Retirement Saving & Income Planning 18% (31 Questions)

Question 1

Qualified Plan Coverage Rules

(ratio test)

Answer 1

1. % Test (Safe Harbor Test)
   The plan MUST cover at least 70% of eligible non-HCE.

*If % Test (Safe Harbor) not met then plan must meet 1 out of 2 plans below:

2. Ratio Test
   % of non-HCE covered
   ÷
   % of HCE covered
   = or > 70%
3. Avg. Benefits % Test
   avg benefits % non HCEs
   ÷
   avg. benefits % HCEs
   = or > 70%

Question 1

Qualified Plans Ratio Test Example

Employer employs 200 eligible employees of whom 10 are highly compensated.
9 of the 10 highly compensated and 120 of the 190 non-highly compensated employees benefit from the plan.
The average benefit for the highly compensated is 8%, and the average benefit for the non-highly compensated is 6%.

Answer 1

Safe harbor test: has to cover 70% of NHCE
120 NHCE ÷ 190 NHCE (eligible) = 63% “X”

Ratio Test:
120/190 NHCE ÷ 9/10 HCE = 70% “ √ “

Avg. Benefits Test:
6% NHCE ÷ 8% HCE = 75% “ √ “

Question 2

Highly Compensated Employee (HCEs)

Answer 2

1. Greater than 5% owner of employer at anytime
2. Salary > $135K (2022) or salary > $150K (2023)

If the employer makes an election, only persons ranked in the top 20% of compensation and having income greater than $150,000 (2023) or $135,000 looking back to 2022 are included as HCE.

Family ownership attribution rules apply to determine 5% owners and 1% owners. [Other family member’s (spouse, child, grandparent, or parent) ownership is added to the employee’s ownership. For example, if the employee owns 4% and his father owns 2%, then they are both HCEs, even though neither worker individually owns more than 5%.] Note that siblings do not count for family attribution rules.

Question 3

DB Pension
50/40 Test

Covered: lesser of 50 people or 40%

Answer 3

All defined benefit pension plans MUST benefit no fewer than the lesser of:
a. 50 employees
b. 40% or more of all nonexcludable employees

Question 4

Top Heavy Plans

Answer 4

A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees.

Top-heavy plans must meet certain additional qualification rules.

DB Pension plan is top heavy if the present value of accrued benefits for key employees is greater than 60% of the present value of accrued benefits for all employees.

DB Vesting Options:
100% after 3 years or 2-6 yr graduated vesting

DC Plan is top heavy if the aggregate of account balances of key employees exceeds 60% of the aggregate account balances of all employees.

DC Vesting:
3 year cliff or 2-6 year graded

Funding: DB pension plans must provide a minimum benefit accrual of 2% x the # of years of service (up to 10yrs)

Question 5

Key Employees

Answer 5

Has to meet one of the following during the yr:
a. Compensation > $215K
b. > 5% owner
c. >1% owner w/ compensation >$150K

The number of key EE who may be considered key EE is limited to the lesser of
a. 50 EE
or
b. the greater of 3 EE or 10% of all EEs

Question 6

Social Security Integration

EP = BP + PD

DC Plans permitted disparity rules:
the max allowable excess contribution percentage is the lesser of:

a. 2x the base percentage
b. base percentage + 5.7%

Integration level: $162,200

Answer 6

Excess Deal = Base Deal + Permitted Disparity

EP = BP + PD

Excess Deal:
The total that ER does for pay over the integration level. It can be benefit or contribution

Base Deal:
What the ER contributions is doing for pay under the integration level. It can be benefit or a contribution

Permitted Disparity:
Is the amount the ER can do that is extra for pay above the integration level only

Defined Contribution Plan can ONLY use “excess method” of integration.

DC Plans permitted disparity rules:
the max allowable excess contribution percentage is the lesser of:

a. 2x the base percentage
b. base percentage + 5.7%

Ex:
If the base contribution percentage for for an integrated defined contribution plan is 5%, the permitted disparity is also 5%, making the excess percentage no more than 10% (5% + 5%) of compensation above the integration level.
Alternatively if the base contribution percentage is 6% their permitted disparity is 5.7% resulting in an excess percentage amount of no more than 11.7% (6% + 5.7%).

