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Flashcards in Retirement Deck (30)
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Social Security Coverage

Fully Insured: eligible for SS retirement benefit. Has 40 credits. Can start receiving benefits at age 62 at the earliest

Currently Insured: eligible for survivor benefits. Has around 15 credits


Social Security (taxation)

If a persons income plus half of their SS Benefit is more than the following base amounts, up to 50% of the benefit will be included in taxable income. Base amounts are $25k for a single taxpayer and $32k for MFJ.

Same as above but up to 85% of benefit will be included. Base of $34k for single and $44k for MFJ.

- muni bond interest counts as income


Section 401k Plan (CODA)

Qualified profit sharing or stock bonus plan that allows participants to defer salary into plan. Limit on contribution is 19.5k (6.5k catch up).

Appropriate: Employer wants to provide qualified plan but can afford only minimal extra expense, when employees want to increase savings on tax-deductible basis.


Keogh Contribution Rules

*only for sole proprietor and partnership*
*DB (no contrib max), Money Purchase, and Profit Share, SEP*

Self employment tax must be computed and a deduction of one-half of the self employment tax must be taken before determining the contribution

Special contribution rules. Max contribution is:
- If 15% Plan for employee - multiply profit by 12.12% for employer
- If 25% Plan- multiply profit by 18.59%


IRA Keys (Simple, SEP, SARSEP)

- no loans
- no life insurance
- immediate vesting
- may not be creditor protected (state specific)
- 59.5 not 55 for no 10% penalty
- must take RMD's at 72(even if not an owner)


Highly Compensated (HC) Employee

- A greater than 5% owner or

- An employee earning in excess of $130k during the preceding year


Key Employee

An individual is a key employee if at any time during the current year he/she has been one of the following:

- A greater than 5% owner, or
- An officer and compensation > $185k, or
- Greater than 1% ownership and compensation>$150k


Vesting - Fast/Slow

Fast: DB Top-Heavy Plans/ All DC Plans
- 3 year cliff or 2-6 year graded or 100% vested after 2 years

Slow: Non-Top-Heavy DB Plans only
- 5 year cliff or 3-7 year graded or 100% vested after 2 years


Multiple Plans 2020

If there is more than one plan, amounts are always aggregated. Aggregate when plans are with separate employers and separate when different employers


Rollovers NOT Permitted

- transfers to another 457 plan remain the only options for non-governmental tax exempt organizations

- hardship distributions cannot be rolled into any other qualified plans

- required minimum distributions


Required Beginning Date (RBD) for : IRA/SEP/SARSEP/SIMPLE

RBD is April 1st of the year following the year in which the covered individual attained age 72. Subsequent distributions must be made by December 31st of each year thereafter
- failure to pay will result in 50% penalty on amount short of RMD (also applies to Q Plans)


Required Beginning Date (RBD) for :
Qualified Plans/403b/ 457 Plans

RBD, with exception of 5% owners, is the later of April 1st of the year following the year in which the covered individual attained age 72 or retired. Subsequent distributions must be made by December 31st of each year thereafter
5% Owner RBD is same as IRA


Roth IRA

- no age restriction
- need earned income
- can be in employer plan
- investments grow tax free and qualified distributions
- spousal rules (like a traditional)
- same contribution limits as traditional
-phase outs will be given
- NO RMD's to owner (only beneficiary)


Inherited Roth IRA RMD's

- distributed within 5 years of owners death or 10 years with named beneficiary

- where sole beneficiary is owner's surviving spouse, the spouse may delay distributions until the Roth owner would have reached 72, or may treat the Roth as his own (rollover)


Non-Qualified Deferred Compensation Plans

- salary reduction plan: uses some portion of employees current compensation to fund the ultimate compensation benefit (pure deferred)

- salary continuation plan: uses employer contributions to fund ultimate benefit

- May discriminate, No ERISA

- Appropriate when employer is trying to provide additional deferred comp benefits to executive who is already maxing out plan

*S Corps cannot offer these*


Rabbi Trust

*Merger, Acquisition, Change of Ownership*

- An informally/unfunded plan where company promises pay and benefits regardless of employment factors
- assets in rabbi available for creditors
- participant has greater rights than unsecured creditors
- fear than ownership/management may change before deferred compensation is paid


Section 457 Deferred Compensation Plans

Non-Qualified deferred compensation plan. Contributions (deferrals) are lesser of $19,500 or 100% salary. Catch up of $6,500 for 50+. There are also special catch up contribution rules.

