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Retirment Planning > Administration Of Qualified Plans > Flashcards

Administration Of Qualified Plans Flashcards

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1
Q

What is a forced payout?

A

When you have < 5k in your pension the company can force you to take it out when you depart.

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2
Q

What options do you have if you leave an employer with whom you have a pension plan before retirement?

Note: Assuming balance of > 5k

A
  1. Lump sum
  2. Roll into IRA.
  3. Keep funds in pension plan
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3
Q

What is a QPSA?

A

Qualified Pre-retirement Survivor Annuity. The benefit given to a surviving spouse of a plan participant.

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4
Q

What taxes is a QPSA subject to?

A

Income and estate taxes.

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5
Q

Can you roll over a distribution from a pension plan? Into what?

A

Distributions from pension plans can be rolled into IRAs (if minimum distributions aren’t required) or other qualified plans.

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6
Q

Is there withholding from indirect qualified plan distributions? How much?

A

Yes, 20%

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7
Q

Is there withholding on QP direct rollovers?

A

No withholding on direct rollovers.

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8
Q

How does the participant get their 20% withholding back in the case of an indirect rollover?

A

Participant gets a check for 80% of account value.

They have 60 days to deposit 100% of account value into new account.

They receive a tax refund for the missing 20%.

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9
Q

What are 2 ways you can get an adjusted basis in a QP?

A
  1. Make after tax contributions or rollovers (if the plan allows for this).
  2. Buy life insurance in the plan and be taxed on the premiums.
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10
Q

How are distributions from QP’s taxed if there’s a basis?

A

Pro-rata

10% penalty on earnings.

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11
Q

What are the 4 criteria for a penalty-free lump sum distribution from a qualified plan?

A
  1. Take out the full account balance.
  2. Have a special circumstance: (MESS AT DQ)
  3. Have had the account open for 5 taxable years.
  4. Elect lump sum distribution by attaching form 4972 to federal tax return.
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12
Q

What are the 3 possible tax breaks for a penalty-free lump sum distribution from a QP?

A
  1. 10-year forward averaging if you were born prior to 1/2/1936
  2. Pre 1974 capital gain treatment (if you participated in the plan prior to 1974.
  3. NUA or Net unrealized appreciation treatment.
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13
Q

What type of stock does NUA treatment apply to?

How does NUA taxation work?

A
  • NUA only applies to employer stock.
  • At distribution, the basis is taxed as ordinary income.
  • At eventual sale, the NUA gain is taxed as LT cap gain.
  • Any subsequent gain, since distribution, is taxed as ST or LT gain depending on holding period.
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14
Q

How is inherited NUA stock taxed?

A

At death, the stock steps up to FMV - NUA.

When sold, taxed on that basis.

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15
Q

Exceptions to the 10% early withdrawal penalty on TAXABLE EARNINGS (9):

A
  1. Age 59.5
  2. Death
  3. Disability
  4. Substantially equal periodic payment (section 72t)
  5. Medical expenses that exceed 7.5% of AGI.
  6. 5K for adoption or birth of child.
  7. Age 55 and separation from service.
  8. QDRO.
  9. Public safety employee who separates after 50.
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16
Q

Is there a 10% penalty on taxable earnings withdrawn early from a qualified plan in the case of plan loans or rollovers?

A

No and no.

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17
Q

10% exceptions listed as MESS AT DQ

A 
M - Medical above 7.5%
E - = periodic payments
S - Separation from service (55)
S - Safety worker (50)
A - Age
T - Taxes
D - Death/disability
Q -QUADRO
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18
Q

10% IRA withdrawal exceptions: HIDE ME

A 
H - Home purchase
I - Insurance (health)
D - Death and disability
E - Education (higher)
M - Medical expenses
E - = periodic payments 72t
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19
Q

What does the 10% early withdrawal penalty apply to?

A

Taxable earnings only!

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20
Q

What kinds of plans have minimum distribution requirements?

A

QP’s, IRA’s, 403(b)’s, SEPs, SIMPLE’s, in-plan and inherited Roth IRA’s.

