Retirement Flashcards
Worker’s eligibility and benefits for SS
Worker is entitled to disability benefits if he/she is under 65 and has been disabled for 12 months, is expected to be disabled for at least 12 months, or has a disability which is expected to result is death
THERE IS A 5 MONTH WAITING PERIOD
Not Covered for Social Security
Railroad employees - have their own retirement system. However they are eligible for Medicare although they are excluded from Social Security coverage
A child, under 18, who is employed by a parent in an unincorporated business
Minitsters, memebers of religious orders, and Christian Science practitioners if they claim an excemption
Members of trial councils (native Americans)
Spousal elibility and benefits for Social Security
Spouse of a retired or disabled worker qualifies for SS benefits if he/she
- is age 62 or over OR
- has a child in care under age 16 or age 16 and over if disabled
The SURVIVING SPOUSE (including a surviving divorced spouse) of a deceased insured worker qualifies for SS payments if the widow(er) is age 60 or over
The divorced spouse must have been married to the worker for at least 10 years and must not be remarried
The surviving spouse of a deceased insured worker, regardless of age, qualifies for SS payments if caring for an entitled child of the deceased who is either under age 16 or is disabled before age 22
Dependent’s eligibility and benefits
The surviving dependent, unmarried child of a DECEASED insured worker, qualifies for SS payments if the child is:
- Under 19 and a full-time elementary or secondary school student or is
- age 18 or over but has a disabiolity which began before age 22
PIA
Receive 100% of worker’sPIA at FRA
Spouse/divorced spouse is entitled to benefits if not entiltled to his/her own that is 50% or more of the workers PIA
Taylor PIA is 500, Chris is 1500, Taylor will get greater or 500 or 750. Chris dies, Taylor gets higher of 500 or 1500
255 lump sum death benefit to surviving spouse or a dependent child (NOT BOTH) .. must have been living in the same household at death
Collecting earlyer
36 months early?
36/180 = 20% reduction or 80% of his PIA
Working after retirement - Effect on benefits
If you are FRA and continue to work, no reduction, no limit as to how much you can earn
Under FRA during all of 2021, government must deduct $1 from your benefits for each $2 you earn above $18,960
If you reach FRA during 2021, the government will deduct $1 from your benefits for each $3 you earn above $50,520 until the month you reach FRA
Taxation of benefits*
Income plus half of his/her SS benenfits, up to 50 % of benefits will be included in taxable income
Single - MAGI $25,000
MFJ - MAGI $32,000
Income plus half of his/her SS benenfits, up to 85% of benefits will be included in taxable income
Single - MAGI $34,000
MFJ - MAGI $44,000
Be careful … Look for municipal bond interest ** that will be included for the calculation
Municipal bond interest is added to AGI when determining the taxation of Social Security benefits
DB 403b pension plan
Benefit beginning at age 65, maximum BENEFIT is 230k (given) or highest compensation averaged over three highest earning consecutive years. Only the first 290K (given) is taken into consideration
Factors that affect the amount the employer contributes (403b plans, more or less)
- *-Forfeitures MUST be applied to reduce employer contributions (always less)
- participants proximity to retirement age (older more, younger less)
- investment return assumptions (lower assumption more, higher assumption less)
- Salary scalre assumptions (older, experiences employees - more and more.. new younger employees - less)
Defined benefit plan. - unit benefit formula/percentage-of-earnings-per-year-of-service formula
Most commonly used. Factors service and salary
Average annual comp: 100K
Years of service: 30 (1.5% per year of service)
= 1.5 x 30 x 100k = 45K
Limited to 30 years of service
Profit Sharing Plan
Flexible employer contribution provisions
Employer can only deduct a maximum of 25% of all participants’ compensation. Only first 290K(given) - of each employee’s compensation can be taken into account for purposes of the limit in 2021
Section 401(k) plan / cash or deferral arrangement (CODA)
Qualified profit sharing or stock bonus plan under which participants have an option to put money in the plan ($19,500)
This deferral is subject to FICA and FUTA taxes
50+ catch up contributions
If the question says DEFERRAL, it is the $19,500 maximum
If the question says CONTRIBUTION, then it includes the deferral AND the catch-up (max $26,000)
Maximum annual contribution company can make to the employee’s profit sharing account for 2021 is 25% of compensation
Annual additionals are the less of 100% of compensation or $58,000
Hardship withdrawals
Hardship withdrawals CAN NOT come from profit sharing plans. The plan has to have 401(k) provisions
An employee’s distributable amount equals participants elective deferrals and vested profit sharing contributions
Solo 401(k) / Uni-401(k)
Not subject to coverage testing and nondiscrimination rules that are required for the typical 401(k) plan
Allows for 2 different types of contributions:
Elective deferral up to $19,500 plus the employer contribution WITH A CAP OF $58,000
Who is solo? You, you and your spouse, or two partners.
