Retirement Flashcards
(80 cards)
1
Q
2019 Covered Compensation Limit
A
$280,000
2
Q
Pension Plan Characteristics
A
- Legal promise: Paying a pension at retirement
- No in-service withdrawals permitted (except DB plans can provide for in-service distributions to participants who are age 62 or older)
- Subject to mandatory funding standards
- 10% of plan assets can be invested in employer securities
- Plan must provide qualified joint and survivor annuity and a qualified pre-survivor annuity
- Defined benefit plans may exceed 25% of covered compensation in annual employer contributions
3
Q
Profit-Sharing Plan Characteristics
A
- Legal promise: Deferral of compensation and taxation
- In-service withdrawals are permitted after two years if the plan document permits
- No mandatory funding
- Up to 100% of plan assets can be invested in employer securities
- No annuities must be provided
- 25% employer annual contribution limit of covered compensation (increased from 15% for years after 2001 by the EGTRRA)
4
Q
Defined Benefit Plan Characteristics (contribution limit, who assumes risk, forfeitures, PGBC, separate investment accounts, credit for prior years of service, actuary, Social Security Integration, who favours)
A
- Annual employer contribution limit: at least the unfunded currently liability
- Employer assumes the risk
- Forfeitures are allocated to reduce plan costs
- Subject to Pension Benefit Guaranty Corporation (PBGC) except professional firms with < 25 employees
- No separate investment accounts (commingled)
- Credit can be given for prior years of service
- Actuary required annually
- Social Security Integration is Offset or Excess
- Favours Older participants
5
Q
Defined Contribution Plan Characteristics (contribution limit, who assumes risk, forfeitures, PGBC, separate investment accounts, credit for prior years of service, actuary, Social Security Integration, who favours)
A
- Annual employer contribution limit: 25% of total covered compensation across all employees
- Employee assumes the investment risk
- Forfeitures can reduce plan costs or be allocated to other participants
- No PBGC coverage
- Usually separate investment accounts
- No credit for prior service
- No annual actuary required (target benefit requires at inception)
- Social Security Integration is Excess Only
- Favours Younger participants
6
Q
Defined Contribution Pension Plan Characteristics
A
- Annual employer contribution limit: 25% of total covered compensation across all employees
- Employee assumes the investment risk
- Forfeitures can reduce plan costs or be allocated to other participants
- No PBGC coverage
- Usually separate investment accounts
- No credit for prior service
7
Q
How are payroll taxes treated regarding plan contributions?
A
- Employer contributions to qualified retirement plans are exempt from payroll taxes (up to 12.4% OASDI and 2.9% Medicare tax savings)
- Employee elective deferrals are subject to payroll taxes.
8
Q
What are the standard eligibility requirements for qualified plans?
A
- One year of service (defined as a 12 month period in which the employee works at least 1,000 hours)
and 2. Age 21
9
Q
What is the standard exception the special eligibility rules?
A
A qualified retirement plan may require that an employee complete two years of service to be eligible for participation in the qualified retirement plan, but then the plan participants must be immediately vested upon completion of two years of service. This exception is not available for 401(k)s.
10
Q
Characteristics of highly compensated employees
A
- Compensation in excess of $125,000 for 2019 (for prior plan year) (if special election is made “and in top 20% of employees ranked by salary”)
or 2. An owner of > 5% for current or prior plan year (where ownership includes ownership by spouse, children, grandchildren, or parents)
11
Q
What is the Defined Benefit 50/40 Test?
A
Requires the DB plan to benefit min(50, 40%) of all nonexcludable (eligible) employees on each day of the plan year.
12
Q
Characteristics of a Key Employee
A
- > 5% owner
- > 1% owner with comp > $150,000 (not indexed)
or 3. officer with comp > $180,000 (2019)
13
Q
Definition of a Top Heavy Defined Benefit Plan
A
More than 60% of the total accrued benefits of the defined benefit plan are for the benefit of key employees
14
Q
Funding of a Top Heavy Defined Benefit Plan
A
Must be at least 2% x years of service x compensation factor
15
Q
Vesting of a Top Heavy Defined Benefit Plan
A
At least as rapidly as a 2 to 6 year graduated vesting schedule or a 3 year cliff
16
Q
Definition of a Top Heavy Defined Contribution Pension Plan
A
More than 60% of the total account balances of the defined contribution plan are for the benefit of key employees
17
Q
Funding of a Top Heavy Defined Contribution Pension Plan
A
3% minimum to all eligible employees or less if less provided to the key employees
18
Q
Vesting of a Top Heavy Defined Contribution Pension Plan
A
At least as rapidly as a 2 to 6 year graduated vesting schedule or a 3 year cliff
19
Q
Defined Benefit Maximum Plan Limitations
A
- Covered Compensation $280,000 for 2019
* Maximum Benefit is lesser of $225,000 for 2019 or the average of 3 highest consecutive years of compensation
20
Q
Defined Contribution Maximum Plan Limitations
A
- Covered Compensation $280,000 for 2019
* Maximum Benefit is lesser of 100% of compensation or $56,000 for 2019 (excluding catch-up provision)
21
Q
What is the 25% Test?
