Working with Employer-Sponsored Retirement Savings Plans

Question 1

Qualified Plan Requirements

Answer 1

(1) Plan must meet stringent requirements requirements of the IRC as well as the ERISA. (2) Overarching concept to remember if that the plan must follow certain overarching nondiscrimination and vesting requirements.

Question 2

Tax advantage of employee participants of qualified plan

Answer 2

(1) Retirement benefits grow on a tax deferred basis (2) Employer contributions are not treated as current taxable income, and (3) lump-sum distribution may be able to use forward averaging when calculating taxes.

Question 3

Tax advantage to employer-sponsor of a qualified plan

Answer 3

(1) The tax benefit to the employer-sponsors of a qualified plan is the ability to deduct the cost of the plan contribution from current taxable income.

Question 4

Examples of pension plan benefit formulas

Answer 4

(1) Unit benefit percentage formula: 1.63% of final compensation per year of service. (2) Until Benefit dollar formula: $150 per month per year of service, 25 year maximum, (3) Flat benefit or fixed benefit: 50% of final three year average compensation, (4) flat benefit or fixed dollar formula: $1,000 per month, (5) Cash Balance formula: contribution to each participant’s hypothetical account balance equal to 6% of compensation.

Question 5

Cash Balance Pension Plan

Answer 5

(1) A type of applicable defined benefit plan. (2) Under a cash balance plan, hypothetical alocations (pay credits) and hypothetical earnings (interest credits) are contributed to a hypothetical account annually.

Question 6

Applicable Defined Benefit Plan

Answer 6

(2) A type of pension plan in which the accrued benefit is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final compensation.

Question 7

Stock Bonus Plans

Answer 7

(1) Stock bonus plans are essentially profit sharing plans in which employer contributions generally are made with employer sock. (2) Distributions also must be made available in the form of stock. (3) The IRA defines it essentially as a profit sharing plan, with distributions made in the form of stock.

Question 8

Employee Stock Ownership Plan

Answer 8

(1) A special type of stock bonus plan. (2)An ESOP acquires shares of the corporation on behalf of active employee. (3) The primary purpose of an ESOP must be to invest in qualifying employer securities. (4) Benefit to the employer include: providing a market for the employer’s stock, increasing the firm’s cash flow, providing financing for business growth or expansion, and as an estate planning tool for owner of a closely held corporation.

Question 9

Money Purchase Pension Plan

Answer 9

(1) A form of a defined contribution plan. (2) The annual addition to each employee’s account is limited to the lesser of 100% of compensation or %53,000. (3) Annual additions include employer contributions, employee contributions, and forfeitures.

Question 10

Target Benefit Plan

Answer 10

(1) A defined are a defined contribution pension plan in which the contributions are made to meet a targeted benefit level. (2) No subsequent adjustments are made to the annual contribution except to add new participants or reflect changes in compensation. (3) The target benefit may or may not be reached. (4) Annual employer contributions are limited to 25% of the plan participant’s compensation. (5) The maximum annual addition to an employee’s account is the lesser of 100% of compensation or $53,000 (6) Based on initial actuarial determination.

Question 11

Keogh

Answer 11

(1) A Keogh is a qualified plan for self-employed individuals. (2) It is only available through sole proprietorships and partnerships. (3) Corporations cannot establish Keoghs. (4) If business owners set up a Keogh for themselves, they must do the same for any employees, and at the same percentage level of contribution.

Question 12

Keogh Maximum Contributions

Answer 12

(1) If the Keogh is a profit sharing plan or money purchase plan, the maximum contribution rate is always 20% (not 25%) times a self-employed individual’s net earnings. Net earnings serve as the contribution base for determining his or her Keogh contribution. (2) Contributions for self-employed individuals cannot exceed 25% of earned income. (3) Earned income for self employed individuals cannot exceed $265,000 in 2015.

Question 13

Unfunded Nonqualified Plans

Answer 13

(1) A written agreement between employer and employee. (2) May discriminate. (3) Exempt from many ERIS requirements. (4) Employer cannot claim deduction until funds are actually distributed to the employee. (5) Any earnings on assets set aside must be recognized as an income subject to taxation. (6) No forward averaging as all distributions must be treated as ordinary income.(7) Cannot be rolled over into a qualified plan.

Question 14

Excess Benefit Plan

Answer 14

(1)An excess benefit plan aimed to increase the retirement benefits of certain employees. (2) Maintained by an employer with the sole purpose of providing benefits for certain employees in excess of limitation on contributions imposed by IRC Section 415. (3) Can be offered to any employee. (4) Only used to make an employee whole due to loss of benefits caused by IRC Section 415 limits and no qualified plan compensation limits.

Question 15

Supplemental Employee Retirement Plan

Answer 15

(1) Excess benefit plans can cover any employee while SERPs can only be provided to management or highly trained employees. (2) Serps and excess benefit plans can be unfunded or funded, though SERPs are generally unfunded. (3) Excess benefit plans can only be used to make up for IRC Section 415 limits, while SERPs supplement beyond qualified plan limits.

Question 16

Top Hat

Answer 16

(1) An unfunded non qualified deferred compensation plan for the purposes of compensating management and highly compensated employees. (2) Must be unfunded, but (3) Subject to ERISA reporting, enforcement, and disclosure requirements. (3) The reporting requirements are generally met through a filing with the DOL.

