Retirement Savings & Income Planning (17%) Flashcards

Question

Target Benefit Pension Plan **Basic Provisions**? Qualified Plan = ERISA Pension Plan = Subject to Minimum Funding Standards and the Qualified Joint and Survivor Annuity requirement Defined Contribution Plan = Provide Uncertain Retirement Benefit

Answer 1

* Employer contributions are limited to up to 25% of covered payroll up to $54,000 per participant. * Forfeitures may be reallocated to remaining participants’ accounts or applied to reduce employer contributions. * Subject to minimum funding standards * \*\*Allocation of employer (ER) contributions is based on **age-weighted formula.** * \*\*Actuary is used for the first year of the plan only.

Answer 2

* An age-weighted profit sharing plan provides the same potential benefit as the target benefit plan; however, the age-weighted profit sharing plan is not subject to mandatory funding.

Answer 3

* Relatively simple to explain and install * Annual contributions generally in favor of **older**, **highly paid participants.**

Answer 4

* Mandatory annual contributions * Limits employer’s tax deduction

Answer 5

* **Younger participants** could benefit from years of contributions and compounding * Participants benefit from excess earnings

Answer 6

* Participants assume investment risk * \*\*Note: The target plan is no longer a useful plan. The *age-weighted profit sharing plan* can provide all its benefits without the fixed annual contribution obligation.

Answer 7

Target Benefit is Determined. Target benefit plans derive their name from the fact that such plans specify a target benefit for each participant at normal retirement age. This target benefit is typically defined by a formula similar to the formula utilized by defined benefit plans, and will generally be based on a percentage of compensation (e.g., 50 percent of final compensation) as well as on years of service. For example, a target benefit plan might specify a normal retirement age of 65 and a target benefit of 60 percent of final compensation for participants with 25 years or more of service; participants with less than 25 years of service would receive a proportionately smaller target benefit. In this case, participants 40 years old or younger (who could qualify for the full 25 years of service requirement prior to reaching the normal retirement age of 65) would receive contributions based on a target benefit of 60 percent of their final compensation. Individuals older than 40, however, have less than 25 years before reaching normal retirement age and would receive contributions based on a prorated benefit percentage. Alternatively, a target benefit plan might provide for a target benefit calculated by granting a specific benefit for each year of service, up to a stated maximum. For example, a target benefit plan could provide for 2.4 percent of compensation for each year of service up to a maximum of 25 years. The target benefit exists for purposes of determining current contribution amounts--it does not represent the expected benefit payout to individual participants. The benefit that a participant actually receives upon reaching normal retirement age depends upon the investment performance of the participant's individual plan account. This type of plan may appeal to older employees: Because the retirement benefit under a target benefit plan is based partially on the participant's age, this type of plan may appeal to employers that wish to benefit older employees. Participating employees who enter the plan at older ages have fewer years than younger employees until retirement. Using a target benefit plan can help allocate larger contributions to these older employees. For a plan to provide benefits that will be equally valuable to all employees at retirement age, the plan must provide higher immediate contributions for older workers than for younger workers. Example: Arnold and Abe are both to be provided with $1,000 at age 65. Arnold is 30 years old and Abe is 50 years old. Assuming an 8.5 percent annual rate of return, $294 needs to be contributed today for Abe to have $1,000 in 15 years at age 65. By contrast, because Arnold has 35 years for his money to grow, only $58 needs to be contributed today to have the same $1,000 at age 65.

Answer 8

Contribution Amounts are Calculated Based on Determined Target Benefits Once a participant's target benefit is determined according to the plan's provisions, a contribution calculation for each participant is made. The calculation assumes that a participant will receive the same contribution every year until reaching normal retirement age. The amount each participant receives as a contribution is the annual amount needed to fund that participant's target benefit (based on appropriate assumptions and projections). In order to calculate the actual contribution required for each participant, actuarial calculations are required that factor in the participant's age and the projected rate of return for the funds in the participant's account. An assumption is made that the participant's compensation remains level throughout his or her years of service for purposes of the contribution calculation. When a participant's compensation does in fact increase, this will result in a new, higher target benefit for that participant. Future contribution calculations for that participant will be based on this new, higher target benefit. The actual investment performance of individual participant accounts plays no role in determining required annual participant contribution amounts. As with any money purchase pension plan, target benefit plans can generally allocate additional plan funds to higher-paid employees by taking into account permitted disparity (often referred to as "integrating with Social Security"). However, target benefit plans must follow the permitted disparity rules of defined benefit plans. These rules are significantly more complicated than the defined contribution permitted disparity rules that apply to other money purchase plans.

