Retirement Flashcards
(34 cards)
When determining the allowable annual additions per ppt to a defined-contribution pension plan, of the choices what would an employer not include?
The lesser of 100% of income or $58,000 (indexed).
Compensation exceeding $290,000.
Compensation exceeding the defined-benefit limitation in effect for that year.
Bonuses.
First, notice that this questions states a defined contribution plan so db limitation doesn’t apply.
The answer is that comp cant exceed 290K for the year.
58,000 as we know is the max contribution but it’s the lesser of 100% of income bc you can’t receive more than what you make.
If the plan provides it, bonuses are includible
Note: Add more to this card
Give me some stats on a profit sharing plan integrated with soc security?
The max social security benefit is 0% to 11.7% as the top of the range?
Difference between cash balance plan and traditional db plans
Db plans will base payments on lifetime when an employee reaches retirement. For a cash balance plan the accumulated cash balance defines the benefit in terms of stated account balance
Hot Dog Moving Company (HDM) sponsors a 401(k) profit sharing plan. In the current year, HDM contributed 20% of each employee’s compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC is 2.5%. Alex, who is age 57, earns $177,778 and owns 7.5% of the company stock. What is the maximum amount that he may defer into the 401(k) plan for this year?
The answer will be 14,500
Remember we must use the ADP chart to figure out contribution bc Alex is a HCE given the stock ownership. Based on the chart we know that if the NHC ADP is 2-8% then the HC can only contribute 2%+NHC rate. So for this example we take 4.5% and put that against the salary of 177,778. Bc alex is over 50 we are allowed an additional contribution of 6,500
Summary: 8K from salary can be deferred and 6.5K from the catch is allowed = 14,500
Calculate the maximum contribution that could be contributed for an employee, age 41, earning $140,000 annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary.
36,300
So this question sucks because for each of these you need to look at the wording. It’s asking the max contribution FOR this employee. Different answers can be provided if it says “on behalf of the employee”, “for the employee”
So for this, the max 401k for an employee under age 50 is 19,500
The money purchase plan said that will contribute 12% of salary so that is 16,800
Timothy is covered under his employer’s Defined Benefit Pension Plan. He earns $500,000 per year. The Defined Benefit Plan uses a funding formula of Years of Service × Average of Three Highest Years of Compensation × 2%. He has been with the employer for 25 years. What is the maximum contribution that can be made to the plan on his behalf?
READ READ READ. Retirement will be the death of me. It says what is the max contribution that can be made to the plan on his behalf?
For a DB you won’t know the contribution to THE PLAN bc that is set by the actuary. SO the answer is can’t determine
What is the maximum excess rate?
The maximum excess rate is 2 times the contribution rate limited to a disparity of 5.7%.
An example would be if a plan makes a 10% contribution, what is the max excess rate? 15.7% would be the answer bc we can’t use the 2*10% due to the limit. So it would be 10%+5.7%
Before we get into the question, tell me what an annual addition is?
In a money purchase plan that utilizes plan forfeitures to reduce future employer plan contributions, which of the following components must be factored into the calculation of the maximum annual addition limit?
Forfeitures that otherwise would have been reallocated.
Annual earnings on all employer and employee contributions.
Rollover contributions for the year.
Employer and employee contributions to all defined contribution plans.
An annual addition is the new money being contributed into an EE account
Forfeitures would not be included bc this lower the contribution required from an ER. They are not added directly to an EE account. Also, earnings and rollovers are not new money ADDED so discount those options
Only answer that applies would be EE and ER contributions to all DC plans
List the formulas provided for DB plans
Unit benefit (a.k.a. percentage of earnings per year of service) formula.
Flat-percentage formula.
Flat-amount formula.
Explain the provisions of loans in a 403b plan.
Max loan amount is the lesser of 50% of the account value of 50,000.
The loan must be paid back with 5 years, using quarterly payments (can be more but it can’t be less frequent)
If used for home purchase I believe it can be paid back in 30 years but will confirm when you read this card.
What companies are eligible for the long service catch up
This is found in a 403b(TSA) plan.
Remember HER
Health
Education
Religious
Who is not a fiduciary to a plan?
Accountants, printers, or really anyone that provides services where they do not have control of the assets/funds
How does life Insurance work in a qualified plan
Tired so taking the from the bank for now:
The premiums paid for the life insurance policy within the qualified plan will trigger a taxable event for the participant at the time of payment.
Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer’s aggregate contributions to the participant’s account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer’s aggregate contributions to the participant’s account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income at or before retirement.
Every year the plan participant pays income tax on the dollar value of the actual insurance protection – approximately equal to the term insurance cost. This is commonly called the PS58 cost. The sum of all those costs is the participant’s basis.
Provide me with some details on the earnings test for OASDHI
- Earnings test does not apply at, or after normal retirement age
- The monthly exempt amount is 4,187.50 (50,520) for those months in the year of normal retirement age before you actually reach normal retirement age.
- Test is based on earned income only
When is PBGC coverage not required for a DB plan?
When it is a professional firm with 25 or fewer EEs.
