Module 4: Tax-Advantaged Plans and Nonqualified Plans

Question 1

Differences between Tax Advantaged Plans and Qualified Plans

Answer 1

• Tax Advantaged Plans don’t have a 10 year forward averaging, special pre-1974 gapital gain treatment or NUA.

They also may not incorporate loans provisions

Question 2

Types of Tax-Advantaged Plans

Answer 2

• SEP Plans
• TIRA
• RIRA
• SIMPLEs
• 403b’s or TSAs (the same thing)

Question 3

SIMPLE characteristics

Answer 3

• not subject to top heavy and nondiscrimination rules
• employer contributions are deductibe if made by the due date of the employer’s tax return, including extentions and are not subject to FIXA taxes.

Question 4

When can plan assets for a SIMPLE be rolled over?

Answer 4

• they cannot be rolled over into another plan (other than another SIMPLE) within 2 years of initial participation.

Question 5

SIMPLE Employer Eligibility

Answer 5

• has 100 or fewer employees on any day during the year who earned 5k AND
• does not maintain another employer sponsored retirement plan, sep plan, sarsep plan, or 403b. maybe a 457.

Question 6

What must the employer tell the employees about the SIMPLE plan?

Answer 6

• they must notify participants that they have a 60 day election period just before the calendar year to make a salary deferral election or modify a previous one.
• The plan must be effective on Jan 1 of any year for which contributions are made, unless it is the first year of adoption

Question 7

SIMPLE covered compensation oddity

Answer 7

If the employer elects 3% match, the covered compensation limit of 290k does not apply, it is 450k because the 3% of 450k is the 13500 annual limit

Question 8

What can’t a SIMPLE IRA do?

Answer 8

Cannot purchase life insurance as a funding vehicle and loans are unavailable.

Question 9

What is a SEP IRA?

Answer 9

• a SEP IRA is an employer-sponsored IRA in which the employer agrees ton contribute retirement monies on behalf of employees on a nondiscriminatory and fully vested basis

Question 10

SEP Requirements

Answer 10

• must cover all employees who are at least 21 years of age and who have worked for the employer for 3 of the preceding 5 years, part-time service counts for purposes of this requirement
• contributions must be made on behalf of any employee whose compensation is at least 650 for the tax year
• SEP contributions can only be made by the employer. No salary deferrals, and the contribution percentage is the same for all participants in the plan.

Question 11

SEP Top-Heavy Penalty

Answer 11

The employer must make a minimum contribution of 3% of the employees compensation for each non-key employee plan participant each year that the plan remains top heavy.

Question 12

What is a section 403b/TSA plan

Answer 12

a tax-deferred retirement plan that may only be adopted by certain private, tax-exempt and non profit organizations that cover employees from public schools, nonprofit hospitals, humane societies, and religious entities such as churches.

Question 13

Universal Availability

Answer 13

For TSA plans, if it is established, it must be available to all eligible employees

Question 14

403(b) Special “Catch Up Provision”

Answer 14

• if participant has worked for the same qualifying employer (healthcare, education, and religion/church - all these employers must be not for profit) for at least 15 years to increase their contribution limit by an amount equal to the lesser of:
• 3000
• 15000 reduced by amounts previously deferred under the special catch-up OR
• 5000 multiplied by the employees years of service with employer, less the sum of all prior salary deferrals

Question 15

Section 403b Plan Advantages

Answer 15

• not generally subject to ADP and ACP testing
• if sponsored by a governmental or church organization it’s not subject to ERISA reporting and disclosure requirements
• nonprofit with no employer contribution is not subject to ERISA reporting and disclosure requirements
• the special catch-up limit

Question 16

Section 403b Plan Disadvantages

Answer 16

• must comply with ACP tests for matching contributions

Question 17

TSA Plans are most appropriate when:

Answer 17

• public or private tax-exempt employer
• the employer wants to provide a tax-deferred retirement plan for employees with minimum admin expenses
• employees are willing to accept the investment risk and investment responsibility associated with the plan
• a plan similar to a Section 401k plan is desired by a nonprofit employer for the benefit of its employees

Question 18

Section 457 Plans

Answer 18

A nonqualified deferred compensation plan established by a private tax-exempt employer (non-church) or a municipal government for the benefit of its employees.

Question 19

457 Catch-Up Contribution

Answer 19

• only available for governmental 457 plan employees

Question 20

Tax Status of Distributions/Contributions by 457 Plan Type

Answer 20

Governmental - include the plan distributions in income when they are paid
Private Tax-Exempt Plans - include as income when there is no longer a substantial risk of forfeiture on their receipt of the funds. (this distributions are not subject to an early withdrawal penalty)

Question 21

What is the special governmental 457 plan catch up (“Three Year Catch Up”)

Answer 21

During the participants last three years of employment before the plan’s normal retirement age, the limit on elective deferrals is increased to the lesser of:

• twice the amount of the regular elective deferral limit
• the sum of the otherwise applicable limit for the year plus the amount by which the applicable limit in the preceding years exceeded the participant’s actual deferral for those years. In other words: catch-up is limited to unused deferrals in prior years.