Answer 9

_**Direct** Relationship_ (if x increases, then plan costs incresase or if x decreases, then plan costs decrease). * Expected Inflation * Expected Wage Increases * Life Expectancy _**Indirect** Relationship_ (if x increases, then plan costs decresase or if x decreases, then plan costs increase). * Expected Investment Returns * Expected Mortality * Expected Forefeiture/EE turnover

Answer 10

* Up to 25% employer deduction * **Flexible contributions** (must be recurring and substantial) * Maximum annual contribution **lesser** of 100% of salary or $54k (2017) * Can have 401(k) provisions * SIMPLE 401(k) exempt from creditors

Answer 11

* 25% employer deduction limit * Employer contributions usually are discretionary, but must be “substantial and recurring” * Forfeitures usually are reallocated to remaining participants’ accounts

Answer 12

* No fixed annual contribution required * Although they must be substantial and recurring. * May motivate employees if based on profits

Answer 13

* Plan may benefit younger participants when the goal is to benefit older owner

Answer 14

* Employer is not required to contribute annually

Answer 15

* Younger participants benefit from many years of tax-deferred contributions, compounding earnings, and forfeiture reallocations.

Answer 16

PSP's are NOT subject to minimum funding standards. PSP Stock Bonus ESOP

Answer 17

DB: Entity Obligation is to "provide the agreed upon benefit" in some sort of annuity based on length of service and pay. Actuarial and Investment risk is on the ER DC: Entity Obligation is to "contribute to the EE fund" Actuarial and Investment risk is on the EE

Answer 18

* Younger employees, * short-service employees, * employees in lower-pay brackets, * employees who quit after medium lengths of service are those who will benefit most from profit-sharing plans.

Answer 19

* Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan * Max $18,000 (2017) deferral for participants under 50 (subject to FICA) * Additional $6,000 catch-up for age 50 and over (2017)

Answer 20

* 401(k) provision allows for pre-tax EE deferrals. * Prior to the enactment of 401(k) provisions in 1981, employees could only make after-tax contributions—this was called a **Thrift Plan**. * The IRS issued proposed regulations on 401(k) plans that sanctioned the use of employee salary reductions as a source of retirement plan contributions. Many employers replaced older, after-tax thrift plans with 401(k)s and added 401(k) options to profit-sharing and stock bonus plans.

Answer 21

* Lesser of 100% of compensation or $54,000 (2017) * Includes employer contributions, employee salary reductions **and** plan forfeitures

Answer 22

A safe harbor 401(k) plan automatically satisfies the nondiscrimination tests involving highly compensated employees (HCEs) with either an employer matching contribution or a nonelective contribution.

Answer 23

In addition to that broad discretion, IRS rules also allow a variety of methods to determine what portion of the total contribution goes to each plan participant. Each of these allocation methods can be combined with 401(k) features, matching contributions, etc. to achieve an overall design customized for each company’s needs. 1. Salary Proportional Method aka Pro-Rata 2. Permitted Disparity Method aka Social Security Integration 3. New Comparability Method aka Cross-Tested 4. Age Weighted Method (TBPP) 5. Service Based Method

Answer 24

Integrated with Social Security aka 'premitted disparity' * A company retirement plan may take into consideration Social Security when allocating an employer contribution to eligible employees. * Because Social Security is only paid on compensation up to a certain dollar amount, any employee with compensation over the Social Security Taxable Wage Base (TWB) will receive a large allocation of the employer contribution allocated in the company retirement plan to account for this. * The TWB for 2017 is $127,200.