A
- The test used depends on the type of life insurance provided by the plan.
- 25% for Term insurance or universal life insurance policies
- 50% for whole life insurance policies
- The aggregate premiums paid for the life insurance policy cannot exceed X% of the employer’s aggregate contributions to the participant’s account.
22
Q
Characteristics of Permitted Disparity (Social Security Integration)
A
- A technique or method of allocating plan contributions to employees’ accounts so that higher contributions will be made for those employees whose compensation is in excess of the Social Security wage base.
- Profit sharing plans only allow the excess method to be used.
- The excess rate is limited to the LESSER of twice the base rate or a difference of 5.7%. As a result, the excess rate is generally 5.7% higher than the base rate.
23
Q
What entities may establish a 401(k) plan
A
Corporations Partnerships LLCs Proprietorships Tax-exempt entities
24
Q
Characteristics of a Roth IRA (contribution limit, catch-up contribution limit, income limit, conversions, loans, qualified distributions, unqualified distributions, required distributions)
A
- Combined with Traditional IRA limit and subject to a maximum of actual earned income or the IRS limit
- $6,000 contribution limit (2019)
- $1,000 catch-up contribution limit (2019)
- Contribution phaseout MAGI (provided on exam): Single $122-137k, MFJ $193-203k, MFS $0-10,000
- Conversions from Traditional IRA allowed (no income limit)
- No loans
- Qualified distributions (not subject to tax or penalty) = (1) Account must be held for at least 5 years and (2) the distribution must be made on account of a first time home purchase, disability, death, or on or after the attainment of age 59 1/2
- Unqualified distributions: order is (1) contributions, (2) conversions, (3) earnings
- No Required minimum distributions during owner’s lifetime
25
Characteristics of a Roth 401(k) (contribution limit, catch-up contribution limit, income limit, conversions, loans, qualified distributions, unqualified distributions, required distributions)
* combined with Traditional 401(k) limit
* $19,000 contribution limit (2019)
* $6,000 catch-up contribution limit (2019)
* No income limits, but subject to a maximum of actual income for deferral
* No conversions from Traditional IRA allowed
* yes loans
* Qualified distributions (not subject to tax or penalty) = (1) Account must be held for at least 5 years and (2) the distribution must be made on account of disability, death, or on or after the attainment of age 59 1/2
* Unqualified distributions: distribution is determined under Section 72 and each distribution will consist of basis and earnings
* RMDs: follows minimum distribution rules, i.e. distributions must begin by April 1 in the year following the year in which the participant reaches 70 1/2
26
ADP schedule for HCEs based on contributions by non-HCEs
NHCE ADP -> HCE permissible ADP
0-2% -> 2x
2-8% -> x + 2%
8+% -> 1.25x
27
What are the alternative remedies available if a plan fails the ADP or ACP tests?
1. Corrective distributions: requires a return of contributions to the highly compensated
2. Recharacterization: requires excess deferrals to be recharacterized as after-tax contributions (but could then fail the ACP test)
3. Qualified non-elective contributions (QNEC): the employer makes a contribution to all non-HCE accounts
4. Qualified matching contributions (QMC): the employer contributes to the non-HCEs who made a contribution
28
Requirements of the Safe Harbor Match
If the employer elects to use a match rather than the non-elective contribution, the standard safe harbor match formula requires the employer to match 100% of the first 3% of employee elective deferrals and 50% of employee elective deferrals between 3% and 5%.
29
Examples of Distributions that are Allowed for CODA Type Plans
1. The retirement, death*, or separation of service of the participant and attainment of age 55*
2. The termination of the plan without the establishment of another plan
3. Certain acquisitions of the company or company assets
4. The attainment of age 59 1/2 by the participant*
5. Certain hardships
Distributions on account of any of these items are taxable as ordinary income to the extent the participant does not have an adjusted basis in the 401(k) plan and may also be subject to a 10% penalty except for * items.
30
Characteristics of Stock Bonus Plans (Plan Establishment, Date and Type of Contributions, Deductible Contribution Limit, Valuation, Eligibility, Allocation Method, Vesting, Portfolio Diversification, Voting Rights, Types of Distributions, In-Service Withdrawals, Loans, and Taxation of Distributions)
* Plan establishment: 12/31
* Date of contribution limit: due date of return + extensions
* Type of contributions: generally stock
* Deductible contribution limit: 25% of covered compensation
* Valuation: generally needed annually
* Eligibility: same as other qualified plans (age 21 + 1 year of service or 2 years with 100% vesting)
* Allocation Method: % of compensation or formula based on age, service of classification
* Vesting: same as other DC plans (3 year cliff or 2 to 6 year graduated)
* Portfolio Diversification: no (may be required as a result of the PPA 2006?)