Question 7

Qualified Plan Loans

Answer 7

1. All loans must be repaid in 5 yrs.
2. Must be available to all EE
   2a. Loans cant exceed $50K
   2b. If account balance < $10K then entire balance is available for loan
   2c. If account balance btwn $10K-$100K then 50% of vested balance available for loan
3. Max loan amount is reduced by previous loan balance participant had in 12 mos preceding loan.
4. Loans must be repaid in full upon separation of service or they’ll be treated as taxable distro & maybe subject to 10% penalty.
5. Interest paid on loans NOT deductible
6. Retirement loans CANT be offered using credit cards
7. Disaster loans up to $100K

Question 8

Traditional Defined Benefit Plan

Subject to ERISA

ER contributions = deductible
EE taxed at distributions

Benefits older EE
EE CANT contribute to plan

Answer 8

1. To provide defined level of retirement income/benefits to EEs
2. ER must have stable cash flow to meet mandatory annual funding requirements.
3. ER has investment risk

Question 9

Cash Balance

(Defined Benefit Plans)

Subject to ERISA

For younger middle income EEs

ER contributions = deductible
EE CANT contribute to plan & taxed at distributions

Answer 9

1. Provides annual contributions at specified rate in indvl. accounts for each plan participant
2. ER GUARANTEES rate of return & contribution level & interest rate credit to each account.
3. ER has investment risk
4. 3 yr cliff vesting schedule.

Question 10

Money Purchase Pension Plan

(Defined Contribution Plan)

For younger EEs

ER contributions = deductible
EE taxed at distributions

Answer 10

1. ER makes annual mandatory contributions to each EE’s account (fixed or flat $ amount)
2. EE has investment risk
3. Simple & inexpensive to design
4. ER can deduct up to 25% annual ER contribution of countable compensation.

Question 11

Traditional Profit Sharing Plan

(Defined Contribution Plan)

Young EEs
EE has investment risk
Permit in service w/d’s under 62 y/o

Answer 11

1. ER contribution purely discretionary but contributions must be made in every 3/5 yrs.
2. ER can deduct 25% of total includable compensation
3. Plan have 3 investment choices (MMF, bond fund, & stock fund)

Question 12

Stock Bonus Plan

(Defined Contribution Plan)

Answer 12

1. Benefits distributed in form of ER stock
2. NUA (net unrealized appreciation) defer on securities. Can be taxed as cap gain when EE sells stock.
3. EE has voting rights dependent on # of shares held.

Question 13

ESOP

Employee Stock Ownership Plan

(Defined Contribution Plan)

Answer 13

1. Is the type of stock bonus plan which individual participant accounts are invested primarily in employee stock .
2. ESOP may borrow money in the name of the plan
3. If the ESOP does borrow money in the plane’s name is commonly referred to as LESOP.
4. EE receives ownership interest and ER may provide performance incentive.
5. EE NOT taxed until shares are distributed.

Question 14

Thrift/Savings Plan

Answer 14

1. Provides for and encourages after tax employee contributions to the plan.
2. The typical thrift plan provides for after tax employee contributions with matching employer contributions.
3. 3 years is the maximum service requirement that a thrift plan may impose as a condition of participation

Question 15

401K Plan

For young EE that have time to accumulate retirement savings

EE willing to accept investment risk

Answer 15

1. When ER wants to provide QRP for EE w/o being required to make ongoing ER contributions
2. Can be funded by EE elective deferrals
3. EE willing to accept investment risk
4. Hardship w/d’s & loans OK
5. $22.5 max contribution (+7.5K over 50 )

Question 16

401K Hardship W/D Rules

Answer 16

Must meet following test:
1. Financial Needs:
Hardship due to an immediate/heavy financial need of EE

2. Resource Test:
   The EE must NOT have other financial sources sufficient to satisfy need

$ can only be w/d for following reasons:
a. Medical Expenses
b. Purchase Primary Residence
c. Education Payment
d. Prevent Foreclosure on Primary Residence
e. Funeral Expenses
f. safe harbor

Question 17

Safe Harbor 401K Plan Rules

Answer 17

1. ER can avoid ADP/ACP Testing if the plan meets one of the provisions
2. The following contributions made by the ER must be 100% vested at all times.

Matching contributions for NHCEs
2a. 100% match up to 3% of deferred compensation plus 50% match for contributions btwn. 3-5% of compensation

2b. Matching contribution percentage for HCEs CANNOT exceed those for NHCEs

3. Elect to match 100% up to 4% of compensation

Question 18

Roth 401K Plans

Answer 18

Contribution (after tax) max elective deferral is $22.5K (+$7.5K is 50)

1. Distribution of basis (contributions) are received income tax free
2. Distributions of earnings are income tax free as long as the following test are met:
   2a. Distro must be made after a period of 5 years after 1st contribution was made (Jan 1 of that yr)
   2b. Must satisfy the following

-After EE turns 59 ½
-Disability
-Distro to estate or beneficiary after EEs death

3. 1st time homebuyer exception
4. RMD which EE reaches 73
5. NQ distributions will be treated as contributions (excludable from income) & a distribution from accumulated earnings.