Answer 25

The _Permitted Disparity Method_, aka as _Social Security Integration_, recognizes that Social Security benefits are only provided on an individual's compensation up to the Social Security Wage Base ($127,200 for 2017) and allows additional plan contributions on pay exceeding that level (referred to as Excess Compensation). The contribution is calculated in two steps: Step 1. A uniform percentage of total base pay is allocated to all eligible participants. This is referred to as the base percentage. Step 2. A uniform percentage of Excess Compensation is allocated to all eligible participants who have such pay. The excess percentage cannot exceed the lesser of the base percentage or 5.7%. It is possible to integrate the allocation at a level below the Social Security Wage Base; however, doing so often results in a reduction of the maximum excess contribution percentage.

Answer 26

**_Salary Proportional Method:_** * The salary proportional or pro rata method provides that each participant receives an allocation equal to a uniform percentage of his or her compensation. * The contribution may be expressed as a percentage, e.g. 5% of pay to all eligible participants, or as a flat dollar amount.

Answer 27

* The new comparability method aka cross-testing, uses the time value of money as a basis to allocate larger contributions to participants who are closer to retirement. * As illustrated below, if the goal is to fund a similar benefit at retirement, much larger annual contribution made for someone who has 10 years until retirement than for someone who has 35 years. * Age 30, $2,875 a year for 35 years = $100K * Age 55, $10,000 a year for 10 years = $100K * Depending on the demographic make-up of a company’s work force, the new comparability aka 'cross tested' method can be an effective means of targeting contributions to certain senior personnel such as the owners or officers. * Eligible participants are divided into allocation groups, usually with each participant placed in his or her own group to maximize flexibility. Each year, the company decides the amount to allocate to each group. * NHCEs are generally required to receive a minimum “gateway” contribution that is equal to the lower of the following: * 5% of compensation, or * One-third of the highest percentage allocated to any HCE * These contributions are then projected to a benefit at the plan’s normal retirement age and tested to confirm the HCEs do not receive a benefit that is disproportionately higher (as a percentage of pay) than that provided to NHCEs. * If HCE benefits fall outside of the acceptable range, the company can choose to increase contributions for NCHEs, reduce contributions for HCEs or a combination of both.

Answer 28

Under the Age-Weighted method, the employer’s profit sharing contribution is allocated in a manner that considers both the participant’s age and compensation. Using one of the mandated mortality tables and interest rates, points are allocated to each participant based on age. The ratio of a participant’s points to the total points of all participants determines the participant’s percent of the overall profit sharing contribution.

Answer 29

A profit sharing contribution must demonstrate non-discrimination in either the form of allocations or benefits. Giving all participants the same percentage of pay as an allocation is clearly non-discriminatory. However, giving each participant the same theoretical retirement benefit is also non-discriminatory and the present-day allocations required to generate these benefits may not be equal. This is because older participants have less time to retirement, and thus require larger allocations to reach the same benefit level. Certain design-based safe harbor allocation methods like the _Salary Ratio and Social Security Integration (permitted disparity) methods_ are deemed to be non-discriminatory. Non-safe harbor allocation methods like the _Age-Weighted and New Comparability (Cross Tested) methods_ must demonstrate non-discrimination by passing the General Test on either an allocations basis or on a benefits basis. When an allocation method passes the General Test on a benefits basis, this is known as Cross-Testing.

Answer 30

The service-based allocation method allows the employer to reward employees with more service by weighting contributions by service. A fixed contribution can be a specified percentage of each participant’s plan compensation or a specified dollar amount for each participant, which is then based on a specified period of service. Example: An employer can specify $10 for each week of employment or 1% of plan compensation paid for each hour of service.

Answer 31

The statutory contribution using a match is $1/$1 on the first 3% employee deferral ***and*** $0.50/$1 on the next 2% employee deferral. If the employer chooses to use the nonelective deferral method, the employer must contribute 3% of all eligible employees' compensation regardless of whether the employee is deferring or not. Employer contributions must be immediately vested.

