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CFP Personal > Retirement Planning & Emp Benefits > Flashcards

Retirement Planning & Emp Benefits Flashcards

1
Q

Types of Defined Benefit Plans

A
  • Defined benefit pension plans
  • Cash balance pension plans
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2
Q

Defined Contribution Pension Plans

A
  • Money Purchase Pension Plans
  • Target Benefit Pension Plans
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3
Q

Profit Sharing Plans

A
  • PSP
  • StockBonus Plans
  • Employee Stock Ownership Plans
  • 401k plans
  • Thirft Plans
  • New Comparability Plans
  • Age-based PSP’s
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4
Q

Advantages of Qualified Plans

A

To the Employer
- Contributions are tax deductible
- Contributions are not subject to payroll taxes

To the Employee
- availability of pretax contributions for employees
- tax deferral of earnings on contributions
- ERISA protection
- Lump sum distribution options

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5
Q

Anti-Alienation Protection

A

ERISA provides creditor protection. Once funds are distributed, they are no longer protected assets

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6
Q

All Qualified plans must meet these tests

A
  • Safe harbor - >70% of NHC covered
  • Ratio Test - % of NHC Covered / % of HC Covered > 70%
  • Averages Benefits Test - AB % of NHC Covered / AB % of HC Covered > 70%
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7
Q

Defined Benefit Plans must additionally pass this test

A

The 50/40 Test - the lesser of 50 Employees or 40% of Employees

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8
Q

HCE

A

Either of the following:
- Any owner > 5% this year or last

  • Compensation > $150K for prior year **
    - Unless elect and in top 20% of employees ranked by salary
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9
Q

Vesting Schedules

A
  • DCP (2 - 6 Year Graduated or 3 Year Cliff)
  • DBP - (3 - 7 Year Graduated or 5 Year Cliff)
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10
Q

Key Employee

A
  • > 5% owner or
  • > 1% owner with comp > $150K or
  • An officer with comp > $215K
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11
Q

Top-Heavy Plans

A

DCP - 60% of account balance to key employees
- Employer must provide non-key employees with a contribution = to 3% of employees comp unless if key employee’s contributions is < 3%

DBP - 60% of accrued benefits to key employees
- Employer must provide non-key employees with a benefit = 2% per years of svc (limit 20%) X annual comp
- plan must use DCP vesting schedule of either 2 - 6 year graduated or 3 year cliff

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12
Q

What plans need an actuary

A
  • DBPP’s annually
  • Cash Balance Plans annually
  • Target Benefit Pension Plans at inception
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13
Q

Social Security Integration Methods

A

Excess Method - provides an excess benefit to those participants whose earnings are > than the avg SS wage base over 35 years (Used by both DBP & DCP). The max increase is .75% per year of svc up to 35 years or 26.25%

Offset Method - Reduces the benefit to those employees whose earnings are < the SS wage base (Used only by DBP’s). The reductionis limited to .75% per year of svc up to 35 years or 26.25%

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14
Q

Cash Balance Pension Plans

A
  • DBPP
  • Mandatory Funding
  • Pension benefit based on an annual guaranteed contribution rate and guaranteed earnings on contributions
  • Quasi-Separate Accounts (part. sees hypothetical account & earnings)
  • Favors younger plan entrants
  • uses 3 year cliff vesting
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15
Q

Control Group Relationships

A
  • when 80% of the stock is owned by one or more corps in the group and
  • the Prent Corp owns 80% of at least one otehr corporation
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16
Q

Maximum Pension Payout

A
  • the lesser of 100% of the avg of the 3 highest compensation years or $265K (2023)
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17
Q

Life Insurance Inside of a QP

A
  • Premiums paid by the employer are taxable to the employee at the time of the payment
  • Must meet the 25% or 50% Test
  • If TERM or UNIVERSAL life, premiums for the policy cannot exceed 25%of the employers aggregate contribution to the participants account
  • If WHOLE Life, premiums cannot exceed 50% of aggregate contribution

OR

  • 100-to-1 Ratio Test - whichlimits the amountof the death benefit of life insruance coverage to 100 times the monthly accrued retirement benefit provided under the same qualified plan’s formula
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18
Q

PBGC Details

A
  • plan sponsors of DBPP’s pay premiums for insurance coverage
  • PBGC pays only a limited retiremetn benefit ($6,750/month or $81K per year)
  • PBGC does not insure DCP or PSP nor DBP with < 25 employees
  • PBGC does insure that all other DBP and covered plans are required to pay a flat rate, per participant premium
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19
Q

