Unit 4: Distributions Flashcards by Geoff White

What are the five options for plan distributions? (PLAID)

1) Do nothing/ RMD not due until 72
2) Lump sum
3) Annuity- Plan buys an Annuity from Insurance Co that distributes payments.
4) Installments- Periodic, regular distribution of funds
5) Partial Lump Sum

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What are the downsides to buying in annuity inside of the 401(k)?

Unable to access lump sum distributions for emergencies and cannot choose investment options

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What 3 types of qualified plans are required to offer annuities?

Money purchase plans, 403 B’s & defined benefit plans

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Most 401(k) plans offer annuity option true or false

False

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What is a QJSA?

Qualified joint and survivor annuity

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When a 401k offers an annuity the law requires it to offer a QJSA?, True or False.

True

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QJSAs payments must extend the following two benefits:

100% for the life of the participant & upon Part. death. a range of 50%-100% for the life of the survivor,

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If I Participant is married are they allowed to elect a single life QJSA?

Only with a waiver from the spouse

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Most participants 401(k) accounts are exempt from QJSA rules but only if: (3 exemptions: 1 is referring to money sources)

1) spouse is entitled to entire death benefit (unless they deferred to another beneficiary.)

2)Participant does not elect an annuity.

3)distribution cannot be from money purchase plan assets that were rolled into 401(k).

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What is a lump sum distribution? Two answers

1) A distribution of the full balance for income purposes with applicable taxes assessed or

2) rollover of the full balance into IRA for continued investment in tax shelter

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What are the two types of rollovers?

1) direct rollover

2) 60 day rollover

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What happens with the 1099R if a participant chooses a direct rollover?

The participant receives a 1099R but no taxable event occurs as 100% of the rollover is transferred into the IRA or other QP

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What happens with a 60 day roll over?

The participant receives a check less 20% which is withheld for taxes. The participant is part of the rollover is responsible for funding the full amount of the rollover. The 20% with out for taxes is refunded to the Participant when they file taxes.

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What are the seven qualified reasons to request a hardship distribution?
(4 home & 3 others)

Medical expenses

Cost for principal residence purchase

Payments for post secondary education

Payments to prevent eviction

Burial expenses

Repair to principal residence

Expenses incurred due to declared disaster

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What are the rules that pertain to the principal residence purchase for a hardship distribution?

The funds cannot be used for a renovation

Cannot be used for a vacation home

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What are the rules that apply to preventing evictions with a hardship distribution?

Only for principal residence

Only to prevent foreclosure of the principal residence

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Regarding the hardship distribution rules towards secondary education expenses:

1) What can be covered?
2) Who can be covered?

May include room and board, fees, educational costs

May be used for the benefit of an employee, spouse, dependents or primary beneficiary

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Hardship Burial expenses can be used for a spouse dependent or primary beneficiary of an account holder true or false

True

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Under hardship distribution rules, the repair to a primary residence maybe used under what IRS code

IRC 165

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What are the three rules that apply to all applications for hardship distributions?

Distribution cannot exceed amount of need (plus taxes)

All other available distributions (not including loans) have been taken

Employee certifies hardship cannot be resolved any other way and the employer does not have information to the contrary

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Concerning the 4 rules for birth in adoption distributions:
1) What is the max amount and time
Limit for the request?
2) What sources can be accessed? And what are the tax treatment of the distribution?
3) When can repayment be made?

Can be made ione year after birth or adoption ( w/ limit $5000 per child)

Pretax sources taxed as normal income but not withheld from distribution

10% early withdrawal penalty’s do not apply

Does allow repayment with no time limit

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What are the conditions that require RMDs to begin? 2 answers

What 2 are exempt?

Participants age 72 after 2020 (70 1/2 years of age before)

An NHCE who achieved age 72 and is not employed (NHCE)

5% owner even if still employed

Who is exempt?

NHCEs that are still working

Any Owners less than 5% who are still working

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What are the rules around the first RMD?
1) When must they begin at the latest?
2) How are the RMD amounts determined?
A) Single
B) Married

The first RMD needs to be taken no later than April 1 of the year after turning age 72

Single participants use just one table

Married participants who have more than 10 years between ages, use RMD table called: “joint life expectancy”

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What are the penalties for any late RMD distributions?