Answer 32

* Up to 25% employer deduction * **Flexible contributions** * Maximum annual contribution **lesser** of 100% of salary or $54k (2017) * 100% of contribution can be invested in company stock * **ESOP cannot be integrated with Social Security or cross-tested**

Answer 33

**NUA Example** Stock is contributed to the retirement plan with a basis of $20k. The stock is distributed at retirement with a market value of $200k. The NUA, $180k, is not taxable until the employee sells the stock, but the $20k is taxable now as ordinary income. The $180k is always LTCG. If the client sells the stock for $230k, the $30k of extra gain is either STCG or LTCG depending on the holding period after distributed at retirement.

Answer 34

* Only for sole proprietor and partnerships Self-employment tax must be computed and a deduction of one-half of the self-employment tax must be taken before determining the Keogh deduction. **Shortcut below takes into account self-employment taxes.** * If contribution **15%** - multiply by **12.12%** of net earnings * If contribution **25%** - multiply by **18.59%** of net earnings

Answer 35

* A Keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. It can be set up by small businesses that are structured as LLCs, sole proprietorships or partnerships. * A Keogh plan can be set up as either a _defined-benefit_ or _defined-contribution_ plan, although most plans are defined as contributions. * A Keogh is similar to a 401(k) for very small businesses, but the annual contribution limits are higher than 401(k) limits. $54K for 2017.

Answer 36

Keogh as Defined Contribution Plan * Keogh as a _Profit Sharing Plan_ (PSP/DC) - * With a profit-sharing plan (PSP), you don’t actually have to show a profit for you to contribute. * You decide how much to contribute to your plan each year. * The amount can change from year to year, as well. * PSPs do come with a cap to how much you can contribute, but anything under that amount is fair game. * Keogh as a _Money Purchase Plan_ (Pension/DC) - * A money purchase plan (MPP), on the other hand, requires you to contribute a fixed percentage of income every year. * This reaches up to 25% of the compensation amount. You decide the percentage at the outset. You cannot change the amount as long as the company profited that year. * If you change the percentage or don’t contribute one year, you could face a penalty.

Answer 37

Keogh as a _defined benefit plan_, determines the annual benefits you’ll receive in retirement. * Defined benefit plans work like a traditional pension, but you fund it yourself. You can contribute up to 100% of your compensation with these plans. * The IRS has the exact formula to calculate your contribution. * Your salary, years of employment, expected return on plan assets and other stated benefits will determine the contribution amount.

Answer 38

* A Keogh plan is similar to a 401(k), personal and tax-deferred, but for very small businesses. * The Keogh structures still exist, but they've lost popularity compared to plans like SEP-IRAs or individual or solo 401(k)s. * A Keogh may be right for a highly paid professional, such as a self-employed dentist or a lawyer, but the cases in which these plans make sense are specific and fairly rare. * It provides self-employed professionals like doctors and writers with similar benefits and tax advantages as those who work in more traditional, corporate settings. * To use a Keogh, a small business must be a sole proprietorship, partnership or limited liability company (LLC). * Employees of small business owners may also be eligible, but the employer makes the contribution instead of the employee.

Answer 39

* Fewer than 100 employees * Employer cannot maintain any other plan * Participants fully vested * Easy to administer and funded by employee salary reductions and an employer match

Answer 40

* NO salary deferrals - employer contributions only * Up to 25% contribution for owner (W-2) / treated like Keogh contributions for self-employed * Maximum of $54k (2017) * Account immediately vested * **Can be integrated with social security** * Special eligibility: 21+ years old, paid at least $600 (2017) and worked 3 of the 5 prior years

Answer 41

* For 501(c)(3) organizations and public schools * Subject to ERISA only if employer contributes * Salary reduction limit up to $18,000 (2017) (plus $6,000 catch-up if 50 or over)

Answer 42

* Max age and service are age 21 and one year of service (21-and-one-rule) * Special provision allows up to 2-year service requirement, BUT then employee is immediately vested (2-year/100%) * Year of service is 1,000 hours (includes vacations, holidays and illness time)

Answer 43

* A greater than 5% owner **OR** * ****An employee earning in excess of $120,000 during the preceding year (2016)

Answer 44

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 \> $170,000 (2017) or * Greater than 1% ownership **and** compensation \> $150,000 (2017)

