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Retirement > Chapter 10 - SIMPLE, 403(b), and 457 Plans > Flashcards

Chapter 10 - SIMPLE, 403(b), and 457 Plans Flashcards

1
Q

Define Annuity Contracts

A

While the contracts are not specifically defined in the IRC, an annuity contract must be purchased for the employee from an insurance company and may give a fixed benefit or a variable benefit depending on the performance of the investment. Any contract or certificate that is transferable to a person other than a trustee is not an annuity contract.

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2
Q

Define 15-Year Rule

A

A special catch-up provision for 403(b) plan participants that have worked for the plan sponsor for 15 years. The catch-up allows them to defer up to an additional $15,000, however, no more than $3,000 per year.

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3
Q

Define Final 3-Year Catch-Up Provision

A

A special catch-up provision for public and private 457(b) plans that allows an individual to defer an additional $17,500 for 2014 to the plan in their final three years before the plan’s normal retirement age.

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4
Q

Define 501(c)(3) Organizations

A

Nonprofit tax-exempt organizations that are established under IRC §501(c)(3) of the IRC.

They are organized exclusively for:

  • For religious, charitable, scientific, literary, or educational purposes, or
  • to foster amateur sports competition nationally or internationally, unless any of their activities involve providing athletic equipment or facilities, or
  • to prevent cruelty to children or animals.
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5
Q

Define Form 5304-SIMPLE

A

The IRS form used to establish a SIMPLE IRA plan when the employees choose the final institution.

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6
Q

Define Form 5305-SIMPLE

A

The IRS form used to establish a SIMPLE IRA plan when the employer chooses the financial institution.

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7
Q

Define 457 Plan

A

A nonqualified deferred compensation plan for employee of state and local government and tax-exempt entities.

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8
Q

Define 457(b) Plans

A

457(b) plans for governmental and tax-exempt organizations under 501(c) that allow employees to defer income taxation on savings for retirement into future years.

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9
Q

Define 457(f) Plans

A

457(f) plans are comparable to traditional deferred compensation plans for employees of governmental entities and tax-exempt entities under 501(c)(3). Ineligible plans are only available to highly compensated and management employees.

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10
Q

Define Grace Period

A

If an employer meets the 100 employee limitation in a given year, the the employer will have a two year “grace period” when the employer can exceed the limitation without losing eligibility to maintain the SIMPLE.

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11
Q

Define Includible Compensation

A

An employee’s taxable wages and benefits for the most recent years of service.l

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12
Q

Define Nonelective Contributions

A

Contributions to a qualified plan on behalf of all eligible employees.

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13
Q

Define Qualified Joint and Survivor Annuity (QJSA)

A

The QJSA pays a benefit to the participant and spouse as long as either lives, although, at the death of the first spouse, the annuity may be reduced.

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14
Q

Define Savings Incentive Match Plans for Employees (SIMPLEs)

A

Retirement plans for small employers with 100 or fewer employees who earn more than $5,000 in a year. SIMPLEs may be established as SIMPLE 401(k) plans or SIMPLE IRAs.

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15
Q

Define SIMPLE 401(k)

A

A SIMPLE plan that utilizes a 401(k) plan as the funding vehicle of the plan.

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16
Q

Define SIMPLE IRA

A

A SIMPLE plan that utilizes an IRA account as the funding vehicle of the plan.

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17
Q

Define Tax Sheltered or Deferred Annuities (403(b) Plans)

A

Retirement plans for certain qualified nonprofit organizations or employees of public education systems - similar to 401(k) plans, but for nonprofit organizations.

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18
Q

What are the characteristics of a SIMPLE? 6

A
  • Employer established SIMPLE plan
  • Employer contracts with employee to have salary reduction.
  • Employer withholds employee deferral over the course of a year.
  • Employee elective deferrals are not subject to income tax but are subject to payroll tax.
  • Employer deposits match on regular basis tax deferred without payroll tax.
  • Earnings grow tax deferred on all contributions.
  • May not be established if the employer contributes to a defined compensation plan during the year, if its employees accrue benefit from a defined benefit plan during the year, or if the employer contributes to a SEP or 403(b) plan during the year.
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19
Q

Why might an employer set up a SIMPLE? 5

A
  • To avoid complicated rules
  • To avoid high administrative costs associated with qualified plans.
  • Don’t have to meet all the nondiscrimination rules associated with qualified plans.
  • No annual filing requirements
  • Easy to establish and maintain.
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20
Q

What are the two types of SIMPLEs?