Other employees? Part-time workers are not “employees”
ESOP/Stock bonus plan
When company wants to broaden ownership of its stock
An S corp can offer an ESOP. NO MATTER HOW MANY EMPLOYEES, AN ESOP IS ONE SHAREHOLDER
Keogh plans/ HR-10 plans
These are for business organizations that are NOT incorporated (sole proprietorships and partnerships)
It is a qualified plan with special contribution limites for owner employee
The plans are: defined benefit, money purchase, or profit sharing
There are NO calculations for defined benefit plans
For owner
15% plan — multiply business profit by 12.12%
25% plan — multiply business profit by 18.59%
For employee
15% plan — employee would receive 15% of salary
Simple plan
Max is 13,500. — given
50+ can put in another 3k —given
Employers can make dollar for dollar matching contributions up to 3% of the employee’s compensation. (Even in the 401(k) SIMPLE .. it would be 3% of 290K) Salary cap woudl apply here… Deferral would still be $13,500
Alternate contributions are allowed
Matching contributions are mandatory/ THERE IS NO SALARY CAP OF 290K
These plans aore for sole-proprietorships, tax-exempt organizations, and government entities, with 100 or fewer employees
Cannot maintain any other qualified plan at the same time it maintains a SIMPLE
25% premature distribution penalty during the first 2 years of participation
Simplified employee pension (SEP)
NO SALARY DEFERRALS
Employer contributions only
Contributions limited to 25% (not 100%) of compensaiton (290K max) or 58K for 2021
For self employed owners only, contribution is calculated like Keogh plans (12.12% or 18.59%)
Requirements:
- Must cover all employees who are at least 21 years of age and have worked for employer during 3 out of the preceding 5 calendar years. Part time employment counts in determing years of service
- Contributions need NOT to be made on behalf of employees whose compensation for the current year was LESS than $650
Advantage for company with numerous short term employees
Disadvantage for company with many returning, part-time employees
SARSEP (salary reduction SEPs)
Must be adopted before jan 1, 1997. Plan can be grandfathered
AN early withdrawal of elective deferrals from a SARSEP does not require a financial hardship condition like a 401(k) does
Fiduciaries
ERISA states that a fiduciary includes any individual “who renders investment advice for a fee or other compensation”
One would breach ERISA fiduciary limites when he/she provides investment advice for a fee while they also accepts additional fees from investment product providers
Age and service rules (eligibility) for qualified plans
Maximum age and service are age 21 and one year of service (21-and-one rule)
Special provision allows up to a 2-year service requirement, but then the employee is immediately vested (2-year/100% rule)
Special provision rule is not allowed for 401(k)
1 year of service
Employee who works 1,000 hours during the initial 12-month period after being hired will earn a “year of service”. This includes vacation, hollidays, and sick time
Coverage tests (non-discrimination)
**Both use 70%
Ratio percentage test
Plan must cover a percentage of NHCE employees that is at least 70% of HCE covered .. 10 HC covered, 100 NHCs, 30 can be excluded and still qualify under this test
Average benefits test
Average benefits for NHCE’s must be at least 70% of that for HCE
Highly compensated employee (HCE)
A greater than 5% owner
OR
Any employee earning in excess of $130,000 in the preceeding year (2020)
Key employee (Affects whether a plan is top-heavy)
Any individual is a key employee if at any time during the current year he/she has been one of the following
A greater than 5% owner OR An officer AND compensation > $185,000 OR A greater-than-1% owner AND compensation >$150,000
Top Heavy Plans
Rule #1
Top-heavy if more than 60% of its aggregate accrued benefits or account balance are allocated to key employees
Rule #2
A top heavy plan must provide minimum benefits or contributions for non-key employees
DB- The benefit must be at least 2% of compensation
DC - The minimum employer contribution must be no less than 3%
*PSP are not subject to the minimum funding standard but are subject to substantial and recurring contributions
B - 2nd letter of alphabet
C- 3rd letter of alphabet