Answer 45

_HCE:_ * A greater than 5% owner * OR * An employee earning in excess of $120,000 during the preceding year (2016) _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 \> $170,000 (2017) or * Greater than 1% ownership and compensation \> $150,000 (2017)

Answer 46

**_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

Answer 47

**Base % + Permitted Disparity = Excess %** * **Base %** - DC plan contribution for compensation below integration level * **Permitted Disparity** - Lesser of base % or 5.7%. You get this becuase the 5.7% is the OA of OASDI. The SDI is 0.50% for a total of 6.2% which is the full OASDI + 1.45% for HI (Health Insurance) or Medicare. * **Excess Benefit %** - DC plan contribution for compensation above integration level

Answer 48

**Base % + Permitted Disparity = Excess %** * **Base %** - DB plan contribution for compensation below integration level * **Permitted Disparity** - Lesser of base % or 26.25%. You get this by multiplying 75% by 35 (max years). * **Excess Benefit %** - DB plan contribution for compensation above integration level

Answer 49

**_Elective deferrals - more than one employer (2017)_** Elective deferrals to multiple plans are always **aggregated**. **_2017_** 401k/403(b)/SIMPLE/SARSEP $18,000 plus catch up $6,000 SIMPLE and other SIMPLE $12,500 plus catch up $3,000 **457 Plans are NOT part of aggregated amounts.**

Answer 50

According to the Treasury Regulations, life insurance benefits must be merely "incidental" to the primary purpose of the plan. If the amount of insurance meets either of the following tests, it is considered incidental: 1. The aggregate premiums paid for a participant's insured death benefit are all times less than the following percentages of the plan cost for that participant: Ordinary life insurance **50%**; Term Insurance **25%**; Universal Life **25%** 2. The participant's insured death benefit must be no more than **100 times the expected monthly benefit.** Defined benefit plans typically use the "100 times" limit.

Answer 51

* Transfers to another 457 plan remain the only option for **non-governmental** tax exempt organizations * Hardship distributions can not be rolled into any other qualified plan * Required minimum distributions

Answer 52

* Death * Disability * Substantially equal periodic payments following separation from service * Medical expenses in excess of 10% of AGI or health insurance costs while unemployed * Distribution following separation from service after age 55 for QP but NOT an IRA. * Distribution in accordance with QDRO (Qualified Domestic Relations Order for divorce) to any alternative payee * **Distribution used to pay insurance premium after separation from employment (must file for unemployment)**

Answer 53

The required beginning date is April 1st of the year following the year in which the covered individual attained 70½. Subsequent distributions must be made by December 31st of each year thereafter.

Answer 54

The required beginning date, **with the exception of 5% owners,** is the later of April 1st following the year in which the individual attained 70½ or **retired**. Subsequent distributions must be made by December 31st of each year thereafter. 5% owner RBD is the same as IRA/SEP RBD.

Answer 55

* If neither spouse (or single person) is an active participant in an employer plan, the IRA is deductible. Employer plans that affect participant status include almost all plans EXCEPT for 457 plans. * If one spouse is an active participant, the other spouse (not active) can do a deductible IRA if combined AGI is less than $186k - $196k (2017) * If both spouses are active, AGI limits apply - $62k - $72k (single) and $99k - $119k (Married) (2017) - Given **NOTE:** Activity that results in active status: annual additions to a DC account or benefits accrued to a DB plan.

Answer 56

* Death * Disability * Substantially equal periodic payments * Medical expenses in excess of 10% of AGI or health insurance costs while unemployed * First home expense up to $10,000 * Qualified education expense * **Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)**

Answer 57

1. Any contributions (not conversions) are withdrawn first 2. Conversions are withdrawn second 3. Earnings are withdrawn last

Answer 58

RMDs for Roth IRAs only required after Death of original owner * Distributed within 5 years of owner's death or * Distributed over the life expectancy of the designated beneficiary with distributions commencing prior to the end of the calendar year following death (stretch) * Where the sole beneficiary is the owner's surviving spouse, the spouse may delay distributions until the Roth owner would have reached 70½, or may treat the Roth as his or her own (roll it to her/her Roth)

