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Flashcards in Retirement: 7 Retirement Plan Distributions Deck (130)
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1

Retirement: 7-1,2 Retirement plan Distributions

An individual may obtain a distribution while still employed (called an in-service distribution) if the plan permits such a distribution to an active participant. Such distributions are permitted only in _____ and IRA hybrid plans, such as a SEP or SIMPLE.

a. profit sharing plans

b. defined distribution plans

a. profit sharing plans

2

Retirement: 7-1,2 Retirement plan Distributions

For_____ (SIMPLEs, SEPs, and SARSEPs), the participant controls the account and, as is the case with all IRA plans, may make withdrawals at any time for any reason (taxes and 10% early withdrawal penalty may apply).

a. IRA hybrid plans

b. pension plans

a. IRA hybrid plans

3

Retirement: 7-1,2 Retirement plan Distributions

For _____ (defined benefit, cash balance, money purchase, and target benefit plans), plan provisions must prohibit in-service withdrawals by employee-participants (individuals who are still employed) prior to the attainment of age 62. Age 62 in-service withdrawal provisions are used to accommodate participants who want to begin a “phased in” retirement rather than terminating all at once.

a. IRA hybrid plans

b. pension plans

b. pension plans

In other words, a pension plan must prohibit in service withdrawals prior to age 62 to retain its status as a qualified plan. If the pension plan’s provisions do not allow in-service withdrawals at age 62 or older, distributions may only be made following death, disability, or separation from service (which includes retirement of the participant).

4

Retirement: 7-1,2 Retirement plan Distributions

Typically, _____ may include provisions for in-service withdrawals after the plan’s normal retirement age. This creates an option for the employee who elects to continue working past the plan’s retirement age but who would like to begin tapping into his or her retirement benefits. Defined benefit plans are less likely to allow in-service withdrawals due to the complex record keeping required

a. money purchase and target benefit plans

b. profit sharing-type plans

a. money purchase and target benefit plans

5

Retirement: 7-1,2 Retirement plan Distributions

For _____, plan provisions will specify the portions of the participant’s account that may be available for in-service withdrawal (if any)—usually the vested portion of employer contributions, and only after a specified period of time (e.g., after funds have been in the participant’s account for two years, or after five years of participation). It is important to note that the plan document must specifically allow this type of in-service withdrawal.

a. money purchase and target benefit plans

b. profit sharing-type plans

b. profit sharing-type plans

6

Retirement: 7-1,2 Retirement plan Distributions

If a traditional profit sharing plan, one that does not include a 401(k) provision, provides for in-service withdrawals, _____ special hardship conditions are required

a. generally

b. generally no

b. generally no

the plan may, however, impose such restrictions

7

Retirement: 7-1,2 Retirement plan Distributions

Hardship withdrawals from a profit sharing plan, if allowed, may be from _____

a. employee contributions

b. employer contributions

c. employer contributions and earnings

c. employer contributions and earnings

There are no employee contributions

8

Retirement: 7-1,2 Retirement plan Distributions

Hardship withdrawals from a profit sharing plan, if allowed, may be from employer contributions and earnings. Three requirements must be met before hardship distributions may be made from a traditional ______.

1. the term hardship must be defined in the plan

2. uniform and nondiscriminatory rules must be followed in determining whether a hardship exists and the amount of the distribution necessary to alleviate the hardship, and

3. the amount of the hardship distribution cannot exceed the participant’s vested interest under the plan.

a. 401k plan

b. profit sharing plan

b. profit sharing plan

9

Retirement: 7-1,2 Retirement plan Distributions

Hardship distributions from a profit sharing plan are taxable to the recipient and _____ be subject to a 10% early withdrawal penalty.

a. may

b. may not

a. may

10

Retirement: 7-1,2 Retirement plan Distributions

In contrast to the hardship withdrawal rules for traditional profit sharing plans, hardship withdrawals from a 401(k) plan or 403(b) plan are available only from ______, and only when the plan document specifically allows such withdrawals.

a. elective deferrals

b. employer contributions

a. elective deferrals

Amounts attributable to employer contributions, and earnings associated with either employer or employee contributions, are not available for hardship withdrawal. (There is an exception for certain contributions made prior to December 31, 1988.)

11

Retirement: 7-1,2 Retirement plan Distributions

Section 401(k) plans and 403(b) plans can offer hardship withdrawals, but certain requirements must be met. Plan participants may qualify for a hardship withdrawal from the plan if they demonstrate

1. “an immediate and heavy financial need,” and

2. a lack of other ______

a. retirement accounts

b. liquid funds of less than $10,000

c. “reasonably available” resources.

c. “reasonably available” resources.

