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CFP Flashcards - July 2021 Exam > Retirement Savings & Income Planning > Flashcards

Retirement Savings & Income Planning Flashcards

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1
Q

When are in-service withdrawals allowed for Pension and Profit Sharing Plans?

A

Pension Plans
- for workers age 62 and older

Profit Sharing
- anyone after 2 years

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2
Q

What are the maximum annual limits for DB and DC plans, and what do they mean?

A

Defined Benefit Plans

  • 2021 max is $230,000
  • the max benefit an EE can receive in a year is a maximum of $230,000

Defined Contribution Plans

  • (2021) the lesser of 100% comp or $58,000
  • the amount of money contributed to a DC plan (EE & ER combined) cannot exceed the lesser of 100% of the EE’s compensation or $58,000
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3
Q

When the difference between a contributory and noncontributory plan?

A

Contributory
- EE can contribute to the plan
• 401ks, thrift plans, etc

Noncontributory
- ER pays for all of it
• most other pension plans, p-s plans, etc

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4
Q

When must a qualified plan be established?

A

By the due date of their tax following deadline of that year including extensions
- in writing
- can be established for plans of a prior year
— ex) establish a plan by 4/15/2021 for 2020

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5
Q

What classifies an employee as a Highly Compensated Employee?

A

1) the EE is a greater than 5% owner at anytime within current or preceding year
• they own 5.0%? -> not a HCE
• they own 5.1%? -> qualifies as a HCE
• a “5% owner” title means they own MORE than 5%

OR

2) compensation is > $130,000 in current or preceding year

  • family ownership attribution applies
    • ex) husband owns 2% and wife owns 4% -> both classify as HCE’s
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6
Q

What’s the “top 20% election”

A

Election that replaces the $130k comp rule for HCE qualification

Ranks EE’s from highest comp to lowest, and the top 20% of that list would be considered HCE’s
- could mean EE’s earning above $130k wouldn’t classify if they fall outside the top 20% list

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7
Q

What classifies an EE as a Key Employee, and why would someone test for this?

A

Used for top heavy testing

1) an OFFICER with comp > $185k
2) a greater than 5% owner
3) a greater than 1% owner with comp > $150k

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8
Q

What’s the general rule test (aka safe harbor test, aka percentage test)

A

The first coverage test for qualified plans

The number of non highly compensated employees covered by the plan divided by the number of non highly compensated employees ELIGIBLE to be covered by the plan must be greater or equal to 70%

NHC EE’s covered / # NHC EE’s eligible to contribute to plan = % >= 70%

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9
Q

What’s the ratio test?

A

The percentage of non highly compensated employees must be greater or equal to 70% of all highly compensated employees covered by the plan

% NHC-EE’s / % HC-EE’s = % >= 70%

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10
Q

What’s the average benefits percentage test?

A

The average benefit percentage for non highly compensated employees divided by the average benefits for highly compensated employees must be equal or greater than 70%

Avg Benefits % NHC-EE’s / Avg Benefits % HC-EE’s = % >= 70%

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11
Q

What are the requirements for a DB/DC plan to be considered too heavy?

A

Top Heavy Defined Benefit
- if the present value of the accrued benefits for KEY EE’s is greater than 60% of all accrued benefits for all EE’s

Top Heavy Defined Contribution
- if the aggregate account balances of KEY EE’s is greater than 60% of the aggregate account balance for all EE’s

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12
Q

What’s the funding requirements for top heavy DB/DC plans?

A

Top Heavy DB Plans
- MUST provide a minimum benefit accrual of 2% * # years of service capped at 10 years

• ex) DB provides for 1.5% * YOS * salary
— 5y’s; normal %, 7.5%; TH %, 10%
— 10y’s; norm %, 15%, TH %, 20%
— 20y’s; norm % 30%; TH %, 30%

Top Heavy DC Plans

  • minimum contribution is 3% of total covered comp
  • if the contribution for Key EE’s is < 3%, the contribution for non key EE’s can be = to contribution for Key EE’s
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13
Q

What are the ADP/ACP tests, and what the % requirements for ADP & ACP testing?