Answer 59

* **Salary reduction plan -** uses some portion of the employee's current compensation to fund the ultimate compensation benefit (also called pure deferred) * **Salary continuation plan** - uses employer contributions to fund ultimate benefit

Answer 60

* **Key Words** - merger, acquisition or change of ownership * Assets in rabbi trust available for company's creditors * Fear that ownership / management may change before deferred compensation is paid * Irrevocable Trust set aside for the benefit of the EE * Contributions to trust are not currently taxable to EE if the Trust does not contain financial triggers and is not located "offshore". **_Informally Funded Plan:_** Rabbi trust (considered to be unfunded) is an example of informally funded deferred compensation. A trust is set up with two beneficiaries, the employee and creditors of the company. The fact that creditors and not the employee could eventually end up with the assets allows the employee to avoid current taxation. Rabbi trusts may not be offshore or contain any financial triggers for benefit payment.

Answer 61

**Holding Period:** 1 year from exercise date **and** 2 years from grant before selling ISOs Violating either rule results in a disqualifying disposition

Answer 62

* Nonqualified deferred compensation plans of governmental agencies and non-church controlled tax exempt organizations * Deferral limited to $18,000 or 100% of compensation (2017) * Catch-up of $6,000 allowed for those 50 and over **ONLY** for governmental plans (2017) * Salary deferrals **NOT** aggregated with other plans (401k, etc.) * Non-governmental plans can **ONLY** be rolled into another 457 plan

Answer 63

* No Loans * No Life Insurance * Immediate Vesting * May not be creditor protected (state specific) * 59½ not 55 for no 10% penalty * Must take RMDs at 70½ (even if not owner)

Answer 64

* The maximum defined benefit plan annual benefit (under a single life or joint and survivor annuity) cannot exceed the lesser of $215,000 in 2017, or * 100% of compensation (average compensation for a participant’s highest three consecutive years). * The maximum retirement benefit is actuarially reduced if retirement occurs before age 62 and is actuarially increased if retirement occurs after age 65.

Answer 65

A target benefit plan is a type of money purchase pension plan. It is often referred to as a "hybrid" plan because, although a money purchase pension plan, **target benefit plans include features commonly associated with a defined benefit plan.** Like a **defined benefit plan, annual contribution calculations are based upon a specified projected retirement benefit (the target benefit).** However, as with other money purchase pension plans, annual contributions (which are both fixed and mandatory) are made to individual participant accounts, and the actual retirement benefit a participant ultimately receives depends upon his or her individual account balance. Because target benefit plans **utilize participant age as one of the factors in determining plan contributions**, these plans generally result in a contribution allocation that tends to **benefit older participants.** Target benefit plans have become increasingly less common. To a large extent, this is attributable to the increased adoption of cross-tested profit sharing plans (e.g., age-weighted profit-sharing plans), which offer comparable advantages but are generally more flexible. Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act), limits on the tax-deductibility of employer contributions to retirement plans favored money purchase pension plans (and therefore target benefit plans) over profit-sharing plans (employers could deduct up to 25 percent of total compensation for contributions made to a money purchase pension plan, but only up to 15 percent of total compensation for contributions made to a profit-sharing plan). The 2001 Tax Act, however, increased the limitation on tax-deductible contributions to profit-sharing plans to 25 percent. With this change, most employers will find it to their advantage to adopt the more flexible profit-sharing plan rather than a money purchase pension plan (including a target benefit plan).

Answer 66

DBPP uses the final-average pay (traditional DB plan). This is the average of earnings paid in the last three or five years before retirement, or the highest paid three or five years in the 10- year period before retirement. TBPP because it uses an age weitghted formula to benefit older EEs and EEs for their length of service?? This type of plan may appeal to older employees: Because the retirement benefit under a target benefit plan is based partially on the participant's age, this type of plan may appeal to employers that wish to benefit older employees. Participating employees who enter the plan at older ages have fewer years than younger employees until retirement. Using a target benefit plan can help allocate larger contributions to these older employees. For a plan to provide benefits that will be equally valuable to all employees at retirement age, the plan must provide higher immediate contributions for older workers than for younger workers.