Question 19

Keogh Plans

(for Self Employed Individuals)

Answer 19

1. Covers one or more self employed individuals.
2. Most common types of QP adopted by SE are: profit share, money purchase, & target benefit.
3. Max contribution = [(contribution formula ÷ (1- contribution formula)]
4. Entities that may adopt Self Employed Plans: Sole Proprietorship, Partnerships, LLP, LLC taxed as sole pro. or partnership

Question 20

SEP IRA

Social Security Integration
EE bears investment risk.
EE CANT contribute

Answer 20

1.ER sponsored IRA in which the ER agrees to contribute retirement monies on behalf of the employees on a nondiscriminatory and fully vested basis (this avoids nondiscrimination testing).

2. Cannot deny participation to any employee 21 years of age or older based on age or EE who earns at least $750 BUT the worker must have also worked for the employer for at least three of the preceding five years (including working part-time).
3. Used by sole employed individuals, sole proprietors.
4. Employers can make discretionary contributions to a SEP IRA of up to $66,000 or 25% of compensation ($330K ceiling) in 2023.
   5. Contributions are currently excludible from the employee’s gross income. Employer contributions to a SEP are not subject to FICA, FUTA, or income tax withholding. NOT SUBJECT TO 20% mandatory federal income tax withholding for rollover

Question 21

Traditional IRA

Answer 21

1. $6500 contribution limit (+ $1K if 50)
2. Contributions can continue past 70/ y/o as long as earned income or married to someone w/ earned income to cover contributions.
3. Income not taxed until w/d from account
4. Loans NOT permitted
5. W/Ds may be subject to 10% penalty (less exclusions)
6. RMDs required by April 1 of the year following the year the person turns 73.

Deduction Rules (MFJ):
1. Both spouses NOT active in ER QP = contributions fully deductible (no MAGI limits)

2. Both spouses Active in ER QP = deduction limited or phaseout MAGIs of ($116K-136K)
3. 1 spouse Active & 1 spouse NOT Active = Not active spouse MAGI deduction phaseout $218K-$228K Active spouse MAGI phaseout of ($116K-136K)

EXAMPLE: James and Donna are married and file a joint return. Their AGI in 2023 is $200,000, and James is covered by his employer’s pension plan. James and Donna earned interest of $1,000 in 2023 on their joint savings account. Donna is not employed, and the couple has no other income. For the year 2023, James contributes $6,500 to a traditional IRA for himself and $6,500 to a traditional IRA for Donna. The maximum allowable IRA deduction on their 2023 joint return is

A)$0
B)$8,500
C)$13,000
D)$6,500 √

When one MFJ spouse is an active participant and one is not an active participant, two separate phaseout limits apply for IRA deductibility.
The nonactive participant phaseout is $218,000-$228,000 (2023) and the active participant phaseout is $116,000-$136,000.
Because their AGI is less than the lower end of the phaseout range for the nonactive participant spouse, Donna’s IRA contribution is deductible but James’s contribution is not deductible. While Donna does not have earned income, a spousal IRA may be established based on James’s income.

Question 22

ROTH
Qualified Distribution Rules

*F-A-D-D

*First Home
*Age 59½
*Death
*Disability

Answer 22

1. 5 year rule (Jan 1 of the taxable year for which the first contribution is made to a Roth
2. Must satisfy any of the following:
   F-A-D-D
   First Home purchase ($10K cap)
   Age: 59 ½
   Death
   Disability

Distributions that are taxable but NO 10% early w/d penalty:
Higher education
Unreimbursed medical expenses excess 7.5% MAGI
Med. insurance premiums while unemployed
Substantially equal periodic payments

Question 23

Inherited IRA Rules

Answer 23

Distribution Rules:
The decedent spouse’s holding period carries over, and the 5 year holding period must be satisfied for distributions to be tax free.

Spouse Beneficiary:
Elect 1. beneficiary OR 2. owner of Roth

*if BENEFICIARY elected then spouse can defer distros until the yr in which the original owner would have turned 73.

*if OWNER elected, then the spouse may continue making contributions into Roth &
The decedent spouse’s holding period carries over, and the 5 year holding period must be satisfied for distributions to be tax free.