A

ADP test
- compares pretax deferrals of HCE’s to NHCE’s

ACP test
- compares ER matching and EE after tax contributions of HCE’s to NHCE’s

% (for both tests)
• If ADP/ACP % for NHCE <=2%, max ADP/ACP for HCE is 2 * ADP/ACP of NHCE
• if % for NHCE is >2% but <=8%, max % for HCE is 2% + ADP/ACP% of NHCE
• if % for NHCE is > 8%, but 1.25 * % of NHCE

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14
Q

What happens if a plan fails the ADP test?

A

Sponsoring employer has 2 options

1) a corrective distribution can be made (HCE)
— decreases ADP of HCE & is included in their gross income
— made in following tax year, w/ the excess contribution being corrected within 2.5 months or ER will pay a 10% penalty on amount not corrected

2) an additional contribution (NHCE)
— two methods, both 100% vested
— 1) qual. Matching c - extra C for NHCE who deferred
— 2) qual non elective c - extra C for all eligible NHCE regardless if they participated

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15
Q

How can an employer avoids ADP/ACP testing and what are the matching/vesting requirements?

A

They can avoid the ADP/ACP testing by meeting the safe harbor 401k provisions

Employer contributions must be 100% vested at all times and must be done with either of the following schedules
— 1) 100% match up to 3% of deferred compensation, with 50% match for c’s between 3-5% of comp (if HCE, can’t exceed the % for NCHE’s)
— 2) match up to 100% of up to 4% of comp
— 3) a non elective contribution of 3% of comp to everyone eligible to participate in the plan even if they don’t

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16
Q

What’s the covered compensation limit for qualified/tax advantaged plans, and what the one exception to that?

A

$290,000

The one exception is a SIMPLE IRA w/ a $-for-$ match of 3% compensation
• if the ER elects the non elective 2% contribution to all eligible EE’s in the plan (even if they don’t defer), then the S.IRA only considers the first $290k of compensation

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17
Q

What’s the max benefit for defined benefit plans?

A

The lesser of

  • $230,000 per year; or
  • the average of the highest 3 consecutive years of compensation
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18
Q

What’s the annual additions limit for defined contribution plans?

A

The lesser of

  • $58,000; or
  • 100% of EE’s compensation that year

INCLUDES

  • ER contributions
  • EE deferrals both pretax and after tax
  • reallocated forfeitures

DOES NOT INCLUDE
- catch up contributions

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19
Q

What happens when a DB is terminated

A

All non-vested amounts are immediately vested

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20
Q

What type of QP is a cash balance plan?

A

Defined Benefit

- you BENEFIT from CASH

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21
Q

What type of QP is a Money Purchase Plan

A

Defined Contribution Plan

- you CONTRIBUTE MONEY to a retirement plan

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22
Q

What are the permitted reasons for a hardship withdrawal?

A

“My Disastrously Faulty Education Foreclosure”

M - Medical and funeral (unreimbursed)
D - Disaster (federally qualified)
F - First home purchase (not primary home)
E - Education
F - Foreclosure (on primary home)
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23
Q

What qualifies as a qualified distribution from a Roth 401(k)? How are non-qualified distributions from a Roth 401(k) treated?

A

Must meet 2 tests

1) distribution is done 5 taxable years after January 1st of the year the first regular contribution is made; and

2) “DAD”
— D -> Death (pmt made to Benny/estate)
— A -> Attainment of age 59.5
— D -> Disability

  • first time homebuyers exception DOES NOT APPY TO ROTH 401(k)‘a
  • RMD RULES APPLY TO ROTH 401(k)’s LIKE THEY DO FOR TRADITIONAL 401(k)’s

Non qualified distributions are part return of contributions (excluded from taxes) and return of earnings (taxable) on a pro-rata basis. Other taxes may apply.

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24
Q

What are the steps needed to calculate the contribution a SE/Keogh Plan?

