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CFP > Retirement Savings and Income Planning > Flashcards

Retirement Savings and Income Planning Flashcards

1
Q

What benefits are provided by Social Security?

A
  1. Retirement income
  2. Survivor benefits to spouse and dependent children
  3. Disability benefits
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2
Q

How is Social Security funded?

A

with payroll taxes (FICA)

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3
Q

If you earn $1300 in any quarter you get credit for the whole quarter

A

Quarter of coverage

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4
Q

To be fully insured under Social Security, you must have earned how many quarters?

A

40

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5
Q

What does it mean to be currently insured under Social Security?

A

you have earned 6 credits in the previous 13 quarters

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6
Q

Those claiming Social Security from 62 to the FRA year will see their benefits reduced ___ for every ___ of earnings above $18,240.

A

$1; $2

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7
Q

Those claiming Social Security in the FRA year will see their benefits reduced ___ for every ___ of earnings above $48,600.

A

$1; $3

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8
Q

How is provisional income calculated for Social Security?

A

Gross Income + non-taxable interest income + one-half of OASDI benefits

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9
Q

At what levels will 0% of Social Security benefits be taxable?

A

Less than $25,000 (single)

Less than $32,000 (MFJ)

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10
Q

At what levels will 50% of Social Security benefits be taxable?

A

$25,000 to $34,000 (single)

$32,000 to $44,000 (MFJ)

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11
Q

At what levels will 85% of Social Security income be taxable?

A

Greater than $34,000 (single)

Greater than $44,000 (MFJ)

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12
Q

When does a spouse become eligible for spousal benefits?

A

Age 62 or any age if caring for a child under 16 or disabled

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13
Q

How much of the covered spouse’s primary insurance amount can be claimed as a spousal benefit?

A

50%

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14
Q

How long must one be married to claim spousal benefits?

A

at least 1 year

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15
Q

How long must one have been married to claim surviving spouse benefits?

A

At least 9 months

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16
Q

At what age can a surviving spouse claim surviving spouse benefits?

A

age 60

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17
Q

How much of a deceased spouse’s PIA can be claimed as surviving spouse benefits?

A

Up to 100%, including delayed retirement credits; $250 paid upon death of a worker

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18
Q

How long must you have been married to claim divorce benefits for Social Security?

A

at least 10 years

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19
Q

Can a remarried spouse claim divorced spouse benefits?

A

No

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20
Q

How old must you be to claim divorced spouse benefits?

A

At least 62

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21
Q

What benefits are available to an ex-spouse eligible for divorce benefits?

A

spousal and survivor benefits

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22
Q

If you are receiving Social Security, will you be automatically enrolled in Medicare when eligible?

A

Yes, parts A and B

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23
Q

How long does the benefit period for Medicare Part A run?

A

begins when you start receiving treatment and ends 60 days after you are no longer receiving treatment

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24
Q

Which employees are not covered under Social Security (5)?

A
  1. Federal government workers hired before 1984
  2. Railroad employees covered under the Railroad Retirement System
  3. Business owners who receive only distributive (dividend) income for services performed
  4. Children under 18 who are employed by a parent in an unincorporated business
  5. State & local government employees who are members of a state or local government employer’s retirement system where the state or local government has elected to exclude Social Security coverage for such group
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25
Q

What are the two types of defined benefit pension plans?

A
  1. defined benefit

2. cash balance

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26
Q

What are the two types of defined contribution pension plans?

A
  1. money purchase

2. target benefit

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27
Q

Under this qualified plan, a defined amount goes into the plan and receives a guaranteed rate of return?

A

cash balance

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28
Q

Under this type of qualified plan, a defined amount for each employee (% of compensation or $ amount) goes into the plan?

A

Money purchase

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29
Q

Under this type of qualified plan, a benefit is targeted for employees. Contributions can skew and put in more for older workers and less for younger workers.

A

Target benefit

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30
Q

How much of a pension plan may be employer stock?

A

10%

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31
Q

This plan allows an employee to put in after tax dollars. The employer can also contribute.

A

private thrift plan

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32
Q

This type of plan has the employer pay stock to the employees?

A

stock bonus

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33
Q

This type of plan only contains company stock?

A

ESOP/LESOP

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34
Q

This type of plan allows age-weighted contributions to older employees, but employer contributions are not mandatory?

A

Age-weighted

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35
Q

This type of profit sharing plan favors certain classes of employees?

A

New Comparability

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36
Q

This provision may be added to a profit sharing plan or SIMPLE plan to allow for the addition of employee pretax contributions?

A

401(k)

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37
Q

What makes a plan qualified? (5)

A
  1. ERISA regulation
  2. Non-discrimination
  3. Minimum vesting requirements
  4. Minimum funding requirements (pension plans)
  5. Protection of assets
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38
Q

Employers may contribute up to ___ of payroll for defined contribution plans?

A

25%

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39
Q

How old must one be to be eligible for a qualified plan?

A

21 years old

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40
Q

What is the consequence if an employer requires 2 years of service before becoming eligible for the qualified plan?

