Retirement: 6 403b Plans and Other Plan Issues Flashcards Preview

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Flashcards in Retirement: 6 403b Plans and Other Plan Issues Deck (144)
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1

Retirement 6-2: 403(b) Investment options

Although Section 403(b) plans are frequently referred to as tax-sheltered or tax deferred annuity plans, there are three different investment options listed in IRS
Publication 571:

These are provided through an insurance company. They may be either fixed or variable. A fixed
one provides a guaranteed minimum rate of return while variable ones offer separate investments accounts called “sub accounts,” which are similar to
mutual funds. Available sub accounts may include an account that provides a guaranteed rate, at least for a short term. Other sub-accounts may be invested in
stocks, bonds, money markets, or a combination of these investments.

a. Annuity contracts

b. Custodial accounts holding mutual fund shares

c. Retirement income account.

a. Annuity contracts

2

Retirement 6-2: 403(b) Investment options

Although Section 403(b) plans are frequently referred to as tax-sheltered or tax deferred annuity plans, there are three different investment options listed in IRS
Publication 571:

The assets must be held by a bank or an approved nonbank trustee or custodian that meets certain requirements imposed by the IRS. The assets in this account must be invested exclusively in regulated investment company stock, commonly known as mutual funds

a. Annuity contracts

b. Custodial accounts holding mutual fund shares

c. Retirement income account.

b. Custodial accounts holding mutual fund shares

3

Retirement 6-2: 403(b) Investment options

Although Section 403(b) plans are frequently referred to as tax-sheltered or tax deferred annuity plans, there are three different investment options listed in IRS
Publication 571:

These are established by a church or church-related organization. They are generally subject to the rules for annuity contracts and must meet certain requirements, such as separate accounting for the participant’s interest in the invested assets.

a. Annuity contracts

b. Custodial accounts holding mutual fund shares

c. Retirement income account.

c. Retirement income account.

4

Retirement 6-2: 403(b) Investment options

Life insurance can be offered as part of an annuity contract; however, this component can only be an _____. This is because the primary reason for a 403(b) plan (or any qualified or retirement plan) is to provide retirement benefits, not life insurance.

a. “secondary benefit.”

b. “incidental benefit.”

c. “inessential benefit.”

b. “incidental benefit.”

5

Retirement 6-2: 403(b) Investment options

Determination of whether or not the life insurance is incidental is based upon the ratio of the life insurance cost or premium to the total amount contributed to the
Section 403(b) account. The allowable ratio depends upon whether or not the life insurance is ordinary or non-ordinary. Whole life policies are considered
_____.

a. ordinary

b. non-ordinary

a. ordinary

6

Retirement 6-2: 403(b) Investment options

Determination of whether or not the life insurance is incidental is based upon the ratio of the life insurance cost or premium to the total amount contributed to the
Section 403(b) account. The allowable ratio depends upon whether or not the life insurance is ordinary or non-ordinary. _____ includes both term insurance and universal life contracts.

a. ordinary

b. non-ordinary

b. non-ordinary

7

Retirement 6-2: 403(b) Investment options

For life insurance to qualify as _____, the plans must meet the following limitations:

-the premium on ordinary life insurance must be less than 50% of the total contributions;

-the premium on non-ordinary plans must be less than 25% of the total contributions; and

-when life insurance is included as part of a TSA, the insured participant must include in his or her income each year the cost of the life insurance protection—that is, the economic benefit derived from life insurance.

a. secondary

b. incidental

c. inessential

b. incidental

8

Retirement 6-2: 403(b) Investment options

The amount of life insurance protection is based upon the face amount minus the cash value of the contract at the end of the year. The reason it is done this way is
so that the premiums for the actual life insurance protection are paid with _____ dollars; then the death benefit would be distributed tax free to the beneficiary.

a. pretax

b. after tax

b. after tax

9

Retirement 6-2: 403(b) Investment options

In order to contribute to a 403(b) plan (or any retirement plan) one must have compensation; what is often referred to as earned income or includible compensation. Here are some examples of what is and is not considered to be compensation.

-wages, salaries, and fees for personal service to the employer;

-certain taxable accident and health insurance programs;

-moving expense payments or reimbursements paid by the employer if not deductible by the employee;

-elective deferrals to a Section 401(k), Section 403(b), or similar arrangement;

-amounts deferred under a Section 125 cafeteria plan;

-amounts deferred under a Section 457 plan.

a. included as compensation

b. not included as compensation

a. included as compensation

10

Retirement 6-2: 403(b) Investment options

In order to contribute to a 403(b) plan (or any retirement plan) one must have compensation; what is often referred to as earned income or includible compensation. Here are some examples of what is and is not considered to be compensation.