A

1) Determine net Schedule C/Schedule K-1 income
— AKA self employment income

2) subtract deductible part of SE Tax
— income * .9235 * .0765 = ER share of SE tax

3) Multiply by table factor (usually 20%)
— 20% because it’s 25% / (1 + plan %)
— .25 / 1.25 = .2 = 20%

OR

1) Multiply net Sch. C/K-1 income by 18.6%
— not exactly, but it gets you close

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25
Q

What are qualified distributions from a Roth IRA?

A

Considers two tests; the 5 year test (time test) and Purpose Test

1) 5 year rule / Time test
— distribution is made after 5 taxable years in which the first regular contribution was made

2) Purpose test -> “Denver Area Fire Dept.”
— Denver -> Death of participant
— Area -> Age 59.5
— Fire -> First time home buyer (10k max)
— Dept. -> Disability

  • NO COLLEGE FUNDING IN QUALIFIED DISTRIBUTION REASONS
    — Traditional IRA’s are ok for this
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26
Q

How do you calculate how much of a deductible IRA contribution someone can make if within the phase out range?

A

(Upper Phaseout # - MAGI) / phaseout window * full amount of contribution

Ex) active participant SP (mfj) w/ MAGI of $110,000 makes full $6k contribution
- phaseout window is $105k-$125k

  • (125k - 110k) / 20k window * 6k C
  • (15k/20k) / 20k * 6k
  • .75 * 6k = $4,500
  • $4,500 of contribution amount is deductible
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27
Q

What distributions from a Roth IRA are taxable but NOT subject to 10% penalty?

A

“HUMS”

H - Higher Education expenses
U - Unreimbursed medical expenses in excess of 7.5% AGI
M - Medical insurance premiums while unemployed
S - Substantially equal periodic pmts

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28
Q

Who qualifies as an EDB?

A

5 groups of people classify;

1) Spouses
2) Chronically ill people
3) Disabled people
4) non-spouse not more than 10 years younger than decedent owner
5) minor child of the decedent owner

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29
Q

What are the RMD rules for Spouse EDB’s inheriting an IRA/QP before/after the decedents RBD?

A

BEFORE decedents RBD

1) roll over & treat as their own
2) distribute over their remaining single life expectancy, beginning when decedent would have attained age 72
3) 10 year rule

AFTER decedents RBD

1) distribute over their remaining single life expectancy, beginning when decedent would have attained age 72
2) roll over and treat plan as their own

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30
Q

What are the RMD rules for NON-Spouse EDB’s inheriting an IRA/QP before/after the decedents RBD?

A

Before RBD

1) distribute beginning the year following the year of death, over beneficiary’s life expectancy -1/y
2) 10 year rule

AFTER RBD

1) continue distributions (decedent OR beneficiary’s LE -1/y)
2) 10 year rule

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31
Q

What are the RMD rules for Designated Beneficiaries inheriting an IRA/QP before/after the decedents RBD?

A

BEFORE & AFTER RBD

  • 10 year rule, for both
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32
Q

What are the RMD rules for “No Beneficiary/Beneficiary Only” inheriting an IRA/QP before/after the decedents RBD?

A

BEFORE RBD

1) 5 year rule

AFTER RBD

1) a single lump sum
2) continue distributions (decedents life expectancy -1)

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33
Q

What is the Required Beginning Date? In what scenario are multiple RMDs must be taken, and can participants in a QP delay their RMDs?

A

The RBD is the date the owner/participant of an IRA/QP must begin taking their RMD’s

The RBD is April 1st the year AFTER the year in which the owner/participant attains age 72.

  • all subsequent distributions must be made by December 31st
  • the individual can always withdraw more than what is required (50% excise tax applies to any shortfall)

If any part of the first distribution is delayed past Dec 31, then the remaining RMD must be taken up to April 1 the year after attaining age 72 & there must be 2 distributions in that calendar year

Participants in QP’s & 403(b)’s may delay their RMDs if they are working past 72, until April 1 following the year of retirement

  • not allowed for IRA’s
  • not allowed for ppl who own 5% or more of the business sponsoring the retirement plan
  • only available for the CURRENT employers plan
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34
Q

Who classifies as Designated Beneficiary?