* Voting Rights: generally yes
* Types of Distributions: generally in stock
* In-Service Withdrawals: May be allowed after two years
* Loans: may be allowed (but not usually)
* Taxation of distributions: lump-sum distributions will qualify for NUA treatment and all others will be treated as ordinary income
* Can Integrate with Social Security
31
Characteristics of Profit Sharing Plans (Plan Establishment, Date and Type of Contributions, Deductible Contribution Limit, Valuation, Eligibility, Allocation Method, Vesting, Portfolio Diversification, Voting Rights, Types of Distributions, In-Service Withdrawals, Loans, and Taxation of Distributions)
* Plan establishment: 12/31
* Date of contribution limit: due date of return + extensions
* Type of contributions: generally cash
* Deductible contribution limit: 25% of covered compensation
* Valuation: generally unnecessary
* Eligibility: same as other qualified plans (age 21 + 1 year of service or 2 years with 100% vesting)
* Allocation Method: % of compensation or formula based on age, service of classification
* Vesting: same as other DC plans (3 year cliff or 2 to 6 year graduated)
* Portfolio Diversification: generally yes
* Voting Rights: generally no
* Types of Distributions: generally in cash
* In-Service Withdrawals: May be allowed after two years
* Loans: may be allowed (but not usually)
* Taxation of distributions: generally full distribution is ordinary income
32
What are the requirements to qualify for nonrecognition of gain treatment when an owner sells all/part of a business to an ESOP?
1. The ESOP must own at least 30% of the corporation's stock immediately after the sale.
2. The seller or sellers must reinvest the proceeds from the sale into qualified replacement securities* within 12 months after the sale and hold such securities three years.
3. The corporation that establishes the ESOP must have no class of stock outstanding that is tradable on an established securities market.
4. The ESOP may not sell the stock acquired through the rollover transaction for three years.
*Qualified replacement securities are securities in a domestic corporation, including stocks, bonds, debentures, or warrants, which receive no more than 25% of their income from passive investments. They can be in the form of stock in an S Corporation.
33
Similarities and Differences between Stock Bonus Plans and ESOPs (Plan Establishment, Date and Type of Contributions, Deductible Contribution Limit, Valuation, Eligibility, Allocation Method, Vesting, Portfolio Diversification, Voting Rights, Types of Distributions, In-Service Withdrawals, Loans, and Taxation of Distributions)
* Same: plan establishment, date of contribution, type of contributions, valuation, eligibility, allocation method, vesting, portfolio diversification, voting rights, distributions, in-service withdrawals, loans, and taxation of distributions
* Deductible Contribution Limit for ESOPs is 25% of covered compensation (Stock Bonus Plan amount) plus interest paid on loan
* ESOPs have no Integration with Social Security
34
Characteristics of Net Unrealized Appreciation (NUA)
* Taxpayers who receive a lump-sum distribution of employer securities (such as stock) may benefit using a special tax treatment on the distribution. This tax treatment allows the more favourable capital gain tax treatment instead of ordinary income tax treatment on the NUA portion of the distribution as well as a deferral of recognition of the gain on the NUA portion until the distributed employer securities are sold.
* NUA is defined as the excess of the FMV of the employer securities at the date of the lump-sum distribution over the cost of the employer securities at the date the securities were contributed to the qualified plan.
* FMV at date of distribution - FMV at employer contribution = NUA
35
What are the exceptions to the 10% early withdrawal penalty for qualified plans?
1. Death
2. Attainment of age 59 1/2
3. Disability
4. Substantially equal periodic payments under Section 72(t)
5. Medical expenses that exceed 10% of AGI
6. Qualified Domestic Relations Order (QDRO)
7. Qualified public safety employee who separates from service after age 50
8. Attainment of age 55 and separation from service
36
Spouse Beneficiary's distribution options before/after the deceased owner began RMDs
Before:
1. Roll plan assets to an IRA in surviving spouse's name and wait until surviving spouse is 70 1/2 to begin RMDs
2. Distribute participant's account within 5 years.
3. Distribution over participant's remaining life expectancy as recalculated using single life expectancy table beginning when the participant would have turned 70 1/2
After:
1. from above still available
2. no 5 year option
3. Spouse can receive distributions over the *surviving spouse's* remaining single life expectancy as recalculated using the single life table. (instead of 3 above over the participant's remaining life expectancy)
37
No beneficiary distribution options before/after the deceased owner began RMDs
* Before: Distribute participant's account within 5 years.