-employer contributions to the employee’s 403(b) account

-compensation earned while the employer was not an eligible employer

-cost of incidental life insurance.

a. included as compensation

b. not included as compensation

b. not included as compensation

11

Retirement 6-2: 403(b) Investment options

Generally, an employee cannot defer more than _____ (in 2016) of compensation in a given tax year. This amount includes deferrals made through all similar plans except the 457 plan, which has its own separate deferral limit.

a. $12,500

b. $18,000

c. $25,000

b. $18,000

12

Retirement 6-2: 403(b) Investment options

TSA participants, regardless of their age, who have at least __ years of service with a qualified organization are allowed a “long service catch-up contribution.”
That is, the IRC Section 402(g) limitation on exclusion for elective deferrals is increased. This provision is unique to 403(b) plans.

a. 5

b. 10

c. 15

c. 15

13

Retirement 6-2: 403(b) Investment options

A “qualified organization” means any “HER” organization:

-Health
-Education
-_____

a. Religious

b. Real Estate

c. Retail

a. Religious

14

Retirement 6-2: 403(b) Investment options

The increase for the long service catch-up is the lesser of the following:

-$3,000
or
-$15,000 reduced by “increases for long service” used in earlier years
or
-$_____ times the number of years of service for the organization, minus the total elective deferrals made in previous years.

a. $5,000

b. $10,000

c. $20,000

a. $5,000

15

Retirement 6-2: 403(b) Investment options

Example. John Smith, age 40, has worked for the local school district and been in the 403(b) plan since he was 24. He recently received an inheritance, so he is
in the position to defer as much as possible this year of his $45,000 in compensation. In addition to the $18,000 regular deferral, he may also be able to
defer an additional _____, since he has been with his employer for at least 15 years.

a. $2,000

b. $3,000

c. $4,000

b. $3,000

Note that this additional deferral amount is based on years of service, and does not require a minimum age

16

Retirement 6-2: 403(b) Investment options

Example. John Smith, age 40, has worked for the local school district and been in the 403(b) plan since he was 24. He recently received an inheritance, so he is in the position to defer as much as possible this year of his $45,000 in compensation. In addition to the $18,000 regular deferral, he may also be able to defer an additional $3,000, since he has been with his employer for at least 15 years. (Note that this additional deferral amount is based on years of service, and does not require a minimum age). If John were to defer the maximum service catch-up each year ($3,000), it would take him five years to achieve the maximum amount available for the service catch-up, which is _____. John is too young to use the age 50 catch-up.

a. $5,000

b. $10,000

c. $15,000

c. $15,000

17

Retirement 6-2: 403(b) Investment options

Example 1. Laurie is a public school teacher and participant in her district’s Section 403(b) TSA plan. She is 48 years old and has been with the district for 14
years. Her salary for the year was $58,000, including a salary reduction agreement of $12,600. The district used that $12,600 to purchase a tax-sheltered annuity on her behalf. Since Laurie has made a $12,600 contribution, the district would be limited to a contribution of

a. $30,400

b. $40,400

c. $53,000

c.

b. $40,400

$40,400 ($53,000 – $12,600 = $40,400) if the district made employer contributions.

Section 415 limits the annual contribution to Laurie’s account to the lesser of $53,000 or 100% of Laurie’s compensation. In this case, the Section 415 limit would be $53,000 and would include contributions from the district and Laurie’s salary deferral.

18

Retirement 6-2: 403(b) Investment options

Example 1. Laurie is a public school teacher and participant in her district’s Section 403(b) TSA plan. She is 48 years old and has been with the district for 14
years. Her salary for the year was $58,000, including a salary reduction agreement of $12,600. The district used that $12,600 to purchase a tax-sheltered annuity on her behalf. Since Laurie has made a $12,600 contribution, the district would be limited to a contribution of

a. $30,400

b. $40,400

c. $53,000

b. $40,400

$40,400 ($53,000 – $12,600 = $40,400) if the district made employer contributions.

Section 415 limits the annual contribution to Laurie’s account to the lesser of $53,000 or 100% of Laurie’s compensation. In this case, the Section 415 limit would be $53,000 and would include contributions from the district and Laurie’s salary deferral.