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21
Q

When do you have to take your first distribution?

When do you have to take your second?

A

April 1 of the year following the year in which you reach 70.5 thru 2019, or 72 beginning in 2020.

12/31 of the year following the year you attained the age. Thus if you don’t take the first distribution in the year you come of age, you take two distributions in the year after.

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22
Q

What happens if you don’t take the distribution?

A

50% penalty on the amount of distribution not taken.

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23
Q

Who does not have to take RMD’s?

Unless…?

A

People who are still employed by the plan sponsor.

Unless they are > 5% owner.

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24
Q

How do you calculate your RMD?

Study These Flashcards
A

Divide your account balance on 12/31 of the year before by the distribution period on the provided IRS table.

25
When do you use the uniform lifetime table? When do you use the joint life expectancy table? Note: these tables calculate RMD’s
Use the Uniform lifetime table almost always. Use the joint life expectancy table when the partner is more than 10 years younger.
26
What dates do you use for age and account balance in calculating RMD? When must you take the distribution by?
Use the age as of 12/31 of the year of the distribution. Use the account balance on 12/31 of the year before the distribution. Take the distribution by 12/31 of the next year.
27
What if you have multiple 401k accounts? What if you have multiple IRA’s?
You must take an RMD from each of your QP or 401k accounts. You can combine your IRA’s into one calculation and take your RMD from any of them.
28
Do you have to take an RMD for the year that you die?
Yes, use the age you would’ve been on 12/31 of that year.
29
What are the options of a surviving spouse inheriting an IRA when distributions had not yet begun?
- Take distributions beginning when the participant would have taken them. - Take distributions by their own age. - Take out entire balance within 5 year.
30
What are the options for a non-spouse beneficiary inheriting an IRA in which distributions have NOT begun?
- Distribute account within 5 years. - Take RMD’s of beneficiary’s remaining single life expectancy (not recalculated) reduced by one year. - Roll assets into an IRA in beneficiary’s name and distribute within 5 years, or the remaining single life expectancy of the beneficiary.
31
Who is an eligible beneficiary to inherit an IRA or QP according to the Secure Act (2019)?
Eligible beneficiaries: - Spouse - Child below age of majority. - Anyone within 10 years in age of participant - Disabled or chronically ill individual.
32
What options does an eligible beneficiary have when inheriting an IRA or QP?
An eligible beneficiary can distribute the assets over their own life expectancy. An older spouse can delay distribution until the participant would’ve been 72.
33
What’s the special circumstance for a child inheriting an IRA?
When they reach the age of majority they must disperse it within 10 years.
34
Who is a Designated Beneficiary in inheriting an IRA or QP? What rules must they follow?
A designated beneficiary is a beneficiary who doesn’t meet the eligible beneficiary criteria. They must distribute the account by 12/31 in the year of the tenth anniversary of the participant’s death.
35
What about an IRA without a designated beneficiary? What if RMD’s haven’t started?
Secure Act (2019) did not change rules for accounts w/o a designated beneficiary. - If RMD’s started, continue taking them. Reduce life expectancy by one year each year. - If not started, distribute account within 5 years.
36
Defined Benefit Pension Plans: - How do they work? - Who do they benefit the most? - Are they relatively expensive
Under DB plans, the employee accrues the present value of future payments. These plans favor older age entrants, and permit inclusion of previous years of service. They also permit social security integration. Defined Benefit plans are expensive to administer.
37
Cash Balance Pension Plans: - How do they work? - Who do they favor? - Are they expensive to run?
- Each year, each employee’s hypothetical account receives a pay credit and an interest credit. SS integration is permitted in the pay credit, and the interest credit is guaranteed. - Theoretically these favor younger employees because they can collect more interest credits. - These are less expensive than Defined Benefit plans; essentially, they’re a cheaper version of a DB plan.
38
Target Benefit Direct Contribution Pension Plans: - How do they work? - Whom do they favor? - Are they expensive to run?
