Retirement Flash Cards
(49 cards)
ERISA
Employee Retirement Income Security Act
• Sets up rules for qual and non-qual plans
• PBGC created by ERISA
• PBGC does not insure 100% of benefits
Section 415 Annual Additions Limit
- (2014) Lesser of 100% of comp or $52k
* Includes employer contrib, employee salary reductions, plan forfeitures
Qualified Plans
• Code Section 401(a)
• No discrimination
• ERISA
• Tax deduction immediate
• Earnings accrue tax deferred
• Distribs taxable as ordinary income(except 10 yr avg* & NUA in stock/ESOP)
• 10% penalty for distribution before 59 ½, except sep from service after 55
* Lump sum is subject to tax rate 10 years prior – no long use)
Non-Qualified Plans
May discriminate Non-ERISA Tax deductable by employer only after employee is taxed Plan earnings taxable to employer Distributions taxed at ordinary rate
Defined Benefit Pension Plan (DB)
Qualified Plan / ERISA • Subject to PBGC • Vesting Schedule • Admin Costs • Exempt from creditors • Integrate with SS • Favors older employees • Certain retirement benefit • Must have stable cash flow • Past service credits allowed • Forfeitures MUST be applied to reduce employer contrib • Min participation - 50 employees or 40% of all employees • Contribs can be > $52k – depends on actuary assessment • QPSA/QJSA required
Section 415 limit
• Max life annuity benefit is lesser of $210k or 100% of average comp over highest 3 years
• Can retire at 62 with no bene decrease
Unit Benefit Formula
• Most popular formula for DB plans
• Percentage-of-earnings-per-year-of-service
Final Average Method
• Average earnings over last 3-5 years
• Only first 260k considered
Past Service
• When setting up new plan for current long-serving employees
• Takes into consieration past service
Cash balance pension plan
- Qualified DB plan
- Employer guarantees min rate of return
- Used to save costs for employer
- Simple defined contribution
- Not good for older employees
- QPSA/QJSA required
Defined Contribution (DC)
Qualified Plans/ERISA vesting sked, admin costs, exempt from creditors, SSI May NOT allow for past service credits Money Purchase Target Benefit Profit Sharing Stock Bonus Plan
Non-qualified DC Retirement Plans
SEP No vesting schedule
SIMPLE Limited Admin Costs
SARSEP
Thrift / Savings
403(b)
Defined Contribution - Factors that effect benes
- Years to retirement - the more, the better
- Employees bear investment risk
- Contribs based on salary for each working year, not salary at retirement
- Employer can contrib 3%+
- Forfeitures can be reallocated to participants or used to reduce employer contributions
Money Purchase Pension
- Fixed Contributions - flat percentage of comp
- Lesser of 100% of salary or 52k
- Up to 25% employer tax deduction of eligible payroll (Section 404c)
- Stable cash flows
- Only takes the first 260k of salary into consideration
- Use: Retain key employees, simple to admin and explain, used for young and well-paid employees
- Employee bears investment risk
- Employer must make min funding of 3%
- Forfeitures go back to employer or employees
- QPSA/QJSA required
Target Benefit Pension
- Features of both DC and DB
- Fixed Contributions actuarialy determined
- Up to 25% employer tax deduction
- Stable cash flows
- Only takes the first 260k of salary into consideration
- Lesser of 100% of salary or 52k
- Favors older employees
- Employee assumes risk
- QPSA/QJSA required
Profit Sharing Plan
- Contributions must be substantial and recurring
- Up to 25% employer tax deduction
- Lesser of 100% of salary or 52k
- FLEXIBLE
- SIMPLE 401(k) is exempt from creditors
- 401(k) provisions (Hardship provision)
- Employee pays FICA/FUTA
- Forfeitures allocated to plan participants
- For young, well-paid employees
- Employee bears risk
Stock Bonus Plan
• Up to 25% employer tax deduction
• FLEXIBLE
• 100% MAY be in company stock
• MAY invest plan in company stock
• Benefits distributable in company stock
• Employers may deduct dividends. Dividends:
Paid in cash directly to participants
Must be distributed 90 days after plan EOY
Used to paydown loans used to acquire shares
Paid to plan and reinvested in comp stock
ESOP
• MUST invest plan in company stock only
• No SS integration or cross-testing
• Benefits distributable in company stock
• However, can ‘put’ to company within 60 days, diversify 25% at ___ age or 50% at _____.