* After: Distributions must continue over the remaining distribution period of the deceased owner (uniform life table). The decedent's remaining distribution period is reduced by one each year.
38
Non-Spouse Beneficiary's distribution options before/after the deceased owner began RMDs
Before:
1. Distribute participant's account within 5 years.
2. Distribute over remaining single life expectancy (not recalculated) of designated beneficiary (reduced by one year each year)
3. Roll plan assets to an IRA in beneficiary's name and then distribute within 5 years or over the remaining single life expectancy of the beneficiary as in 2.
After:
1. No 5 year option available
2. as above except that the distribution period is the longer of the remaining single life expectancy (not recalculated) of the designated beneficiary (reduced by one year each year) or the remaining life expectancy of the participant.
3. as above except with the after-2 distribution period
39
Keogh Calculation
1. Self-employed individual's contribution rate = [Contribution Rate to Other Participants / (1 + Contribution Rate to Other Participants) ]
2. Calculate Self-Employment Tax:
* Net Earnings Subject to Self-Employment Tax = Net Self-Employment Income x 0.9235
* Self-Employment Tax x= 12.4% up to $132,900 + 2.9% on all net earnings
3. Calculate the Self-employed individual's contribution:
* Adjusted Net Self-Employment Income (Earned Income) = Net Self-Employment Income - 50% of Self-Employment Tax
* Self-Employed Individual's Qualified Plan Contribution x= Self-Employed Contribution Rate
All in one formula (if under $132,900):
NetEarnings x 0.9235 x 0.124 x 0.5 x [CRtoOP / (1 + CRtoOP)]
40
Characteristics of a disqualified person
1. A fiduciary of the plan
2. A person providing services to the plan.
3. An employer, any of whose employees are covered by the plan
4. An employee organization, any of whose members are covered by the plan.
5. A member of the family of any individual described in (1), (2), (3), or (6). (A member of a family is the spouse, ancestor, lineal descendant, or any spouse of a lineal descendant.)
6. Any direct or indirect owner of 50% or more of any of the following:
(a) The combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation that is an employer or employee organization described in (3) or (4).
(b) The capital interest or profits interest of a partnership that is an employer or employee organization described in (3) or (4).
(c) The beneficial interest of a trust or unincorporated enterprise that is an employer or an employee organization described in (3) or (4).
41
Examples of prohibited transactions
1. Transfer of plan income or assets to, use of them by, or for the benefit of a disqualified person.
2. Self dealing by a fiduciary.
3. Receipt of consideration by a fiduciary for his own account when working with a party dealing with the plan (e.g. attorney, accountant).
4. Selling, exchanging, leasing, buying as well as lending or borrowing between a disqualified person and the plan.
42
The Catch-Up (Over Age 50) amounts for:
* Traditional IRAs
* Roth IRAs
* SEPs
* SARSEPs
* Traditional IRAs: $1,000
* Roth IRAs: $1,000
* SEPs: N/A
* SARSEPs: $6,000
43
Examples of Earned Income
* W-2 income
* Schedule C net income
* K-1 income from an LLC (SE income)
* K-1 income from a partnership where the partner is a material participant
* Alimony payments from divorces finalized and not modified prior to 12/31/2018
44
Examples of Unearned Income
* Earnings and profits from property, such as rental income, interest income, and dividend income
* Capital gains
* Pension and annuity income
* Deferred compensation received (compensation payments postponed from a past year)
* Income from a partnership for which you do not provide services that are a material income producing factor
* Any amounts excluded from income, such as foreign income and housing costs
* Unemployment benefits
* Investment returns as a limited partner in a partnership
* Income flowing from an S-corporation via Schedule K-1
* Social Security benefits
* Worker's compensation
* Alimony received from divorces finalized or modified after 12/31/2018
45
Summarize the deductability phaseouts of an IRA contribution for:
* Non active participant
* Active participant
* One spouse is an active participant and one is not
* Non active participant: No AGI limit
* Active participant: in 2019, AGI phaseout is (a) Single 64-74k, (b) 103-123k MFJ, or (c) $0-10k MFS
* One active participant spouse leaves an AGI phaseout of $193-203k for the nonactive participant spouse
46
Similarities and differences between Traditional and Roth IRAs: Earned Income, Contributions, Deductions, Investment Choices, Minimum Distribution Rules, Prohibited Transactions
* Same: Earned Income, Investment Choices, Prohibited Transactions
* Contributions: Roth IRA anytime, Traditional IRA only before 70 1/2
* Deductions: yes Traditional IRA, N/A Roth IRA
* RMDs: both after death, plus Traditional IRAs during life
47
Requirements for a Qualified Distribution from a Roth IRA
1. The distribution is made after a five-taxable-year period
and 2. The distribution satisfies one of the following requirements:
(a) Made on or after the date on which the owner attains age 59 1/2
(b) Made to a beneficiary or estate of the owner on or after the date of the owner's death
(c) Is attributable to the owner being disabled
(d) For first time home purchase (lifetime cap of $10,000 for first time homebuyers includes taxpayer, spouse, child or grandchild who has not owned a house for at least 2 years
48
What is the tax treatment and penalties of the following distributions from a Roth IRA?