The penalty is 50% of the amount that should’ve been distributed plus income taxes

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When are all RMD’s after the first RMD required to be taken?

December 31

It’s possible to have two RMDS required in your first year correct?

That is correct, especially if it was pushed out to the April 30 deadline for the first year’s distribution.

When the death of a participant occurs what are the three options a beneficiary has related to RMD’s?

Distribute full amount by end of the 10th year An annuity distribution must be set up by end of year in which the death occurred over the life of the beneficiary Roll over to qualified plan or IRA. Beneficiary must take RMDs according to deceased Participants RMD schedule.

A plan must have stated procedures that must be followed when a domestic relations order is being processed? And what tends to occur when a DRO process begins?

True. And often the account is frozen by the plan administrator during the process

What are four items that a DRO must contain?

Name and last known mailing address of Participant or alternate PE Name of the plan Amount or percentage of Participant’s assets to be paid to Alternate payee Number of payments, or the period to which the order applies

A QDRO must not do what four things?

Provide an option or benefit not prescribed by the plan Provide for increased benefits (determined on the basis of actuarial values) Pay benefits to an ex spouse that are required to be paid to another alternate payee under previous QDRO Pay benefits to an alternate Payee via QJSA

To be a QDRO a DRO must be valid and consistent with the terms of the plan true or false

True

The QDRO will not specify when distributions can be made true or false?

False: The QDR will specify

1) Roth deferrals are never _____ at distribution. 2) How long does Roth funds need to be invested so earnings are not taxes? 3) The first year of Roth contributions date to when? 4) On what date are earnings tax free?

1) Roth deferral’s are never taxed at distribution 2) five-year rule applies to earnings 3) The first year of contributions dates to January 1 of that year 4) earnings are tax free after 12/31 of the fifth year

Roth distributions must be for distributable events true or false What are they? (3)

True. Death, disability or Age 59 1/2

Concerning Roth rollovers, if you roll your Roth 401(k) account into a Roth IRA what applies?

The five year rule is based on when the Roth IRA was set up.

Are pretax 401(k) dollars allowed to be converted to Roth 401(k) dollars inside of a plan? And if so how? (2 items) What dollars can be converted, if allowed?

Yes Provided the plan permits “in plan Roth rollovers” Only vested portions can be converted Five-year clock starts in year of conversion

During a direct rollover of pretax funds to a Roth IRA what occurs? (3 items)

Pretax basis and earnings will be taxed as income No 10% penalty applied Five year clock starts in year of conversion

What five types of Distributions are eligible for rollover into an IRA? KEY: “SPOIL under 10”

Single Sum Death Benefit paid to Beneficiary Partial withdrawal paid as Single Sum Offset (Loan) Installment Payments LESS than 10 yrs Lump Sum Distribution

Substantially equal payments over the life expectancy following separation of service are exempt from 10% penalty?

Yes

Separation from service after age 50, is exempt from 10% early distribution penalty?

No separation from service after age 55

Distribution to a qualified IRA is exempt from 10% penalty?

True

Opt outs related to automatic enrollments are exempt from 10% penalty if within 180 days true or false

False, 90 days.

Distributions for funds for birth and adoption are exempt from 10% early withdrawal?

True.

What form do participants receive distribution information for tax filing on

1099R

What box on the 1099R, notifies of the type of distribution?

Box seven

If part of a distribution is rolled over and the other part is not, what happens with the tax reporting forms? How many are prepared?

Two forms are prepared

When is the 1099R required to be provided to a participant?

By January 31 of the calendar year following the year of distribution

When must an Employer file the 1099R with the IRS?

A copy must be filed with the IRS by February 28 by the employer

What’s the minimum amount of distribution exempt from a 1099R filing?

$10

How is form 945 used?

Plan sponsor uses to report withholding

What does the form 945 accomplish?

Reconciles actual deposit with income tax withheld liability

When is the 945 normally due? When can it be extended to, if deposits are made in full?

By January 31 of the following calendar year, if deposits made in full deadline extended February 12

Electronic deposit must be made through what?

EFTPS: electronic federal tax payment system

945 must be filed each year, true or false?

False no form is required if no withholdings were made for the year

What are the three options that apply to how death benefits are distributed?