A

Any person, or certain type of trust, determined by September 30th of the year following the participants death

If it’s a trust, the beneficiaries will be designated beneficiaries as long as;

  • trust is valid under state law
  • irrevocable, or becomes so upon death
  • beneficiaries are identifiable from trust doc
  • appropriate documentation has been provided to plan admin
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35
Q

What is a “no beneficiary” or “beneficiary only” designation? What does it mean?

A

A beneficiary to a participants IRA/QP that is NOT A LIVING PERSON

  • a charity
  • decedents estate
  • not a “see through” trust
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36
Q

What’s the early withdrawal penalty for a SIMPLE IRA?

A

Early w/d’s inside of first 2 years
- subject to 25% penalty

Early w/d’s after 2 years
- reverts to general 10% penalty

Penalty % is applied to taxable portion and it does NOT include taxes

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37
Q

When are early withdrawals from a QP/IRA not subject to 10% penalty (section 72t)?

A

1) attainment of age 59.5
2) distributions made to beneficiary/estate of participant due to their death
3) distributions made due to disability of participant
4) up to $5,000 per parent for birth or adoption of child under 18 (taxed but not penalized, can be repayed into plan)
5 distributions made as a series of substantially equal payments made at least annually over LE of owner
6) up to $100,000 as qualified disaster distributions (can be repayed)
7) for medical expenses exceeding 7.5% AGI

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38
Q

What are the S.72t exceptions for QPs only?

A
  • distributions made after a separation from service after age 55
  • distributions made to qualifying family members pursuant to a QDRO
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39
Q

How do you calculate if someone is FULLY insured?

A

Subtract their age from 22 to determine amount of credits they need to be fully insured
- With a MINIMUM of 6 and a MAXIMUM of 40

Ex) a 26 year old is fully insured if they have at least 6 credits
- 26-22 = 4, but 6 is the minimum

  • you earn 1 credit per $1,470 of earnings, to a yearly maximum of 4
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40
Q

How many credits for Social Security can you earn in a year and how?

A

You earn 1 credit per $1,470 in annual earnings upon which Social Security taxes are paid, to a maximum of 4 credits per year

41
Q

Who is eligible for Survivorship Benefits under Social Security?

A
  • Surviving Spouses age 60+ (FI only) - 100%
  • Divorced Spouses age 62 & over (FI only) - 100%
  • Spouse if caring for a child < 16 y/o (FI/CI) - 75%
  • unmarried child < 18y, or < 19y of full time HS student (FI/CI) - 75%
  • dependent parent (FI only) - 75-82.5%

• $255 lump sum death benefit paid to widow(er) or child

  • divorced spouse must have been married to decedent for 10+ years and unmarried/remarried after 62
  • this is the only type of payment a dependent parent can receive*
42
Q

Who is eligible for social security disability benefits?

A
  • Disabled worker (100% PIA)
  • spouse/divorced spouse of disabled worker (50%)
  • unmarried child < 18, < 19 if in HS (50%)
  • unmarried child disabled before 22 (50%)
43
Q

What are the requirements to receive Social Security Disability benefits?

A
  • 5 month waiting period
  • must meet the social security definition of disability
    — NO gainful employment
    — disability is expected to last at least 12 months or result in death
44
Q

What is your MAGI for determining amount of taxable social security benefits? How do you determine Provisional Income?

A

MAGI = AGI + tax exempt income

Provisional Income = MAGI + 1/2 social security benefits

45
Q

How much of someone’s Social Security benefits are subject to taxation, if applicable, and what are thresholds?

A

If the taxpayers Provisional Income exceeds;
• $25,000 - $34,000 (S)
• $0 (MFS but didn’t live apart for entire yr)
• $32,000 - $44,000 (MFJ)
• up to 50% of social security benefit is taxable if inside the above thresholds
• if provisional income is more than the above thresholds, up to 85% of Soc Sec benefits will be taxable

46
Q

What are the requirements for a defined benefit plan to NOT be forced to have PBGC coverage?

A

A traditional DB plan maintained by a PROFESSIONAL SERVICE EMPLOYER with 25 OR FEWER employees does not have to be covered by PBGC insurance

PSC Employers are

  • “ADD AAA Engineers”
  • Architects, doctors, dentists
  • accountants, actuaries, attorneys
  • engineers
47
Q

What 3 factors have an inverse relationship in respect to plan costs for Defined Benefit Plans?

