Retirement/Employee Benefits

pg 35 review questions

#1, 3, 7

pg 79 review

#1, 4, 5, 8, 9, 10, 14, 15, 16, 18, 19, 20

pg. 168 review q's

#2, 3, 7, 9, 18, 19

pg 126 review q's

#3, 9

pg 223 review q's

#4, 6, 11, 12, 14, 15, 17, 20, 23, 24, 26, 27, 28, 29, 34, 35, 36

pg 216 review q's

#9, 10, 12, 16, 17, 18, 21, 22

moving expense

$0.18 per mile

business mile expense

$0.545 per mile

achievement awards: qualified

$1,600

SIMPLE contribution limit

$12,500 -catch-up: $3,000

highly compensated empoyee

$120,000

social security wage base

$128,400

adoption assistance

$13,810

401k, SARSEP, 457, 403b employee deferral limit

$18,500

SARSEP contribution limit

$18,500 -$6,000 catch-up over age 50

403b annual deferral limit

$18,500 -catch-up: $6,000 -15-year rule catch-up: $3,000

457 plan annual deferral limit

$18,500 -catch-up: $6,000 -final 3-year catch-up: $18,500

adoption assistance phaseout

$207,140 - $247,140

de minimis public transit pass, tokens, or fare cards

$260 per month

qualified parking

$260 per month

covered compensation

$275,000

achievement awards: nonqualified

$400

dependent care assistance

$5,000 ($2,500 if single parent)

educational assistance program

$5,250

PBGC monthly benefit at age 65

$5,420.45

traditional & Roth IRA contribution limit

$5,500 -$1,000 catch-up over age 50

group term insurance

$50,000

defined contribution maximum limit

$55,000

PBGC yearly benefit at age 65

$64,045.40

benefits-accrued benefit/account balance

*-a participant in a defined benefit plan has an accrued benefit roughly equal to the present value of the expected future payments at retirement accrued benefit -an employee who terminates participation in a defined benefit plan, usually through termination of employment before full retirement age, will be entitled to a benefit payable from the plan equal to the retirement benefit earned to date. this benefit is the actuarial equivalent of the benefit that would have been provided to the participant had the participant waited until retirement to receive the payments -in contrast, a participant in a defined contribution plan has an accrued benefit equal to the account balance of the qualified plan consisting of any combination of er and ee contributions plus the earnings on the contributions reduced by any nonvested amounts account balance -the benefit in a defined contribution plan is simply the participant's account balance reduced by an non-vested amounts. the participant's account balance is the sum of the employer contributions to the plan and the ee's contribution to the plan minus any investment earnings or losses

qualified distributions from Roth IRAs

*a qualified distribution is a distribution from a Roth IRA that satisfies BOTH of the following tests: 1. the distribution must be made after a five-taxable-year period (which begins January 1st of the taxable year for which the first regular contribution is made to any Roth IRA of the individual, or if earlier, January 1st of the taxable year in which the first conversion contribution is made to any Roth IRA of the individual), AND 2. the distribution satisfies ONE of the following requirements: -made on or after the date on which the owner attains age 59 1/2 -made to a beneficiary or estate of the owner on or after the date of the owner's death -is attributable to the owner being disabled -for first-time home purchases (lifetime cap of $10,000 for first-time homebuyers includes taxpayer, spouse, child, or grandchild who has not owned a house for at least 2 years) -the 5-year taxable period is not redetermined when the owner of a Roth IRA dies -the beneficiary of the Roth IRA would only have to wait until the end of the original five-taxable-year period for the distribution to be a qualified distribution ex on pg 142, 143 (if a distribution is taken before the 5 year period, the amount that is all from the Roth IRA and nothing from a rollover traditional IRA is subject to income tax) (if didn't wait 5 years but over age 59 1/2, there will be no 10% penalty) nonqualified distributions -any amount distributed from an individual's Roth IRA that is not a qualified distribution is treated as made in the following order (determined as of the end of a taxable year and exhausting each category before moving to the following category): 1. from regular contributions (ex: the $5,500 annual contributions) 2. from conversion contributions on a first-in-first-out basis 3. from earnings 10% early withdrawal penalty -the 10% early withdrawal penalty will generally apply to any portion of a distribution from a Roth IRA that is includable in gross income (such as distributions that consist of earnings within the Roth IRA) -the penalty also applies to a nonqualified distribution, even if it's not includable in gross income, to the extent it is allocable to a conversion contribution if the distribution is made within the 5-taxable-year period beginning with the first day of the individual's taxable year in which the conversion contribution was made -it's important to note that although a nonqualified distribution may be subject to the 10% penalty based on Roth IRA rules, the penalty may be avoided if the distribution falls within one of the exceptions chart on pg 143, 144 treatment from the standpoint of taxation and penalties of distributions from a Roth IRA to the extent the distribution is not a qualified distribution: -distribution subject to taxation?: contributions and conversions NO, earnings YES -distribution subject to a 10% penalty?: contributions NO, conversions YES if within 5 years of conversion*, earnings YES* * = penalty will not apply if the distribution falls within the exceptions for the 10% penalty

prohibited transactions from IRAs

*know these if an individual or beneficiary of an IRA engages in ANY of the following transactions, then the account will cease to be an IRA as of the first day of the current taxable year: -selling, exchanging, or leasing of any property to an IRA -lending money to an IRA -receiving unreasonable compensation for managing an IRA -pledging an IRA as security for a loan -borrowing money from an IRA -buying property for personal use (present or future) with IRA funds -if a "deemed distribution" is made due to a prohibited transaction then the entire balance in the IRA is treated as having been distributed -in this case, the taxpayer will be subject to ordinary income tax on the entire balance and will also be subject to the 10% early withdrawal penalty

ERISA protection

-Congress enacted the Employee Retirement Income and Security Act (ERISA) in 1974 to provide protection for an employee's retirement assets, both from creditors and abuse by plan sponsors Anti-Alienation Protection -because a qualified plan is designed to provide individuals with income at their retirement, ERISA provides an anti-alienation protection over all assets in the qualified plan ex on pg 5 -once funds are distributed from a qualified retirement plan, the distributed assets are not longer protected by ERISA -HOWEVER, qualified retirement plan assets are NOT protected from alienation due to a Qualified Domestic Relations Order (QDRO- a court order related to divorce, property settlement, or child support), a federal tax levy, or from a judgment or settlement rendered upon an individual for a criminal act involving the same qualified plan -IRAs (traditional, roth, SEP, or SIMPLE) are not afforded the same anti-alienation protection under ERISA. the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA 2005), provided IRAs similar credit protection. the Act clarifies that retirement accounts that are exempt from tax under the IRC are also exempt from the debtor's estate (up to $1M)

voting of ESOPs

-ESOP participants have the same voting rights with their allocated shares as other shareholders, including the right to vote the shares and the right to earn dividends

diversification of ESOPs

-ESOPs are permitted to hold 100% of the corporate stock in the trust -under the IRC, qualified participants may force diversification in their holdings if they are at least 55 years old and have completed at least 10 years of participation in the ESOP -the qualified participant must be offered a diversification election within 90 days after the close of each plan year beginning with the year after the ee becomes qualified -the participant may elect to diversify up to 25% of the account balance into one of the plan's alternate investment options -in the final year of the 6-year election period, the cumulative diversifiable percentage is increased to 50%