• Employers may deduct dividends. Dividends:
Paid in cash directly to participants
Must be distributed 90 days after plan EOY
Used to paydown loans used to acquire shares
Paid to plan and reinvested in comp stock
• LESOP - Leverage ESOP. Used by employer to borrow
401(k)
- Also called Cash or Deferred Arrangement (CODA)
- Qualified profit-sharing or stock bonus plan
- FUTA/FICA due on deferral amounts
- Hardship withdrawal allowed without penalty
- 10% penalty for distribution before 59 ½, except sep from service after 55
Solo 401(k)
• Also known as Uni-401(k)
• Allows catch-up contribution for 50+
(unlike Keogh/SEP)
Safe Harbor 401(k)
- 100% match on first 3%, 50% 3 – 5% OR 3% to all employees
- EXEMPT FROM ADP/ACP TESTS
- Requires employer match (immediate vest)
Roth 401(k)
• Must be rolled into Roth IRA or withdrawals subject to tax/penalty
New Comparability Plan
- Can discriminate on AGES and WAGES
* Tested under cross-testing rules
Cross Testing Plan
- Sometimes referred to as age-weighted
- Designed to provide max to HCEs and min to NHCEs
- NHCEs get lesser of 1/3 of HCE with highest alloc. or 5% of NHCE’s comp
- Works if NHCEs are on avg 15 years younger than HCE
- Self-employed with qual plans CAN use cross-testing
- Cannot be used by ESOPs
Traditional IRA
• Max contrib $5500 or $6500 if 50+, same for spouse for both IRA and Roth IRA
• Combined total earned income must be equal or greater to IRA contrib
• May pay as late as 4/15 of next year, but filing extension does not extended contrib date
• No contribs past 70 ½
• 10% penalty for distribution before 59 ½
• NO LOANS
• If too much is paid, 6% non-deductable excise tax every year $ stay in IRA
• Deductable if not covered by plan at work (Single) or neither spouse covered (MFJ)
• If spouse works, deduction phases out at:
181K – 191k AGI MFJ
• If covered by plan at work:
60K – 70k AGI (Single)
96K – 116k AGI (MFJ)
0 – 10k AGI (MFS)
• Non-deductable amounts come out as return of capital
Roth IRA
• Max contrib $5500 or $6500 if 50+, same for spouse for both IRA and Roth IRA
• Combined total earned income must be equal or greater to IRA contrib
• NOT DEDUCTABLE
• No RMDs
• Bankruptcy protection up to $1m
• May pay as late as 4/15 of next year, but filing extension does not extended contrib date
• Can contribute regardless of age as long as there is matching income
• Thresholds:
114K – 129k AGI (Single)
181K – 191k AGI (MFJ)
0 – 10k AGI (MFS)
• Distributions are tax-free if money has been in Roth 5 years and trigger event:
59 ½ or older
Death, Disability
First time home purchase up to $10k
• Otherwise, contribs come out first tax-free, then conversions, tax-free and possibly 10% early withdrawal, earnings taxed as ordinary income
Traditional IRA to Roth IRA rollover
- No AGI limitations
- Ordinary income taxes must be paid in year of conversion
- Taxes must be paid from outside IRA
- Can go back to traditional IRA with no penalty if done before tax return filed
- If then want to go back to Roth again, must wait 30 days or until end of next tax year
SIMPLE IRA
- For small employers < 100 employees
- Requires employer match (immediate vest)
- Salary reduction limit - $12,000 (FICA) + 2,500 catch-up for 50+
- ERISA
- COMPANY CANNOT HAVE OTHER PLAN
- EXEMPT FROM CREDITORS
- EXEMPT FROM ADP/ACP TESTS
- NO LOANS
- Employer must match up to 3% or 2% to ALL employees, can do 1% in 2 out of 5 years
- Eligible if ……
- 25% penalty if dist made in first two years, then 10% after