A
  • investment returns
  • employee turnover
  • mortality
48
Q

What are some provisions and the matching requirement of a DB(k) plan?

A
  • for ER’s with < 500 EE’s
  • combines a traditional DB plan with a 401(k)
  • EE’s get a guaranteed retirement benefit in addition to their own account they may defer a max of $19,500/y into
  • MUST include an auto enroll feature with a FULLY VESTED match on 50% of the first 4% of compensation deferred by an EE
  • EXEMPT from too heavy rules
  • more predictable costs and lower premiums for sponsoring employers
  • requires only 1 trust doc, F. 5500, SPD, and one set of statements
  • more simple and cost effective than sponsoring 2 separate plans
49
Q

What are the features of a Cash Balance Pension Plan?

A

A type of DEFINED BENEFIT PLAN
- “you BENEFIT from CASH”

• ER contributes $ to “hypothetical individual accounts” for plan participants
— not actual individual accounts like a DC
— ER has investment risk

  • guaranteed contribution level and minimum Interest Rate credit
  • MUST use 3 year cliff vesting
  • if plan investments exceed guaranteed IR % then the earnings can lower plan contributions
50
Q

When is a Cash Balance Plan Appropriate?

A
  • EE group is relatively large, young, and is mostly middle income earners
  • EE group has concerns over security of retirement income
  • ER wants contribution flexibility (can either be a fixed % for everyone or higher for EE’s with longer LOS) -> FUNDING IS MANDATORY REGARDLESS
    — a disadvantage is that it doesn’t typically benefit older EE’s and benefits paid may be inadequate
  • ER wants a defined benefit plan but not something as expensive as a traditional DB plan
51
Q

What is a Fully Insured DB Plan/Section 412(e)(3) Plan?

A

It’s a traditional DB plan funded exclusively by cash value life insurance or annuity contracts under Tax Code Section 412(e)(3)

  • guarantees payment of a death benefit to plan beneficiaries
  • exempt from minimum funding standards UNLESS there’s an outstanding loan against the insurance policy funding the plan
  • eligible for simplified reporting req’s and not required to be certified by an actuary
  • ER transfers investment risk to a third party (IC)
  • ER must commit to premium payments
52
Q

What are some features of Money Purchase Plans?

A

A type of DEFINED CONTRIBUTION PLAN
- you CONTRIBUTE MONEY

• mandatory annual ER contributions to each EE’s account, subject to Ann. Add. Limit
— lesser of 100% covered comp or $58k
• contributions are made under a certain non discriminatory formula (fixed %/flat $)
• ER can deduct contributions of up to 25% of total covered comp paid to EE’s
• relatively simple and cost effective (no PBGC/no actuary)

• EE’s cannot invest more than 10% of plan assets in ER stock
• good for when workforce is young or a SE person w/ no EE’s
— profit sharing plans are usually better choice

53
Q

What are the features of a Target Benefit Pension Plan?

A

A Defined Contribution plan that benefits older workers

  • “my CONTRIBUTION TARGETS a BENEFIT”
  • “a TARGET BENEFIT favors the OLD”
  • an ER used an actuary at the plans establishment to determine contributions to pay
  • each EE has their own account and bears investment risk
  • uses DC annual additions limit, but also has Money Purchase Plan similarities (can’t invest more than 10% in ER stock)
  • aims to pay a target benefit at normal retirement age, doesn’t guarantee it’ll get there
  • No PBGC insurance required, no recurring actuarial valuations
54
Q

What are requirements to cover employees under a SIMPLE 401(k)/IRA?

A
  • ER has 100 or fewer EE’s
  • EE’s have earned at least $5,000 in any 2 preceding years and are reasonably expected to earn that amount in current year
55
Q

What are the requirements for an EE to be covered by a SEP IRA?

A
  • at least 21 years old
  • worked for ER in 3 out of the last 5 years (part time work included)
  • earned more than $650 in compensation
  • not a member of collective bargaining units
56
Q

What are the matching requirements for SIMPLE IRA’s?