A

All employer contributions must be 100% vested immediately

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41
Q

A defined benefit plan may grant credits for up to ___ years of service prior to the establishment of the plan.

A

5

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42
Q

Which vesting schedules are available for a non top-heavy defined benefit plan?

A

5-year cliff and 3-to-7 year graded

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43
Q

What vesting schedules are available to a top-heavy defined benefit plan and defined contributions plans?

A

3-year cliff and 2-to-6-year graded

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44
Q

What is the only vesting schedule available for a cash balance plan?

A

3-year cliff

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45
Q

What is the maximum contribution an employer can make for an employee into a defined benefit plan?

A

The actuarilly determined amount needed to fund a pension of the lesser of 100% of salary or $230,000

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46
Q

Under this defined benefit plan formula, service is not considered and the benefit is a flat amount or percent of earnings.

A

Flat benefit

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47
Q

Under this defined benefit plan formula, the benefit is a dollar amount per year of service or a percentage of earnings per year of service. The participant accrues additional benefit each year. Service limitation may be used.

A

Unit benefit

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48
Q

The average earnings over plan participation period.

A

Career-average pay

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49
Q

The average earnings over the final 3 or 5 years, or average of highest 3 or 5 of the last 10 years.

A

Final-average pay

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50
Q

This law requires that a qualified optional survivor annuity be offered at retirement with a required benefit of 75% to the survivor.

A

Pension Protection Act of 2006

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51
Q

When may the Pension Benefit Guaranty Corporation involuntarily terminate an underfunded plan (4)?

A
  1. The plan is not in compliance with minimum funding standards
  2. The plan is unable to pay benefits when due
  3. The plan has unfunded liabilities following the distribution of $10,000 or more to the owner
  4. The potential loss to the PBGC is expected to increase unreasonably if the plan is not terminated
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52
Q

The minimum amount that must be contributed to the plan to provide the benefit promised.

A

minimum funding standard

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53
Q

What is the penalty for plans that do not meet the minimum funding standard?

A

10%

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54
Q

This type of plan transfers the risk from the employer to the employee?

A

Defined contribution

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55
Q

Annual additions to a defined contribution plan are made up of what?

A
  1. employer contributions
  2. employee contributions
  3. forfeitures
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56
Q

IRC Section 415(c) limits annual additions to the lesser of

A
  1. 100% of compensation or

2. $57,000

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57
Q

What is the employer deduction limit for defined contribution plans?

A

25% of payroll (not including employee deferral amounts)

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58
Q

This type of plan allows for employer contributions that are discretionary.

A

profit sharing plan

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59
Q

Distributions from this type of plan are not subject to the 20% income tax withholding requirement.

A

ESOP

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60
Q

At what age may employees make catch-up contributions?

A

50+

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61
Q

How are employer contributions treated in a Roth 401(k)?

A

They are pre-tax contributions

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62
Q

Does a Roth 401(k) have an RMD requirement?

A

Yes

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63
Q

How much of a profit sharing plan may be invested in employer stock?

A

100%

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64
Q

What is the advantage of Net Unrealized Appreciation treatment?

A

It is taxed as a long-term capital gain, not as ordinary income

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65
Q

When is NUA treatment available?

A

for employer stock being distributed from a qualified plan

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66
Q

The dollar amount that the employee defers into a 401(k) plan.

A

Elective deferral

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67
Q

What businesses may set up a solo 401(k) (Keogh) plan?

A

an unincorporated business (sole proprietorship/partnership)

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68
Q

What is the maximum employer contribution on behalf of a self-employed individual into a solo 401(k) (Keogh) plan?

A

20% of self-employed earnings

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69
Q

How do you calculate the maximum employer contribution rate for a self-employed individual?

A

% contribution for common-law employees/(1+% contribution for common-law employees)

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70
Q

Can common-law employees borrow from a Keogh plan?

A

yes

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71
Q

Can a self-employed person borrow from a Keogh plan?

A

yes

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72
Q

How is net earnings calculated for purposes of self-employed Keogh contributions?

A

Net earnings from self-employment - 1/2 of the self-employment tax = adjusted net self employment income

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73
Q

When can a self-employed person take a lump sum distribution from a Keogh plan? (4)

A

if the distribution is

  1. due to death, age 59 1/2, or disability
  2. the full balance of the account
  3. distribution in one tax year, and
  4. from a qualified plan
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74
Q

This is a discretionary profit sharing contribution made by an employer. It is a discretionary matching contribution and must be 100% vested when made.

A

Qualified matching contributions (QMACs)

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75
Q

This is a discretionary profit sharing contribution made by an employer. It is a nonelective contribution and must be 100% vested at all times.

A

Qualified nonelective contributions (QNECs)

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76
Q

Is Social Security integration allowed for an ESOP?

A

No

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77
Q

In a stock bonus plan, at what point must an employee be allowed to diversify entirely out of company stock?

A

after 3 years of service

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78
Q

In an ESOP, when must an employee be allowed to begin diversifying out of company stock?

A

Upon attaining age 55 and having at least 10 years of service. The employee can diversify out up to 25% the first five years and up to 50% in year 6.