Question 24

IRA Prohibited Transactions

Answer 24

1. Borrowing $ (loans not OK)
2. Selling property to it
3. Receiving unreasonable compensation for managing it
4. Using it as a security for a loan
5. Buying property for personal use w/ IRA funds

If any prohibited transaction occurs then:
1. IRA not treated as an IRA as of the 1st day of the yr.
2. Person must include full value of IRA in gross income
3. May have to pay 10% premature distribution penalty

IRA CANT invest in collectibles or life insurance

IRA CAN hold US Treasury minted gold/silver coins

Question 25

Simple IRA

ER w/ < 100 EE

EE eligible if they make at least $5K & don’t have another retirement plan

Answer 25

1. Contribution 15.5K (+3.5K if 50)
2. Not subject to nondiscrimination & ADP rules

ER Contributions:
1. Match dollar for dollar up to 3%
2. Give all EE 2% compensation elective contribution
3. Match as little as 1% no more than 2 out 5 yrs

*EE who makes distributions w/in 2 yr of setup = 25% premature distribution penatly

Question 26

403b Plan

Tax exempt organizations, governmental organizations, & public schools/colleges

Answer 26

1. Contributions not taxable to EE
2. Account balances tax deferred until w/d
3. EE has investment risk
4. Stocks & Bonds NOT permitted as investments in plan
5. Life insurance only incidental to plan benefit.

Question 27

457 Plan

For state & local gov’t agencies
Non church controlled tax exempt orgs.

Answer 27

1. Contributions are pretax & grow tax deferred
2. EE has investment risk
3. During last 3 yrs before retirement, EE can double contribution (catch up provision CANT be included though)
4. EE include distro of 457 in gross income when taken

Question 28

SERP

Supplemental Executive Retirement Plan

NQP for “BIG WIGS”

Answer 28

1. NQP that provides retirement income to top execs.
2. Can bring income up to exec’s highest 3 yrs of compensation
3. Social Security integration allowed

Question 29

Nonqualified Stock Options

NQSOs

Answer 29

Grant: No taxable event occurs

Exercise: Bargain Element (FMV - Exercise Price) = W2 Income

Sale: Capital gain or loss

Question 30

Incentive Stock Options

ISOs

Answer 30

Grant: No taxable event occurs

Exercise: NO ordinary income received

Sale:
Option 1: after 1 year from exercise & 2 yrs from grant = LTCG

Option 2: Within one year of exercise or within two years of grant, W-2 compensation income not subject to payroll taxes to extent FMV at exercise > exercise price, capital gain for any amount the sale price is > FMV on exercise date

Question 31

RDM Rules

Answer 31

1. Must be taken by April 1 the year AFTER person turns 73. Following RMDs must be taken by Dec 31
2. 25% penalty on difference of RMD not distributed

Distribution Amount:
1. Dividing account balance (as of Dec 31st of previous yr) by distribution period.

Question 32

Social Security

Must be fully insured in order to be eligible for Social Security retirement benefits.

Fully Insured Eligibility: (Persons age - 22)
6 credits minimum- 40 credits max

*Currently insured status will provide coverage for survivor benefits.

Answer 32

1. Full old age (retirement) benefits for many individuals began as early as age 65 and provide a lifetime income based on the worker’s average earnings during the work years.

NOT COVERED:
1. Railroad workers
2. Certain Federal civil service workers
3. Certain state/local gov’t EE

Benefits:
1. Earliest a person can receive Soc. Sec benefits is age 62
2. Reduction in benefits for the worker if retirement benefits begin before FRA
3. Yearly benefits increase up to 8%/yr for delayed retirement up to age 70.
4. a. A person who is under FRA throughout the entire year in 2023 can earn up to $21,240 without impacting benefits.

b. A person who attains FRA in 2023 can earn up to $56,520 in the period before the month in which FRA is reached.

Question 33

If provisional income exceeds all the thresholds given, then a maximum of ___________ of Social Security benefits are subject to taxation.

Answer 33

A maximum of 85% of the excess amount is taxable as ordinary income.

Question 34

Social Security Benefits Thresholds

Answer 34

If provisional income is between:
$32,000 and $44,000 (MFJ) then the max
amount of Social Security benefits subject to tax is 50%.

If provisional income exceeds
$44,000 (MFJ) then max amount of Social Security benefits subject to tax is 85%

Question 35

Fully Insured v. Currently Insured

Social Security Survivor Benefits

Answer 35

Fully Insured:
1. Income payable to a deceased worker’s spouse at age 65 OR at age 50 if the widowed spouse is disabled.
2. Monthly retirement income of 100% of the worker’s primary insurance amount at the insured’s full retirement age.

Currently Insured:
1. A $255 lump-sum death benefit, which is generally payable to the insured’s spouse.
2, A widow or widower’s income payable to a surviving or divorced spouse with a dependent child under the age of 16.

Question 36

% Test to Determine if life insurance is an incidental benefit provided by a retirement plan

TERM & UNIVERSAL: 25%

WHOLE LIFE: 50%

Answer 36

Term insurance or Universal life: premiums CANT exceed 25% of the plan contributions for the participant.

Whole life policy =
premiums CANT exceed 50% of the plan contributions for the participant.