A 
SIMPLE IRAs
SIMPLE 401(k)s
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21
Q

What type of entities may establish SIMPLE plans? 6

A 
C Corps
S Corps
LLCs
Partnerships
Proprietorships
Government Entities
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22
Q

What are the characteristics of a SIMPLE IRA?

A
  • Utilizes an IRA account as the plan funding vehicle.
  • Established by the employer via a written plan that allows each employee to choose between directing the employer to make contributions to the SIMPLE IRA or allowing the employee to receive such payments directly in cash (a CODA feature) as compensation.
  • They require the employer to either match the employee contributions of those that participate or provide nonelective contributions to all employees who are eligible.
  • Can be established by for-profit entities, tax-exempt employers, and government entities.
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23
Q

What are the characteristics of a SIMPLE 401(k)?

A
  • Utilizes a 401(k) plan as funding vehicle
  • Plan loans are permitted
  • Must be maintained by eligible an employer and satisfy contribution requirements, eligibility requirements, and vesting requirements.
  • Must be maintained on calender year (not fiscal)
  • May be adopted by employer if they have 100 or fewer employees.
  • Non subject to nondiscrimination requirements or top-heavy rules if it meets certain contribution and other requirements.
  • More costly to administer than SIMPLE IRAs
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24
Q

Who can establish a SIMPLE?

A

By companies who employ 100 or fewer employees who earned at least $5,000 of compensation from the employer for the pending calendar year.

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25
Q

What happens for companies with a SIMPLE that no longer comply with the 100 employee limit?

A

The employer is given a two year grace period where the employer can exceed the limitation without losing eligibility to maintain the SIMPLE.

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26
Q

If an employer with a SIMPLE undergoes an acquisition, disposition, or other similar transaction, the employer will retain eligibility for the year of the transaction plus the two subsequent year only if what two rules are met?

A
  1. The plan coverage has not significantly changed during the grace period, and
  2. the SIMPLe plan would have continued to qualify after the transaction if the employer had remained as a separate employer.
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27
Q

As illustration of the relaxed administrative rules and required paperwork, what to Forms 5304-SIMPLE and 5305-SIMPLE do?

A
  1. Satisfy employer notification requirements,
  2. Maintain the SIMPLE plan records, and
  3. Establish proof that the employer set up a SIMPLE plan for its employees.
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28
Q

What are the contribution rules for SIMPLE IRAs?

A

Employee Elective Deferrals
- Max of $12,500 (2015), plus $3,000 (2015) as catch up contribution for those age 50 and over

Employer Contributions

  • Employer matching contributions
  • –Dollar-for-dollar match up to 3% of compensation (without regard to covered compensation)
  • —–May be reduce under special circumstances
  • 2% Non elective Employer Contributions
  • –2% of compensation contribution to each eligible employee (up to covered compensation limit)
29
Q

What are the rules for withdrawals/distributions from a SIMPLE IRA?

A
  • It is taxed as ordinary income to the recipient
  • May be rolled over to an IRA or other qualified plan
  • May be subject to early withdrawal penalties
  • 25%, rather than 10%, penalty of the withdrawal is completed within the first two years of the employee’s participation in the plan
  • Subject to IRA early withdrawal exclusions
30
Q

What are the eligibility requirements for an employee for a SIMPLE?

A
  • Employees who earned $5,000 during any two proceeding calendar years
  • Employees who are expected to earn $5,000 during the current calendar year.
31
Q

Why is the time period from November 2 to December 31 relevant to SIMPLEs?

A

It is the 60-day period every year that employers must allow employees to make their deferral elections.

32
Q

Who may be excluded from the eligibility requirements of a SIMPLE IRA plan by the employer?

A

Air pilots, nonresident aliens, and union workers whose retirement benefits were subject of good faith bargaining.

33
Q

What is the vesting schedule for SIMPLEs?

A

All employer contributions to SIMPLE accounts on behalf of employees and the related earnings are fully and immediately vested.

34
Q

What is the maximum catch-up contribution for an eligible year for the calender year?

A

The lesser of:

  • The catch-up contribution limit of $2,500 for 2014, or
  • The employee’s compensation for the year reduced by all of the employee’s other elective deferrals for the year to other SIMPLEs, or 401(k) plans, SEPs, and 403(b) plans.
35
Q

Under what circumstances may an employer reduce the 3% matching contribution requirement for a calendar year?

A
  • The limit is reduced to no less than 1%
  • the limit is not reduced for more than two years our of the five periods that ends with (and includes) the year for which the election is effective; and
  • employees are notifies of the reduced limit within a reasonable period of time before the sixty days election period for a salary reduction agreement.

