Retirement Plans & Employee Benefits Flashcards
Name the four Pension Plans and describe which type of pension plan it is.
Defined Benefit Pension Plans
-Defined Benefit Pension Plans
-Cash Balance Pension Plans
Defined Contribution Pension Plans
-Money Purchase Pension Plans
-Target Benefit Pension Plans
Name the seven Profit Sharing Plans
-Profit Sharing Plans
-Stock Bonus Plans
-Employee Stock Ownership Plans
-401(k) Plans
-Thrift Plans
-New Comparability Plans
-Age-Based Profit Sharing Plans
What are the advantages of a qualified plan to the employer & employee?
Employer Advantages:
-Employer Contributions are tax deductible.
-Employer Contributions are not subject to payroll taxes.
Employee Advantages:
-Availability of pretax contributions
-Tax deferral of earnings on contributions
-ERISA protection
-Lump-sum distribution options (ten-year averaging, NUA, Pre-1974 cap gain treatment)
What are the disadvantages of a qualified plan?
-Limited contribution amounts
-Contributions can’t be made after money received
-Plans usually have limited investm’t options
-No or limited access to money while an active employee
-Distributions usually taxed as ordinary income
-Early withdrawal penalties
-Mandatory distributions @72
-Only ownership permitted is by acct holder
-Can’t assign or pledge as collateral
Can’t gift to charity b4 age 70.5 w/o income tax consequences
-Charitable deduction reduced by deductible contribution made after 70.5 if deductible contribution made to IRA & charitable distribution made from IRA
-Limited enrollment periods
-Considered to be IRD making distributions subject to income & estate taxes with no step-up basis
-Costs of operating the plan
Describe highly compensated employees.
For Owner employees:
-Owner of more than 5% stock for this yr or prior yr (ownerships includes parents, spouse, children, & grandchildren)
OR
-Compensation in excess of $135k
For Non-Owner employees:
-Compensation in excess of $135k
Do Defined Benefit Plans 1.) Have annual actuary, 2.) Bear investment risk, 3.) Treat forfeitures, 4.) Have PBGC Insurance, 5.) Give credit for prior service, 6.) Have Social Security integration, 7.) Separate investment accounts, 8.) Favors Younger or Older?
1.) Have annual actuary-Yes
2.) Bear investment risk-Yes
3.) Treat forfeitures-Must reduce plan costs
4.) Have PBGC Insurance-Yes
5.) Give credit for prior service-Yes
6.) Social Security integration-Offset or Excess Methods
7.) Separate investment accounts-No, comingled
8.) Favors Younger or Older-Yes, favors older
Do Defined Contribution Plans 1.) Have annual actuary, 2.) Bear investment risk, 3.) Treat forfeitures, 4.) Have PBGC Insurance, 5.) Give credit for prior service, 6.) Have Social Security integration, 7.) Separate investment accounts, 8.) Favors Younger or Older?
1.) Have annual actuary-No, except Target Benefit at inception
2.) Bear investment risk-No, employee bears risk
3.) Treat forfeitures-Reduce plan costs or allocate to other plan participants
4.) Have PBGC Insurance-No
5.) Give credit for prior service-No
6.) Social Security integration-Yes, Excess method only
7.) Separate investment accounts-Yes, usually
8.) Favors Younger or Older-Yes, favors younger usually
How much higher is the excess rate compared to the base rate when calculating retirement benefits for qualified plans?
5.7% higher
What is the formula to calculate Excess Rate?
BP = Exxon
B.ase Rate + P.ermitted Disparity = Excess Rate
Permitted Disparity equals the lesser, the base rate or 5.7%
Which entities may establish a 401(k) plan?
-Corporations
-Partnerships
-LLC’s
-Proprietorships
-Tax-exempt entities
What is Actual Deferral Percentage (ADP) test?
-If ADP for NHC employees is 0-2%, then permissible ADP for HC employees is 2x ADP for NHC employees.
-If ADP for NHC employees is 2-8%, then permissible ADP for HC employees is 2%+ ADP for NHC employees.
-If ADP for NHC employees is 8% and over, then permissible ADP for HC employees is 1.25x ADP for NHC employees.
How can an ESOP allow owners of closely held businesses to sell all or part of the business and defer cap gain recognition?
-ESOP must own at least 30% immediately after sale
-Seller(s) must reinvest proceeds into qualified replacement securities (domestic corps stocks, bonds, etc. that receive no more than 25% of income from passive investments) w/in 12 months & hold for 3 yrs.
-Corp that forms ESOP must not have no class of stock outstanding in the market
-Seller(s), relatives of seller(s), & 25% shareholders are precluded from receiving allocations of stock from ESOP thru rollover
-ESOP can’t sell stock from rollover for 3 yrs.
-Stock sold to ESOP must be common/preferred stock and owned by seller for at least 3yrs prior to sell.
What are the exceptions to the 10% early withdrawal penalty from a qualified plan?
M.E.S.S. A.T. D.Q.
-M.edical expenses that exceed 7.5% of AGI
-E.qual periodic payments (Section 72(t))
-S.eparation from S.ervice at 55 (50 for qualified public safety employee)
-A.ge of 59.5
-T.ax levies of $5k per taxpayer
-D.eath
-Q.ualified Domestic Relations Order (QDRO)
-also for birth or legal adoption
What are the exceptions to the 10% early withdrawal penalty from a IRA?
H.I.D.E. M.E.
-H.ome purchase (1st time)
-health I.nsurance
-D.eath & disability
-higher E.ducation
-M.edical expenses
-E.qual periodic pmts (Sec 72t)
-also birth & adoption expenses
-Of course age 59.5
What qualifies as earned income and not earned income?
Earned Income:
-W2 income
-Schedule C income
-K1 income from LLC or partnership where partner is material participant
-Alimony (if divorce prior to 12/31/18)
All other income is not earned income.