Answer 67

CBPP because it is a DC similar to PSP and it benefits people to stay in the program for longer periods so that they get to have more in their separate accounts???? Cash balance plans generally are more advantageous to younger employees (more years for contributions and guaranteed returns due to shorter vesting schedule than Traditional Pension Plans). Career-average pay (cash balance plan always uses) This is the average of earnings over the participant’s entire period of plan participation NOT the highest average over a 3 year period. MPPP - Although a younger and an older employee with the same level of compensation will receive the same allocation, the long-term accumulation of tax-sheltered funds will benefit younger employees more than older employees.

Answer 68

If you are retired, most 401(k) plans (\*\*NOT IRA's\*\*) allow for penalty-free withdrawals at age 55. To use this 401(k) retirement age 55 provision your employment must have ended no earlier than the year in which you turn age 55, and you must leave your funds in the 401(k) plan to access them penalty-free. Before tapping into your 401(k), be sure to review the rules governing this age-55 liquidity provision: * If you retire the year prior to reaching age 55, the 401(k) retirement age 55 provision will not apply. Your withdrawal will be subject to a 10% early withdrawal penalty tax. For example, assume you retire at 54, thinking in one year you can access funds penalty-free. Nope, sorry. You needed to wait one more year to retire for that provision to apply. * If you roll your 401(k) plan over to an IRA, the retirement age 55 provision will not apply. The earliest age at which you can withdraw funds from a traditional IRA account without penalty taxes is age 59 ½.

Answer 69

Hardship W/D for QP and NQP How to set up the Problem for how much of an IRA we can deduct when we are investing in a QP?

Answer 70

Yes, you are taxed at your income tax rate and there is a 10% penatly but you can only access your deferrals.

Answer 71

The participant must exhaust other "reasonably available" resources. Examples of the required "immediate and heavy financial need" include: * college tuition expenses * medical expenses * purchase of a primary residence * prevention of eviction from a primary residence Hardship withdrawals may consist of the participant's elective deferrals only, not earnings associated with these deferrals. * If the participant is under age 59 1/2, the withdrawal is subject to the 10% early withdrawal penalty.

Answer 72

Allowable IRA Deduction Limit Calculation IRA contribution limit x (Upper Limit of phaseout - AGI) / (Phaseout Range) = deductible amount set it up by writing down the following Name l A/P (Y or N) l AGI I IRA Contribution I Phaseout Range

Answer 73

_Deductible IRA contributions:_ * For married taxpayers filing jointly, who are both active participants in a company-maintained retirement plan, the IRA deduction is phased out between $99,000 and $119,000 of AGI for joint returns. * A taxpayer who is not an active participant, but who has a spouse who is an active participant, may take a deduction for the contribution, subject to a phaseout ranging from $186,000 to $196,000. The active participant spouse is subject to the $99,000 and $119,000 AGI limitation. * For single taxpayers who are active participants, the phaseout is between $62,000 and $72,000 in 2017.

Answer 74

Ten-year forward averaging is a special tax computation available only to individuals born before 1936 that are taking a lump-sum distribution from their qualified retirement plan. Ten-year forward averaging allows you to figure the tax on your lump-sum distribution by applying 1986 tax rates to one-tenth of the amount of your distribution, then multiplying the resulting tax amount by ten. This tax is payable for the year in which you receive the lump-sum distribution. **You would almost never select this becuase someone would have to be 92 years old in 2018. You can disregard this for the test.**