* Contributions: neither
* Conversions: no tax (b/c already taxed) but subject to the 10% penalty within 5 years of the conversion
* Earnings: subject to tax if distribution is not qualified and 10% penalty
* 10% penalty is waived if the distribution falls within the exceptions for it
49
Prohibited Investments for an IRA
* Life insurance and collectibles are prohibited to be held in an IRA. If they are purchased within an IRA, the purchase is deemed as a distribution and the value of the purchase is subject to tax and/or penalty.
* Collectibles include: any work of art, antiques, metal or gems, stamps or coins, wines, etc.
* Certain US minted coins and bullion, such as American Gold, Silver, and Platinum Eagle coins, are permitted to be held in an IRA account. Gold, silver, platinum, or palladium bullion investments are also permitted.
* Coins of most foreign countries, however, are considered collectibles, such as South African Krugerrands.
50
Examples of Prohibited Transactions for an IRA
If an individual or beneficiary of an IRA engages in any of the following transactions, then the account will cease to be an IRA as of the first day of the current taxable year:
1. Selling, exchanging, or leasing any property to an IRA
2. Lending money to an IRA
3. Receiving unreasonable compensation for managin an IRA
4. Pledging an IRA as security for a loan
5. Borrowing money from an IRA
6. Buying property for personal use (present or future) with IRA funds
51
List the entities that can establish SIMPLE plans.
1. C Corporations
2. S Corporations
3. LLCs
4. Partnerships
5. Proprietorships
6. Government Entities
52
What are the eligibility characteristics for SIMPLEs?
* Employees who earned $5,000 or more the employer in any two preceding calendar years
* Employees who are expected to earn $5,000 during the current calendar year
53
Characteristics of SIMPLE plans: Application, Style, Established by What Date, Ability to have Other Plans, Filings and Costs, Annual Testing, Vesting, Employee Elective Deferral Contribution Limit, Catch-Up Contribution for Age 50, Employer Contribution, Loans Permitted
* Application: Small employers (limit of 100 employees with compensation > $5,000)
* Style: Self-reliant employee elective deferral contributions and employer match
* Established by: generally October 1 of the year the plan starts
* Must not have another retirement plan
* SIMPLE IRA: No annual filing requiring, minor costs
* Simple 401(k): Annual filing required and administrative costs
* Annual testing: none required if meet contribution requirements
* All contributions are fully vested
* $19,000 employee elective deferral contribution limit for 2019
* $3,000 catch-up contribution for age 50
* No loans permitted
* SIMPLE IRA: The employer must generally make: (1) a dollar-for-dollar match up to 3% of pay or (2) a 2% nonelective contribution for each eligible employee
* SIMPLE 401(k): same as SIMPLE IRA except employer match cannot be reduced to as low as 1% for no more than 2 out of 5 years, including the year of election
54
Characteristics of 401(k) Plans: Application, Style, Established by What Date, Ability to have Other Plans, Filings and Costs, Annual Testing, Vesting, Employee Elective Deferral Contribution Limit, Catch-Up Contribution for Age 50, Employer Contribution, Loans Permitted
* Application: Most employers
* Style: Self-reliant employee elective deferral contributions and employer match
* Established by: 12/31 of the year before
* There may be other plans
* Annual filing required and administrative costs
* Annual testing required
* Vesting schedules allowed
* $19,000 employee elective deferral contribution limit for 2019
* $6,000 catch-up contribution for age 50
* Employer may contribute
* Loans permitted
55
Characteristics of 403(b) plans: Application, Style, Subject to ERISA, Established by What Date, Characteristics, Elective Deferral Contribution Limit, Available Contribution, Additional After-Tax Contributions Permitted, Investment Risk, Investment Alternatives, Penalties, Loans Permitted, Rollovers, ERISA Protected, In-Service Withdrawals, Vesting
* Application: not-for-profit institution (e.g. large universities)
* Style: self-reliance plans; employee only contributions
* Subject to ERISA: maybe (if organized as a qualified plan)
* Established By What Date: End of year
* Characteristics: Self-reliant savings plan
* $19,000 employee elective deferral contribution limit for 2019
* $6,000 catch-up contribution for age 50
* Available Contribution: $56,000 for 2019 or 100% of compensation including elective deferrals
* Additional After-Tax Contributions Permitted: Permissible by plan document
* Investment Risk: Employee has investment choices and risks
* Investment Alternatives: Limited to Insurance Annuities and Mutual Funds
* Penalties: 10% early withdrawal (if applicable)
* Loans Permitted: yes (regular qualified plan rules on loans if plan permits)
* Rollovers: Yes, to IRA, qualified plan, or other 403(b) (to Roth IRAs permitted after December 31, 2007
* ERISA Protected: Yes, if ERISA plan. ERISA not applicable if governmental or church TSA.
