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CHFC HS 326 PLANNING FOR RETIREMENT NEEDS > Chapter 5 & 6 - Profit Sharing Plans, Stock Bonus Plans, & Employee Stock Ownership Plans > Flashcards

Chapter 5 & 6 - Profit Sharing Plans, Stock Bonus Plans, & Employee Stock Ownership Plans Flashcards

1
Q

PSP contributions

A

Annual contributions are discretionary
must be substantial and recurring - 3 out of 5 or 5 out of 10 years

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2
Q

PSP employer stock

A

100% of assets can be in employer stock

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3
Q

PSP types

A

Profit sharing plan
Stock Bonus Plan
Employee stock ownership plan
401k plan

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4
Q

Contributory plans

A

401k
Thrift savings

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5
Q

Noncontributory plans

A

Profit sharing
Stock bonus
Employee stock ownership

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6
Q

PSP formulas

A

Standard allocation
Age based and benefits based
Social security integration

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7
Q

Standard allocation - PSP

A

fixed percentage of each employee’s compensation

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8
Q

Age based and benefits based - PSP

A

allocations are allowed

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9
Q

Social security integration - PSP

A

allowed
Excess method

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10
Q

PSP Advantage

A

Allocation Flexibility
Withdrawal flexibility
Contribution flexibility

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11
Q

PSP disadvantage

A

Unpredictable benefits

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12
Q

PSP vesting

A

Generally 2-6 yr graduated or 3 year cliff - can be faster but not longer
if plan requires 2 years of service must have 2 year cliff
401k safe harbor requires 100% immediate vesting

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13
Q

PSP employer contributions

A

Tax deductible
total of all employer contributions can’t exceed 25% of total employee compensation for the year
Total contributions and deferrals can’t exceed lesser of 100% of compensation or $66,000

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14
Q

Advantages of standard allocation method

A

Easy for employees to understand
Likely to be accepted as fair
Easy to implement because math is straightforward

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15
Q

Disadvantages of standard allocation method

A

At retirement total income replacement will be lower for owners and executives
If plan is established when owner is older the owner will struggle to accumulate enough plan assets to replace income

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16
Q

Permitted Disparity Method advantages

A

Increases profit sharing contribution for highly paid employees
Not viewed as discriminatory

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17
Q

Permitted Disparity Method Disadvantages

A

Harder to explain to employees why higher compensated colleagues get more
Not as easy to calculate

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18
Q

PSP Permitted Disparity calculation

A

All employees receive base contribution
Base contribution x $160,200
Excess contribution x ($330,000 - $160,200)
Total of both calculations is contribution

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19
Q

Advantages of Age Based Allocation

A

Shifts contributions toward older employees
Plan established by older owner allows them to accumulate funds quickly
not viewed as discriminatory

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20
Q

Disadvantages of Age Based Allocation

A

Younger employees may view as inequitable
Complex calculations to derive final contributions
Plan likely top heavy and will require 3% minimum contribution

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21
Q

Comparability plan

A

Employee classification scheme - owner group and employee group
must pass 1 of 2 minimum allocations
NHCE allocation is at least 1/3 of highest HCE allocation or
NHCE receives at least 5%

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22
Q

Comparability plan advantages

A

Strongly shifts contributions to owners
Not viewed as discriminatory

23
Q

Comparability plan disadvantages

A

Ver complicated and expensive to establish and maintain
non-owner employees be view as inequitable
often requires 5% compensation to NHCE

24
Q

Client need to contribute more than contribution limit each year

A

Defined benefit plan

25
Q

Client wants to make modest levels of company contributions with minimum paperwork

A

SEP IRA

26
Q

Client wants to use company contributions to motivate employees to save their own wages

A

401k or simple ira

27
Q

Does the client want to skew contributions to owners regardless of age

A

Comparability plans

28
Q

Does client want to skew contributions to older employees

A

Age based plan

29
Q

Would the client be satisfied with a simple and proportional contribution for all employees

A

Standard allocation plan

30
Q

Does the client want to add additional contribution skewing toward highly compensated employees

A

Social security integration

31
Q

Cash or deferred arrangements (CODA)

A

Funded by employee wage deferral contributions
Attached to PSP, stock bonus plans or ESOP
limit lesser of 100% compensation or $22,500
no 2 year eligibility allowed
vesting is 2-6 graduated or 3 year cliff
must meet ACP and ADP test
Not allowed in government plans

