Retirement Planning

Question 1

Types of Pension Plans

Answer 1

Defined Benefit Pension Plans
• Defined Benefit Plan
• Cash Balance Plan

Defined Contribution Pension Plans
• Money Purchase Plan
• Target Benefit Plan

Question 2

Types of Profit Sharing Plans

Answer 2

All Profit Sharing Plans are Defined Contribution Plans

• Profit Sharing Plan
• Stock Bonus Plan
• ESOPs
• 401k Plan
• Thrift Plan
• New Comparability Plan
• Age-Based Profit Sharing Plan

Question 3

Safe Harbor Test

Nondiscrimination Test

Answer 3

Required to pass:
=> 70% of NHC covered

Formula:
= Covered NHC / Total NHC

Question 4

Ratio % Test

Nondiscrimination Test

Answer 4

Required to pass:
=> 70% of NHC covered to HC covered

Formula:
= (Covered NHC / Total NHC) / (Covered HC / Total HC)

(If you passed Safe Harbor Test, you automatically pass the Ratio % Test)

Question 5

Average Benefits Test

Nondiscrimination Test

Answer 5

Required to pass:
=> 70%

Formula:
= (AB % of covered NHC / AB % of covered HC)

Question 6

50/40 Test

Answer 6

For Defined Benefit Plans only (in addition to other nondiscrimination tests)

Plan must cover lesser of:
• 50 employees or
• 40% of employees

Question 7

Actual Deferral Percentage Test

ADP Test

Answer 7

Includes traditional and Roth 401k contributions.

• If NHC is contributing 0%-2%, then HC can only contribute 2x what NHC’s contribute.
• If NHC is contributing 2%-8%, then HC can only contribute 2% + what NHC’s contribute.
• If NHC is contributing 8%+, then HC can only contribute 1.25x what NHC’s contribute.

Question 8

Safe Harbor 401k Rules

Answer 8

Not subject to ADP or ACP testing.

Employer must provide one of the following:
• 3% nonelective contribution.
• Matching contribution of:
   • 100% up to 3%, and
   • 50% from 3% to 5%

These contributions are 100% vested at all times.

Question 9

Incentive Stock Options (ISO)

Answer 9

If exercise price = FMV, no taxable income recognized.

On date of exercise, not subject to ordinary income tax on difference between exercise and FMV.

When stock is sold, difference between sales price (and exercise price is long term capital gain assuming holding period requirements are met).

Qualified sale requires holding 2 years from grant date and 1 year from date stock was exercised. If not, taxed like a NQSO.

Question 10

Disqualifying Disposition (ISO)

Answer 10

If stock is disposed before either 2 years from grant date or 1 year from exercise date, difference between exercise and FMV is considered ordinary income. Any gain above difference between exercise and FMV is short- or long-term capital gain.

Question 11

Taxation of NQSO

Answer 11

At exercise, executive recognizes W-2 income to extent of difference between current stock price and exercise price.

Question 12

Basis of NQSO

Answer 12

Adjusted basis is FMV of stock (exercise price paid + W-2 income recognized).

Question 13

Basis of ISO

Answer 13

Adjusted basis equals exercise price.