Question 17

Formally Funded Deferred Compensation plan

Answer 17

(1) According to the Department of Labor, a non qualified deferred compensation plan is considered formally funded (and subject to ERISA requirements) when (2) an amount is irrevocably placed with a third party for the benefit of the participants, and (3) neither the employer or any of its creditors have an interest.

Question 18

Advantages and Disadvantages of Funded Plan

Answer 18

(1) A funded plan secures future payments to the participant. (2) The tax consequences of a funded plan is the employee loses tax deferral, (3) and is considered to be in constructive receipt of the funds, and (4) must recognize the funds as current income.

Question 19

Death Benefit Only Plan

Answer 19

(1) Unlike other non qualified deferred compensation plans, death benefit only plans provide no lifetime payment to the employees. (2)The only benefit is the payment of a death benefit to a designated beneficiary, and only (3) if the employees dies while in service to the company. (4) All payments are taxed as ordinary income to the beneficiary. (5) Excluded from federal estate tax if the employee owns 50% or less of the closely held corporation’s stock

Question 20

Forfeiture Provision

Answer 20

(1) A forfeiture provision is a requirement found in a non qualified deferred compensation plan, which states, in effect that (2) an employee’s right to deferred compensation payments is contingent upon satisfaction of some stipulated condition.

Question 21

Life insurance in deferred compensation plans

Answer 21

(1) to fund future obligations of payment and (2) to make additional life insurance coverage available to a company’s executives. (3) The company is the owner and beneficiary of these cash value life insurance policies. (4) The benefit is the tax deferral of earnings in the policy and a tax deduction of premiums with certain limits.

Question 22

Rabbi Trust

Answer 22

(1) A rabbi trust is a form of irrevocable grantor trust established by the employer. (2) It can be used to protect the employee’s interest in future payments of deferred compensation. (3) Contributions can be made to the trust by the employer. (4) Contributions and subsequent earnings may only be used to pay deferred compensation. (5) Earnings are taxable to the grantor, and (6) assets in the trust may be used to satisfy creditor claims. (7) It preserves the tax deferral employees want

Question 23

Secular Trust

Answer 23

(1) Contributions to the trust are taxable to the employee. (2) However, the employer’s promise to pay is secured, and (3) creditors cannot make a claim for the assets in the trust. (4) A secular trust allows the employee to avoid being taxed at higher future income tax rates.

Question 24

Avoiding Constructive Receipt

Answer 24

(1) An executive can avoid constructive receipt if there is a substantial risk of forfeiture, and (2) the interest is nontransferable. (3) Loss of benefits at death or disability do not constitute substantial risk of forfeiture. (4) A requirement that the employee provides consulting services during retirement constitutes a substantial risk of forfeiture. (5) These plans are governed by Section 83 of the IRC.

Question 25

QJSA

Answer 25

A cash balance pension plan, as with all pension plans, must provide a qualified and joint survivor annuity payout option.

Question 26

Qualified

Answer 26

(1) In order to be qualified, a plan must meet the requirements of the Internal Revenue code, and (2) the Employee Retirement Income Security Act.

Question 27

Identification of Defined Benefit Plan

Answer 27

Defined formula plans are frequently identified by the benefit or integration formula used by the plan, and not the actuarial method.

Question 28

Maximum tax-Deductible contribution to Money Purchase, LESOP, Target Benefit, and Profit sharing

Answer 28

25% of compensation

Question 29

Investing in Employer Stock

Answer 29

(1) Profit sharing plans are not restricted when it comes to employer stocks, but (2) Pension plans are restricted to 10% employer stock.

Question 30

401k provisions

Answer 30

(1) May be permitted for profit sharing or ESOP, but not (2) Money purchase or target benefit.

Question 31

Vesting

Answer 31

(1) Employer matching profit sharing contribution sis 3 year cliff or 2-6 year. (2) defined benefit is 5 year cliff and 2-7 years.

Question 32

401K plan optional employee contribution arrangements

Answer 32

(1) Salary reduction or (2) Cash Deferral

Question 33

Section 457

Answer 33

Do not allow distributions until 70 1/2 except for emergency and separation of service.

Question 34

15 year catch up for 403b

Answer 34

(1) In addition to the age 50 catch-up of $6,000, (2) the 15 year catch up is available to health care, educational, and religious institutions. (3) These catch up provisions are not considered annual additions.

Question 35

403b investments

Answer 35

Historically, insurance companies have received the lion’s share of 403b investments.

Question 36

Pension Protection Act of 2006

Answer 36

(1) The death proceeds of corporate owned life insurance policies, which exceed basis, become taxable income to the employee. (2) The proceeds may be tax free if the employee worked for the employer for 12 months or more before death, or was a director of highly compensated individual.

Question 37

Unfunded Nonqualified Plan taxation doctrines

Answer 37

(1) Constructive receipt, (2) Economic benefit, and (3) cash equivalency.

Question 38

Qualified Plan Lump-Sum Distribution

Answer 38

(1) The employee must have been an active participant for at least 5 years. (2) the funds must be distributed within 1 taxable year, (3) the distribution must represent the plan participant’s entire account balance, and (4) the distribution must be due to death, disability, attainment of age 59.5, or separation from service