32
Q

After tax contributions

A

Previously called thrift plan contributions
only limited by $66,000 limit

33
Q

415c limit

A

lesser of 100% employee compensation or $66,000

34
Q

401k added to PSP in service distribution

A

not allowed until 59 1/2, separation of service or hardship

35
Q

Safe Harbor 401k rules test

A

none

36
Q

ADP test

A

Two groups - HC and NHCE
Determine actual deferral ratio for each employee
Ratio = $ deferred/total compensation
Every employee eligible to participate must be counted
Add all deferral ratios for group and take average expressed as percentage
Compare % for NHC and HC groups
If HC % is above permissible value plan fails

37
Q

ADP & ACP failure corrections

A

Corrective distributions from HC accounts
Recharacterization of deferrals of HCs
Qualified non-elective contributions to NHC accounts
Qualified matching contributions to NHC accounts

38
Q

ACP test

A

Divide into groups - HC and NHC
Ratio = all contributions/employee compensation
Determine average for each group
If ACP for HCs is above permissible plan fails

39
Q

ADP matrix for HC permissible deferral

A

NHC 0-2% = 2x ADP for NHC
2-8% = 2% plus ADP for NHCs
8% and over = 1.25 times ADP for NHCs

40
Q

Safe Harbor 401k

A

no ADP or ACP testing
must provide:
3% non elective contribution to all eligible employees
employer matching of at least 100% match up to 3% and 50% match from 3-5%
automatic enrollment

41
Q

Qualified automatic contribution agreement (QACA)

A

Exempts plan from annual ADP/ACP testing
Deferrals increase each year
Match for NHC must be 3% or 100% match to 1% and 50% match to 6%
2 year cliff

42
Q

Stock bonus plan

A

2-6 year graduated or 3 year cliff vesting
contributions must be substantial and recurring
in-service withdrawals after 2 years can be allowed
can allow employee deferrals
must have stock voting rights
can demand distributions in stock
if not publicly traded must offer put option
Right to diversify employer contributions after 3 years

43
Q

Stock bonus plan distributions

A

Must begin no later than end of next plan year for retirement, death or disability
must begin no later than end of 5th plan year for other separation and must be completed in 5 years

44
Q

Stock bonus plan taxation

A

Partial distributions over more than 1 year = ordinary income
Lump sump = NUA

45
Q

NUA

A

stock distributed from qualified plan as part of a lump sum distribution
at time of distribution FMV must be determined and contribution value is taxed as ordinary income. NUA is taxed as LTG when finally sold anything above that is taxed at STG/LTG depending on time held

46
Q

ESOP

A

Only employer contributions
Commonly established to buy stock of retiring owners of closely held companies
Allows trust to borrow money from bank to purchase shares
25% of employer covered contribution limit
Social security integration not allowed

47
Q

Qualified participant of ESOP

A

At least age 55 and has 10 years participation
Qualified participant may diversify or distribute 25% of total over the first 5 years of qualified election period
50% for 6th and final year

48
Q

ESOP distributions

A

Retirement, death and disability must begin no later than the end of the next plan year
Other separation distributions must begin no later than the end of the 5th subsequent plan year and must be completed within 5 years unless over $1,033,000 then can extend one year for each additional $265,000 but no more than 10 years

49
Q

ESOP special tax treatment

A

Owners can sell shares of closely held c-corp to plan and delay recognition of gains if they reinvest proceeds in qualified replacement securities within 12 months and hold them for 3 years
after sell ESOP must own at least 30% of company stock
seller, seller’s relatives and 25% shareholders must not receive any of stock bought by ESOP

50
Q

ESOP - S corp

A

Participant can’t demand stock instead of cash
Trust can act as single owner in place of participants
ESOP doesn’t pay taxes on s corp distributed earnings - participants pay taxes at time of distribution

51
Q

Disqualified person in ESOP

A

person who owns (with family) 20% or more of stock or a person without family that owns 10% of stock

52
Q

Roth 401k qualified distributions

A

5 yrs
Death
Disability
59 1/2
NO first time home buyers exception

53
Q

Nonqualified distributions from Roth account

A

Pro rata from earnings and contributions

CHFC HS 326 PLANNING FOR RETIREMENT NEEDS (10 decks)

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