DBP Payout Formulas

A
  • Flat Amount Per month
  • Flat % based on comp
  • Unit Credit benefit based on a combination of service and comp
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20
Q

Cash Balance Plans

A
  • Popular choice to get rid of old expensive DB plans
  • Contributions based on age as well as salary
  • DBPP that shares characteristics of DCP’s
  • Guaranteed Earnings!
  • Quasi-Separate accounts where funds are comingled but participant receives separate statements and hypothetical allocation
  • Favors younger participants
  • **3 Year cliff **for vesting
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21
Q

MPPP

A
  • DCPP that provides for a contribution of a fixed % of the employees’ comp by the employer
  • Employer required to make specific contributions to the plan but not req to guarantee a specific retirement benefit
  • Employer cannot deduct contributions > 25% of employees covered comp paid
  • limited to the lesser of 100% of comp or $66K
  • needs to be a definite and non-discretionary employer contribution formula
  • an individual account must be maintained for each employee receiving employer contributions
  • forfeitures can be reallocated to remaining participants or reduce employer contributions
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22
Q

Target Benefit Pension Plans

A
  • Special type of MPP that provides a contribution toeach participant that is actuarially equivalent to the present value of the benefit at retirement favoring older employees
  • Actuary needed at the beginning
  • Participant is responsible for choosing investments
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23
Q

Permitted Disparity

A
  • technique of allocating plan contributions to employees’ accounts so that higher contribution will be made for those employees with comp > the SS wage base
  • 2 Contribution rates (Base up to the integration or SS wage base and Excess income > SS wage base up to the max of $330K in comp)
  • Excess rate is the lesser of 2x the base rate of 5.70%
  • Base rate + Permitted Disparity = Excess Rate
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24
Q

Types of orgs that may establish a 401k plan

A
  • Corps
  • Partnerships
  • LLC’s
  • Proprietorships
  • Tax-exempt entities
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25
Q

Corrective action for Qualified Plans failing the ADP or ACP tests

A
  • corrective distirbutions within 2.5 months of end of plan year
  • recharacterization as after-tax employee contributions within 2.5 months of end of plan year
  • Qualifed non-elective contributions (QNEC) - employer contribution on behalf of all NHC employees as elective deferral
  • Qualifed matching contributions (QMC) - plan sponsor contributions only to those NHC employees who contributed to the plan
26
Q

ADP Rules for 401k’s

A

if ADP for NHC is:
- 0% - 2% - HC employee can do 2 x ADP for NHCs
- 2% - 8% - HC employee can do 2% + ADP for NHCs
- 8% + - HC employee can do 1.25 x ADP for NHCs

27
Q

Safe Harbor Match

A

100% of the employee elective deferrals on the 1st 3% and then 50% of the deferrals > 3% but < 5%

28
Q

What 401k clause can assis tthe plan in meeting the requirements of the ADP test?

A

a negative election clause because it automatically deems that an employee defers a specific amount unless they elect out of the automatic deferral amount

29
Q

Automatic deferral requirements

A
  • 3% of comp for 1st year
  • 4% during the 2nd year
  • 5% during the 3rd year
  • 6% during the 4th yearr and therafter
  • must be applied to all eligible employees
30
Q

401k/403b Loans

A

-1/2 of the vested accrued benefit up to $50K or for balances of $20K or lower, the greater of $10K or the vested accrued benefit
- loan must generally be repaid within 5 years with an exception for loans associated with personal residences which could be as long as 30 years

  • loans up to $100K available to TP’s residing in a federally declared disaster area
  • if participant had a loan previously, the $50K limit is reduced by the difference between teh highest outstanding balance of all the participants loans during the 12-month period
31
Q

Stock Bonus Plans

A
  • DC PSPs that allow employers to contribute stock to a QP on behalf of their employees
  • must pass through voting rights to the emplyee
  • must have put option back to the employer for private stock
  • distributions must be fully paid within 5 eyars of commencment of distributions
  • distributions must begin within 1 year of normal retirement age, death, or disability or within 5 years for other modes of employment termination

*employees eligible for NUA tax treatment on lump-sum distributions

32
Q

What is required to be distributed annually to defined benefit plan participants

A
  • The plan’s summary annual report
  • Terminating employee’s benefit statement
  • Individual benefit statement required once every 3 years
33
Q