Archer MSA's

-HIPAA established a tax-favored savings account for medical expenses called an Archer Medical Savings Account (MSA) -could be established from 1996-2005 for er's with 50 or fewer ee's and self-employed individuals -ee's could not establish the MSA but could contribute (subject to limitations) to the account if their er established an MSA on their behalf -after 2005, MSAs were replaced by Health Savings Accounts (HSA) -MSAs that were established before 2006 are still in existence, may still be maintained, and retain their tax-favored status -contributions can be made by the ee or the er -ee contributions are deductible from the ee's gross income -er contributions are tax deductible by the er, not subject to payroll taxes, and not taxable income to the ee -the aggregate contributions by the er and the ee cannot exceed 65% of the deductible for individual coverage and 75% of the deductible for family coverage -the earnings on the assets within an MSA are tax deferred until a distribution is taken from the account -if a distribution is for qualified medical expenses, the distribution, including any earnings, is not taxable -if the distribution isn't for qualified medical expenses, the entire distribution is taxable as ordinary income -if the distribution is taken before the owner of the account is 65, the distribution is subject to an additional 20% excise penalty tax

ERISA protection vs. state law protection for IRAs

-IRAs are now afforded similar protection to qualified plans under federal bankruptcy law -the Act clarifies that retirement accounts that are exempt from tax under the IRC are also exempt from the debtor's estate -the aggregate value of the assets in a traditional IRA or a Roth IRA that may qualify for this exemption cannot exceed $1M for an individual debtor -the assets subject to the $1M cap do not, however, include amounts attributable to rollover contributions or earnings on these amounts

investments in IRAs

-IRAs have a wide selection of investment choices, BUT certain types of investments are prohibited and are not allowed to be held within an IRA, mainly life insurance and collectibles -if either life insurance or collectibles are purchased within an IRA, the purchase is deemed as distributions; the value of the purchase is subject to tax and/or penalty -collectibles include any work of art, antiques, metal, gems, stamps, coins, wines, etc -an EXCEPTION to the collectibles rule exists for certain US minted coins and bullion, such as American Gold, Silver, and Platinum Eagle coins, are permitted to be held in an IRA account -coins of most foreign countries, such as South African Krugerrands, are considered collectibles and are therefore not permissible investments for an IRA -investments in gold, silver, platinum, or palladium bullion are permitted *know that life insurance and collectibles are not allowed in an IRA. also know the exceptions that gold, silver, platinum, or palladium are permitted

salary reduction simplified employee pensions (SARSEPs)

-SIMPLE plans were introduced to replace SARSEPs -not permitted to be established after 1996, but many of the SARSEPs in existence prior to 1997 are still in operation -allow employees to select to defer a portion of their current salary into a SEP-IRA in a similar fashion to 401k plans -the SARSEP deferral limit is the same as 401k plans -easy to establish and had minimal reporting and testing requirements to establish a SARSEP, an employer had to meet the following provisions: -at least 50% of the ee's eligible to participate must choose to defer a portion of their salary -the er had to have no more than 25 eligible ee's -the elective deferrals of the highly compensated ee's had to meet the SARSEP ADP test SARSEP ADP test -the amount deferred each year by each eligible HC ee as a percentage of pay (the deferral percentage) cannot be more than 125% of the ADP of all NHC ee's eligible to participate -the deferral percentage equals: ADP = elective ee deferral / ee's compensation elective deferral limit: -just like the 401k, the ee cannot defer more than $18,500 -age 50 catch-up available -the $18,500 deferral limit applies to the AGGREGATE elective deferrals the ee makes for the year to a SARSEP and to any of the following plans: -cash or deferred management plan (401k) -salary reduction arrangement under a tax-sheltered annuity plan (403b) -SIMPLE IRA plan -no double dipping on elective deferrals! -however, other income sources may be eligible to be considered for some other type of qualified plan arrangement or simplified ee pension -if the er makes nonelective contributions to the SARSEP, the combined er contributions cannot exceed the lesser of 25% of the ee's compensation or $55,000 excess deferrals -excess deferrals in a SARSEP are elective contributions made by highly compensated ee's that violate the SARSEP ADP test -the HC ee's must be given notice within 2 1/2 months after the end of the plan year of their excess contributions -these deferral contributions must then be removed from the SARSEP -if the er does not inform the HC ee's, then the employer must pay a 10% excise tax on the excess portions

eligibility of 403b plans

-a 403b plan with immediate vesting may require a maximum waiting period of 2 years and the attainment of age 21, OR 1 year and the attainment of age 26 (educational systems ONLY) -exception: if immediate vesting is not offered, the maximum waiting period is 1 year and the attainment of age 21 eligible employees (who must meet the age and service requirements) to participate in a 403b plan: -ee's of tax-exempt organizations as defined under IRC Section 501C3 -ee's who are involved in the day-to-day operations of a public school or public school system -ee's of cooperative hospital service organizations -ministers who meet one of the following criteria: ministers employed by Section 501C3 organizations, who are self-employed, or who are employed by organizations that are not Section 501C3 organizations and function as ministers in their day-to-day responsibilities with their employer *a 403b plan is a employee deferral plan (contributory) and is not a qualified plan, investment risk is borne by the employee, ee's deferral is 100% vested, and the plan assets can be invested indirectly in stocks and bonds through annuities and mutual funds

Flexible Savings Accounts (FSA)

-a cafeteria plan that is funded by ee deferrals rather than er contributions -b/c of the consequences of forfeiture of unused benefits, they are often referred to as "Use it or lose it" accounts -however, IRS now permits FSA funds to be used in a "grace period", which must not extend beyond the 15th day of the 3rd calendar month after year-end (March 15) -the limit is $2,650 -minimizes employee outlay (costs) since the FSA converts what would have been after-tax ee expenditures for the benefits selected to pretax expenditures -since FSAs are funded entirely through ee salary reductions, the er only bears the administrative costs -salary reductions elected by ee's to fund the nontaxable benefits available under the plan are not subject to income taxes or payroll taxes -there are many nontaxable benefits available from an FSA, which include many benefits that ee's might not otherwise provide to their ee's such as dependent care, dental, etc -must meet the same nondiscrimination requirements as FSA plans ex on pg 208 *NO payroll taxes on ee deferrals *contributions only made by ee, not er *benefit of taking dependent care credit vs. using a dependent care FSA expense account depends on your level of income/tax bracket *an FSA is technically a cafeteria plan that can be used by itself or as part of a broader cafeteria plan *a separate FSA salary reduction must be made for each type of eligible benefit *a salary reduction for an FSA will lower an ee's income for SS tax purposes if the ee earns less than the SS Wage base