* In-Service Withdrawals: Generally no, except hardships, which are plan specific
* Vesting: 100% at all times for contributions and earnings
56
Public 457(b) Plans: Eligible/Ineligible, Employer/Sponsors, Assets in Plan, Elective Deferral Contribution Limits, Age 50 and Over Catch-Up Provisions, 3-Year Catch-Up Provisions, Rollovers Permitted?
* Eligible
* Employer/Sponsors: Governmental Entities
* Assets in Plan: Protected by Trust
* $19,000 in 2019 elective deferral contribution limit
* Age 50 and over catch-up provisions
* 3-year catch-up provision: $19,000 in 2019
* Rollovers permitted to 401(k), 403(b), 457(b), or IRA plans (to Roth IRAs permitted after 12/31/2007)
57
Private 457(b) Plans: Eligible/Ineligible, Employer/Sponsors, Assets in Plan, Elective Deferral Contribution Limits, Age 50 and Over Catch-Up Provisions, 3-Year Catch-Up Provisions, Rollovers Permitted?
* Eligible
* Employer/Sponsors: Tax-Exempt Organizations under 501(c)
* Assets in Plan: Not protected by Trust; Available to Employer's Creditors
* $19,000 in 2019 elective deferral contribution limit
* No age 50 and over catch-up provisions
* 3-year catch-up provision: $19,000 in 2019
* Rollovers only permitted into another 457(b)
58
457(f) Plans: Eligible/Ineligible, Employer/Sponsors, Assets in Plan, Elective Deferral Contribution Limits, Age 50 and Over Catch-Up Provisions, 3-Year Catch-Up Provisions, Rollovers Permitted?
* Ineligible
* Employer/Sponsors: Governmental Entities (rare) & Tax-Exempt Entities under 501(c)
* Assets in Plan: Not Protected by Trust; Available to Employer's Creditors
* No limit on elective deferral contributions
* No age 50 and over catch-up contributions
* No 3-year catch-up provisions
* No rollovers permitted
59
Characteristics of 457 Plans: Application, Style, Qualified Plan, Established by What Date, Characteristics, Elective Deferral Contribution Limit, Available Employer Contribution, Additional After-Tax Contributions Permitted, Investment Risk, Investment Alternatives, Penalties, Loans Permitted, Rollovers, ERISA protected, in-service withdrawals
* Type of Plan: Nonqualified Deferred Compensation Plan
* Application: Employees of state and local government, tax-exempt governmental agencies, and 501 entities
* Style: Self-reliant, employee elective tax-deferred savings
* Not a qualified plan
* Established by end of year
* Characteristics: deferred compensation plan
* Elective deferral contribution limit: lesser of $19,000 for 2019 or 100% of compensation + $6,000 catch-up for 2019 for age 50 or older (catch-up for public only)
* Employer contributions permitted, but very unusual
* No additional after-tax contributions permitted
* Investment Risk: Employee selects investments and bears risk
* Investment Alternatives: Broad
* Penalties: 10% for early withdrawal
* No loans permitted
* Rollovers: (a) Public 457(b) plans may be rolloed over to 457, 403(b), 401(k), or IRA plans permitting. (b) Private 457(b) plans can only be rolled to other 457(b) plans. (c) 457(f) plans cannot be rolled over.
* ERISA Protected: No
* In-Service Withdrawals: Yes
60
Characteristics of Unfunded Promise to Pay for: Funded with assets, Funded (for purposes of ERISA), Risk of forfeiture without employer financial instability, Risk of forfeiture if employer is insolvent, When is there taxable income to the executive?, When is the payment deductible to the employer? Accomplishes the objective of deferral?
* Funded with assets: No
* Funded (for purposes of ERISA): No
* Risk of forfeiture without employer financial instability: Yes
* Risk of forfeiture if employer is insolvent: Yes; Claim is below general creditors
* When is there taxable income to the executive? When actual or "constructively" received
* When is the payment deductible to employer? Deferred until payment is made to executive
* Accomplishes the objective of deferral: Yes
61
Characteristics of Rabbi Trust: Funded with assets, Funded (for purposes of ERISA), Risk of forfeiture without employer financial instability, Risk of forfeiture if employer is insolvent, When is there taxable income to the executive?, When is the payment deductible to the employer? Accomplishes the objective of deferral?
