Retirement Flashcards by Nick Ninedorf

The spouse of a retired or disabled worker qualifies for Social Security benefits if he/she

Is age 62 or over (see below)

Has a child in care under age 16 or age 16 and over if disabled

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This surviving spouse (including a surviving divorced spouse) of a deceased insured worker qualifies for Social Security payments if

The widow(er) is age 60 or over.

“Kid can’t drive” - If caring for an entitled child of the deceased who is either under age 16 or is disabled before age 22

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Divorced spouse can receive social security benefits

Must have been married to the worker for at least 10 years and must not be remarried.
A divorced spouse who is at least age 62 and has been divorced from the worker for at least two years can receive retirement benefits based on the worker’s earnings even if the worker does not claim benefits.

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The surviving dependent, unmarried child of a deceased insured worker, qualifies for Social Security payments if the child is:

- Under 19 and a full-time elementary or secondary school student

Is age 18 or over but has a disability which began before age 22.

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Taxation of Social Security Benefits

“Provisional Income” = MAGI + 1/2 SS Income

Single
- $25,000+ —> 50%
- $34,000+ —> 85%

MFJ
- $32,000+ —> 50%
- $44,000+ —> 85%

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Reduction of SS Benefits before FRA

Months Early
Before FRA % Reduced
12 months (6.67%)
24 months (13.34%)
36 months (20%)
48 months (25%)
60 months (30%)

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Earned income reduction (while receiving SS benefits)

Before FRA - $1 for $2 over $21,240

Year of FRA - $1 for $3 over $4,710/mo

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Reminders for Retirement Plans

DB/DC salary cap - $330,000
Simple IRA salary cap - $516,667
DC max contribution - $66K ($73,500 if 50)
DB max contribution - stuff it like a pig!!
Tandem - wrong answer

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Defined Benefit Pension
(qualified plan/ERISA/PBGC)

Grandpa’s pension Plan

“Guarantees the Paycheck”

vesting schedule/administration costs/exempt from creditors/integrate with Social Security

- favors older employee/owner (age 50+)
- guaranteed retirement benefit amount (can meet a set retirement objectives)
- requires very stable cash flow
- past service credits allowed
- “Annual and Mandatory”

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Cash Balance Plan

A Pension type of DB plan

“Guarantees the Lump Sum” - not the payment

vesting schedule/administration costs/exempt from creditors/integrate with Social Security

“Annual and Mandatory”

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Money-Purchase Pension

Keys:
1. up to 25% employer deduction
2. fixed contributions
3. stable cash flow needed
4. “Annual and Mandatory”

Defined Contribution (qualified plans/ERISA)
- vesting schedule
- administration costs
- exempt from creditors
- integrated with social security

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Target Benefit Pension

Keys:
1. up to 25% employer deduction
2. fixed contributions
3. stable cash flow needed
4. favors older employees
5. “Annual and Mandatory”

Defined Contribution (qualified plans/ERISA)
- vesting schedule
- administration costs
- exempt from creditors
- integrated with social security

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Profit Sharing Plan

Keys:
1. up to 25% employer deduction
2. flexible contributions (must be recurring and substantial)
3. 401(k) provisions $22,500
(FICA) (hardship withdrawals)
4. SIMPLE 401(k) is exempt from creditors - see SIMPLE for additional information
5. “Substantial and recurring”

Defined Contribution (qualified plans/ERISA)
- vesting schedule
- administration costs
- exempt from creditors
- integrated with social security

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Stock Bonus Plan
- Employer contribution and deduction amounts
- Fixed or flexible
- % in company stock
- SS Integration and cross testing

Key:
1. up to 25% employer deduction
2. flexible contributions
3. Maximum Annual Contribution lesser of 100% of salary or $66K (2023)
4. 100% of the contribution can be invested in company stock
5. ESOP cannot be integrated with Social Security or cross-tested

Defined Contribution (qualified plans/ERISA)
- vesting schedule
- administration costs
- exempt from creditors
- integrated with social security

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SIMPLE IRA keys
- max # of employees
- match/vesting
- contribution limit
- other plans

no vesting schedule / lower administration costs

for small employers (100 or fewer employees)
requires employer match (immediate vesting)
salary reduction limit up to $15,500 (FICA)
company cannot have another plan

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SEP IRA keys
- Salary Deferrals
- Max Contribution
- Vesting
- Social Security integration
- Employee Eligibility

no vesting schedule / lower administration costs

No salary deferrals in a SEP

up to 25% contribution for owner (w-2) / up to 18.59% contribution for self-employed
account immediately vested

3. CAN be integrated with Social Security

special eligibility: 21+ years old, paid at least $750, and worked 3 of the 5 prior years

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SARSEP keys

may have up to 25 employees, and 50% of the eligible employees must defer
must have been in existence before 12/31/96 (grandfathered Psn)
salary deduction limit $22,500 (FICA)
New employees may participate in a SARSEP if it was established before 1/1/97