cash balance pension plans

-a defined benefit pension plan that shares many of the characteristics of a defined contribution plan but provides a specific defined retirement benefit -from the participant's perspective, a cash balance plan is a qualified plan that consists of an individual account with guaranteed earnings attributable to the account balance. HOWEVERm the account that the ee sees is a hypothetical account displaying hypothetical allocations and earnings -it's subject to all of the requirements of defined benefit plans and pension plans contributions and earnings -when a cash balance pension plan is established, the plan sponsor develops a formula to fund the cash balance hypothetical alloclation -the formula consists of a Pay Credit and an Interest Credit -the pay credit may be integrated with social security to produce a higher benefit percentage to those participants who earn a salary above the SS wage base or may be based on a combination of age and years of service -the benefit, which is a guaranteed return and is determined under the plan document, will be payable to the participant at retirement regardless of the plan's true earnings, whether greater than or less than the benefit provided by the plan formula -a cash balance formula might be structure as follows: 5% pay credit with a guaranteed interest credit of 2%. each year, a hypothetical contribution of 5% of salary is contributed to the plan and the balance earns a 2% guaranteed rate of return quasi-separate accounts -does not have separate accounts for each participant -consists of a commingled account that has a value equal to the actuarial equivalent of the present value of the expected future benefits that will be paid from the plan to the participants (the promised contribution and earnings) younger/older -generally more beneficial for younger participants b/c the formula is generally based on the number of years the participant is employed with a guaranteed rate of return -younger participants have more years of contributions and earnings than older participants vesting -3-year cliff vesting conversions to a cash balance plan -a cash balance "conversion" occurs when an employer changes from a traditional defined benefit pension plan into a cash balance plan -under the PPA 2006, a hybrid plan must meet three main requirements: 1. a participant's accrued benefit would be equal to or greater than that of any similarly situated, younger participant. an individual is similarly situated to a participant if the individual and the participant are (and always have been) identical in every respect (including period of service, compensation, position, date of hire, work history) except for age 2. the interest rate used to determine the interest credit on the account balance in the hybrid plan must not be greater than a market rate of return 3. for plan years beginning after 2007, the hybrid plan must provide 100% vesting after 3 years of service -the PPA also addresses the "whipsaw" effect by providing that the distribution of a participant's hypothetical cash balance account is sufficient to satisfy his or her benefit entitlement from distributions after the date of enactment. thus, employers are no longer penalized for using a higher interest credit *cash balance plans are a popular choice to get rid of old expensive defined benefit plans -the cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand, and as a cost-savings measure -subject to minimum funding requirements -has a guaranteed annual investment return to participants

younger/older

-a defined benefit plan is generally considered to benefit OLDER participants b/c at the creation of the plan, the largest percentage of the overall contribution to the plan will be attributable to the older participants -DB plans also can consider prior service -defined contribution plans usually favor YOUNGER participants *defined benefit pension plan, target benefit pension plans, and money purchase pension plans with permitted disparity would allocate a higher percentage of the plan's current costs to a certain class or group of eligible employees (DB plan and target plan would allocate more costs to older participants)

money purchase pension plans

-a defined contribution pension plan that provides for a contribution to the plan each year of a fixed percentage of the ee's compensation -the er promises to make a specified contribution to the plan for each plan year, but the er is not required to guarantee a specific retirement benefit contribution limit -an er cannot deduct contributions to the plan in excess of 25% of the er's total covered compensation paid -defined contribution plans are limited to contributing, on behalf of each participant, the lesser of 100% of the participant's compensation or $55,000 to the plan separate accounts -contributions to a money purchase plan are made to a separate account on behalf of each participant younger/older -like all defined contribution plans, benefits YOUNGER participants more than older b/c of the increased number of contributions and compounding periods impact of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001) -increased the contribution limit for profit sharing plans to 25% (from 15%) putting defined contribution pension and profit sharing plans on equal contribution levels -since profit sharing plans do not require mandatory funding (more flexible), this law virtually ends the creation of new money purchase pension plans vesting -2-to-6 year graduated or 3-year cliff *noncontributory plans: money purchase pension plans and profit sharing plans (employers generally contribute to money purchase pension plans, ESOPs, and profit sharing plans *employees contribute (thus contributory plans) to 401ks and thrift plans

early withdrawal penalty for distributions prior to age 59 1/2

-a distribution prior to the participant attainting the age of 59 1/2 may be subjected to a 10% early withdrawal penalty unless the distribution meets one of the exceptions *exceptions to the 10% early withdrawal penalty: -death -attainment of age 59 1/2 -disability -substantially equal period payments (Section 72t) -medical expenses that exceed 10% of AGI (7.5% for 2017 and 2018) -QDRO -qualified public safety employee who separates from service after age 50 -attainment of age 55 and separation from service four additional ways to avoid the 10% penalty (E,T,M,Q): -the government provides an exception (E) to the penalty if the distributions are dividends paid within 90 days of the plan year end from an ESOP -if the distribution is made to pay certain unpaid income taxes (T) because of a tax levy on the plan -if the distribution is made to the participant for certain medical (M) expenses paid during the year greater than 10% of AGI (7.5% for 2017 or 2018) (whether the taxpayer itemizes or not) -if the distribution is pursuant to a QDRO (Q) -other exceptions to the 10% penalty are plan rollovers and plan loans *for qualified plans to avoid the 10% penalty, they make a "MESS AT DQ" (Medical expenses, Equal period payments, Separation from Service, Age, Tax levies, Death and disability, and Qdro) *for IRAs to avoid the penalty, the say "HIDE ME" (first time Home purchase, health Insurance, Death and disability, higher Education, Medical expenses, Equal periodic payments, and of course, age) *education expenses are only an exception for IRAs

cash or deferred arrangements (CODA) 401k plans

-a feature that attaches to certain types of qualified plans to create a contributory component -a CODA is permitted with profit sharing plans and stock bonus plans -permits ee's to defer a portion of their salary on a pretax basis, thereby reducing their current income tax liability -these ee elective deferral contributions are tax-deferred-meaning the earnings are not subject to income taxation until the ee takes a distribution from the plan *the ee must have a choice of receiving an er contribution in cash or having it deferred under the plan *in addition to an indexed limitation for any taxable year on exclusions for elective deferrals, the law caps the amount of pay that can be taken into consideration for qualified plans ($275,000)

fringe benefits

-a form of compensation where a benefit, other than customary taxable wages, is provided by the er to the ee for the performance of services -used effectively, it's a way to increase ee total compensation without raising (or minimally raising) ee taxable income taxation of fringe benefits -under IRS Treasury Regulations, all fringe benefits provided to an ee are taxable as wages UNLESS a specific provision of the IRC excludes the benefit from taxation OR unless the ee pays fair value for the fringe benefit -the value of a fringe benefit provided to an ee is deductible as compensation expenses by the er unless the fringe benefit is excludable from the ee's taxable income -TCJA 2017 eliminated the ability to deduct costs associated with many fringe benefits nondiscrimination of fringe benefits -ensuring that the er does not discriminate against different classes of ee's is vital -if the fringe benefit is deemed discriminatory, then the exclusion may be lost -this will result in the value of the fringe benefit being added in ee's income -some fringe benefits have nondiscrimination requirements while others do not 2017 TCJA changes: -no deduction is allowed for: an activity generally considered to be entertainment, amusement, or recreation, membership dues to any club organized for business, pleasure, recreation, or other social purpose, or a facility or portion thereof used in connection with any of the above items (effective after 2017) -no er deduction for any qualified transportation fringe. except as necessary for ensuring the safety of an ee, no deduction for expenses for commuting between an ee's residence and the plan of employment (effective after 2017) -taxpayers may still deduct 50% of food and beverage expenses associated with operating a trade or business (travel meals). the law expands the 50% limitation to meals provided for the convenience of the er (effective 2017-2025) summary of available fringe benefits -meals and lodging furnished for the convenience of the er (modified by TCJA 2017) -educational assistance programs -no additional cost services (airlines/hotels/line of business) -working condition fringe benefits -qualified moving expense reimbursement (W2) for AGI (modified by TCJA 2017) -adoption assistance programs -athletic facilities furnished by the er -dependent care programs -qualified ee discounts (products vs. services) -de minimis fringe benefits -qualified tuition reduction plans -prizes and awards (modified by TCJA 2017)

other allocation methods of profit sharing plans

-a highly compensated owner can fund his plan with the annual additions limit ($55,000) using profit sharing plans with or without a cash or deferred arrangement -in many cases, the use of a CODA may enable an owner to reach the maximum contribution limit of $55,000 with a lower total employer contribution

effect of multiple qualified plan or IRAs on RMD's

-a minimum distribution must be taken from EACH qualified plan in which the taxpayer has an account balance -therefore, if the taxpayer had 3 qualified plans resulting from previous jobs, then 3 minimum distributions would have to be taken -for taxpayers with multiple IRAs, taxpayers are permitted to COMBINE the value of all of their IRAs in determining the RMD -the RMD for the IRAs can be taken from any account or from multiple accounts