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79
Q

Which employers are able to offer a 403(b) tax-sheltered annuity? (6)

A
  1. public education systems
  2. 501(c)(3) organizations
  3. Ministers performing religious services for for-profit companies
  4. State
  5. Agency of a state
  6. University (public or private)
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80
Q

Who is not required to be covered by a 403(b) plan?

A
  1. Students who work less than 20 hours/week

2. Nonresident aliens

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81
Q

What are the minimum requirement to participate in a 403(b)?

A

21 years old with 1 year of service

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82
Q

This is an agreement to take an amount of out of pay to go into a 403(b).

A

Salary Reduction Agreement

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83
Q

The employer may require a _____ minimum annual deferral into the 403(b) to meet nondiscrimination safe harbor.

A

$200

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84
Q

If an employer makes a 403(b) available to one employee, it must be available to what % of other employees?

A

100% of eligible employees

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85
Q

What is the long service catch-up for a 403(b)?

A

$3,000

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86
Q

Who is eligible to make a long service catch-up contribution to a 403(b)?

A

Must have

  1. 15+ years of service for the same employer
  2. Work for a health, education, or religious (HER) organization
  3. Did not contribute the max in previous years
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87
Q

What amount of annual long service catch-up is allowed for a 403(b)?

A

The lesser of

  1. $3,000
  2. $15,000 reduced by the sum of prior years’ 15-year catch-up deferrals, or
  3. $5,000 times the number of years of service, minus the total elective deferrals made by employee for earlier years (including 15-year catch-up contributions)
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88
Q

Can you contribute the age-50 catch-up contribution and the long-service contribution in the same year?

A

yes, if eligible

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89
Q

What are permitted distributions from a 403(b)? (6)

A
  1. attainment of age 59 1/2
  2. Separation from service
  3. Death
  4. Disability
  5. Hardship (employee deferrals only) (must be an immediate and heavy need with no other resources)
  6. Loans
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90
Q

How much can be borrowed from a 403(b)?

A

Lesser of
1. 50% of nonforfeitable account balance
2. $50,000
If the 50% vested amount is less than $10,000, the plan can loan up to $10,000 provided the loan is adequately secured

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91
Q

Which employers are eligible for a 457(b) plans?

A
  1. state and local government

2. tax-exempt (501(c)(3)) organizations

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92
Q

Is the amount contributed to a 457 plan limited by contributions to a 403(b), 401(k), SARSEP, or SIMPLE plan?

A

no, you may contribute the full amount to one of these plans and the full amount to a 457

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93
Q

Is there a 10% penalty on early withdrawals for a 457 plan?

A

no

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94
Q

When can distributions be made from a 457 plan while the employee is working?

A

Generally not until the employee is 70 unless it meets the unforeseeable emergency exception

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95
Q

What is the final three-year catch-up provision for a 457 plan?

A

You can make a catch-up contribution of up to double the annual contribution limit if you have unused past available contributions.

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96
Q

Is a 403(b) subject to RMDs?

A

yes

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97
Q

What sources can fund a 403(b)? (4)

A
  1. Rollovers and transfers from a qualified plan
  2. Elective salary deferrals
  3. Employer contributions
  4. After-tax employee contributions
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98
Q

Do ADP and ACP tests apply to a 403(b)?

A

ADP tests to not apply
ACP test applies if a 403(b) plan maintained by a 501(c)(3) employer provides matching contributions or employees are allowed to make after-tax contributions

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99
Q

Does top-heavy testing apply to 403(b) plans?

A

Generally no

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100
Q

What investment options are available for 403(b) plans? (3)

A
  1. Annuities
  2. Mutual fund shares kept in a custodial account
  3. Life insurance
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101
Q

This is an IRA funded with post-tax dollars. Distributions are tax free.

A

Roth IRA

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102
Q

What % of earned income may (potentially) be contributed to an IRA up to the max limit?

A

100%

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103
Q

When is the IRA contributions deadline?

A

April 15 of the following year

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104
Q

What is the minimum IRA contribution that will be deductible?

A

$200 - if the amount eligible for deduction is greater than $0 but less than $200, you will still be able to deduct $200

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105
Q

Can life insurance and collectibles be owned inside an IRA?

A

No

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106
Q

Can loans be taken from an IRA?

A

No

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107
Q

Are Roth IRAs subject to RMD requirements?

A

No

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108
Q

At what age must RMDs be taken from an IRA?

A

72

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109
Q

What is the penalty on excess contributions to an IRA?

A

6%

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110
Q

What are the requirements to be eligible for an IRA?

A
  1. Compensation
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111
Q

What makes an employee an active participant in a defined contribution plan?

A

If the employee received any annual additions to their account (employer contribution, employee contribution, forfeiture)

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112
Q

What makes an employee an active participant in a defined benefit plan?

A

The employee is eligible to participate in the plan

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113
Q

If the investments in an employee’s 401(k) grow $10,000 in a year, but the account receives no other contributions, is the employee an active participant?

A

No, investment earnings do not affect active participant status

114
Q

How do you calculate the dedutible IRA contribution?