Option one: distribute entire amount as taxable income by the end of the 10th year containing anniversary of death Option two: start lifetime annuity option based on beneficiary’s life expectancy by day of last year of employee death Option three: roll over to IRA or another 401(k)

Jeopardy Style: “SPOIL under 10”

What are the types of Distributions eligible for Rollover into an IRA.

The SECURE Act 1.0 states that participants who are 72 after what year must take an RMD?

2020

RMDs: If a participant is married & the spouse is more than 10 years younger than the participant, what tables are used for the RMD calculation?

Joint Life and Expectancy Tables

RMDs: If the spouse of a participant is not more than 10 years younger, what tables are used?

Uniform Life Expectancy

In a QDRO, if a plan does not permit payment of a QDRO immediately, then payments may generally only be made, when?

At the same time the participant is entitled to a distribution.

In a QDRO, and in a plan that does not permit immediate payment, a QDRO can provide benefit payments to the alternate payee beginning as early as:

The earliest Retirement Age listed on the plan, even if the participant is not entitled to a distribution.

What are the two conditions in order for a distribution of Roth money to be treated as a “Qualified Roth Distribution”?

1) The 5 Year Rule is Satisfied 2) The Event Rule is Satisfied

What are the possible events for the Roth “Event Rule”? (3 possible)

Death Disability 59 1/2 yrs old

What does the Key “SPOIL under 10” stand for?

Distributions that can be rolled into an IRA

What are the distributions that can be rolled into an IRA? (Use the KEY to help)

Single Sum Death Benefit paid to Beneficiary Partial W/D paid as a Single Sum Offset (Loan) Installments over less than 10 yrs Lump Sum Distribution

What does the key “La CHAIR Def” stand for?

Distributions that can not be rolled into an IRA.

What are the Distributions in the Key, “La CHAIR Def” that can not be rolled over to an IRA?

Life Annuity Corrective Dist Hardship With Adoption (Birth) Install over 10 years RMD Defaults on Loans

What is the Key for Distributions that are exempt from the 10% Early Withdrawal Penalty?

A QT SCORED BM

Using the Key, what Distributions are exempt from the 10% early withdrawal penalty?

QDRO Taxable portion of Life Insurance Security ER Div Payments Corrective Distribution Opt Outs (90 day EACA) Reservist Qualified Distribution Equal payments over life following Sep of Service Disabilty After age 55 Separation Benefit-Death Medical Expense (significant)

What is the key for Distributions that are not exempt from the 10% early distribution?

PHILeR

What are the distribution types that are not exempt from 10% tax on early distributions?

Plan Termination (for those under age) Hardship Involuntary Distribution Later Distribution of DRIPs on ER Secuities

What is the Key for Distributions that are not subject to the 20% Tax W/H?

RACHAL

What are the Distributions not subject to 20% Tax W/H using the key?

RMDs Adoption/Birth Corrective Distributions Hardship Annuity-life

When a plan is subject to the QJSA rules, a Participant’s spouse has certain rights concerning the 401k account. These include these two things:

1) A minimum death benefit 2) Spouses ability to consent to most distributions and loans.

What is the One Year Marriage Rule?

An option for plans that defines a Participants’ Status as “Married” only after 1 year Anniversary of Marriage.

Can a participant take out a Hardship Dist for Education Expenses 18 months in advance? If yes/no, Why?

No. Limited to expenses in next 12 months.

Can a participant request a hardship for medical expenses for a parent?

Not unless the parent is a primary beneficiary or dependent.

Can a Participant access their 401k for a HW for burial expenses for a parent?

Yes. This is the only HW where a parent is expressly allowed as a reason.

What is the calculation to determine your RMD, if you are single or married and your spouse is not 10 years younger than you?

1) Locate your age on the Uniform Life Expectancy Table. 2) Find the Life Expectancy Number that corresponds with Your Age 3) Divide your Account Balance as of December 31st of the Previous Year by the LEN.

What is the RMD Formula if your spouse is more than 10 years younger than you?

Go to the Joint Life and Survivor Expectancy Tables Find both your ages using the matrix Locate the LEN Divide your account balance as of 12/31 of the prior year by the LEN.

A Plan can remit unvested balances to forfeitures in which two cases?

The earlier of: 1) distribution by the terminated employee of their vested account balance. 2) 5 1-year breaks in service