10-year forward averaging

-a participant born prior the January 2, 1936 may be eligible for 10-year forward averaging when taking a lump-sum distribution from a qualified plan -the income tax due on a lump-sum distribution is calculated by dividing the taxable portion by 10 and then applying the 1986 individual income tax rates to the result. this result is then multiplied by 10 to determine the total income tax due on the distribution -the benefit is that the taxpayer avoids the distribution being taxed in the higher current income tax brackets -does not allow the tax to be paid over various years; the tax is paid in the year of the lump-sum distribution steps to calculate (pg 95): lump sum distribution - ee's contributions that were previously taxed and the cost of insurance (this includes participant's after-tax contributions to a qualified plan, PS-58 costs-resulting from life insurance within a qualified plan- and certain loans from qualified plans that are treated as taxable distributions) - minimum distribution allowance (only applicable to small lump-sum distributions less than $70,000) = taxable amount of distribution / taxable amount by 10 determine the tax on the result (calculated using 1986 income tax rates) x result by 10 pay the tax from above step (tax is paid in one payment) minimum distribution allowance is the lesser of: -$10,000, or -1/2 of the adjusted total taxable amount of the lump-sum distribution for the taxable year, reduced (but not below zero) by 20% of the excess (if any) of the adjusted total taxable amount over $20,000 ex on pg 95 *10-year forward averaging is only available coming from qualified plans, not IRAs *if rolled over from qualified plan to IRA then back to qualified plan, the amount transferred into the qualified plan can be eligible for 10-year forward averaging rules

pension plans vs. profit sharing plans

-a pension plan is a qualified retirement plan that pays a benefit, usually determined by a formula, to a plan participant for the participant's entire life during retirement -under profit sharing plans, plan participants usually become responsible for the management of the plan's assets (investment decisions) and sometimes even responsible for personal contributions to the plan (contributory plans) *know the differences: pension plan: -legal prmise: paying a pension at retirement -in-service withdrawals permitted: NO (under the pension protection act of 2006, defined benefit pension plans can provide for in-service distributions to participants who are age 62 or older) -plan subject to mandatory funding standards: YES (for plan years beginning in 2008, the funding rules under IRS section 412 have been amended by the pension protection act of 2006) -% of plan assets available to be invested in employer securities: 10% -must the plan provide qualified joint and survivor annuity and a qualified presurvivor annuity: YES profit sharing plans: -legal promise: deferral of compensation and taxation -in-service withdrawals permitted: YES (after 2 years) if plan document permits -plan subject to mandatory funding standard: NO -% of plan assets available to be invested in employer securities: up to 100% -must the plan provide qualified joint and survivor annuity and a qualified presurvivor annuity: NO

profit sharing plans

-a plan established and maintained by an employer to provide the participation in profits by employees or their beneficiaries 7 types of profit sharing plans: -profit sharing plans -stock bonus plans -employee stock ownership plans (ESOP) -401k plans -thrift plans -age-based profit sharing plans -new comparability plans *advantages of profit sharing plans to businesses/business owners: allows discretionary contributions, permit withdrawal flexibility, controls benefit costs, may provide legal discrimination in favor of older owner-employees

Simplified Employee Pension (SEP)

-a practical retirement plan alternative to a qualified plan that can be used by small businesses and sole proprietors -easier to establish than qualified plans and have practically no filing requirements -because SEPs use IRAs as the receptacle for contributions, there is no trust accounting for the plan sponsor -SEPs have similar characteristics of profit sharing plans -contributions are limited to the lesser of 25% of compensation or $55,000 participation (eligibility & coverage) -employers that sponsor SEPs must provide benefits to almost all ee's -the requirements for coverage include: -attainment of age 21 or older, -performance of services for 3 of the last 5 years, and -received compensation of at least $600 during the year -based on this definition, even part-time ee's must be covered -if a company has high ee turnover, a SEP may be used to exclude the ee's who do not remain employed for a period of at least 3 years establishment of a SEP -SEPs can be established and funded for a plan year as late as the due date of the federal income tax return including extensions -can be established as late as April 15 or October 15 with extensions for Sole props (Schedule C) and corporations (Form 1120) -can be established as late as March 15 or September 15 with extensions for Partnerships (Form 1065) and S-corporations (Form 1120S) to establish a SEP, the er must complete 3 basic steps: -a formal written agreement to provide benefits to all eligible ee's must be executed -all eligible ee's must be given notice about the SEP -a SEP-IRA must be set up for each eligible ee contributions -similar to profit sharing plans, employer contributions to SEPs are discretionary -in years that a contribution is made to a SEP, a contribution must be made to all employees eligible during the year, whether or not they are employed or alive as of the end of the year -contributions to SEPs are made by the er and must be made to ee's IRA accounts based on a written formula that does not discriminate in favor of highly compensated employees -contributions to SEPs may be integrated with Social Security (permitted disparity) -for self-employed individuals, the general 25% limit converts to 20% of net self-employment income, just like the Keogh calculation vesting & withdrawals -contributions for a SEP are made to IRA accounts on behalf of ee's -as a result, there is NO vesting for er contributions -employees are able to withdraw funds in any amount from their SEP-IRA *a SEP is inappropriate for er's with many part-time ee's who want to limit coverage under the SEP b/c the SEP requires coverage after a short period of time *a partner in a partnership is considered self-employed and therefore subject to the special calculation for self-employed individuals *employer contributions to a SEP are NOT subject to FICA and FUTA (payroll taxes) *contribution limit is NOT the same as 401k/SARSEP deductible limits; the SEP limit is 25% of covered compensation up to $55,000 *contributions are currently excludable from ee's gross income (deferred) *do not offer catch-ups b/c they're 100% employer contributed *SEPs and qualified plans have the same funding deadlines; can be funded as late as the due date of the return plus extensions *IRAs and SEPs are not protected by ERISA *SEPs and qualified plans have the same nondiscriminatory and top-heavy rules

allocations/funding of new comparability plans

-a profit sharing plan in which contributions are made to an ee's account based on their respective classification in the company as defined by the employer -to meet the nondiscrimination rules, new comparability plans, like age-based plans, must comply with the cross-testing rules -cross-testing rules dictate testing of defined contribution plans on the expected benefits to be received by employees at retirement -these plans are more expensive to administer