* Funded with assets: Yes
* Funded (for purposes of ERISA): No
* Risk of forfeiture without employer financial instability: No
* Risk of forfeiture if employer is insolvent: Yes; Claim is below general creditors
* When is there taxable income to the executive? When actual or "constructively" received
* When is the payment deductible to employer? Deferred until payment is made to executive
* Accomplishes the objective of deferral: Yes
62
Characteristics of Secular Trust: Funded with assets, Funded (for purposes of ERISA), Risk of forfeiture without employer financial instability, Risk of forfeiture if employer is insolvent, When is there taxable income to the executive?, When is the payment deductible to the employer? Accomplishes the objective of deferral?
* Funded with assets: Yes
* Funded (for purposes of ERISA): Yes
* Risk of forfeiture without employer financial instability: No
* Risk of forfeiture if employer is insolvent: No
* When is there taxable income to the executive? Immediately upon funding by employer or vesting
* When is the payment deductible to employer? Immediately as funded and "constructively received"
* Accomplishes the objective of deferral: If vesting is required
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Incentive Stock Options (ISOs) holding period and requirements
* A qualified sale requires waiting until 2 years from the date stock was granted and 1 year from the date stock was exercised.
* Sales prior to either holding period being met are disqualified dispositions and terminate most of the benefits - it effectively triggers similar treatment as a NQSO.
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Requirements for Incentive Stock Options
1. ISOs can only be granted to an employee of the corporation issuing the ISOs.
2. At the date of the ISO grant, the exercise price must be greater than or equal to the fair market value of the stock.
3. An ISO cannot be transferred except at death.
4. The aggregate fair market value of ISO grants must be less than or equal to $100,000 per year per executive. Any excess grant over the $100,000 is treated as a NQSO. (*tested occasionally)
5. To qualify as an ISO, the executive must not dispose of the stock within two years of the grant of the ISO or within one year of the exercise of the ISO. (*tested often)
6. The executive must be an employee of the corporation continuously from the date of the grant until at least three months prior to the exercise.
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Taxation of ISOs: At Grant Date, At Exercise, Adjustable Basis, and When Stock is Sold
* At Grant Date: No taxable income to holder if issued at current or greater share price.
* At Exercise: Executive gives options and exercise price to company. Company issues stock to executive to replace option. No regular taxable income recognized, but will have an AMT adjustment for the appreciation over the exercise price.
* Adjustable Basis: Exercise Price
* When Stock is Sold: Capital Gain or loss treatment
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Taxation of NQSOs: At Grant Date, At Exercise, Adjustable Basis, and When Stock is Sold
* At Grant Date: No taxable income to holder if issued at current or greater share price.
* At Exercise: Executive gives options and exercise price to company. Company issues stock to executive to replace option. Executive recognizes W-2 income to extent of difference between current stock price and exercise price.
* Adjustable Basis: Fair market value of stock at exercise (exercise price in cash plus the recognition of W-2 income)
* When Stock is Sold: Capital Gain or loss treatment
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Qualified Transportation and Parking
* The regulations provide for an exclusion of the value of qualified transportation benefits from an employee's gross income, subject to a limit of (a) $265 per month for commuter highway transportation and transit passes combined and (b) $265 per month for 2019 for qualified parking.
* For any given month, if the value of a benefit is more than the limit, then any excess amount above the limit, less any amount the employee paid, is included in the employee's gross income. The excess may not qualify as a de minimis benefit.
* For years after 12/31/2017, the cost of the transportation benefit is not deductible to the employer.
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Adoption Assistance Program
* An employee may exclude from their gross income amounts paid for, or expenses incurred, by the employer for for qualified adoption expenses concerning the adoption of a child by an employee if these amounts are furnished according to a written adoption assistance program.
* An employer may establish a written adoption assistance program that will pay expenses related to an adoption assistance program not exceeding $14,080 for 2019 to an employee.
* The amount paid is excluded from the employee's income, but it is subject to an income phaseout starting at $211,160 of adjusted gross income (AGI) for 2019.
* Must adopt a child under the age of 18 to receive the credit.
* Nondiscrimination requirements apply.
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Taxation of Group Disability
* Premiums paid by the employer are deductible by them and not included in the employee's gross income.
* When the employer pays the premium and the value is excluded from the employee's gross income, any disability income benefit received by the employee is taxable to the employee.
* If the employee pays the entire premium with after-tax income or the employer pays the premium and the employee includes the premium in income, any benefits received will be considered tax-exempt.