Answer 75

**_Transfers:_** A transfer is the term used when the same type of retirement plan is moved from one firm to another. An example would be moving your Traditional IRA from Oak Bank to another Traditional IRA at Maple Brokerage. This is the same for Roth IRAs and SIMPLE IRAs. Transfers are not reported to the IRS. They are not taxable because assets were never made payable or distributed to the taxpayer. **_Rollovers:_** You can also move money from one type of retirement account at one firm to another type of retirement account at another firm for a rollover. In a rollover, you request a distribution of your retirement plan assets. In a distribution, because the funds are made payable to the taxpayer, the assets are generally taxable and subject to an early distribution penalty if you don’t roll the funds over to an account at another IRA provider. You have 60 days after the distribution to find another firm willing to accept what was distributed. Rolling over the assets will keep them tax-deferred. **_Direct Rollover:_** Moving assets out of an employer-sponsored plan (such as a 401(k), 403(b), or governmental 457(b) plan) to an IRA is called a direct rollover. If you formerly participated in an employer-sponsored plan, you may direct your previous employer to send your retirement funds to an IRA administrator. A direct rollover is different from a transfer because it involves two different types of plans. If you choose to take a distribution from your employer plan and rollover the assets, the transaction must be completed within 60 days. **_Indirect Rollover:_** Moving assets out of an employer-sponsored plan (such as a 401(k), 403(b), or governmental 457(b) plan) to an IRA is called a direct rollover. If you formerly participated in an employer-sponsored plan, you may direct your previous employer to send your retirement funds to an IRA administrator.

Answer 76

Qualified employee discounts and health and accident insurance are the only listed employee benefits that are nontaxable to the employee.

Answer 77

Yes, Withdrawals can be taken from an IRA penalty free if used for qualified education expenses but you will have to pay regular taxes on the distribution.

Answer 78

Yes, Withdrawals can be taken from a Roth IRA penalty free if used for qualified education expenses and the distribution is tax free as long as you take less than the amount contributed.

Answer 79

Yes, but it would have to be in the form of a loan. You can not take a distribution or you will be taxed.

Answer 80

Integration with Social Security and permitted disparity. The purpose of integration is to equalize the employer’s contributions (to a qualified plan and Social Security) regarding retirement benefits for higher- and lower-paid employees. Without integration, the disparity is that the employer contributes a higher percentage of compensation for lower-paid employees. The net result is to lower the cost for rank-and-file employees while maintaining the same level of contribution (cost) for more highly paid employees (typically owners). Permitted disparity is the lesser of the base contribution percentage or 5.7%.

Answer 81

An employee-funded secular trust provides protection of the deferred funds during employment years; due to ERISA requirements, it almost never allows the employee to defer taxes on the deferred funds. The advantages would be the receipt of tax-free retirement income and the security of knowing the funds in the trust are not subject to forfeiture.

Answer 82

The NHCE benefiting from the plan must be at least 70% of the HCE's. Ex. 1,000 EE's 100 HCE 900 NHCE If 90% of the highly compensated employees benefit from the plan (90/100 = 90%). Therefore, at least 63% of nonhighly compensated employees must benefit from the plan (90% × 70% = 63%). With 900 eligible nonhighly compensated employees, 567 must participate (900 × 63% = 567).

Answer 83

**Funding Methods** _A. Unfunded (essentially an IOU)_ 1. employer’s “promise to pay”—only an unsecured agreement between the employer and the employee (essentially an “IOU”) 2. agreement executed prior to performance of services _B. Funded_ 1. account is set up for employee in trust, trust income is taxable to employer until employee is no longer subject to substantial risk of forfeiture, then income is taxable to employee. 2. Secular trust: employer gets tax deduction, employee is taxed since the employee is immediately vested and there is no substantial risk of forfeiture. _C. Informally funded_ 1. In effect, a compromise between “funded” and “unfunded.” 2. Employer must either informally dedicate general assets to the plan through an accounting device (bookkeeping entry), or segregate assets using a trust. 3. Rabbi trust (considered to be unfunded) is an example of informally funded deferred compensation. A trust is set up with two beneficiaries, the employee and creditors of the company. The fact that creditors and not the employee could eventually end up with the assets allows the employee to avoid current taxation. Rabbi trusts may not be offshore or contain any financial triggers for benefit payment. Substantial risk of forfeiture provisions are generally necessary only in funded plans to prevent constructive receipt. Under IRC Section 409A, compensation will be deemed to be subject to a substantial risk of forfeiture if the right to receive compensation is conditioned on performance of substantial future services (or certain other circumstances) and the possibility of forfeiture is substantial in nature

Retirement Savings & Income Planning (17%) Flashcards

(107 cards)