SIMPLE 401k's

-a qualified plan and must generally satisfy the same requirements as 401k plans and SIMPLE IRA plans -an ee may choose to make "salary reduction contributions" or deferrals -the salary reduction contribution is stated as a percentage of the ee's compensation but may not exceed $12,500 -the employer MAY, but is not required to, permit certain ee's to use the catch-up feature; $3,000 catch-up over age 50 -a participant may take a loan (if the plan permits) from the SIMPLE 401k; this is NOT allowed in a SIMPLE IRA -the amount of the loan is subject to the same restrictions as loans from qualified plans -er's who sponsor SIMPLE 401k plans MUST make either (1) a dollar-for-dollar matching contribution up to 3% of the ee's compensation or (2) a nonelective contribution of 2% of each eligible ee's compensation -unlike SIMPLE IRAs there is NO flexibility on the contribution formula -the ADP, ACP test and top-heavy rules DO NOT apply to SIMPLE 401k's b/c they are safe-harbor plans

Incentive Stock Options (ISOs)

-a right given to an ee to purchase an er's common stock at a stated exercise price -if the requirements of IRC Section 422 are met when the incentive stock option is granted (provided the exercise price is equal to FMV of the stock), the ee will not recognize any taxable income at the date of the grant -at the date of exercise, the ee will also not be subject to ordinary income tax on the difference between the FMV of the stock and the exercise price (bargain element) -HOWEVER, this difference (Bargain element) is a positive adjustement for the Alternative Minimum Tax (AMT) calculation -when the ee sells the stock subsequent to the exercise, the difference between the sales price of the stock and the original exercise price is considered long-term capital gain (Assuming the holding period requirements are met), and there is a negative adjustment for the AMT calculation -to obtain this preferred tax treatment, the requirements below must be met -in addition, a strict dual holding period must be met; a qualified sale requires waiting until 2 years from the date stock was granted and 1 year from the date stock was exercised -sales prior to either holding period being met are disqualified dispositions and terminate most of the tax benefits- it effectively triggers similar treatment as a NQSO *must know the holding period and requirements requirements for ISO: -the ISOs can only be granted to an ee of the corporation issuing the ISOs -the ISO plan must be approved by the stockholders of the issuing corporation -the ISOs must be granted within 10 years of the ISO plan date -the exercise of the ISO is limited to a 10-year waiting period (5 years for 10%+ owners) -at the date of the ISO grant, the exercise price must be greater than or equal to the FMV of the stock -an ISO cannot be transferred except at death -an owner of more than 10% of a corporation cannot be given ISOs unless the exercise price is 110% of the FMV at the date of the grant and the option term is less than 5 years *-the aggregate FMV of ISO grants at the time the option is first exercisable must be less than or equal to $100,000 based on the grant price per year per executive. any excess grant over the $100,000 is treated as a NQSO (tested occasionally) *-to qualify as an ISO, the executive must not dispose of the stock before the later of two years from the grant of the ISO or within 1 year of the exercise of the ISO (tested often) -the executive must be an ee of the corporation continuously from the date of the grant until at least 3 months prior to the exercise chart of process on pg 185 ex on pg 186, 188 *employer will not have a tax deduction related to the grant, exercise, or sale of the ISO disqualifying disposition -if stock acquired after exercising an ISO is disposed of either 2 years from the date of the grant or 1 year from the date of exercise, the sale is known as a disqualifying disposition and some of the favorable tax treatment is lost -for such a sale, any gain on the sale of the stock attributable to the difference between the exercise price and the FMV at the date of exercise will be considered ordinary income, but it will not be subject to payroll tax or federal income tax withholding -any gain in excess of the difference between the exercise price and the FMV at the date of exercise will be short or long-term capital gain considering the executive's holding period ex on pg 187 cashless exercise (disqualifying disposition, too) -at the time of a cashless exercise, a third-party lender lends the executive the cash needed to exercise the option and the lender is immediately repaid with the proceeds of the almost simultaneous sale of the stock -a cashless exercise of incentive stock options automatically triggers at least a partial disqualifying disposition since the holding period requirements will not be met ex on pg 187

employee stock ownership plans (ESOPs)

-a special form of stock bonus plans that reward ee's with both ownership in the corporation and provide owners with substantial tax advantages -controlled through a trust; the sponsor company receives tax deductions for contributions of stock from the corporation. the ESOP then allocates the stock to separate accounts for the benefit of the individual employee-participants -a key characteristic of the ESOP is that the trust may borrow money from a bank or other lender to purchase the employer stock -the corporation generally repays the loan through tax-deductible contributions to the ESOP -both the interest and principal repayments for the loan are income tax deductible -the ESOP can thus be leveraged (aka LESOP) parts of the leveraged ESOP transaction: 1. bank loans to ESOP Trust with corporation's guarantee to purchase shares from the stockholders 2. ESTOP Trust buys stock from existing shareholders who generally also guarantee the loan 3. corporation contributes annually (tax deductible) to the ESOP trust, and ESOP trust repays the bank both principal and interest 4. ee's obtain stock when they retire or leave (distributions) 5. the trust may have to purchase back "put option" shares from ee's who exercise their buy-back rights

target benefit pension plans

-a special type of money purchase plan -determines the CONTRIBUTION of the participant's account based on the benefit that will be paid from the plan at the participant's retirement -the plan formula may be written to provide a contribution to each participant during the plan year that is actuarially equivalent to the present value of the benefit at the participant's retirement -this will provide a greater contribution for OLDER participants -an actuary is required at the establishment but not required on an annual basis -this plan does not fund the plan with the amount necessary to attain the target at retirement rather the employer PROMISES A CONTRIBUTION to the plan based on the actuarial assumptions -once the contribution has been made, the participant is responsible for choosing the investments -like any DC plan, the participant is entitled to the plan balance at retirement regardless of its value, be it greater than or less than the intended target benefit -a form of money purchase pension plan, so it follows the same contribution, eligibility, coverage, vesting, and distribution limitations as the money purchase pension plan -like the money purchase plan, EGTRRA 2001 has generally eliminated their usefulness. instead, employers are establishing age-weighted profit sharing plans so that the contributions to the plan each year are discretionary rather than mandatory but still favor older employees

Voluntary Employees Beneficiary Association (VEBA)

-a welfare benefit plan into which er's deposit funds that will be used to provide specified ee benefits in the future -the VEBA is either a trust or a corporation set up by an er to hold funds used to pay benefits under an er benefit plan -the payments made to the VEBA are deductible by the er and the income of the VEBA is tax exempt VEBAs can provide: -life insurance before and after retirement -fitness and accident benefits -severance benefits paid through a severance pay plan -unemployment and job training benefits -disaster benefits -legal service payments for creditors VEBAs cannot provide: -savings -retirement -deferred compensation -commuting expenses -accident or homeowners insurance

cafeteria plans

-a written plan under which the ee may choose to receive cash as compensation or tax-free fringe benefits -provided the cafeteria plan meets the requirements, the value of the fringe benefit will be a deductible expense for the employer and will not be included in the taxable income of the ee -in the case where the plan provides a benefit that's not allowed, the value of the benefit will be included in the ee's gross income -discrimination in favor of either HC or providing more than 25% of the benefit to key ee's, will result in the value of the nontaxable benefits chosen by the key ee's or HC being included in their gross income allowed benefits: -accident and health benefits (but not medical savings accounts or long-term care insurance) -adoption assistance -dependent care assistance -group term life insurance coverage (including costs that cannot be excluded from wages) benefits not allowed -Archer medical savings accounts -athletic facilities -de minimis benefits -educational assistance -employee discounts -lodging on ee's premises -meals -moving expense reimbursements -no-additional-cost services -transportation benefits -tuition reduction -working condition benefits *taxed on any cash received instead of choosing a benefit