A
  1. Determine the dedutible %
  2. Multiply by the max contribution
  3. Result (round up to the nearest $10)
115
Q

How do you calculate the non-taxable portion of non-deductible IRA distributions?

A

(Total non-deductible contributions/[IRA balances + any distributions]) x Distributions for the year

116
Q

Does the Roth IRA phaseout only apply to active participants?

A

No

117
Q

When may a qualified distribution be made from a Roth IRA?

A

Two requirements

  1. Five-year holding period requirement
  2. One of the following
    a. The owner is at least age 59 1/2
    b. To a beneficiary or after the death of the owner
    c. To the owner because of the owner’s disability
    d. For a qualified special purpose distribution
    i. first-time home buyer expenses of up to $10,000
118
Q

What happens if gains are withdrawn from a Roth IRA before the account is 5 years old?

A

The gains are taxable and may be subject to penalty

119
Q

When does the clock start on the 5-year rule for Roth IRAs?

A

on January 1 of the year you open the account

120
Q

What vesting schedules are available for SEP IRAs?

A

participant accounts are always 100% vested

121
Q

What are the eligibility requirements for a SEP? (3)

A
  1. Age 21 and over
  2. Performed service during three of the immediate five preceding years
  3. Earned at least $600 during the current year
122
Q

Can employees contribute to a SEP IRA?

A

No, employer contributions only

123
Q

Is an employer required to contribute to a SEP IRA the same % for all employees?

A

Yes

124
Q

Is an employer required to contribute to a SEP?

A

No

125
Q

How long does an employer have to establish and fund a SEP?

A

Until the tax return due date

126
Q

Who is considered a key employee?

A
  1. > 5% owner
  2. 1% owner who makes more than $150,000
  3. Officer with over $185,000 in compensation from employer
127
Q

Do coverage tests and top-heavy rules apply to a SEP?

A

Yes - top-heavy applies when more than 60% of assets go to key employees

128
Q

Can a SEP integrate with Social Security?

A

yes

129
Q

What employer contributions are required in a SIMPLE IRA?

A

Either

  1. 3% mandatory match
  2. 2% non-elective contribution
130
Q

What vesting schedules are available to a SIMPLE IRA?

A

All contributions are 100% vested

131
Q

Which employers are eligible to establish SIMPLE IRAs?

A
  1. Employers with no more than 100 employees who earned $5,000 or more in compensation during any two preceding calendar years (all employees employed during the calendar year are counted)
  2. Employer cannot maintain a qualified plan, SEP, 403(a) or (b), or government plan (other than 457)
132
Q

Which employees are eligible to participate in a SIMPLE IRA?

A
  1. Received at least $5,000 in compensation during any two preceding years and is reasonably expected to receive at least $5,000 in compensation during the current year
133
Q

What is the exception to the 3% matching contribution into a SIMPLE IRA?

A

an employer may match at a rate of not less than 1% for two of every five years

134
Q

If one spouse is an active participant and the other is not, what limits are used for IRA contributions?

A

The active participant uses MFJ AGI limits and the non active participant uses the Spousal IRA AGI limits

135
Q

How much can a nonworking spouse contribute to an IRA?

A

$6,000 as long as the other spouse is working

136
Q

What are exceptions to the 10% early withdrawl penalty in an IRA? (8)

A
  1. Death of the IRA owner
  2. Disability of the IRA owner (permanent)
  3. Medical expenses in excess of 10% of AGI
  4. Payment of medical insurance premiums after separation from employment as long as 12 consecutive weeks of unemployment compensation is received
  5. Qualified higher education expenses (tuition, fees, books, supplies, & equipment) - must be post secondary. Includes graduate level.
  6. Qualified first-time homebuyer expenses up to $10,000
  7. Qualified reservist distribution
  8. A series of substantially equal periodic payments taken under IRC Rule 72(t)
137
Q

When must RMDs begin?

A

On April 1 of the year following the year in which the owner turns 72

138
Q

What is the penalty for distributing less than the required amount from an IRA?

A

50% penalty tax on the shortfall

139
Q

How much protection do IRAs have from creditors?

A

up to $1,000,000 is protected in bankruptcy

140
Q

When may a SIMPLE IRA participant make a rollover?

A
  1. May rollover distributions from one SIMPLE plan to another at any time
  2. May roll over a distribution from a SIMPLE plan to another IRA, SEP, qualified plan, TSA, or Sec 457 plan on a tax-free basis after a two-year period
141
Q

What is the two-year rule for SIMPLE IRA?

A

A distribution taken within 2 years of joining the plan is assessed a 25% penalty tax if it is subject to early withdrawal penalty

142
Q

Do pension plans allow in-service withdrawals?

A

No. Maybe after 62

143
Q

Do profit sharing plans allow in-service withdrawals?

A

Sometimes

144
Q

Do IRAs allow in-serice withdrawals?

A

yes, but penalties may apply

145
Q

What conditions are necessary for a hardship withdrawal?

