Retirement Plans and Taxation

Question 1

Defined contribution plan - what is it ? Is it a qualified plan ?

Answer 1

IS A QUALIFIED PLAN Separate account for each employee and benefits based on contributions/earnings in account. Have cash value today that’s easy to quantify. Yes qualified. QDRO required

Question 2

Defined benefit plans - what is it ? Does it require QDRO ?

Answer 2

YES qualified. QDRO required (except some government plans no QDRO). Obligates employer to pay specific pension to employee upon retirement. Interest is derived from the amount of pension promised to each employee upon retirement. No cash value today.

Question 3

IRA - what is it ? Is it qualified ?

Answer 3

NOT qualified. Accounts set up at custodial for individual to save for retirement - with tax free growth (ROTH) or on tax deferred basis (traditional)

Question 4

IRC 1041

Answer 4

TRANSFER of spouse interest in retirement plan as part of division of marital property is not taxable

Question 5

Are distributions pursuant to divorce taxable ? How in general ? Employer security ?

Answer 5

YES - if employer securities, tax on unrealized appreciation is deferred until sale otherwise OI

Question 6

What happens with a distribution from qualified plan ?

Answer 6

Mandatory 20% withholding unless direct rollover

NOT APPLICABLE TO IRA’s

Question 7

IRC 72 T 2 C

Answer 7

Non participant spouse can receive DISTRIBUTIONS from QUALIFIED PLAN pursuant to a QDRO without 10% penalty (subject to OI). They have to take cash before 401k changed hands to escape penalty

Question 8

Methods of TRANSFERRING IRAs

Answer 8

1. Change owners name on IRA (if full transfer)
2. Trustee to trustee transfer (60 day rule applies)
3. Rollover (60 day rule applies)

Question 9

Avoid 10% penalty rule - equal and periodic payment for 5 years or until age 59 1/2, whichever is longer. Which type of account ?

Answer 9

IRAs

Question 10

Exceptions to 10% penalty - defined contribution ERISA (5)

Answer 10

1. Death
2. Disability
3. Distributions for medical/qualified higher education
4. Distributions in form of annuity payments for life expectancy
5. Distributions made to ex-spouse pursuant to QDRO (IRC section 72T2c)

Question 11

What are the methods of dividing a pension ?

Answer 11

1. Present value of cash out method (non employee paid lump sum settlement or receives assets equal their interest)
2. Deferred division of future share method (no PV determined. spouse is awarded share of bene’s if and when paid)
3. Reserved jurisdiction (court retains the authority to order distributions from pension in future. LAST RESORT)

Question 12

Coverture fraction

Answer 12

Method in pension valuing and defined contribution to show percentage of plan spouse has access to (# of years married while working/ total # of years worked until retirement OR years working while married until divorce) X pension amount.

Question 13

Inflation adjusted ROR

Answer 13

[(1+ discount rate) / (1+inf rate)] - 1 x 100

Question 14

Public employee pension - diffs ?

Answer 14

WONT ALLOW division by QDRO (exception because it is a qualified defined bene plan). In some states, assets not assignable at all to ex spouse.

Question 15

Vesting schedules - required

Answer 15

5 year cliff vest
3-7 year graded vesting: (20% more per year) year 3 20%, year 4 40%, year 5 60%, six 80%, 100% year 7

Question 16

Mature plan

Answer 16

Employee may be fully vested but may have to wait until reaching a certain age to get benefits. For ex, some companies do not pay out benefits until the employee has reached age 60 or 65. In some cases, if employee isn’t vested in plan and dies before retirement age, benefits are lost.

Question 17

When must the PV of pension be calculated based on ?

Answer 17

Earliest year of retirement without penalty

Question 18

Who are QDRO distributions taxable to ?

Answer 18

If child support (usually arrears), taxable to participant. If marital division, taxable to alternate payee. Alimony, not taxable income to payee

Question 19

Plans divisible by QDRO include (9)

Answer 19

1) Defined contribution pension plans
2) Defined benefit pension plans
3) 401ks
4) Thrift savings plans
5) Some profit sharing and money purchase plans
6) Keogh plans
7) Tax sheltered annuities
8) Esops
9) Old PAYSOPs

Question 20

What are methods to determine amount paid to alternate payee QDRO pension ?

Answer 20

1. stated %
2. stated $

Question 21

ERISA - when and what

Answer 21

1974 - employee retirement income security act of 1974. Established laws relating to attachment of pension bene’s. Family courts confused about how to treat plan assets that state courts said were marital property

Question 22

USFSPA When ? What ?

Answer 22

1982 - uniformed services former spouses protection act. Recognizes military retirement bene’s as marital property and says state court can divide by state law. can order direct payment of benefits to ex spouse (not more than 50%) if during marriage military spouse was in service for 10+ years

Question 23

REA When ? What ?

Answer 23

(10 years after ERISA) Retirement Equity Act 1984 - Provides all qualified plans subject to ERISA may segregate assets for benefit of an alternate payee through court order known as a QDRO. Many non ERISA plans will also honor

Question 24

TRA When ? What ?

Answer 24

1984 - Tax Reform Act of 1984 - added code sec 1041 which allowed marital property to be transferred free of tax.

Question 25

Pension plan ancillary benefits

Answer 25

1. Early retirement supplement, subsidy, or temporary benefit
2. Social security bridge - extra money that falls off after person qualifies for SS
3. COLA on pension bene paid

Question 26

Double dipping

Answer 26

Pitfall - In some states, a retirement plan is divided as part of the property division and when the employee retires, the income from their portion of the retirement plan is taken into consideration to calculate spousal and child support. The end result is that the non-employee spouse is getting paid twice from the same asset.

Question 27

When should QDRO be drafted ?

Answer 27

Before parties are divorced and entered in court with the divorce decree

Question 28

Vesting

Answer 28

Employee contribution is always 100% vested

Question 29

Pension Valuation - Future Value

Answer 29

N = years from retirement age to life expectancy x 12
I = Interest rate / 12
PMT = monthly pension payment
FV = 0
PV = the value of the pension at 65

Question 30

Pension Valuation - Present Value

Answer 30

The amount needed to fund the payments = FV

FV = answer from above
I = interest rate (do not use inflation adj.)
PMT = 0
N= number of years until retirement age
PV = the present value