defined benefit vs. defined contribution plans

-all defined benefit plans are pension plans, but defined contribution plans can either be pension plans or profit sharing plans -pension plans can be either defined benefit or defined contribution, while all profit sharing plans are defined contribution plans defined benefit plans: -annual contribution limit: not less than the unfunded current liability -who assumes investment risk: employer -forfeitures allocated: to reduce plan costs -plan subject to Pension Benefit Guaranty Corporation (PBGC) coverage: YES (except professional firms with less than 25 employees) -separate investment accounts: NO, they're commingled -credit for prior service for the purpose of benefits: YES defined contribution plans: -annual contribution limit: 25% of total employee covered compensation -who assumes investment risk: employee -forfeitures allocated: to reduce plan costs or allocate to other participants -plan subject to PBGC: NO -separate investment accounts: YES, they're usually separate -credit for prior service: NO *defined benefit plan: the plan specifies the benefit an EE receives at retirement, the law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of salary or $220,000 per year, the plan has less predictable costs as compared to defined contribution plans, and the plan assigns the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employer

vesting of 401k plans

-all ee elective deferral contributions and the earnings on those contributions are always 100% vested -the er-matching contributions, er discretionary profit sharing contributions, and the earnings must vest under a schedule at least as generous as the 2-to-6 year graduated or 3-year cliff schedules ex on pg 56

Roth IRAs

-although the contributions to a Roth IRA are not deductible, qualified distributions from Roth IRA accounts consist solely of NONTAXABLE INCOME -Roth IRAs may be funded after the owner attains the age of 70 1/2 and are not subject to the RMD rules during the owner's life *similarities/differences between traditional and Roth IRAs: -earned income requirements: same -contribution requirements: same; for traditional, contributions cannot be made beyond 70 1/2 -deductions: only traditional IRAs allow deductions -investment choices: same -minimum distribution rules: traditional-during life and after death, Roth-only after death -prohibited transactions: same -minimum distributions must be taken from inherited IRAs-both traditional and Roth IRAs contributions -taxpayers can fund Roth IRAs by either making cash contributions or by converting traditional IRAs into Roth IRAs -both Roth IRAs and traditional IRAs share an annual single contribution limit and use the same definition for earned income -however, taxpayers can only contribute to a Roth IRA if they fall within the income limits without regard to active participant status *contribution AGI phaseout limits given for Roth IRAs Roth 401k -a 401k plan may include a Roth contribution program in which ee's are able to make after-tax contributions to a Roth account conversions -an individual may convert a traditional IRA to a Roth IRA, with the expectation that distributions are completely tax free -at the time of the conversion, however, the taxpayer must include the value of the conversion amount in their taxable income -a traditional IRA can be converted to a Roth regardless of AGI recharacterized contributions -IRA owners may recharacterize certain contributions made to one type of IRA as made to a different type of IRA for a taxable year by the due date of the return plus extensions -as a result of TCJA 2017, recharacterization cannot be used to unwind a Roth conversion. however, recharacterization is still permitted with respect to other contributions distributions -a distribution from a Roth IRA is not included in the owner's gross income if it's a qualified distribution -qualified distributions from Roths are not subject to the 10% penalty

distributions from ESOPs

-an ESOP is subject to minimum distribution requirements -HOWEVER, plan participants can elect to receive substantial equal periodic payments of their account balance not less than once per year after the participant separates from service -the substantially equal periodic payments must be for a period no longer than 5 years, unless the participant's account balance is valued at more then $1,105,000, in which case the distribution period may be extended 1 year for each additional $220,000 of account value up to a total of 10 years -any distribution from an ESOP that is not a lump-sum distribution of the er securities will not be eligible to receive NUA treatment and will be taxed as ordinary income; these distributions may also be subjected to the 10% early withdrawal penalty

funding arrangements and types of nonqualified deferred compensation plans

-an NQDC plan is a contractual arrangement between an er and executive whereby the er promises to pay the executive a predetermined amount of money sometime in the future advantages of deferred compensation plans to the employer: -cash outflows are often deferred until the future -the er will save on payroll taxes except for the 1.45% Medicare match (since the ee's income is probably over the SS wage base) -the er can discriminate and provide these benefits exclusively to a select group of key employees unfunded promise to pay -this type of arrangement will meet the standards of a substantial risk of forfeiture and will, therefore, meet the objective of tax deferral -the employee is at some risk of not being paid secular trust -irrevocable trusts designed to hold funds and assets for the purpose of paying benefits under a nonqualified deferred compensation arrangement -since a secular trust eliminates the substantial risk of forfeiture with regards to the assets being secure, the ee is at risk of immediate taxation to the ee; this tax consequence is the cost of eliminating risk that the funds will not be paid in the future -assets placed into secular trusts are often subject to some other substantial risk of forfeiture, like a vesting schedule or term of employment required to prevent immediate taxation *participants do not have a substantial risk of forfeiture and thus, do not provide the ee with tax deferral *provide the er with a current income tax deduction for contributions *protect the participant from er unwillingness to pay b/c they are funded *protect from bankruptcy b/c there is no risk of forfeiture rabbi trust -strike a good balance between the risk of an unfunded promise to pay and the lack of that risk of forfeiture in a secular trust -while the assets in the rabbi trust are for the sole purpose of providing benefits to ee's and may not be accessed by the er, they may be seized and used for the purpose of paying general creditors in the event of the liquidation of the company -even though assets are set aside in a trust, rabbi trusts are treated as unfunded (also can be informally funded) due to the presence of a substantial risk of forfeiture *a rabbi trust is a trust established and sometimes funded by the er that is subject to the claims of the er's creditors, but any funds in the trust cannot generally be used by or revert back to the employer *rabbi trusts do not provide security against er bankruptcy or a current tax deduction for the er *irrevocable, the er may fund the trust from the general assets of the company, er contributions to the trust are exempt from payroll taxes, and the trust's assets may be used for purposes other than discharging the obligation to the ee (bankruptcy) chart on pg. 182 differences between unfunded promise to pay, rabbi trust, and secular trust -funded with assets: rabbi trust and secular trust -funded (for purposes of ERISA): only secular trust -risk of forfeiture without employer instability: only unfunded promise to pay -risk of forfeiture if employer is insolvent: unfunded promise to pay and rabbi trust if claim is below general creditors -when is there taxable income to the executive?: when actually or constructively received for unfunded promise to pay and rabbi trust, immediately upon funding by er or vesting for secular trust -when is the payment deductible for the employer?: deferred until payment is made to executive for unfunded promise to pay and rabbi trust, immediately as funded and constructively received for secular trust -accomplishes the objective of deferral: yes for unfunded promise to pay and rabbi trust, if vesting is required for secular trust

active participant status

-an active participant is an employee who has benefited under one of the following plans through a contribution or an accrued benefit: -qualified plan -annuity plan -tax-sheltered annuity (403b plan) -certain government plans -simplified employee pensions (SEPs) -simple retirement accounts (SIMPLEs) -considered an active participant for the year a contribution was received ex on pg 136,137 *if enrolled in a 457 plan, not an active participant *401k, 403b, SEP, defined benefit plan = active participant