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403(b) keys/TSA/TDA

for 501(c)(3) organizations and public schools
subject to ERISA only if employer contributes
salary reduction limit up to $22,500 (FICA)
Employer contributions may be subject to vesting schedule

401k contribution verbiage (age 50+)

If the test says “deferral” - $22,500

If it says “contribution” - $30,000

Social Security Reduction Formula

# of mo. before FRA |
PIA — |—————————— x PIA |
| 180 |

Hardship Withdrawals

Only 401k/403b plans offer hardship withdrawals (subject to income tax and 10% penalty)

Other plan types may allow loans but not hardship withdrawals

Overall coverage and participation rules

Coverage is further regulated through two alternative coverage tests. (non-discrimination)

Ratio percentage test
The plan must cover a percentage of non-highly compensated (NHCE) employees that is at least 70% of the percentage of highly compensated (HCE) employees covered.

Average benefits test
The average benefits for all non-highly compensated (NHCE) employees must be at least 70% of that for highly compensated (HCE) employees.

Note: Both of these tests use the same 70% ratio.

HCE - Highly Compensated Employee
- Who is it?
- What tests does it affect?

“Discrimination”

affects the ADP / ACP test and the ratio/average benefits test

A greater-than 5% owner or
Any employee earning in excess of $150,000* in the preceding year

Key employee
- What test does this effect?
- What plan feature can it impact?

“Vesting”

Affects whether a plan is top-heavy

An 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 > $215,000* (2023) or
- A greater-than-1% owner and compensation > $150,000*

Top-Heavy plan (Rule #1)

A plan is top-heavy if more than 60% of its aggregate accrued benefits or account balance are allocated to key employees.

Top Heavy Plans: Minimum benefits and contributions for non-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%.
Please note: Profit-sharing plans are not subject to the minimum funding standard but are subject to substantial and recurring contributions.

ADP/ACP Test

actual deferral test/actual deferral percentage

Shortcut method: 0 to 2% is “times 2”; 2% to 8% is “plus 2.”

. NHCE HCE

Deferral 1% (x2) 2%

Deferral 2% (+2%) 4%

Deferral 3%. (+2%) 5%

Deferral 4% (+2%) 6%

Which Plans Integrate with Social Security?

Integrate
- Defined Benefit
- Cash Balance
- Money Purchase
- Target Benefit
- Profit Sharing
- Stock Bonus
- SEP

Match Only
- Safe harbor 401(k) match
- 401(k) match

Do Not Integrate
- ESOP
- SIMPLE
- 401(k) SIMPLE

Cross-Tested Plan
- also called what?

also called “new comparability”

All you need to know
- MAXIMUM TO OWNER
- Everyone else gets 5%

Controlled group/related employers

Common control rules must be taken into account in identifying the “employer.”

The common control rules are as follows.

Parent-subsidiary
One entity (the parent company) owns at least 80% of one (or more) of the other entities.

Brother-sister
Five (or fewer) owners of two or more entities own 80% or more of each entity.

Affiliated service group
A service organization and a professional organization

Life Insurance in Retirement Plans

Benefits must be “incidental”

Must meet either one of these two tests

DC Plans - Aggregate Percentage of Contributions
- Whole life - 50%
- Universal Life - 25%
- Term Life - 25%

DB Plan
- “100 times” limit
- Death benefit cannot be more than 100 times the monthly benefit
- ex $4000/mo benefit can’t exceed $400k death benefit

Mini case covering QDRO, QJSA, distributions, penalties, and rollovers

Mrs. Willis is filing for a divorce. She has $500,000 vested in a pension plan. Mr. and Mrs. Willis have no other liquid assets (like investment accounts).

She wants to borrow $50,000 for attorney’s fees. Can she?
Mr. Willis obtains a 50% QDRO ($250,000). Remember there are no compensating assets.
A. Does the plan administrator have to distribute the money now?

B. If the $250,000 is distributed, is it subject to 20% withholding or a 10% penalty?

C. Must the $250,000 be paid out as QJSA?

Can Mrs. Willis name her daughter as beneficiary of the pension plan after the divorce?

Answers:
1. It requires spousal consent (unlikely).

2A. Yes, if the plan allows. If the plan does not allow, then the $250,000 is placed in a separate account.

2B. A direct payment is subject to 20% withholding tax but not a 10% penalty (exception).

2C. No, it can be paid out as a lump sum or rolled into an IRA because they are no longer married.

Yes, she is no longer married.