A

1) match $-for-$ 3% of employees compensation
— ER can match as little as 1% in no more than 2 out of 5 years

2) make a nonelective 2% contribution to all eligible employees

  • the 3% match isn’t hamstring by the covered comp limit of $290k (like the 2% c is)
    — ex) EE defers $13,500 with a $f$ 3% match
    — $13,500 + (3% * $13,500) = $13,905
57
Q

How do you determine if someone is fully insured vs currently insured? What type of benefits do the beneficiaries of those types of people get?

A

Fully Insured

  • Age - 22 = credits needed to be FI (minimum of 6, max of 40
  • survivor, disability, and retirement benefits available

Currently insured

  • work backwards, start with most recent credits
  • must have 6 of the most recent 13 credits to be currently insured
  • SURVIVOR BENEFITS ONLY
58
Q

If you take social security benefits before FRA how much of a reduction in benefits do you get?

A
  • 5/9th’s of 1% per month, for first 36 months before FRA
  • a 5/12th’s of 1% beyond 36 months
  • maximum reduction of benefits is 30% for a person w/ a FRA of 67
  • max reduction of benefits is 20% for someone with a FRA of 65

ex) Fred has FRA of 65, he elects at 62
- 5/9 * 1 * 36 = 20% reduction

ex) Fran has FRA of 66, she elects at 62
- 5/9 * 1 * 36 = 20% reduction
- 5/12 * 1 * 12 = 5% reduction
- Fran has a max benefit reduction of 25%

59
Q

Who is eligible for SS retirement benefits?

A
  • retired workers (62+)
  • spouse of retired worker (62+)
  • divorced spouse (married 10y+, 62+ regardless of workers actual retirement)
  • unmarried children under 18/under 19 if in HS/any age if disabled before 22 and is a dependent of retiree
  • caretaker spouse of any age w/ dependent child under 16/child of any age disabled before 22
60
Q

What is/isn’t counted towards the annual additions limit?

A

Is counted towards AAL

  • employee elective deferrals
  • employer contributions
  • reallocated forfeitures*
  • employee after tax contributions

Isn’t counted towards AAL

  • reinvested dividends
  • investment gains
  • catch up contributions

*if forfeitures are used to reduce future employer contributions then they are NOT counted towards the AAL

61
Q

What’s the penalty for excess contributions into an IRA?

A

6%

62
Q

Are employee deferrals and employer contributions subject to payroll taxes?

A

EE deferrals subject to FICA/FUTA

ER contributions are not

63
Q

What are some forbidden acts by fiduciaries according to ERISA?

A
  • be paid for services to the plan, if already receiving full time pay from an ER/union whose EE’s are memebers of the plan
  • act in a transaction involving the plan on behalf of a party who’s interests are adverse to those of the plan or its participants/bennys
  • receive consideration to their own personal
    acct from any party dealing with the plan involving transactions of assets of the plan
  • cause the plan to engage in certain transactions with parties in interest
  • permit more than 10% of plan assets invested in ER securities or real property, excluding some p/s plans
64
Q

Which two plans are be covered by PBGC insurance?

A

Traditional DB plans and Cash Balance plans

65
Q

What is UBTI and what is/isn’t considered UBTI?

A

UBTI = unreleased business taxable income

It’s income derived from any T/B that is regularly carried on and not related to a retirements tax exempt purpose (less deductions for said T/B)

UBTI IS
- usually arises from property purchase with borrowed funds (aka margin)

UBTI ISNT
- dividend, interest income
- royalties
- incidental rents
- gains from disposition of property
• ESOPs specifically excluded
66
Q

Do 401ks require employer contributions and if so what tests must be satisfied?