12

Retirement: 7-1,2 Retirement plan Distributions

IRS regulations (Reg. Section 1.401(k)–1(d)(2)(iv)) provide the following examples of needs that would be considered “immediate and heavy”:

1. medical expenses for a parent, spouse, child, dependent, or any beneficiary;
2. purchase of a ____ residence;
3. tuition payments for a parent, spouse, child, dependent, or any primary beneficiary;
4. payments to prevent eviction from one’s _____ residence;
5. funeral expenses for a parent, spouse, child, dependent, or any primary beneficiary; or
6. repairs to principal residence that would qualify for a casualty loss income tax deduction.

a. primary

b. secondary

a. primary

13

Retirement: 7-1,2 Retirement plan Distributions

A _____ is someone who is named as a beneficiary under the plan and has an unconditional right to all or part of the participant’s plan account balance after a participant dies.

a. family member

b. spouse

c. primary beneficiary

c. primary beneficiary

14

Retirement: 7-1,2 Retirement plan Distributions

In determining if the participant has exhausted other “reasonably available” resources, the IRS requires that the participant first receive any employer plan distributions and loans available from other qualified retirement plans and _____.

a. personal loans

b. home equity loans

c. nonqualified deferred compensation plans

c. nonqualified deferred compensation plans

15

Retirement: 7-1,2 Retirement plan Distributions

Hardship distribution amounts:

1. are subject to the 10% early withdrawal penalty for distributions made before age 59½,
2. are not eligible for rollover, and
3. _____ subject to mandatory withholding.

a. are

b. are not

b. are not

16

Retirement: 7-1,2 Retirement plan Distributions

Ownership of a plan participant’s interest may be changed during his or her lifetime through a qualified domestic relations order (QDRO). A QDRO is a legal judgment mandating the distribution, segregation, or attachment of one person’s property for the benefit of another, referred to as the _____. QDROs are a fairly regular feature of divorce settlements that involve spousal interests in qualified retirement plans.

a. primary beneficiary

b. spouse

c. alternate payee

c. alternate payee

Here, the court orders the distribution or attachment of a plan participant’s interest in a retirement plan in favor of an ex-spouse, a child, or another dependent who is recognized by the court order as having rights to a participant’s qualified plan benefits. A QDRO must be presented to the plan administrator, who must confirm the QDRO as a qualified or valid order.

17

Retirement: 7-1,2 Retirement plan Distributions

QDRO requirements apply to qualified plans, 403(b) plans, and Section 457 arrangements, but do not apply to _____.

a. traditional pensions

b. cash balance pensions

c. IRAs or plans utilizing IRAs, i.e., SEPs or SIMPLE IRAs

c. IRAs or plans utilizing IRAs, i.e., SEPs or SIMPLE IRAs

Plans using an IRA may be awarded to an ex-spouse according to the terms of a divorce decree.

18

Retirement: 7-1,2 Retirement plan Distributions

QDROs may not require the plan to pay benefits before the earliest retirement age of a participant who is still active and has not separated from service. The “earliest retirement age” is the earlier of

1. the date on which the participant is entitled to a distribution, or

2. the later of the date the participant attains age __, or the earliest date upon which the participant could, under the plan document, begin receiving benefits if the participant terminated employment.

a. 50

b. 55

c. 62

a. 50

19

Retirement: 7-1,2 Retirement plan Distributions

Under the QDRO, the former spouse is treated as the spouse for purposes of calculating the required minimum distribution. The participant’s required beginning date is the _____’s required beginning date for the QDRO, and distributions are paid out over the life of the alternate payee.

a. the employee

b. alternate payee

b. alternate payee

20

Retirement: 7-1,2 Retirement plan Distributions

Example: Plan permits distributions to terminated participants. George Baker is a participant in a plan that permits distributions to terminated participants. George is 48 and his divorce is final. His former spouse’s attorney sends the plan administrator a QDRO requiring the plan to pay the former spouse the benefits awarded by the court in the QDRO when George separates from service or turns age __, whichever occurs first.

a. 50

b. 55

c. 62

a. 50

21

Retirement: 7-1,2 Retirement plan Distributions

Distributions made to an alternate payee who is a spouse or former spouse will be taxed in the same manner as if the alternate payee were the participant. For example, if the alternate payee so elects, he or she can qualify for 10-year forward averaging tax treatment if the participant is qualified to so elect. The participant’s status is unchanged by the elections of the alternate payee. The distribution, if made to a spouse or former spouse, is eligible for rollover and is subject to the rollover rules, such as the __% mandatory withholding requirement.

a. 20%

b. 25

a. 20%

22

Retirement: 7-1,2 Retirement plan Distributions

The alternate payee who is a spouse or former spouse may also roll the QDRO distribution directly into his or her qualified plan, TSA, SEP, or governmental 457 plan that accounts for such rollovers separately, if that plan so permits. If not, the proceeds may be rolled to an ___.

a. brokerage account

b. savings account

c. IRA

c. IRA

23

Retirement: 7-1,2 Retirement plan Distributions

QDRO distributions to someone other than a spouse or former spouse (meaning child or other dependent of the participant) are included in the income of the _____ for the year of the distribution. Withholding requirements will apply unless the participant elects not to have withholding apply. In addition, such distributions are not eligible for rollover treatment.