Nonqualified deferred compensation plans (Sect 409 plans)
- Discrimination?
- ERISA
- Employer deduction
- Earnings taxation
- Distribution taxation
- Two Major downsides

Nonqualified (Usable by regular corporations)
- May discriminate
- Exempt from most ERISA requirements
- No tax deductions for contributions until employee is taxed
- Fund’s earnings are sometimes taxable to employer. (life insurance / annuity)
- Distributions are taxable at ordinary tax rates

Too major downsides:
- Bankruptcy: you’re an unsecured creditor
- Competitor Takeover: need Rabbi Trust

“Unfunded” or “Informal Funding”

The plan has assets, set aside in another account
Assets are owned by the company (even if in a separate account)
They are subject to creditors of the company

Funded vs. Informally Funded (Unfunded) Plans

If a deferred compensation plan is not a naked promise to pay (nor is informally funded), for income tax purposes it may be said to be “funded.”

The two major determinants of taxation under Code Section 83 are the following:
- The free transferability of the employee’s interest and
- The presence of a “substantial risk of forfeiture” at the time the contribution to the plan is made by the employer

If “funded” it is immediately taxable

Substantial risk of forfeiture

The employee’s relationship to other stockholders and the degree of their potential control (Forfeitures are unlikely for an owner and his/her family members.)
The employee’s relationship to corporate officers

Nonqualified Stock Option (NSO)

Right to purchase a specified number of shares of the employer’s stock at a given time and a given price.
No taxation occurs as long as a substantial risk of forfeiture exists.

Grant: No tax
Vesting Period: Non required
Exercise: FMV minus Strike is Taxed @ Ordinary Income (Phantom)
Basis: FMV at Exercise
Sale: Cap Gains above Exercise (1 year for LTCG)

Incentive Stock Options (ISO)

A tax-favored plan for compensating executives by granting options to buy company stock
Only the first $100,000 worth of ISOs granted to any employee that vest in one calendar year is entitled to favorable ISO treatment
If $150,000 of ISOs are granted that vest in one calendar year, then the $50,000 (excess) is treated as a nonqualified stock option.
The corporation granting an ISO does not ordinarily receive a tax deduction for it at any time
ISOs are not deferred compensation.

Grant: No tax
Vesting Period: Depends
Holding Period: 1+ yr from exercise, 2+ years from grant
Exercise: No tax, but bargain element (FMV minus strike price) is added back for AMT
Basis: Strike Price
Sale: Cap Gains above Strike (1 year for LTCG)

ISO holding Rules - EGG

The ISO holding-period rules must be satisfied to prevent a disqualifying disposition.

1+ yr from exercise (E)
2+ years from grant (GG)

Violating either part of the rule turns ISO into NSO

ISO - Exercise to Sale Violation

Harry is granted an ISO in March 2019 at $20 per share. In January 2022, Harry exercises the option when the fair market value is $100 per share. In December 2022, he sells the shares at $200 per share.

Result:
- $80 is compensation ($100 - $20)
- $100 is short-term capital gain ($200 - $100) (less than 1 year: short-term capital gain above basis).
- The excess ($80) of the fair market value over the grant price is treated as compensation (taxed as wages) in the year the stock is sold.
- It loses its ISO status and is treated like a nonqualified stock option because the shares were sold within one year of exercise.
- If the ISOs are sold in the same calendar year as the ISOs were exercised, the bargain element is taxable compensation subject to FICA and FUTA.
- If the ISOs are sold within 12 months of exercise (but in the following calendar year), the bargain element is ordinary income (not subject to FICA/FUTA).

ISO - Grant to sale violation

Harry is granted an ISO in March 2020 at $20 per share. In December 2020 Harry exercises the option when the fair market value is $100 per share. In February 2022 he sells the shares at $200 per share.

Result:
- $80 is ordinary income ($100 - $20)
- $100 is long-term capital gain ($200 - $100) (greater than 1: year long-term capital gain above basis).
- The excess ($80) of the fair market value over the grant price is treated as ordinary income (but not taxed as wages) in the year the stock is sold.
- It loses its ISO status and is treated like a nonqualified stock option because the shares were sold within two years of the grant (issue) date.
- If a no qualifying disposition is triggered by a violation of the 2-year rule but the sale occurs in a different calendar year than the exercise occurred, the bargain element is ordinary income.

ISO - No rules violated

Harry is granted an ISO in March 2018 at $20 per share. In January 2020 Harry exercises the option when the fair market value is $100 per share. In February 2022 he sells the shares at $200 per share.

Result:
- $80 is an AMT add-back item ($100 - $20)
- $180 is long-term capital gain assuming no AMT is due ($200 - $20 basis).
- The excess ($80) of the fair market value over the grant price is treated as an AMT add-back item.
- It maintains its ISO status because the shares were sold more than two years after the grant (issue) date and more than one year after the exercise date.

Active Participation in a Plan (for IRA deductibility)

Annual additions (your contribution or a MATCH) to a DC account (except 457)

Benefits accrued in a DB plan

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Retirement Flashcards

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