A

No, they can be funded entirely by elective deferrals

If there employer matching, the plan must satisfy both the ADP & ACP test

67
Q

How do you take a hardship withdrawal from a 401k

A

Must satisfy 2 tests and if satisfied the withdrawal can only be for qualified reasons

The 2 tests
• 1) Financial needs test - hardship is due to an immediate and heavy need
• 2) Resources test - person doesn’t have other financial resources sufficient to cover the need

If both tests are met the withdrawal can only be for;

  • pmt of unreimbursed med exp for W/Sp/Dep
  • purchase/repair of casualty loss of primary residence
  • pmt for up to 12m of higher Ed expenses for w/sp/dep
  • pmt to prevent foreclosure of primary res
  • burial/funeral expenses of W’s parents/sp/dep/kids
  • safe harbor (satisfies financial need)
68
Q

What happens when an employee makes a hardship withdrawal?

A

Employee has the right to make elective deferrals suspended

H-W/D is taxed and possibly subject to 10% EWP

69
Q

Who supervises the creation of new, and monitors/audits existing, qualified plans?

A

The IRS

70
Q

Who governs the non tax aspects of RP’s/EE benefits? What are the QP requirements, and what are the 4 parts of it?

A

ERISA

QPs must meet the following ERISA req’s

  • coverage
  • participation
  • vesting
  • reporting & disclosure
  • fiduciary requirements
ERISA’s four titles include
- Workers rights 
- Tax code
- regulatory & administrative framework 
- PBGC
• “Way To Replace Pay”
71
Q

Who governs fiduciaries and what are the other responsibilities of this department?

A

Fiduciaries are governed by the DOL

They also have duties of
• reporting & disclosure
— summary plan description 
• defining prohibited transactions 
— ERISA prescribes certain PT’s
— DOL issues PT exemptions 
• interpretation
72
Q

What’s Form 5500 and who requires it?

A

A reporting document required by ERISA

Includes

  • detailed financial information
  • actuarial information (DB plans)
  • consolidates report forms of the IRS/DOL/PBGC
73
Q

What’s Form 5500-SF?

A

Reporting document for

  • plans with 25 or fewer participants
  • hold NO ER SECURITIES
  • 100% of assets are in invested in assets w/ readily determinable FMV
  • eligible for small plan audit waiver
74
Q

What’s Form 5500-EZ?

A

F. 5500 for small plans
- for individual and/or spouse, or individual and/or their partner

If all conditions are met and plan assets are < $250,000 at close of plan year then 5500-EZ isn’t required

75
Q

What documents must the plan administrator file?

A

• summary plan description (SPD)
— explains how plan works, available benefits, how to get benefits
— must be provided to all participants
— issued at least every 10 years

• summary annual report (SAR)
— summary of the annual report (F. 5500)
— provided to participants annually

• summary of material modification (SMM)
— explains changes that occurred to SPD during the past year
— issued as needed; summarizes only Major changes

• individual accrued benefit statement
— sent within 30 days of request

76
Q

What happens to the benefit with respect to participation in a DB plan for less than 10 years?

A

The maximum benefit permitted by law is reduced proportionately for each year of participation less than 10 years

77
Q

What are the ramifications regarding an integration level below the SSWB in DC plans re: constitutions, costs, etc?

A

In the Integration level in DC plans is below the SSWB (142,800)

  • larger contributions are made on behalf of EEs whos comp is > SSWB
  • the PLAN COST to the ER is INCREASED as INTEGRATION LEVEL is DECREASED
  • permitted disparity between max excess contribution % and base contribution % is reduced

*optimum integration is generally just above the highest compensation of highest paid nonowner EE

78
Q

For what reasons would and why wouldn’t a government employer choose to establish a 457 plan?

A

Why would

  • income tax credit for certain TP’s regarding elective contributions
  • tax deferred growth
  • no EWP on distributions

Why wouldn’t
- tax deductibility of contributions
• plan is sponsored by tax exempt entities, tax deductibility isn’t an issue

79
Q

When are the ADP test and ACP test required?

A

The ADP test is required when the plan provides
- EE elective deferral contributions

The ACP test is required when the plan provides

  • ER matching contributions; OR
  • EE AFTER TAX contributions
80
Q

What retirement plan(s) require PBGC insurance?

A

Traditional DB plans & Cash Balance Plans, generally

81
Q

Can you take a distribution from a SIMPLE w/o separating from service?

A

Yes

82
Q

What is the penalty for withdrawals from a SIMPLE within the first 2 years of participation?