A

Must establish that

  1. Other resources are not “reasonably available,” and
  2. There is an “immediate and heavy financial need”
146
Q

What are examples of needs for which a hardship withdrawal may be taken?

A

medical bills, eviction or forclosure, casualty loss on property, purchase of primary residence, tuition payments

147
Q

What can be withdrawn for a hardship withdrawal?

A

Only employee contributions.

148
Q

Does the 10% withdrawal penalty apply to hardship withdrawals?

A

yes

149
Q

How are loans from a qualified plan paid back?

A

Over five years in quarterly payments (unless for the purchase of a primary residence)

150
Q

Do pension plans offer loans?

A

No

151
Q

What are the early withdrawal penalty exceptions for a qualified plan? (8)

A
  1. Death
  2. Disability
  3. Medical expenses above 10% of AGI
  4. Substantially equal periodic payments (if separated from service)
  5. Separation from service after age 55
  6. Qualified domestic relations order
  7. Distribution to reduce excess 401(k) plan contributions
  8. Distribution of ESOP dividends
152
Q

What are the separation from service options for a qualified plan? (5)

A
  1. Leave with employer (if over $5,000)
  2. Transfer to a new employer’s plan
  3. Annuitization
  4. Lump sum distribution
  5. IRA rollover
153
Q

This is a rollover from one qualified plan into an IRA and then into another qualified plan.

A

Conduit IRA

154
Q

This is a rollover in which funds are sent from the old qualified plan straight to the IRA company.

A

Direct rollover

155
Q

This is a rollover in which money is withdrawn from a qualified plan and then deposited into another plan or IRA.

A

Indirect rollover

156
Q

In an indirect rollover, how long does a person have to invset the money in another plan or IRA?

A

60 days

157
Q

What is the withholding from an indirect IRA rollover?

A

20%

158
Q

What is the withholding from a direct IRA rollover?

A

0

159
Q

When must RMDs begin for a qualified plan?

A

April 1 of the year following the later of

  1. The year the participant attains age 72
  2. The year in which the participant retires, if not a 5% owner
160
Q

How is the RMD calculated?

A

Balance in the plan on Dec 31 of prior year/life expectancy

161
Q

How is life expectancy determined for RMD purposes?

A

life expectancy is based on the age at the end of the year in which one attains age 70 1/2

162
Q

What life expectancy table is available for an IRA owner?

A

Uniform Lifetime Table (recalculated). This is the most advantageous.

163
Q

What life expectancy table is available to an IRA owner and spouse who is 10+ years younger?

A

Joint Life Expectancy Table

164
Q

What is the life expectancy table that is available to an IRA beneficiary?

A

Single Life Table (it is recalculated for a spouse and fixed period for a non-spouse)

165
Q

Which plans are allowed to aggregate RMDs?

A

IRAs and 403(b)s

166
Q

Which plans are not allowed to aggregate RMDs?

A

401(k)s and Roth 401(k)s

167
Q

What are the options available for RMDs to a spouse beneficiary when the the RMDs have not yet begun? (3)

A
  1. Roll into their own IRA and take RMDs at 72
  2. Transfer assets to an Inherited IRA and begin distributions by 12/31 of the year the original owner reached age 72
  3. Lump sum
168
Q

What are the options available for RMDs to a non-spouse beneficiary when the the RMDs have not yet begun? (3)

A
  1. Transfer the assets to an inherited IRA and begin distributions by 12/31 of the year following the original owner’s death
  2. Transfer to an inherited IRA and distribute under the five-year rule
  3. Lump sum
169
Q

What are the options available for RMDs to a spouse beneficiary when the the RMDs have begun? (3)

A
  1. Roll into own IRA and take RMD at own age 72
  2. Transfer assets to an inherited IRA and take RMDs by 12/31 of the year following death
  3. Lump sum
170
Q

What are the options available for RMDs to a non-spouse beneficiary when the the RMDs have begun?

A

Must begin RMDs by 12/31 of the year following death

171
Q

Which plans must offer the option of a qualified preretirement survivor annuity or a qualified optional survivor annuity to the surviving spouse of a plan participant who dies before retirement?

A

pension plans both DB and DC; profit sharing plans may offer such a payout, but are not required to do so unless the plan documents calls for it

172
Q

What distributions are not eligible for rollover treatment? (3)

A
  1. Distributions that are part of a series of substantially equal periodic payments
  2. Distributions that are made to comply with RMD requirements
  3. The nontaxable portion of any IRA distribution
173
Q

This type of retirement plan is best for employers seeking the max tax shelter?

A

Defined benefit

174
Q

This type of retirement plan is best for a business with stable cash flows and an owner willing to make annual financial commitment but not over 25% of compensation.

A

Money purchase or target benfit plan

175
Q

This type of retirement plan is best for rewarding long term employees and favoring older employees?

A

Defined benefit

176
Q

This type of retirement plan is best for businesses with fluctuating cash flow.

A

Profit sharing, SEP, or Tandem plan

177
Q

This type of retirement plan is best for businesses where the owner is 45 or older or one of the oldest employees.

A

Defined benefit

178
Q

This type of retirement plan is best for younger employees who will benefit from years of contributions and compounding.

