A

Under code 415 - max benefit NOT max contribution (unlimited)

Max BENEFIT of $275,000 or 100% of EE comp

30
Q

Max DC plan contribution:

A

$69,000 or 100% of EE comp

31
Q

Forfeitures:

A

In Defined Benefit (DB) plans, forfeitures must be used to:
- Reduce future employer contributions
- Forfeitures cannot be reallocated to increase participants’ benefits

In Profit-Sharing or other Defined Contribution (DC) plans (e.g., 401(k) plans) forfeitures can EITHERRR be:
- Reallocated to other plan participants
- Used to offset employer contributions

32
Q

A qualified plan must cover a broad group of EE. The two types of requirements must be satisficed is:

A
  1. Age/Service (21/1 and 2 year 100%)
  2. Coverage: Ratio or Average benefit test
33
Q

Ratio and Average Benefit test:

A

Qualified plan coverage requirements:

  • Ratio % Test: 70% of HCE EE are non HCE EE
  • Average benefit of NHCE is 70% of HCE
34
Q

DB Minimum Participation:

A
  • Lesser of one of the following:
  • 50 EEs
  • or the > of: 40% eligible or two EEs
35
Q

HCE EEs vs Key EEs

A

HCE: >5% owner and >155k

Key EEs:
- > 5% owner
- Office AND has comp >$220k
- >1% owner and comp >$155k

36
Q

Top Heavy Plans:

A

> 60% of benefits or account balances are allocated to key EEs

37
Q

Vesting Schedules (2):

A
  1. Top heavy DB and ALL DCs
    - 3 Year cliff
    - 2 - 6 year vesting
    - 100% vested with 2 year eligibility
  2. Non top heavy DB
    - 5 Year cliff
    - 3 to 7 year vesting
    - 100% vested with 2 year eligibility
38
Q

Family Attribution:

A

EEs who are souses, parents, child, grandparent, etc. who is a >5% owner are also deemed to be >5% owners

39
Q

ADP/ACP:

A

Compares HCE to NHCE:

ADP (Actual Deferral %)
ACP (Actual Contribution %)

  • 0% to 2% is x 2%
  • 2% to 8% is + 2%
40
Q

Controlled groups:

A

Controlled groups are used for determining whether multiple entities or businesses should be treated as a single employer for certain retirement plan rules, such as contribution limits, nondiscrimination testing, and compliance with IRS and Department of Labor regulations. These rules prevent businesses from setting up multiple plans to avoid contribution limits or from favoring highly compensated employees.

  • Parent subsidiary: Entity owns >80% of each entity
  • Brother-sister: 5 or fewer own two or more entities >80%
  • Affiliated Service group: Services in professional services (health, law, accounting)
  • EE leasing: Lease EE from independent EE leasing org rather than employ them directly
41
Q

DB Plan integration

Excess Method:

A

Integration level: level of comp above the excess contribution is made. The integration level may NOT exceed the SS taxable wage base

  • Base Benefit Percentage: Plan benefit for comp BELOW integration level
  • Excess Benefit Percentage: Plan benefit for comp ABOVE the integration level

Lesser of the BASE BENEFIT or 26.25%

EX.
Base 30% PERMITTED Disparity is 26.25% = Excess % of 56.25%
Base 20% Permitted Disparity is 20% = Excess % of 40%

42
Q

DC Plan Integration:

Excess Method:

A

Integration level: Any dollar amount up to SS wage base of $168,600
Base contribution %: For comp below integration level
Excess contribution %: For comp above integration level
Permitted disparity: lesser of the base % or 5.7%

Ex.
Base % 10% + Permitted Disparity 5.7% = Excess % of 15.7%
Base % 4% + Permitted Disparity 4% = Excess % of 8.7%

43
Q

Which plans can NOT be integrated with SS:

A
  • 401(k)s (Solo, Simple)
  • IRAs
  • ESOPS
44
Q

DB contributions:

A

DB - B is the 2nd letter

Must be at least 2% of comp * years of service (up to 10)

45
Q

DC contributions:

A

C - 3rd letter:

Minimum ER comp NO less than 3% of non key comp

CFP Final (4 decks)

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