a. participant

b. other recipient

a. participant

24

Retirement: 7-1,2 Retirement plan Distributions

John Kim participates in QualCo’s qualified retirement plan. He was recently divorced. The court awarded 42% of John’s benefit to his former spouse, Rose, under a QDRO. His benefit is valued at $167,000; Rose has elected a lump sum. The plan is not contributory, so John has no basis in the benefit. Unless she rolls over the distribution, ____ will be taxed on the full distribution of $70,140 (42% of $167,000). The 10% early withdrawal penalty does not apply, even though both parties are age 42—QDRO distributions are exempt from the 10% penalty.

a. John

b. Rose

b. Rose

25

Retirement: 7-1,2 Retirement plan Distributions

The penalty for premature withdrawals is a 10% tax on the taxable portion of the distribution. Four general exemptions from the 10% penalty generally apply to early withdrawals from these plans. These exemptions are for distributions attributable to

1. death

2. disability

3. unreimbursed medical expenses that are in excess of 10% of AGI (or unreimbursed medical expenses in excess of 7.5% of an individual’s AGI if such individual or his or her spouse (for joint filers) attains age 65 or older before the close of the taxable year

4. a series of substantially equal periodic payments (for qualified plans and TSAs, the employee must be separated from service) For periodic payments to be exempt from the 10% penalty, these payments must continue for at least ____ years or until the participant reaches age 59½, whichever is later

5. IRS levy

6. Certain distributions to qualified military reservists called to active duty

a. 5

b. 10

a. 5

26

Retirement: 7-1,2 Retirement plan Distributions

In addition to the exemptions that apply to qualified plans, TSAs, and IRAs, three exemptions are available for IRAs only. The 10% penalty does not apply to premature IRA distributions attributable to

1. Education expenses: Withdrawals to pay for qualified education expenses are exempt from the 10% early withdrawal penalty. Qualifying expenses are defined as tuition, fees, books, supplies, and equipment required for enrollment or attendance at post secondary educational institutions, including graduate-level courses, for a taxpayer, his or her spouse, or the child or grandchild of either the taxpayer or the taxpayer’s spouse.

2. First-time home buyer acquisition costs of up to $10,000. Withdrawals up to a $10,000 lifetime limit to pay for qualified acquisition costs of a principal residence for a first-time home buyer.

3. Payment of medical insurance premiums after separation from employment, as long as a minimum of 12 consecutive weeks of unemployment compensation is received; you receive the distributions either the year you receive unemployment or the year after, and you receive the distributions no later than __ days after you have been re-employed.

a. 30

b. 60

b. 60

27

Retirement: 7-1,2 Retirement plan Distributions

For periodic payments to be exempt from the 10% penalty, these payments must continue for at least five years or until the participant reaches age 59½, whichever is later, and the distribution amount may not be altered once established, but the method may be changed _____ under some circumstances.

a. one time

b. two times

a. one time

28

Retirement: 7-1,2 Retirement plan Distributions

Payments will qualify as a series of substantially equal periodic payments if they are made according to one of the three methods described in paragraphs (a)–(c) of Revenue Ruling 2002-62, Section 2.01:

The annual payment is determined by dividing the account balance for the year by the applicable life expectancy obtained from the chosen life expectancy table. The participant or IRA owner must select the table from among the three alternatives: RMD Single Life Table, RMD Joint Life Table, and the Uniform Table. Once selected, the table may not be changed. Payments are recalculated each year based upon the life expectancy factor for that year and the account balance for that year. As long as the method remains unchanged, the payment amount can change, and there will not be a deemed modification of the series of substantially equal payments.

Method 1: Required minimum distribution method.

Method 2: Fixed amortization method.

Method 3: Fixed annuitization method.

Method 1: Required minimum distribution method.

The account balance used in the calculation is the balance of the account determined in any reasonable manner based on “facts and circumstances.” For example, according to Regulation 2002-62, 2.02(d), it is reasonable to use the applicable balance between December 31 of the year prior and the date of the actual distribution.

29

Retirement: 7-1,2 Retirement plan Distributions

Payments will qualify as a series of substantially equal periodic payments if they are made according to one of the three methods described in paragraphs (a)–(c) of Revenue Ruling 2002-62, Section 2.01:

The annual payment is determined by amortizing in level payments the account balance over the number of years specified by the selected IRS life table and the selected interest rate. The interest rate must be less than or equal to 120% of the federal mid-term rate for either of the two months prior to the month the distribution begins. Once the initial distribution amount is determined, it cannot be changed—the payment is the same in all subsequent years.

Method 1: Required minimum distribution method.

Method 2: Fixed amortization method.

Method 3: Fixed annuitization method.

Method 2: Fixed amortization method.

30

Retirement: 7-1,2 Retirement plan Distributions

Payments will qualify as a series of substantially equal periodic payments if they are made according to one of the three methods described in paragraphs (a)–(c) of Revenue Ruling 2002-62, Section 2.01:

This method determines the payment by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year beginning on the participant’s or owner’s age in the first distribution year. The annuity factor is arrived at by using the mortality table in Appendix B of Revenue Ruling 2002 and the selected interest rate. Once the first payment is determined, it remains unchanged in the subsequent years.

Method 1: Required minimum distribution method.

Method 2: Fixed amortization method.

Method 3: Fixed annuitization method.

Method 3: Fixed annuitization method.