RP and EB - Lesson 3 (Administration of Qualified Plans) Flashcards
If a participant of a qualified plan’s vested account balance is below $ ____________ then the plan may distribute the balance to the participant if the participant does not make a timely election. This is called a __________________ .
$5000
Forced Payout
The Department of Labor requires that forced payouts between $ ________ and $ ___________ be directly rolled to an IRA if the participant has not made a timely election. This is called a ___________________ .
$1,000 and $5,000
Forced Payout
This dictates the distribution options available to a participant of a pension plan.
Plan Document
Provided to married participants of a pension plan and profit sharing plan unless the benefit is payable to the surviving spouse at death. This pays a benefit to the participant and spouse as long as either lives.
Qualified Joint and Survivor Annuity
A non-participating spouse beneficiary of a pension plan/profit sharing plan may choose to waive his or her right to annuity by
Executing a notarized waiver of benefits (during the 90 day period beginning 90 days before the annuity start date).
This type of annuity must ALSO be provided to married participants of a pension plan or a profit sharing plan unless the benefit is payable to the surviving spouse at the participants death. This provides a benefit to the spouse if the participant dies before normal retirement age.
Qualified Pre Retirement Survivor Annuity
Unlike pension plans, __________________ are not required to offer survivor benefits if the plan does not pay the participant in the form of a life annuity benefit and the participants non forfeitable accrued benefit is payable to the surviving spouse upon the participants death.
Profit sharing plans
How do you calculate the return of adjustable basis amount of a lump sum distribution from a qualified plan?
(Basis / FMV) * Distribution Amount
How do you calculate the penalty amount of a distribution from a qualified plan?
(Distribution Amount - Return of Adjusted Basis) * 10%
Which type of pension plans benefit older people more as they have less time to accumulate?
Defined Benefit Pension Plans
Target Benefit Pension Plans
Which type of pension plans benefit older people more as they have more time to accumulate?
Cash Balance Pension Plan
Money Purchase Pension Plan
To take an income tax deduction for for contributions for a particular tax year, the plan must be adopted by when?
The due date of the tax return (plus extensions)
What is the calculation to calculate a self employed individuals contribution?
Contribution Rate / (1 + Contribution Rate) = Self Employed Contribution Rate
Distributions from pension plans are normally made because of…
Death, Disability, Normal Retirement, Early Retirement, or Termination of Employment
What is generally the automatic benefit for a single participant in a pension plan?
A Single Life Annuity
The benefit for married individuals of a pension plan is a …
Qualified Joint and Survivor Annuity
What form of tax are qualified pension plans subject to?
Ordinary income
In a QJSA the surviving spouses annuity payments can range from ___ % to ___% upon the death of the first spouse.
50-100%
At termination a profit sharing plan participant may be able to take distributions from a profit sharing plan in 3 ways?
1) As ordinary income
2) Annuitize the value of the account (if plan document permits)
3) Roll assets over (into IRA or Qualified Plan)
For distributions or rollovers from a qualified plan, the plan custodian is generally required to withhold a mandatory 20% of the distribution for federal income tax unless a __________ rollover is made.
Direct
In order to complete an indirect rollover, a participant must invest ________________ in order to avoid taxable income, into the account within _______ days of the original distribution into the new qualified plan.
The full original account balance (including the 20% mandatory withholding)
In the case of a rollover of after tax contributions from one qualified plan to another qualified plan, the rollover can only be accomplished through a __________________ .
Direct Rollover
A qualified plan is not allowed to accept rollovers of after tax contributions unless the plan provides __________________ for such contributions and the applicable earnings on those contributions.
Separate Accounting
Each annuity payment is considered a partially tax free return of adjusted basis and partially ordinary income using an inclusion/exclusion ratio that is …
Cost Basis in the Annuity / Total Expected Benefit
Once the participant has recovered the entire cost basis of an annuity, all future monthly payments will be ____________ taxed.
Fully
Distributions from a qualified plan that are not lump-sum and not part of an annuity are taxed pro rata to the
Account balance in comparison to the Pre-taxed Portion
Lump sum distributions from a qualified pension or profit sharing plan may receive special income tax treatment. To be considered a “lump sum distribution” the distribution must meet 4 requirements, which are:
1) Distribution must represent entire accrued benefit (pension plan) OR full account balance (defined contribution).
2) Distribution must be on account of death, disability, attainment of age 59.5, or separation of service
3) Employee must have participated in the plan for at least 5 taxable years prior to distribution (waived on account of death)
4) Taxpayer must elect lump sum distribution treatment by attaching form 4972 to the taxpayers federal income tax return. (Must be filed within 1 year of distribution)
When inheriting stock with NUA treatment, the beneficiary assumes (receives a step-up) __________ minus ___________________ . The unused NUA portion will be taxed at ________________ . Any gain above will be taxed based on ____________________ .
FMV minus unused NUA.
Long Term Capital Gains
Beneficiaries Holing Period (Capital Gains)
An order, judgement or decree pursuant to a state domestic relations law that creates or recognizes the right of a third party alternate payee to receive benefits from a qualified plan.
QDRO (Qualified Domestic Relations Order)
What are the two basic approaches to a QDRO being used?