A

25%

83
Q

What are some benefits/disadvantages of stock bonus plans and ESOPs?

A

Advantages

  • give EEs a stake in the company via stock ownership
  • tax deferral on stock appreciation
  • creates a market for ER stock
  • enhance cash flow due to ER’s making cashless contributions to plan

Disadvantages

  • limit funds if ER stock sharply declines in value
  • creates an administrative and cash flow problem for ER’s by requiring them to offer a repurchase option (put option) if stock isn’t ready tradable on an established market
84
Q

Do DB plans have predictable costs?

A

No, they are determined annually by an actuary

85
Q

What are the 2 retirement plans that generally offer loan provisions?

A

401ks & 403bs

86
Q

What is the max permitted disparity limit for DB plans?

A

26.25%

87
Q

Do pension plans permit in service withdrawals?

A

No the 4 pension plans generally do not allow in service withdrawals (to participants under age 62)

88
Q

What plan requires a mandatory contribution to each employees account based off of a nondiscriminatory, specified % of each employees annual compensation?

A

A Money Purchase Pension Plan

89
Q

What are the contribution arraignments for cash balance plans and money purchase plans?

A

Cash Balance Plan
- a DB plan

Money Purchase Plan

  • a DC plan
  • mandatory contributions to each employees account, either a fixed % or flat $
  • contribution is done based off a non discriminatory formula based off a specified % of each employees compensation
  • relatively SIMPLE to administer
90
Q

What are the contribution likits to 457 (non qualified) plans?

A

$19,500/y w/ +$6,500 catch up contributions for people 50+

Eligible plans allow double deferral limits to the extent of deferrals not taken within the final 3 years to retirement age
- catch-ups not allowed during this period

91
Q

What are the differences between public, private, and ineligible 457’s?

A

Public

  • held by state/local govts
  • no SRF
  • $19,500 ($6,500) contributions
  • Roth contributions allowed
  • rollovers to other plans allowed
  • no 10% EWP

Private

  • non church tax exempt organizations
  • SRF
  • $19,500 ($6,500) contributions + Roth’s
  • can only roll to other 457’s

Ineligible plans (457(f))

  • aka “Top Hats”
  • HCE & K-EE’s only
  • no contribution limits
  • no rollovers allowed
92
Q

Are distributions from 457 plans permitted and if so for what reasons?

A

No distributions allowed except for

  • attainment of age 72
  • unforeseen emergency
  • separation from service
  • rmd rules apply
    In-service withdrawals are allowed
93
Q

Are Thrift Plan contributions, 401k elective deferrals, salary reduction contributions to existing SARSEPs, and ER contributions to SEP IRAs subject to FICA/FUTA tax?

A

Subject to FICA/FUTA

  • thrift plan contributions
  • 401k elective deferrals
  • salary reduction contributions to existing SARSEPs*

NOT subject to FICA/FUTA
- SEP IRAs

*new SARSEPs cannot be established

94
Q

What are the characteristics of ESPP’s? Who can contribute? Can they discriminate? What are the w/d & stock ownership provisions?

A

ESPP’s are
- nonqualified plans that CANNOT DISCRIMINATE (HCE’s cannot contribute to ESPP’s)
- employee may recognize ordinary income at sale
— OI on the basis on the lesser of FMV of stock at Grant date less option price, or FMV of stock on disposition date less option price

  • must exercise options within 3 months of separation of service
  • no EE can acquirethe right to buy more than $25,000 of stock per year @ grant
    — the $100k limit is for ISO’s
95
Q

What is someone provisional income and is it taxable?

A

Provisional income = MAGI + 1/2 SSB

50% or 85% taxable to the extent it exceeds certain thresholds

96
Q

When does survivor benefits terminate for caretaker parents?

A

When the dependent child turns 16 unless they are disabled

97
Q

When can you take a 55+ distribution from plans that allow it?

A

You must be 55 when you separate/get fired from the job

98
Q

When are children who are disabled prior to 22 no longer eligible for survivor benefits?

A

When the disabled child marries an able bodied person

CFP Flashcards - July 2021 Exam (8 decks)

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