19

Retirement 6-2: 403(b) Investment options

If a participant over-contributes to the TSA, and it is not corrected in a timely fashion, an excise tax of ___ of the excess amount may be imposed. If the contribution was to a custodial account, the tax will apply; if made to an annuity, the excise tax will not apply.

a. 6%

b. 10%

c. 25%

a. 6%

20

Retirement 6-2: 403(b) Investment options

An in-service distribution _____ be taken prior to age 59½

a. can

b. can not

a. can

21

Retirement 6-2: 403(b) Investment options

TSA plans that are subject to ERISA must provide for a qualified joint and survivor annuity (QJSA). This is the required form of distribution for married plan participants and can be changed only with the written and notarized consent of the spouse. It must provide the surviving spouse a minimum of ___ of the payment that is in effect prior to the death of the deceased spouse.

a. 50%

b. 65%

c. 75%

a. 50%

The plan must also allow participants to choose either a 50% QJSA (at the least) or a 75% QJSA when the benefit is annuitized.

22

Retirement 6-2: 403(b) Investment options

The employee participant who has attained age __ can take a distribution at his or her discretion, within vesting limitations. However, employed participants
who have not reached this age may still be able to tap some of the value in their accounts, either through withdrawals or loans. Most employers offer one or the
other, or both, but they are not required to do so.

a. 55

b. 59½

c. 70½

b. 59½

23

Retirement 6-2: 403(b) Investment options

Section 403(b) plans are allowed to provide for in-service hardship withdrawals (_____ offer them). A hardship withdrawal must meet two tests:

1. the participant must have an “immediate and heavy financial need,” and
2. the distribution must be necessary to meet that need. (Therefore, loans must be exhausted prior to the granting of the hardship distribution.)

a. they must

b. but do not have to

b. but do not have to

Amount of distribution. In terms of the second test, the distribution cannot exceed the demonstrated financial need, and the need must be such that it cannot
be satisfied from the participant’s other resources.

24

Retirement 6-2: 403(b) Investment options

A hardship distribution can be made from

a. salary deferrals

b. salary deferrals and earnings

c. salary deferrals, earnings, and employer contributions

a. salary deferrals

A hardship distribution can be made from salary deferrals only; employer contributions and earnings cannot be withdrawn as part of a hardship
withdrawal. Such distributions are not eligible for rollover, and therefore the 20% mandatory withholding does not apply. Hardship withdrawals create taxable
income, and would normally include a 10% penalty unless one of the exceptions apply.

25

Retirement 6-2: 403(b) Investment options

With a hardship withdrawal, 20% mandatory withholding ____ apply.

a. does

b. does not

b. does not

Hardship withdrawals create taxable income, and would normally include a 10% penalty unless one of the exceptions apply.

26

Retirement 6-2: 403(b) Investment options

Loans from 403(b) plans are subject to limits stated in the plan and in the underlying investment. Loans generally cannot exceed the lesser of $50,000 or
50% of the participant’s vested account balance. Technically, for balances less than _____ and more than $10,000, the participant can borrow up to $10,000; and for balances less than $10,000 the participant can borrow the entire vested account balance

a. $20,000

b. $30,000

c. $40,000

a. $20,000

27

Retirement 6-2: 403(b) Investment options

There is a _ year term limit on loans, except loans used to purchase a home.

a. 3

b. 5

c. 10

b. 5

28

Retirement 6-2: 403(b) Investment options

Deferrals _____ be made to a designated Roth 403(b) plan.

a. can

b. can not

a. can

29

Retirement 6-2: 403(b) Investment options

Tax-free distributions from Roth 403(b) contribution accounts. “Qualified distributions” are distributions made from a Roth 403(b) account when the Roth
account owner is at

1. least age 59½, fully disabled, or deceased, and
2. the account has been open for at least five calendar years.

The five-year “clock” starts on _____ of the year for which the contribution was made. For example, if a contribution was made in December 2013, the clock
would start _____ 2013.

a. January 1

b. April 1

c. December 31

a. January 1

30

Retirement 6-2: 403(b) Investment options

If a participant has had a Roth IRA for more than five years, then by moving the Roth 403(b) over to the Roth IRA the five-year requirement _____ been met, regardless of how long the Roth 403(b) has been opened.

a. has

b. has not

a. has