Retirement Plans Flashcards
What is the income phaseout for Roth IRAs for 2012?
Single filers: 110-125k MAGI
Joint filers: 173-183k MAGI
What is considered a highly compensated employee (HCE)?
- > 5% owner
- salary over $110k for previous year (2012 look back) OR company can choose to use the top 20% of employees
What is the 50/40 test?
It is the minimum participation requirement of a defined benefit plan. On each day of the year, a DB plan must cover the lesser of:
- 50 employees. OR
- the greater of 40% of ERISA employees or 2 employees
What are the 2012 phase out limits for traditional IRAs?
Single: 58 - 68k* MAGI
Joint: 92 - 112k** MAGI
- no phase out if not an active participant at work
- if one spouse is active, other phases out at 173 - 183k
What is the required minimum contribution for non-highly compensated employees for top heavy defined contribution plans (DC)?
3% per year
How can a DB or DC plan past discrimination testing?
It must pass either: 1) the safe harbor coverage test OR 2) the ratio % test or the average benefit test
What is the safe harbor coverage test?
If the DB or DC benefits 70% or more of the non excludable NHCEs.
What is the ratio percentage test?
A DB or DC passes this test if the participating NHCEs is at least 70% of the participating HCEs.
Example: a plan with 90% HCE participation passes if at least 63% of NHCEs participate (90*70%=63%).
What is the average benefit test?
A DB or DC plan passes this test if 1) it is nondiscriminatory and 2) the average benefits of NHCEs is at least 70% of the average benefits of HCEs.
What makes a plan “top heavy?”
A plan is top heavy if MORE than 60% of the assets are attributed to key employees.
What is a key employee?
- > 5% owner
- officer with >165k in comp (2012)
- > 1% owner with >150k in comp (2012)
What is the penalty for underfunding a DB plan?
A 10% penalty tax is assessed plus a 100% tax if the problem isn’t corrected in the required amount of time.
What is the maximum monthly benefit the PBGC will pay?
$4,563 @ age 65
Regarding Keogh plans, who in the company are considered self employed?
- sole proprietors
- partner with an interest of more than 10%
- company directors
What is the penalty for a prohibited transaction?
15% of the amount involved
100% if not corrected as required
What are the prohibited transactions?
1) sale, exchange, lease of property
2) loans from general plan assets
3) furnishing goods/services/facilities
4) transfer/use of plan assets
Who are “disqualified persons” or “parties of interest?”
1) the fiduciary
2) anyone providing services to the plan
3) an EE organization or ER with EEs covered by the plan
4) a 50% owner
5) family members of 1-4
6) entities that are 50% owned by 1-4
7) officer, director, HCE,10% owner of 3 & 6
What services are not considered fiduciary?
Legal
Consulting
Actuarial
Accounting
What items are exempt from the prohibited translation rules?
- receipt of benefits under the terms of the plan
- distribution of plan assets according to allocation provisions
- loans available to all participants
- loans to ESOPs
- qualified ER securities in individual account PS, stock bonus, thrift or ESOP for adequate consideration and NO commission
- the provision of office space or services required for establishment or operation of the plan (if reasonable)
What income is considered Unrelated Business Taxable Income (UBTI)?
- income from a business directly held (vending machines owned by the retirement trust)
- dividend income IF stock is margined
- partnership income
What income is NOT considered Unrelated Business Taxable Income (UBTI)?
- passive income, interest, dividends, royalties and rent from real property
- capital gains from stock and bond transactions in the retirement trusty
- leveraged real estate that is directly held
What are the immediate and heavy needs?
- medical expenses for parent, spouse, children, dependent or any primary beneficiary
- purchase of a primary residence
- tuition for the same list as above
- funeral expenses for the same list as above
- to prevent eviction
- for repairs on principal residence that would qualify as a casualty loss
Vesting schedule for DB plan
5 year cliff or 3-7 graded
Top heavy: 3 year cliff or 2-6 graded
Can balance MUST be 3 yr cliff
Key = 3 letters = 3 rules
1) > 5%
2) > 1% plus 150k comp
3) officer & comp > 165k
Highly Compensated = 2 words = 2 rules
1) >5%
2) prior year >110k
DBs with no PBGC coverage
Professional service employers
ERs with never more than 25 active participants
Can DB benefits be adjusted?
Yes
Down if before 62
Up if after 65
Entry age normal
Recognizes past service
Max ER securities in pension plan
10%
Significance of 2002 wrt DC pension plans
Profit sharing contributions were increased by EGTTRA to 25% thus making DC pension plans useless
Stock Bonus Plan diversification requirements
EE contributions diversifiable at all times
ER contributions have 3 years of service requirement
ESOP diversification requirements
Age 55 with 10 years of service can diversify 25% of account
ESOP stock distribution
No 20% mandatory withholding
SIMPLE contribution limits for 2012
11,500
Catch up $2500
Keogh plan shortcut if given net profit (for 2012)
Net * 18.59%
Top heavy
More than 60% of accrued benefit (account value) is for KEY employees
Parent subsidiary
80% or more of each company is owned by the same entity
Brother sister relationship
Determined by 2 tests
1) 80% owned by 5 or fewer
2) 50% identical ownership
Leased employee requirements
1) no more than 20% of workforce
2) they are covered by a 10% Money Purchase Plan
Permitted disparity in DC
Lesser of base contribution percentage or 5.7%
Permitted disparity in DB plan (excess plan)
Flat: lesser of base benefit or 26.25%
Unit: .75% for each YOS up to 35 years
Max reduction of offset method for social security integrated DB plans
50%
Max UBTI before it is taxable
$1,000
ISO 10/110 rule
ISOs can’t be granted to owner of mor than 10% of voting power (all classes) unless exercise price is at least 110% of FMV
ISO approval
By shareholders with in 12 months BEFORE OR AFTER adoption
ISO time limits
10 year duration
10 years from grant
ISO time lines for favorable tax treatment
Must hold 2 years from grant &
1 year from exercise
ISO annual limits
$100k based on FMV. Overage considered NQSO
ISO AMT
Bargain element of purchase (diff between option price and FMV) is AMT income
Disqualifying disposition
ISO hold times for favorable tax treatment not met
1) gain now OI taxed
2) no AMT income if stk is sold in year of exercise
ESPP or Section 423
EE stock purchase plan
ESPP annual max
$25k
ESPP max discount
15%