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Allowed benefits for a Cafeteria Plan
1. Accident and health benefits (but not medical savings accounts or long-term care insurance).
2. Adoption assistance
3. Dependent care assistance
4. Group term life insurance coverage (including costs that cannot be excluded from wages)
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Benefits not allowed for a Cafeteria Plan
1. Archer Medical Savings Accounts (see accident and health benefits)
2. Athletic facilities
3. De minimis (minimal) benefits
4. Educational assistance
5. Employee discounts
6. Lodging on employer's business premises
7. Meals
8. Moving expense reimbursements
9. No-additional-cost services
10. Transportation benefits
11. Tuition reduction
12. Working condition benefits
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The Endorsement of Split Dollar Insurance
* The employer owns the life insurance policy on the employee and the employer pays the policy premium.
* The employer withholds the right in the plan to be repaid for all of its premium either at the employee's death or the surrender of the life insurance policy.
* Usually any death benefit or cash surrender value in excess of the employer's refund is paid to the policy beneficiaries.
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The Collateral Assignment Method of Split Dollar Insurance
* The employee owns the life insurance policy and the employer makes a loan to the employee to pay the policy premiums.
* At the employee's death or at the surrender of the policy, the employer loan will be repaid and any excess will be paid to the policy beneficiaries.
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Characteristics of MSAs: Established, Creators, Health Insurance Deductible, Maximum Contribution, Catch-Up Contribution Available, Penalty for Nonqualified Expenditures
* Established before 2006
* Creators: (a) Employers with < 50 employees or (b) Self-employed individuals
* Health Insurance Deductible: $2,350-$3,500 Single or $4,650-$7,000 Family
* Maximum Out-of-Pocket: $4,650 Single or $8,550 Family
* Maximum Contribution: 65% of deductible for Single or 75% for Family
* Catch-Up Contribution Available: No
* Penalty for Nonqualified Expenditures: Ordinary income tax and 20% penalty if owner is < 65
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Characteristics of HSAs: Established, Creators, Health Insurance Deductible, Maximum Contribution, Catch-Up Contribution Available, Penalty for Nonqualified Expenditures
* Established: 2004 and Later
* Creators: any individual
* Health Insurance Deductible: at least $1,350 for Single or $2,700 for Family
* Maximum Out-of-Pocket: $6,750 for Single or $13,500 for Family
* Maximum Contribution: $3,500 for Single or $7,000 for Family (in 2019)
* Catch-Up Contribution: yes, $1,000 for 2010 and beyond
* Penalty for Nonqualified Expenditures: same as for MSA: ordinary income tax and 20% penalty if owner is < 65
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Exceptions to the 10% Early Withdrawal Penalty for: IRAs and Qualified Plans
* Both: (a) Death, (b) Attainment of age 59 1/2, (c) Disability, (d) Substantially equal periodic payments through Section 72(t), and (e) Medical expenses that exceed 10% of AGI
* Only Qualified Plans: (a) Qualified Domestic Relations Order (QDRO), (b) Attainment of age 55 and separation from service, (c) Public safety employee who separates from service after age 50
* Only IRAs: (a) Higher education expenses, (b) First time home purchase (up to $10,000), and (c) Payment of health insurance premiums by unemployed
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What are the Minimum Distribution Rules?
* The minimum distribution rules require individuals to begin taking minimum distributions when the participant attains the age of 70 1/2.
* If the funds are not distributed by the required date, a 50% excise tax will be levied on the participant for failure to take the RMD.
* Minimum distributions apply to assets in a qualified plan, IRA, 403(b), SEP, SIMPLE, or 457 plan. While minimum distribution rules do not apply to Roth IRAs, they do apply to Roth accounts in a 401(k) or 403(b) plan.
* The first distribution must be taken by April 1 of the year following the year the participant attains the age of 70 1/2.
* For each tax year thereafter, the RMD must be taken before 12/31 of the tax year.
* If the participant delays taking the first RMD until April 1 of the year following the attainment of 70 1/2, the second RMD must still be taken by December 31 of that same year.
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What is an exception to the required Minimum Distribution Rules?
If a participant is still employed by the plan sponsor of a qualified plan upon attainment of age 70 1/2, the participant dose not have to begin taking RMDs until April 1 of the tax year after they terminate employment with the plan sponsor. (This exception is not available for any participant that owns more than 5% of the ownership of the plan sponsor in the year they reach the age of 70 1/2.)
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Defined Contribution Plan Vesting Schedules
* 2-year eligibility election -> 2 year cliff vesting
* 2 to 6 year graduated: 0, 20%, 40%, 60%, 80%, 100%
* 3 year cliff: 1:0, 2:0, 3+:100%
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Defined Benefit Plan Vesting Schedules
* Non-top heavy: 3 to 7 year graduated (0, 0, 20%, 40%, 60%, 80%, 100%) or 5-year cliff
* 2-year eligibility election: 2 year cliff vesting
* Top heavy plan: 2 to 6 year graduated or 3 year cliff