Integrated plans max excess rate

A
  • max excess is 2 x the contribution rate limited to a disparity of 5.70%
  • if plan contribution is 10%, it would be the lesser of 20% or 15.70%
34
Q

COBRA

A
  • Benefits are not required of employers who have < 20 employees
  • the max period for continuation is 36 months
  • COBRA non-compliance carries a penalty of $100 per day per participant
35
Q

Simple IRA

A
  • Simple plans allow the employer to match to deviate below the required % in 2 of the last 5 years
  • The match is mandatory
  • 25% penalty assessed for withdrawals during the first 2 years employee is a participant
  • eligibility - $5K in comp either the past 2 years or expected this year
  • Match - employer typically expected to match $ for $ the first 3%
  • immediate vesting
36
Q

FSA Details

A
  • funded with pretax dollars
  • part of a cafeteria plan
  • Unused funds are returned to the employer, not to the employee
  • Dependent care FSAs are limited to $5K per year
  • Medical FSA funds can only pay for medical expenses

*Child care expenses would be non-qualified expenses

37
Q

Actuarial assumptions for DBP’s

A
  • future inflation, expected wage increases, life expectancy of the assumed retirees, expected investement returns on plan assets, exepected mortality rates rates for retirees and expected forfeitures resulting from termination
38
Q

NonQualified Stock Options

A
  • when stock option is exercised, there will be w-2 income of FMV - Exercise price
  • also will be taxed at capital gains rates for the balance whenthe stock is subsequently sold (FMV at time of exercise - Sales Px)
39
Q

Penalties on prohibited transactions

A
  • 15% of the amount involved is automatic, even if the violation was inadvertent
  • if the prohibited transaction is not remedied, the second excise tax is 100% of the amoutn involved
  • The plan must be restored to a financial position no worse than if the transaction had never occurred
40
Q

Active participant rules for deductible IRA contributions

A
  • An employee who has benefited under one of the following plans through a contribution or an accrued benefit during the year:
  • Qualifed plan, annuity plan, 403b, SEPs, SIMPLES
  • eligible for a defined benefit plan, even if they waived their right

*457’s are not counted

41
Q

Rabbi Trust Details

A
  • an IRR trust but, unlike a funded deferred comp plan, the assets are subject to the claims of the employer’s creditors
  • this avoids constructive receipt by the employee and delays income taxation until distribution
42
Q

NUA

A

Net Unrealized Appreciation
- if lump sum distirbution is made, the employee is subject to ordinary income taxin the year of the distirbtuion basedon teh securities FMV at time of contribution
- the NUA is not taxed at the time of the distribution but rather follow the stock as deferred LTCG until stock is sold

43
Q

Qualified Plans

A

Pensions - (DB, Cash Balance, MPP, Target Benefit Plan, DB(k))

PSPS - (PSP, 401k, Stock Bonus, ESOP, Age based PS, New Comparability, Thrift Plans)

44
Q

Tax Advantaged Plans

A

IRA’s, Roth’s, 403b, SEPs, SIMPLEs, SARSEPs

45
Q

NQ Plans/Deferred Comp Plans

A

ISOs, NSOs, ESPPs, Rabbi Trust, Secular Trust, Phantom Stock, Promise to Pay, Restricted Stock, 457 Plans

46
Q

ESOP

A

Special form of stock bonus plans that is controlled through a trust allowing the company to borrow money from a bank to purchase the employer stock.

The corp generally repays the loan through tax-deductible contributions to the ESOP.

Both the interestand the principal repayments for the loan are income tax deductible.

ESOP can be “leveraged”

Allows owners of closely held businesses to sell allor part of their interest and defer recognition of the capital gains if:
- ESOP must own at least 30% of the corp after the sale
- the seller must reinvest the proceeds from the sale into qualified replacement securities within 12 months and hold securities for 3 years
- no class of stock tradable on an establsihed securities mkt
- the ESOP may not sell the stock acquired for 3 years
- seller must have owned stock for 3 years