Only applies to SIMPLE IRAs and not SIMPLE 401(k)s

36
Q

After the two years participation period, what types of accounts can a SIMPLE IRA be transferred or rollover over tax-free to?

A
  • an IRA other than a SIMPLE IRA
  • A qualified plan
  • A 403(b) account or tax sheltered annuity
  • a deferred compensation plan of a state or local government (457 plan)
37
Q

403(b)s are retirement plans for who?

A
  • Public schools or educational organizations, and

- Tax-exempt Organizations under IRC §501(c)(3)

38
Q

When would and would not ERISA apply to 403(b)s?

A

ERISA applies to:

  • Employee benefit pension plans of 501(c)(3) organizations
    • Unless employer involvement is minimal
      • Employer only provides salary reduction agreement

ERISA does not apply to>

  • Governmental 403(b)s
  • Church Related 403(b)s
39
Q

What happens when ERISA does apply to a 403(b)?

A

Plan must meet the following tests:
-Nondiscrimination test
-Matching contributions must satisfy ACP test
Plan must offer the following distribution options:
-Preferred Joint and Survivor Annuity
-Qualified Joint and Survivor (QJSA)

40
Q

When are 403(b) plans generally not subject to ERISA rules?

A

If all of the following are true:

  • Employee participation is voluntary
  • There are no employer contributions
  • Employee has solely enforceable rights under the plan
  • Employer’s involvement is limited in scope, and
  • Sponsored by a government or religious institution.
41
Q

Define employee benefit pension plan?

A

Any plan, fund, or program established or maintained by an employer that provides retirement income to employees or defers income of employees for periods until termination of employment or beyond.

42
Q

What is the only nondiscrimination requirement that applies to 403(b) plans that only provides for elective deferrals?

A

If one employee has the right to elect to have the employer make salary reduction contributions under a salary reduction agreement, then all employees must be permitted to elect salary deferral contributions.

43
Q

What is the universal availability rule?

A

If any employer permits one employee to defer salary by contributing to a 403(b) plan, the employer must extend this offer to all employees with the following exceptions:

  • employees who will contribute $200 or less annually
  • employees who participate in a 401(k) or 457(b) plan or in another 403(b) plan of the employer,
  • nonresident aliens,
  • employees who work less than 20 hours per week, and
  • students who are enrolled and regularly attending classes at such school, college, or university.
44
Q

What are the eligibility requirements for somone to participate in a 403(b) plan?

A

For plans that do not offer immediate vesting

  • They must be age 21 or over and
  • Have one year of service
For plans that offer immediate vesting
-They must be age 21 and over and
-Two years of service
or (educational institutions only)
-Be 26 or older and
-One year of service
45
Q

What types of contributions are allowed in a 403(b)?

A
  • Employee elective deferral
  • Nonelective contributions
  • After-tax contributions
  • Any combination of the above
46
Q

What is the special catch up rule that only applies to 403(b) plans and who is eligible for it?

A

“15-Year Rule” Exception
The limit of elective deferrals to the 403(b) account is increased by the lesser of the following:
-$3,000
-$15,00, reduced by increases to the general limit that we allowed in previous years due th the 15-year rule, or
$5,000 times the number of years of service for the organization by the employee, subtracted from the total elective deferrals made by the employer on behalf of the employee for earlier years.

Eligibility:

  • Participants age 50 and over
  • Participants who have at least 15 years of service with a public school system (not required to be consecutive), home health service agency, health or welfare service organization, church, or convention or association of churches
47
Q

What is an ‘In plan Roth rollover”?

A

A distributions from an individual’s plan account, other than a designated Roth account, that is rollover over to the individual’s designated Roth account in the same plan.

48
Q

What can funds inside a 403(b) account be invested in?

A
  • Insurance Annuity Contracts
  • Mutual Funds

Specifically in one of the following forms:

  • A contract provided through an insurance company called an annuity contract
  • An account invested in mutual funds only, which is referred to as a custodial account, or
  • An account for church employees that is a retirement income account, which invests in either annuities or mutual funds.
49
Q

Distributions can generally be paid from a 403(b) account only after what events?

A
  • the employee turns age 59 1/2
  • the employee is separated from service
  • the employee dies
  • the employee becomes disabled
  • for salary reduction contributions, the employee endures a severe hardship.

These restrictions apply only to contributions from salary reduction agreements. Non Elective deferral contributions have no such restriction upon distribution.

50
Q

What are the benefits of a 403(b) plan?