A

Profit sharing, SEP, or tandem plan

179
Q

This type of retirement plan is best for companies that want a pension plan that is easy to communicate to employees and reduced admin costs?

A

money purchase or target benefit plan

180
Q

This type of retirement plan is best for companies willing to make annual financial contributions in excess of 25% of compensation.

A

Defined benefit

181
Q

This type of retirement plan is best for businesses with not other qualified plan or 403(b)?

A

SIMPLE IRA or SIMPLE 401(k)

182
Q

What are prohibited transaction for a retirement plan?

A

Transactions between a qualified plan and a disqualified person that involves “self-dealing” such as

  1. sale, exchange or lease of property
  2. Loans from general plan assets
  3. Furnishing goods/services/facilities
  4. Transfer/use of plan assets
183
Q

Who are disqualified persons for a qualified plan? (4)

A
  1. Fiduciary
  2. Owners
  3. Family members
  4. Officers
184
Q

What are the penalties for a prohibited transaction from a qualified plan? (3)

A
  1. 15% penalty
  2. Correct transaction
  3. Transactions that are not corrected are subject to additional penalties
185
Q

This results if a qualified plan is carrying on a trade/business not related to the purpose of the trust.

A

Unrelated Business Taxable Income (UBTI)

186
Q

What types of income are considered UBTI?

A

Income from

  1. a directly held trade or business
  2. certain types of rental income (but not from real estate)
  3. use of leverage (except for real estate)
  4. investment in pass-through entities
187
Q

What is not considered UBTI? (6)

A
  1. dividends
  2. interest
  3. annuities
  4. royalties
  5. rent from real property
  6. gain from sale/exchange of capital assets
188
Q

How is UBTI taxed?

A

UBTI that exceeds $1,000 is taxed at the corporate rates

189
Q

How much life insurance may be owned inside a defined contribution plan?

A

Premiums paid for the cost of life insurance must be less than 25% (term/universal) or 50% (whole life) of the contributions the employer makes to employee plans.

190
Q

How much life insurance may be owned inside a defined benefit plan?

A

The death benefit must not exceed 100x the anticipated monthly retirement benefit.

191
Q

Who is considered a highly compensated employee for purposes of ERISA tests?

A
  1. A 5% owner (actually >5%) in the determination year or in the preceding plan year
  2. A person whose compensation was in excess of $125,000
192
Q

For ERISA tests, the employer may limit the highly compensated employees to the top-paid ____ employees based on the preceding year’s compensation.

A

20%

193
Q

According to the ratio percentage test, the percentage of eligible non-highly compensated employees benefiting under the plan must be at least ____ of percentage of highly compensated employees benefiting.

A

70%

194
Q

Under the average benefits test, the average benefit, as a percentage of compensation, for non-highly compensated employees must be at least ____ of that for highly compensated employees.

A

70%

195
Q

For minimum coverage tests, a qualified plan must meet

A

Either

  1. General Safe Harbour Coverage Test, or
  2. One of the two coverage tests
    a. Ratio Percentage Test
    b. Average Benefits Test
196
Q

What are the minimum participation tests for a defined benefit plan?

A

The plan must benefit at least the lesser of
1. 50 employees, or
2. The greater of
a. 40% of all the company’s ERISA eligible employees
b. two employees (or one employee if there is only one employee)
50/40 test

197
Q

What are a company’s options if it fails an ADP/ACP test?

A
  1. Return excess contributions to highly compensated employees
  2. Recharacterize the highly compensated employees’ deferrals to bring down the percentage (make it an after-tax contribution)
  3. Raise non-highly compensated employee percentage through a QMAC or QNEC
198
Q

What is measured by the ADP test?

A

employee deferrals as a % of compensation

199
Q

What is measured by the ACP test?

A

employer contributions and employee after-tax contributions as a % of compensation

200
Q

How much more can highly compensated employees contribute or have contributed as a percent of compensation and not violate ADP/ACP tests?

A

When non-highly compensated employees contribute 1-2%, highly compensated employees may contribute double
When non-highly compensated employees contribute between 2% and 9%, highly compensated employees may contribute +2% above them.
When non highly compensated employees contribute 9% and up, highly compensated employees may contribute 1.25x more.

201
Q

When is a defined contribution plan considered top heavy?

A

If the aggregate account balances for key employees exceed(s) 60% of the aggregate account balances for all employees.

202
Q

When is a defined benefit plan considered top heavy?

A

If the present value of cumulative accured benefits for key employees exceed(s) 60% of the present value of cumulative accrued benefits for all employees.

203
Q

What minimum funding is required of a top heavy defined contribution plan?

A

It must provide a contribution of at least 3% of compensation per year, or, if less, the percentage contributed for key employees

204
Q

What minimum funding is required of a top heavy defined benefit plan?

A

The plan must provide a minimum benefit of 2% of employee’s highest 5-year average compensation for each year of service earned while plan is top-heavy, to a max of 20%

205
Q

How does being top-heavy affect vesting in a defined benefit plan?