A Target Benefit plan is a type of money purchase plan. It contributes to an employee based on the benefit that will be paid from the plan at the participant’s retirement. The contribution can be based on the present value of the employee’s retirement income stream. These DC plans favor older workers because they’re structured around NPV. Plans have separate accounts in which EE’s choose from investment options. No guarantee of results. More expensive than money purchase direct contribution pension plans.
39
Money Purchase Direct Contribution Pension Plans: - How do they work? - Whom do they favor? - Are they expensive?
Money Purchase direct contribution pension plans give a % of wages to each employee’s account. The % is promised, but the return is not. EE’s manage their own investment options in their own separate accounts. Cheaper than Target Benefit because you don’t need an actuary at the outset.
40
Whom do profit sharing plans favor? How do expenses compare with stock bonus plans?
Highly compensated and younger persons. They allow SS integration, and they’re cheaper than Stock Bonus plans because you don’t need someone to evaluate the stock.
41
How do stock bonus plans and ESOP’s compare?
Both favor highly compensated and long-tenured. Both are expensive to run. Stock bonus plans allow social security integration, ESOP’s don’t. ESOP’s represent changing ownership of the company to the employee’s.
42
Who do 401k and Thrift plans favor? How do they compare?
Both favor young persons and savors. 401k’s don’t permit integration in matches, but can thru additional profit sharing. Thrift plans permit integration, and are generally for govt. EE’s.
43
Age-Based Profit Sharing and New Comparability Plans?
Age-based favors older and HC. New comparability favors owners.
44
How do QP’s generally interact with the IRS in getting their plans adopted, amended or terminated?
Through determination letters.
45
If a plan hires an asset manager to manage the money in their plan, are they fiduciary? What is required of EE investment options?
Yes, fiduciary. There must be at least three. They must have substantially different risk profiles. Taken together, they must reduce market risk.
46
When are employer contributions to qualified plans due?
When their tax return is due, plus extensions.
47
How much can an employer deduct if they run both a DC and a DB plan?
The greater of 25% of covered comp, or the minimum DB funding needs.
48
What is a Keogh plan? Can it be different types?
A Keogh plan is a qualified plan for a self-employed individual. It can be any type of plan that doesn’t involve stock.
49
How do you calculate a self-employed person’s contribution rate?
Contribution rate to others ÷ (1 + contribution rate to others)
50
How do you calculate self-employment tax
Net self-employment earnings x .9235 = earnings subject to SE tax. SE tax = 12.4% on above income up to wage base + 2.9% on all income
51
How do you calculate self employed individual’s Keogh contribution?
Net income x .9235 = taxable income. X 12.4% up to SS wage base + 2.9% on all income = SE tax (Taxable income - 1/2 of SE tax) x contribution rate = Keogh contribution
52
What happens if a plan makes excess contribution? Can a plan carryover excess contributions? What if an SE person has carryover to company plan?
Generally, they can correct them, if it’s for something difficult to foresee. Carryover contributions can be deducted in future years, but may face a 10% excise penalty. SE individuals never face a penalty for carryovers.
53
What are prohibited transactions? Who is a disqualified person? What are the consequences of a prohibited transaction?
Prohibited transactions are interactions between a plan and disqualified persons. Disqualified persons are people who do work for the plan, company owners of 50% or more, employers whose employees are covered by the plan, and employee organizations. And families of all of the above. Prohibited transactions are those that let dq’d persons borrow or use plan money. The consequence is fix in 14 days or 100% excise
54
What is the 2006 exception to prohibited transaction rules?
Disqualified persons can give investment advice to plan participants.
55
Are qualified plan administrators fiduciaries?
Yes, ERISA requires it of them.
56
When are QP’s amended or terminated?
A lot! Tax law changes or business circumstances often make it advantageous to amend or terminate a plan.
57
What are the 3 types of termination for DB plans?
Voluntary—The plan has enough money to cash everyone out. Distress—The plan is in difficulty, and the employer doesn’t want to keep it going. Involuntary—The PBGC terminates the plan to limit its own exposure.
58
What happens to un-vested amounts when a plan is terminated?
They vest automatically.
59
What is a plan freeze?
DC—No additional contributions. DB—No more benefit accrual, but present benefits must be maintained.

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