**Does not integrate with SS and contr limit of 25% of covered comp + interest on the loan

Employees 55 and older may require the ESOP diversify 25% of the account

47
Q

Exceptions to 10% Early Withdrawal Penalty for QPs

A
  • Death
  • 59.5+
  • Disability
  • 72(t)
  • Medical Expenses > 7.50% of AGi
  • $5K for Birth or legal adoption
  • QDRO
  • 55+ and separation from service
  • 50+ and separationfrom service if public safety employee, FF, or corrections officer
  • terminal illness
  • $22K for those in qual disaster zone

no in-service withdrawals are exempted from the 10% penalty

48
Q

Exceptions to 10% Early Withdrawal Penalty for IRA’s

A
  • 1st time home purchase
  • health insurance
  • death and disability
  • higher education
  • medical expenses
  • 72t
  • age
49
Q

Penalty for missed RMD

A
  • 25%
  • could be reduced to 10% if TP takes the distribution from the same plan during the correction window

Correction window = earliest of the date the IRS issues a notice of deficiency, the date the IRS assesses the excise tax, or the last day of the 2nd taxableyear that begins after the endof the year in which the tax is imposed

50
Q

How much company stock can beheld in Pensions and PSP’s?

A
  • Pensions can hold < 10%
  • PSPs canhold up to 100%
51
Q

What plans favor younger participants?

A
  • Cash Balance
  • MPP
  • 401k
  • Thrift Savings
52
Q

Group Term LIfe Insurance

A
  • a plan must benefit 70% of all employees or a group of which at least 85% are not key employees
  • if the plan is part of a cafeteria plan, it must comply with section 125 rules
  • the difference between benefit bands must be no greater than 2.5 x the next smaller band with the bottom band being equal to no less than 10% of the top band
53
Q

Tax implications of a self-funded accident or medical plan where the employer reimburses the employee directly

A
  • the employer can always deduct the reimbursements paid to the employee if they are paid to the employee or the employee’s bene and are considered reasonable compensation
  • in a discriminatory plan, a highly compensated employee must include the excess benefit as income
  • in a discriminatory plan, benefits received by non-highly compensated employees are generally tax free without limit
54
Q

What is a VEBA

A

Voluntary Employees Beneficiary Association is a welfare benefit plan into which employers deposit funds that will be used to provide specific benefits
- payments in are deductible by the employer and the income is tax exempt
- provides for (life insurance before retiremetn, fitness and accident benefits, severance benefits, unemployment and job training benefits, disaster benefits, legal service payments for credits

55
Q

Secular Trusts

A
  • used in non-qualified deferred comp
  • IRR Trusts
  • eliminates the subtantial risk of fofeiture
  • could be subject to vesting schedule or term of employment requirement
56
Q

Cafeteria Plan Details

A
  • a family can effectively create its own benefit plan by selecting the options available
  • the plan must offer one cash benefit and one pre-tax benefit
57
Q

403b special contributions

A
  • If employer is a H, E, R org (Health, Education, Religious) there is a long service catch-up amount they can contribute = $3,000 with a lifetime max of $15K
58
Q

NQSO Taxation

A
  • Grant date - none unless the option has ascertainable value
  • Exercise date - w-2 income of appreciation of the FMV over the option price
  • Sale date - capital gain or loss starting from exercise date
  • Basis - = to the FMV of stock (exercise px + recognition of w-2 income)
59
Q

ISO Taxation

A
  • Incentive Stock Option
  • Grant date - none unless the option has ascertainable value
  • Exercise date - no taxable income but will have an AMT adjustment for the appreciation over the exercise price (FMV at exercise - option px)
  • Sale Date - CG from option px to sales price
  • Basis - = to the exercise price. qualified sale means waiting until 2 years from the date stock was granted and 1 year from the date the stock was exercised. treated as a long term gain.
  • If disqualified transaction, difference between FMV and exercise price at the date of exercise will be considered ordinary income. Any gain in excess of the difference between the exercise price and the FMV at the date of exercise will be ST or LT Capital gains
  • $100K limit
60
Q

Advantages of a cross-tested plan

A
  • permits a higher employer contribution on behalf of older employees without violating non-discrimination rules in a PSP
61
Q

Roth Qualified Distribution Triggers

A
  • age 59.5
  • death
  • disability
  • first time home purchase (up to $10K)
62
Q

Income Tax Implications of Employer premium payments for group health insurance

A
  • if stockholder/employees of a closely held c corp are covered as employees, the premiums are fully deductible
  • S Corps and proprietorships cannot deduct any premiums for group health insurance for owners
  • premiums costs paid by a partnership are passed through to the partner who can dedut 100% of the costs on their individual returns

CFP Personal (3 decks)

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