A

Must use 3-year cliff or 2-6 year graded vesting

206
Q

What does a safe harbor 401(k) avoid?

A

the testing requirements including ADP, ACO, and top-heavy rules

207
Q

How can a 401(k) qualify for the safe harbor? (3)

A
  1. 3% nonelective contribution, or
  2. 100% match on first 3% of compensation and 50% match on next 2% of compensation, or
  3. 100% match on first 4% of compensation
208
Q

What is the maximum permited disparity for Social Security integration in a defined contribution plan?

A

5.7%, unless the base is less in which case the max is the same as the base

209
Q

What is disparity?

A

The amount that the employer can contribute for income beyond the Social Security wage base

210
Q

What is the maximum permited disparity for a defined benefit plan?

A

lesser of the base percentage (19.50) or 26.25%

211
Q

Are deferred compensation plans qualified plans?

A

No

212
Q

Are deferred compensation plans allowed to discriminate?

A

Yes

213
Q

When can the employer take a tax deduction for a qualified plan?

A

In the year of the plan contribution

214
Q

When can an employer take a tax deduction for nonqualified plans?

A

In the year of employee taxation

215
Q

When will a nonqualified plan be tax-deferred for an employee?

A

If it is unfunded or funds are at risk

216
Q

Are rollovers available from nonqualified plans?

A

No

217
Q

How are current earnings taxed in a nonqualified plan?

A

Usually they are currently taxable to the employer

218
Q

What are the requirements for deferral of taxation on a nonqualified plan? (3)

A
  1. The agreement to defer compensation must be made before the dollars are earned.
  2. The agreement must represent only an unsecured promise.
  3. The plan must be unfunded or, if funded, benefits must be nontransferable and subject to substantial risk of forfeiture
219
Q

An employee’s right to payments must be contingent upon future performance of substantial services (which does not include death or disability). They lose this right to payments if substantial services are not performed or if employment terminates for reasons other than death or disability. Creditors have access to the funds in a bankruptcy.

A

Substantial Risk of Forfeiture

220
Q

An amount is treated as received for tax purposes if credited to employee account, set aside, or otherwise made available even if amount is not actually received.

A

Constructive Receipt Doctrine

221
Q

Employee is taxed when plan accumulations are vested even though employee cannot yet withdraw cash.

A

Economic Benefit Doctrine

222
Q

This type of NQDC plan is linked indirectly to the qualified plan or plans in place and provides for benefits for income that exceeds the income limit covered by the plan.

A

Excess Benefit Plan

223
Q

This NQDC plan is an unfunded plan providing benefits for select employees in excess of those provided by the employer’s qualified retirement plan. Benefits are usually based on elements of compensation not otherwise provided under the qualified plan.

A

Suppmental Executive Retirment Plan (SERP) (or top hat plan)

224
Q

What ERISA requirements are unfunded SERPs subject to?

A

reporting and disclosure

225
Q

This funding structure for a NQDC plan that sets corporate assets aside to fund deterred compensation benefits.

A

funded

226
Q

This is an irrevocable, fully funded trust established for an employee. Assets are not subject to the claims of the employer’s creditors.

A

Secular Trust

227
Q

This funding structure for a NQDC plan has a general reserve that is built to fund future plan obligations, but the reserve is subject to the company’s creditors.

A

Informally Funded Plans

228
Q

How are informally funded plans treated for ERISA purposes?

A

as unfunded plans

229
Q

This is an employer-sponsored irrevocable grantor trust. It has two beneficiaries: the employee and the creditors of the company.

A

Rabbi Trust

230
Q

What are the tax implications of a NQDC plan to the employer?

A
  1. Deduction when taxed to employee

2. Earnings taxed to employer

231
Q

What are the tax implications of a NQDC plan to the employee?

A
  1. Taxed when benefit is constructively received

2. Subject to FICA taxes when constructively received

232
Q

When must elections to defer compensation take place?

A

In the year prior to the tax year services will be performed.

233
Q

For what reasons can benefits be distributed from an NQDC according to IRC Section 409(a)? (7)

A
  1. Separation from service
  2. Death
  3. Disability
  4. Change of control or ownership of the company
  5. Unforseeable emergency
  6. Plan termination
  7. Age, date, or fixed schedule specified prior to first deferral
234
Q

Are Incentive Stock Options required to pay FICA tax?

A

No

235
Q

How long must stock from an ISO be held to get LTCG treatment?

A

2 years from grant date and 1 year from exercise date

236
Q

With an ISO, what is added to AMT?

A

the bargain element

237
Q

How is the bargain element calculated for an ISO or NQSO?

A

the difference between the exercise price and the grant price

238
Q

How soon must an ISO be exercised after retirement to preserve favorable tax treatment?

A

3 months

239
Q

When is an ISO taxed?

A

On the date it is disposed

240
Q

When is an NQSO taxed?

A

On the date it is exercised

241
Q

Are nonqualified stock options required to pay FICA tax?

A

yes, they are compensation

242
Q

What tax rates apply to NQSO?

A

ordinary income tax rates

243
Q

How is income determined for a NQSO?