split-dollar life insurance

-an arrangement where an ee and er generally share the premium costs and cash value or death benefit of a life insurance policy covering the life of the ee -the purpose of the split benefit is to reimburse the er's share of the premium cost of the policy -this is typically done with the death benefit reimbursement in the amount of the premiums paid or, if the policy is surrendered, the amount of the premiums paid or the entire cash value ways to structure the premium split: -standard split-dollar plan: the er pays the portion of the premium that equals in the increase in cash value -advantages- simple in design and easy to explain and the er's "investment" is fully securied -disadvantages- high premium payments required by the ee early on -level premium plan: the ee's share of the premium cost is level over a specified period of time (ex: 5 or 10 years) -advantages- does not require the high premium payments by the ee -disadvantages- if terminated early, the er's reimbursement, if limited to cash value, is not fully recognized -employer pay all plan: the er pays the entire premium -advantages- the ee does not have to pay out of pocket yet receives life insurance protection -disadvantages- the ee must recognize taxable income based on the Table 2001 rates. if terminated early, the er's reimbursement, if limited to cash value, is not fully recognized -offset plan: the ee pays the Table 2001 cost, if applicable, any the er pays the remainder. this effectively "zeros out" the ee's income tax cost for the plan -advantages- the ee's cost is minimal and this offers the potential that the er provides a special "bonus" in the amount owed by the ee. although the premiums paid are not tax-deductible, the bonus amount is -disadvantages- if terminated early, the er's reimbursement, if limited to cash value, is not fully recognized methods to structure the cash value or death benefit split: -the amount of the premiums paid -the cash value, or -the greater of the cash value or premiums paid ex on pg 212 two ways or policy ownership: -endorsement method: the EMPLOYER owns the policy and is primarily responsible for making the premium payments. the ee may elect a beneficiary but the er is paid a portion of the death benefit equal to the death benefit split that is in the agreement -advantages- the plan is easy and simple to create and administer, the er exercises greater control, and it avoids being considered a loan for purposes of laws and regulations -collateral assignment: the EMPLOYEE owns the policy and is primarily responsible for making the premium payments. the er makes interest-free loans to the ee in the amount of the premium the er is responsible for. the ee may elect a beneficiary but the er is paid a portion of the death proceeds -advantages- the plan provides more protection for the ee and the ee's beneficiary, and can be implemented easier with existing life insurance owner by the ee ex on pg 213, 214 *the employeR owns the policy if it's endoRsement method -taxation depends primarily on the method chosen -for all methods, the er does not receive a deduction for premiums paid and the death proceeds are tax-free -the endorsement method and non-equity-type collateral assignment plans require that the ee recognize income in the amount of the pure death benefit under Table 2001 less any amount contributed to the plan by the ee -the ee is also taxed on any cash value that the ee gains access to during the year ex on pg 214 -for equity-type collateral assignment plans the premium amounts "loaned" to the ee are deemed "demand loans" if there is no stated interest rate -the tax treatment is additional compensation income to the ee in the amount of the assumed interest payable based on the applicable federal rate (AFR) -the er gets a deduction for the assumed income paid and the ee must report the income on their tax return -then the ee pays the er the assumed interest, providing interest income to the er and an interest deduction for the ee, subject to standard limitations ex on pg 214 business overhead expense insurance -provides coverage for business expenses, not including the owner's wages, in the event the business owner becomes totally disabled -the policy may have varying lengths, but 1 or 2 years is typical -policy premiums are deductible business expenses and the income is generally taxable

adoption assistance programs

-an ee may exclude from gross income amounts paid for, or expenses incurred, by the er for qualified adoption expenses -an er may establish a written adoption assistance program that will pay expenses related to an adoption not exceeding $13,810 to an ee -the amount paid is excluded from the ee's income, but is subject to an income phaseout: $207,140 - $247,140 AGI -if the ee's AGI is greater than or equal to $247,140 then the exclusion is eliminated -must adopt a child under the age of 18 to receive the credit -nondiscriminatory requirements apply

qualified tuition reduction plans

-an ee may exclude from gross income any amount representing a qualified tuition reduction qualified tuition reduction is defined in the IRC as the amount of any reduction in tuition provided to an ee of an education organization for education below the graduate level for: -current ee's -former ee's who retired or left on disability -widow of a person who died while employed -widow of former ee's who retired or left on disability -dependent children or spouses of any of the above -although this exclusion normally does not apply to the graduate level, exceptions for individuals who are graduate students teaching or performing research activities for an educational organization may be eligible -the education organization must normally maintain a regular faculty and curriculum and have a regularly enrolled body of students in attendance at the place where its educational activities are carried out in the normal course of business -can be elementary, secondary, college, or university -nondiscrimination rules apply

eligibility of 401k plans

-an employee CANNOT be required to complete more than one year of service as a condition of participation in a Section 401k arrangement -the reason is that the ee elective deferral contributions are already 100% vested ex on pg 55

qualified nonelective contributions

-an employer may choose to make a qualified nonelective contribution (QNEC) to all eligible NHC employees CODA accounts to increase the ADP of the NHC employees for purposes of passing the ADP test -the QNEC is made by the employer to all eligible NHC employees covered by the plan -no consideration is given to the employee's election to participate by electively deferring -QNEC's are considered to be elective deferrals made by the ee for purposes of the discrimination testing -b/c the contribution is treated as an employee elective deferral, it is also 100% vested when contributed ex on pg 64

credit for prior service

-an employer who establishes a defined benefit plan may ELECT to give employees credit for their service prior to the establishment of the plan -this means that an ee will receive "accrued benefits" in a DB plan based on their service prior to the start of the DB plan -granting credit for prior service must be nondiscriminatory (have to provide for everyone), but may benefit an older owner-employer who does not have many long-term employees -a defined contribution plan CANNOT grand credit for prior service ex on pg 43

group retirement planning services

-an er may exclude from an ee's gross income the value of any retirement planning advice or information they provide to the ee or their spouse if the er maintains a qualified retirement plan -the services provided may also include general advice and information on retirement -the exclusion does NOT apply to the value of services for tax preparation, accounting, legal, or brokerage services

Qualified Domestic Relations Order (QDRO) from a qualified plan

-an exception to the ERISA anti-alienation rules has been made if the assignment or alienation is at the direction of a QDRO -a QDRO is an order, judgment, or decree pursuant to a state domestic relations law that creates or recognizes the right of a third party alternate payee (nonparticipant) to receive benefits from a qualified plan -a distribution pursuant to a QDRO will not be considered a taxable distribution to the third party alternate payee as long as the assets are deposited into the recipient's qualified plan or IRA there are 2 basic approaches used to divide the benefit depending on the reason the QDRO is being used: -the "shared payment approach" splits the actual benefit payments made between the participant and the alternate payee -the "separate interest" approach divides the participant's retirement benefit into two separate portions (the plan document, not the court, determines how the QDRO will be satisfied) (there is no Form required for the QDRO)

disallowance of in-service withdrawals

-an in-service withdrawal is any withdrawal from the plan while the ee is a participant in the plan other than a loan -plan loans are not in-service withdrawals because they are required to be paid back; although loans are allowed by the IRC, most pension plans do not permit loans -under the Pension Protection Act of 2006, defined benefit pension plans can now provide for in-service distributions to participants who are age 62 or older