A
  • The employee does not pay income taxes on the contributions to the plan.
  • Earnings and gains on the amounts placed in a 403(b) account are not subjected to income tax until withdrawn by the employee.
  • The employees have tax-deferred benefits of growth over time, along with a vehicle where an employer may provide for other incidental contributions for an employee’s benefit.
51
Q

What are the differences between a 403(b) plan and a 401(k) plan?

A
  • Investment choices: Generally the 401k plan has more flexibility than the 403b. 401k plans usually offer mutual funds, stocks, ETF’s, etc. The 403b is usually an annuity contract offered through an insurance company, but as of recently mutual funds have become a choice as well.
  • Catch-up rules specific to 403(b)s
  • Who can use the plan: generally prove sector employees use 401k, 403b for public education organizations, hospital service organizations, and self-employed ministers, and some non-profit employers
  • Vesting rules - Typically it takes longer to become fully vested in a 401k than it does a 403b because each private company has the ability to create whatever vesting rules they choose to use.
52
Q

What are the types of 457 plans?

A
  • Government (Public) 457(b) Plans - All eligible employees
  • Tax Exempt (Private) 457(b) Plans - HCE or management
  • “ineligible plans” under IRC §457(f).
53
Q

What is the main distinction between 457(b) plans and 457(f) plans?

A

457(f) plans provide for a greater deferral of funds.

54
Q

What are Public 457(b)s required to be funded through?

A

A trust holding all assets and income for the exclusive benefit of plan participants and their beneficiaries.

55
Q

In what types of 457 plans are assets not protected and susceptible to an employer’s creditors?

A 
Private 457(b)
457(f)
56
Q

Which 457 plan allows for catch-up contributions at age 50?

A

Public 457(b)s

57
Q

What is the final 3-year catch up provision?

A

A provision allowed for Public and Private 457(b) plans. It allows employees to make up for previously missed contributions as follows: Three years prior to normal retirement age (as defined by the plan) an employee may contribute an additional amount equal to the elective deferral limit (17.5k - 2014) limited to the prior year employee deferrals not taken.

When this is used the employees cannot use the age-50 catch up provision.

58
Q

Why are matching plans to 457 plans infrequent?

A

Because the $17,500 limit includes both the employee and employer contributions.

59
Q

What is an advantage of distributions out of a public 457(b) plan?

A

That the age 59 1/2 withdrawal rule does not apply. Basically there is no 10% penalty for early withdrawal at RETIREMENT OR UPON TERMINATION of employment for participants in public 457(b) plans.

60
Q

What does it mean that a 457(b) plan has portability?

A

It allows for a rollover into a new employer’s 457 plan, 401(k), 403(b), or into an IRA.

61
Q

What is the contribution limit to a 457(f)?

A

There is no limit.

62
Q

What does it mean that amounts contributed to a 457(f) plans are subject to a substantial risk of forfeiture?

A

This means that the participant is considered to be a general unsecured creditor of the plan sponsor or employer. The substantial risk of forfeiture is conditioned upon:
1. the unsecured status of the employer, and
2. the employee’s future performance of substantial services for the employer.
The employer agrees to pay the participant a certain amount of money after a specified period of employment, at which time the employee is no longer at substantial risk of forfeiture of the funds.

63
Q

What is the taxation for a 457(f) plan?

A

Taxation of funds occurs when there is no risk of forfeiture. Amounts may therefore be taxable prior to the actual payment or distribution to the participant. The amounts that are taxable prior to actual payment are included in the gross income of the participant in the first year that the deferral amount is not subject to a substantial risk of forfeiture.

64
Q

What are three disadvantages of 457(f) plans?

A
  • If the participant terminates employment before the stated payment period, the participant may forfeit all of the 457(f) plan funds.
  • Because the funds in the plan remain the employer’s property until vested, the employee-participant may lose all the 457(f) funds if the employer goes bankrupt.
  • The participant may be taxed on the value of the plan once the funds vest in the participant or are no longer subject to substantial risk of forfeiture, even without being distributed.
65
Q

What employees can participate in a Public 457(b) plan?

A

Rank and File Employees and Key Management

66
Q

What employees can participate in a Private 457(f) plan?

A

Key Management and HCs for Tax Exempt Organizations

All Employees if Church Related Organization.

67
Q

What employees can participate in a 457(f) plan?

A

Key Management and HCs

68
Q

What are the rules for rollovers for Private 457(b) plans?

A

Not permitted unless rolled into another 457(b)

69
Q

What are the rules for rollovers for 457(f) plans?

A

Not permitted

Retirement (11 decks)

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