A

income = bargain element

244
Q

The value of ISO exercised in any year may not exceed _____ based on grant price.

A

$100,000

245
Q

These plans enable rank and file employees to purchase company stock.

A

Employee Stock Purchase Plans

246
Q

What discount can a company offer on an ESPP?

A

up to 15%

247
Q

How much company stock can an employee purchase in an ESPP?

A

up to $25,000/year

248
Q

When will stock in an ESPP be eligible for LTCG treatment?

A

When the same holding period as an ISO is met

249
Q

Historically, what is the most tax-favored means to informally fund a NQDC plan?

A

corporate-owned life insurance

250
Q

This is an arrangement that provies a severance benefit to a valued employee conditioned on the sale or substantial change in ownership of the company and the subsequent termination of the employee.

A

Golden Parachute

251
Q

What is the penalty for an excess parachute payment?

A

20%

252
Q

Coverage for group life insurance is usually based on

A

a percentage or multiple of compensation. It must be based on a uniform formula for all employees.

253
Q

A group life insurance plan must meet one of four requirements

A
  1. At least 70% of employees must benefit
  2. At least 85% of participans are not key employees
  3. Plan benefits a nondiscriminatory class of employees
  4. Plan complies with IRC Sec 125 requirements if part of a cafeteria plan
254
Q

Accumulating units of single premium whole life, decreasing units of group term; the employee purchases the permanent portion

A

Group Paid-Up

255
Q

A combination of term and permanent life insurance; it may be contributory

A

Group Ordinary

256
Q

When will the death benefit for group life insurance be tax deductible?

A

If the employer pays the premiums on a tax deductible basis.

257
Q

This provides a monthly benefit paid to the surviving spouse and children of the employee. It is taxable and there is no ability to change the beneficiary.

A

Group Survivor’s Income Benefit

258
Q

This provides coverage on a spouse and unmarried children of an employee.

A

Dependent’s Group Life

259
Q

How much coverage may the provided through dependent’s group life.

A

$2,000

260
Q

This is contributory group term coverage for specific class of (or all) employees

A

Supplemental Group Life

261
Q

This is an individual, discriminatory benefit for selected executives removed from group term coverage.

A

Group Carve Out

262
Q

Group term of up to what amount is dedutible by the employer and nontaxable income to the employee?

A

$50,000

263
Q

Is the death benefit of group term life insurance above $50,000 taxable?

A

No, it is income tax free

264
Q

How do you calculate the taxable amount of group term life insurance premium paid by the employer?

A

[(Face amount - 50,000)/1,000] x Table I rate x 12 = imputed income

265
Q

What are examples of nontaxable non-cash fringe benefits? (6)

A
  1. working condition fringe benefits
  2. No-additional-cost services
  3. qualified employee discounts
  4. Use of on-premises athletic facilities
  5. Deminimus fringe benefits
  6. Meals and lodging furnished for employer’s convenience
266
Q

How are disability benefits taxed?

A

If employer pays the premium, the employee will pay taxes on the benefits.
If the employee pays the premium, the benefits will not be taxed.

267
Q

What are prohibited benefits in a cafeteria plan? (6)

A
  1. education assistance
  2. LTC insurance
  3. employee discounts
  4. noncash fringe benefits
  5. commuter benefits
  6. retirement benefits
268
Q

Under this program, the employer has absolute liability for employee injuries, regardless of who may have been negligent.

A

Workers’ Compensation

269
Q

What benefits are available under workers’ compensation? (7)

A
  1. Medical expenses
  2. Total temporary disability
  3. Partial temporary disability
  4. Total permanent disability
  5. Partial permanent disability
  6. Survivors’ death benefit
  7. Rehabilitation benefits
270
Q

This enables employers to fund a trust for nonretirement benefits and take an immediate tax deduction.

A

Voluntary Employee Beneficiary Association (VEBA)

271
Q

What benefits may not be offered in a VEBA?

A
  1. retirement benefits
  2. commuting benefits
  3. miscellaneous fringe benefits
272
Q

A parent-subsidiary group exists if the parent company owns at least ___ of the stock in another corporation.

A

80%

273
Q

What is the allowable employee discount for services?

A

20%

274
Q

These are issued to an employee through a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with their employer for a particular length of time. They give an employee interest in company stock but they have no tangible value until vesting is complete.

A

Restricted stock

275
Q

Is the use of employer-provided lodging a taxable benefit?

A

yes

276
Q

Is the use of a corporate jet a taxable benfit?

A

yes

277
Q

This provides a retirement benefit in excess of the company’s qualified plan benefit, without regard to the IRC Section 415 limits.

A

SERP

278
Q

How can forfeitures in a retirement plan be used?

A
  1. Reallocated to remaining participants

2. Decrease employer contributions

279
Q

Do investment returns affect employer contributions in a pension plan?

A

No

280
Q

What types of investments cannot be owned in an IRA? (5)

A
  1. Life insurance
  2. Types of derivative positions
  3. Antiques/collectibles
  4. Real estate for personal use (income or living)
  5. Most coins

CFP (9 decks)

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