1) Shared payment
2) Separate interest (divides benefit in 2 separate portions)
Exceptions to the 10% early withdrawal penalty? (9)
Death, Disability, Attainment of age 59.5, Attainment of age 55 and separation from service, qualified public safety employee who separates from service after age 50, QDRO, Substantially Equal Periodic Payments (72t), Medical Expenses that exceed 7.5% of AGI, $5,000 per tax payer for birth or legal adoption
3 methods of calculating and distributing substantially equal periodic payments?
1) Required Minimum Distribution Method
2) Fixed Amortization Method
3) Fixed Annuitization Method
How long must the payment continue for a 72(t) distribution?
The later of 5 years or until attainment of age 59.5
What is the key to remember for Qualified Plans to avoid the 10% penalty?
MESS AT DQ
Medical expenses
Equal periodic payments
Separation from Service
Age
Tax Levies
Death and Disability
QDRO
What is the key to remember for IRA’s to avoid the 10% penalty?
HIDE ME
Home Purchase (first time)
Insurance (health)
Death and Disability
Education (higher)
Medical Expenses
Equal Periodic Payments
Age
What is the exception to the general RMD for qualified plans if a participant is still employed by the plan sponsor of the qualified plan?
The RMD will not have to be taken until April 1 of the year after the participant terminates employment of the plan sponsor
(Not available if participant owns more than 5% of company by age 72)
How is the RMD calculated?
Previous end of year balance / RMD factor
Upon death of an eligible beneficiary, their beneficiary must distribute assets from the account with in ____________ years.
10
What is an eligible designated beneficiary?
- Surviving Spouse
- Child Participant who has not reached age of majority
- Disabled or Chronically Ill individual
- Any individual not more than 10 years younger than the participant
When must a designated beneficiary distribute the account balance by?
By December 31st of the year containing the 10th anniversary of the participants death
What happens if an IRA owner dies prior to entire distribution before and after RMD for Non-Designated beneficiaries?
Before RMD… Take entire balance by end of 5th year following year of death
After RMD… Use owners age as of birthday in year of death, reduce beginning life expectancy by 1 for each subsequent year, can take owner RMDs in year of death
Type of defined benefit pension plan where risk is undertaken by the employer and favors older entrants but is more expensive.
Defined Benefit Plan
Type of defined benefit pension plan where risk is undertaken by the employer and favors younger entrants but is less expensive:
Cash Balance Pension Plan
Type of defined contribution pension plan where risk is undertaken by the employee and favors older entrants but is more expensive.
Target Benefit Plan
Type of defined contribution pension plan where risk is undertaken by the employee and favors younger age entrants but is less expensive.
Money Purchase Pension Plan
For the employer of a qualified plan to take an income tax deduction for contributions to a qualified plan the plan must be adopted by
the due date of the tax return plus extensions
The majority of qualified plans follow standard forms that have been pre-approved by the IRS and are available for employers to simply adopt, these are called _____________ .
Master or Prototype Plans
These may be used when a retirement plan is adopted, amended, or terminated and are issued by the IRS at the request of the plan sponsor. Even if this is requested and approved, the IRS may still disqualify the plan.
Determination Letter
If a company has specific needs of a plan that are not addressed in a master or prototype plan the company may have their own ___________________ .
Individually drafted plan
A qualified plan for a self employed person.
Keogh Plan
How to calculate self employment tax?
Net Self Employment Income
X 92.35%
_______________________
= Net Earnings Subject to Self Employment Tax
X 12.4% up to $147,000 + 2.9% on all income
_______________________
Self Employment Tax
The maximum for a Keogh Plan Contribution is 25%, which really equals 20%.
For example, if a self employed individual contributes 15% to their employees, 15% is used in the contribution rate formula, making the employer contribution ________ %. How?
Approx. 13%
15 / 1.15 = .1304
If the employer contributes more to a qualified plan than the permitted deduction for the year, the excess contribution can be carried over and dedcuted in future years although it may be subject to a ____ % __________ tax.
10% Excise Tax
Transactions between a qualified plan and a disqualified person that are prohibited by law are called _______________ .
Prohibited Transactions (Be able to identify these)!
Then initial penalty on a prohibited transaction is ______ on the amount involved for each year in the taxable period.
15 percent excise tax
Who is charged with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of the fiduciary provisions of law, and workers benefits rights as regulated by ERISA.
The Department of Labor
The PBGC does not cover defined contribution plans, nor does it cover defined benefit pension plans of professional services corporations with ______ or fewer participants.
25
The PBGC covers all defined benefit plans with more than 25 participants at a cost to the plan sponsor of $______ per plan participant per year and $_____ per $1,000 of plan underfunding for the year.
$88
$44
When a qualified plan is terminated (presuming adequate funds are available) all of the participants in the plan become __________________ as of the date of termination.
Fully vested in their benefits
Can a qualified plan be terminated although qualified plans are “required” to be permanent? Why?
Yes, the requirement is to dissuade owners from creating plans that will only benefit the owners and key employees and then having the plan vanish before benefits can be accrued by rank-and-file employees.
What is essentially all that must be done by the employer to terminate a defined contribution plan?
Pass a corporate resolution
Retirement plans SHOULD NOT be created for the benefit of ______________ .
The owner