For pension plans, detail the anti cutback rules for benefits have been accrued to date
The law states that you can not change the formula to impact current employee benefits that have already accrued.
Examples:
You have a current benefit accrual for the DB plan at 3% but you want to change it to 2% per year for future years. This would be allowed bc it would only affect the future benefits. Same case if you have a money purchase plan with a contribution formula change from 6% to 3% for future years.
Decreasing the max benefit under the DB plan from 70% to 50% for all future retirees. This WOULD NOT be allowed bc you are changing the formula for current employees that have not yet retired but already have benefits accrued
What is a determination letter?
They are issues by the IRS at the request of the plan sponsor. The plan sponsor is not required to request a determination letter. Even if the determination letter is requested and approved, the IRS may still disqualify the plan.
In retirement planning, what sources are statutory and what are regulatory?
Internal Revenue Code Labor Department U. S. Tax Court Private Letter Rulings ERISA
The IRC and ERISA are laws or statutes passed by Congress. The Labor Department and Private Letter rulings are sources of regulatory law. Of course, the U.S. Tax Court only interprets statutory and regulatory law (theoretically), and is not a source of laws.
Describe how eligibility works with the secure act for part time employees
If you are part time, you will be eligible for the plan if you have obtained age 21 AND you work for atleast 500 hours per year for a consecutive 3 years. This starts on 1/1/21 so the first part time employee will be eligible in 2024
According to ERISA, which of the following is/are required to be distributed annually to defined benefit plan participants or beneficiaries?
Individual Benefit Statement.
The plan’s summary annual report.
A detailed descriptive list of investments in the plan’s fund.
Terminating employee’s benefit statement.
Plan summary report and terminating EE benefit statement.
The individual statement is not required annually for DB plans. This would be required once every 3 years. But this can be avoided if the sponsor provides a notice of the availability of the pension benefit pension statement and the ways to obtain it each year.
In addition, the plan administrator of a defined benefit plan must furnish a benefit statement to a participant or beneficiary upon written request, limited to one request during any 12-month period. There are no individual accounts in a defined benefit plan, so a specific listing of invested assets is not required.
Tara is a participant in Kean Co.’s defined benefit plan and standard 401(k) plan. Tara, who is a mid-level manager, is 44 years old and earns $100,000. She has five years of service for purposes of the plans and has worked at Kean for five years. The plan provides a benefit of 2% for each year of service. Both plans have the least generous graduated vesting schedule possible. Almost eighty percent of the accrued benefits in the defined benefit plan are attributable to the rank and file employees, and not the owners. According to the actuary, Tara’s accrued benefit in the defined benefit plan is $10,000. Over the last five years, Tara has deferred a total of $30,000 from her salary, which has grown to $40,000. In addition, Kean has matched these contributions with $15,000, which is now worth $20,000. If Tara were to leave today, how much could she rollover into a new employer’s plan?
The DB plan is not top heavy. Therefore, the vesting for the DB plan is a 7 year graded schedule and he is 60% vested in the $10,000. She is 100% vested in the $40,000, but only 80% vested in the employer matching contribution.
This question requires you to know the vesting schedules, which are not provided on the exam.
For DB either 5 year cliff or 7 year graded, for DC 3 year cliff or 6 year graded.
DB DC Yr 1 0% 0% Yr 2 0% 20% Yr 3 20% 40% Yr 4 40% 60% Yr 5 60% 80% Yr 6 80% 100% Yr 7 100% -- DB plan has 10,000 and is 60% vested = 6,000
DC Employee contribution is $40,000 (100% vested)
DC Employer match is 20,000 and is 80% vested = 16,000
Total vested is $62,000
A supplemental deferred compensation plan providing retirement benefits above the company’s qualified plan AND without regard to Section 415 limits is known as
SERP supplements the pension plan without regard to limits imposed upon salary levels (i.e., maximum salary of $290,000 in 2021) or the maximum funding levels of Section 415. Do not confuse with an excess benefit plan which extends the benefits of a company’s qualified plan above the Section 415 limits but still adheres to maximum salary limitations.
Carleen has a vested 401(k) plan balance with her employer in the amount of $420,000. Eight months ago, Carleen borrowed $30,000 from the plan. She paid back the outstanding loan balance last month. What is the maximum loan Carleen can take from the plan today?
Would be eligible to the full 50K expect the EE already took a loan this year. You would deduct the limit by the outstanding balance of the previous loan so we are able to take 30K
Jane P. Lane is a clerical worker who has been with her employer for the last 20 years. Last year, she got married in the Swiss Alps, which was quite out of character for her.
She participates in an employer-paid group term life plan and selected term insurance in the amount of $200,000, which is three times her salary.
She has named her spouse as the beneficiary of the policy.
What is the tax consequence of this policy?
Her employer is permitted to deduct the premiums paid on the entire amount of coverage.
Her employer is permitted to deduct the premiums paid on the first $50,000 of coverage.
Jane is subject to tax on the entire benefit.
Jane is subject to tax on the amount which exceeds three times her annual salary or $50,000, whichever is less.
Look at the question, it’s employer paid. So they get to deduct 100% of the contributions.
For Jane, the taxation starts once we hit the excess of 50K