- No coordination with other Q Plans (can have both)


Integrated w/ SS vs Age Weighted Plans

Integrated w/SS: (discriminate based on wage)
1) owners age is 50 or under
2) owners income is under $200k
3) rank and file employees are making under $90k (+1)

Age Weighted Plan: (discriminate based on age)
1) owner is age 50 or older (+1)
2) owners income is over $200k (+1)
3) rank and file employees are younger than owner (+1)


Traditional IRA

- limit of $6k contribution ($7k if 50+)
- need earned income (alimony counts)
- if spouse does not work, they can do $6k to spousal
- no age limit on contribution deductibility


A QDRO addresses:
A QDRO becomes valid:

- Qualified Plans
- Child Support Payments
- Alimony Payments
- Marital Property Rights
- NOT IRA's or NQ plans

- In court once signed by judge and approved by plan administrator


Qualified Plan Deduction Rule (404c)

Employer can only deduct 25% max of all participants eligible compensation


Defined Contribution Plan Limits (415)

All annual additions (employer, employee, forfietures) are limited to lesser of 57k or 100% compensation.


Top-Heavy Plans

A DC plan where more than 60% of total $ amount is allocated towards Key Employees. This type of plan must provide minimum benefits for non-key employees:
- DB: benefit must be at least 2% of compensation times years of service (max 10 years)
- DC: employer contribution must be no less than 3% of non-key employee salary


Qualified Plan Loans

- loan cannot exceed lesser of 50% vested balance or 50k (special small plan rules allow for 100k)
- max 5 years repayment (unless used for home)
- repayments are at least quarterly


Qualified Plan Age and Service Rule

- 21 yo and 1 year of service to participate (21 and 1 rule)


Qualified Plan Coverage Requirements

Ratio Test: the plan must cover a percentage of NHCE's that is at least 70% of the HCE's covered. If this test is failed, the Average Benefit Test must be passed

Average Benefit Test: the average benefit for all NHCE's must be at least 70% of those for HCE's


ADP/ACP Testing

These tests compare the % of deferral and contributions of HCE's to those of NHCE's.

Basic rule is that HCE's can only contribute 2% more than the average contribution by NHCE's


Life Insurance in Retirement Plans

The life insurance benefits must be incidental to the primary purpose of the plan (to provide retirement benefits). Tests to prove incidental:

1) the aggregate premiums paid for a participants insured death benefit are at all times less than the following % of the plan for the participant:
- Whole Life 50%
- Term or Universal Life 25%

2) the participants insured death benefit must be no more than 100x the expected monthly benefit.

- 412 Plans are retirement plans using LI


In-Service Distributions

Distributions from Q Plans while the participant is working may be allowed for three situations:

1) Attainment of a specific age (usually NRA or 59.5)
2) Hardship (allowed at any age. Financial Need Test and Resources Test)
3) Pension Protection Act allows at age 62 (retirement income)


Substantially Equal Payments (Rule 72t)

This rule provides a number of exceptions for early withdrawal of retirement funds (before 59.5). One is the substantially equal payments exception. The penalty will not apply if:
- payment is at lest annually
- paid without changing the amount for the longer of 5 years or when payee reaches 59.5
- based on life expectancy of recipient
- based on reasonable rate of interest
- based on reasonable mortality assumption.

Once started, no increase, decrease, change, or stop of payments.

Recapture rule specifies 10% of the total annual payments received before age 59.5, plus interest

The "one time election" allows the person to switch from annuity/amortization method to RMD method