IRA annuities vs. IRA accounts

-an individual retirement annuity is different than a traditional IRA account because it's an annuity contract or endowment contract issued by an insurance company -an IRA annuity must meet certain similar requirements regarding transferability, nonforfeitability, premiums, and distributions transferability and nonforfeitability -an IRA annuity is not transferable by the owner and the benefits must not be forfeitable -the proceeds from an IRA annuity must be received by the owner or by a beneficiary of the contract -similar to traditional IRAs, these IRA annuities cannot be pledged as collateral nor can loans be taken from the contract premiums -the annual premiums for an IRA annuity may not exceed $5,500 -in the event that premium payments cease, the owner must be given the right to receive a paid up annuity and the owner of the annuity must also be allowed to forego (reject) payment of the annuity premium distributions -the distribution rules for IRA annuities, including the RMD rules, are the same as for traditional IRAs

Nonqualified Stock Options (NQSOs)

-an option that does not meet the requirements of an incentive stock option or it is explicitly identified as nonqualified -basically a bonus program- additional compensation, nothing more -the exercise of NQSOs do not receive favorable capital gains treatment, but also are not subject to the holding period associated with ISOs -from a risk perspective, the executive takes no risk in an NQSO. if the stock price falls below the exercise price, the executive simply does not exercise. if the stock appreciates, the executive may choose to exercise and may immediately sell the stock or hold it (there is investment risk to holding the stock) taxation -grant date: the grant of an NQSO will not create a taxable effect assuming that there is no readily ascertainable value for the NQSO -if, however, the option does have a readily ascertainable value at the date of the grant, the executive will have W-2 income equal to the value and the er will have an income tax deduction (no taxable income at the date of the grant if the exercise price is equal to the FMV of the stock) -exercise of the NQSO: at the exercise date of the NQSO, the executive will deliver to the employer both the option and the exercise price per share -the executive will recognize W-2 income for the appreciation of the FMV of the stock over the exercise price (the bargain element), income and payroll tax withholding will apply, and the employer will have an income tax deduction for the same amount -the amount paid for the stock at exercise plus the bargain element included in the executive's W-2 will form the basis for the stock -sale of the stock from the NQSO exercise: stock acquired through the exercise of an NQSO does not have a specified holding period requirement -when the stock is sold, the executive's gain or loss will be considered capital gain or loss and will receive short or long-term capital gain treatment according to the elapsed time between the exercise date and the date of the sale ex on pg 189

de minimis fringe benefits

-any property or service provided by an er to an ee that is so small in value that it makes accounting for it unreasonable or impracticable examples: -occasional typing of personal letters by a secretary hired by an er -occasional personal use of an er's copying machine, providing that the er exercises sufficient control and imposes significant restrictions on the personal use of the machine so that at least 85% of the use of the machine is for business purposes -traditional birthday or holiday gifts or property (not cash) with a low FMV -coffee, donuts, or soft drinks -local telephone calls -flowers, fruit, or books, or similar property provided to ee's under special circumstnaces (on account of illness, outstanding performance, family crisis) NOT qualified as de minimis: -season tickets for sporting or theatrical events -the commuting use of an er-provided automobile more than one day a month -membership in a private country club or athletic facility -er-provided group term life insurance on the life of the spouse or child of an ee -use of er-owned or leased facilities (such as an apartment, hunting lodge, boat, etc) for a weekend, unless required for work benefits exceeding value and frequency limits- all or nothing -if a benefit is provided to an ee that is not deemed de minimis due to excess value or excess frequency, then NO amount is considered a de minimis fringe

limited investment in life insurance

-any qualified plan may purchase life insurance. as long as life insurance is not the primary focus of the plan, the government allows this exception because the death benefit of the life insurance policy is payable to the ee's spouse and other survivors -premiums paid by the employer for the life insurance policy are taxable to the employee at the time of payment -a qualified plan that includes life insurance must pass either the 25% test or the 100-to-1 ratio test 25% test: -consists of 2 tests, a 25% test and a 50% test; the test used depends on the type of life insurance in the plan -if a term insurance or universal life insurance policy is purchased within the qualified plan, the aggregate premiums paid for the LI policy cannot exceed 25% of the er's aggregate contributions to the participant's account -if a whole life insurance policy is purchased, the aggregate premiums paid for the whole life insurance policy cannot exceed 50% of the er's aggregate contributions to the participant's account -in either case, the entire value of the life insurance contract must be converted into cash or periodic income at or before retirement ex on pg 40 100-to-1 ratio test: -limits the amount of death benefit of life insurance coverage purchased to 100 times the monthly-accrued retirement benefit provided under the same qualified plan's defined benefit formula ex on pg 40

distribution options for profit sharing plans

-at termination, the participant may be able to take distributions from a profit sharing plan as ordinary taxable income, annuitize the value of the account (if the plan document permits), or roll the assets over into a rollover qualified plan or IRA -unlike pension plans, profit sharing plans are not required to offer survivor benefits if the plan does not pay the participant in the form of a life annuity benefit and the participant's nonforfeitable accrued benefit is payable to the surviving spouse upon the participant's death

Traditional IRAs

-both deductible and nondeductible contributions can be made -can be in two forms, an IRA account or an IRA annuity -an IRA account can hold a wide variety of investments and can be held by a wide variety of custodians (ex: brokerage, bank, mutual fund, etc) -an IRA annuity is usually held by an insurance company as custodian contribution limits -lesser of $5,500 or earned income -catch-up for individuals who have attained age 50 by the end of the year ($1,000)

actual contribution percentage (ACP) test

-calculates a contribution percentage for both the HC and the NHC for the express purpose of determining if the NHC are subject to financial discrimination -the ACP tests the sum of the ee's after-tax contributions and employer-matching contributions -the ACP is calculated the same ways as the ADP test -if the er fails the ACP test, the same corrective measures may be used to bring the plan back into compliance

awards and prizes

-certain prizes and awards given to ee's by the er may be excluded from the ee's gross income limits on value of awards -an ee is allowed to exclude from gross income that value of any ee achievement awards if the cost of the award does not exceed: -$400 for all nonqualified plan awards when added to the er's cost for all other ee achievement awards made to the ee during the taxable year that are not qualified plan awards, and -$1,600 for all qualified plan awards when added to the er's cost for all other ee achievement awards made to the ee during the taxable year (including nonqualified plan awards) qualified plan award -an ee achievement award bestowed as part of an established written plan of the taxpayer that does not discriminate in favor of HC ee's -if the average cost of all ee achievement awards provided by the er during the year exceeds $400, then such ee achievement award will not be treated as a qualified plan award -the 2017 TCJA added a definition for tangible personal property, which shall not include: cash, cash equivalents, gift cards, vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, or other similar items -therefore, any award must now comply with the definition for tangible personal property (effective after 2017)

Roth 401k vs. Roth IRA

-contribution limit: $18,500 elective deferral and $6,000 catch-up vs. $5,500 with $1,000 for Roth IRA -no income limits, however participant must have income for the deferral vs. income phaseouts for Roth IRA -no conversion from traditional IRA allowed vs. conversion from traditional IRA allowed for Roth IRA -available for loans vs. no loans for Roth IRA -qualified distributions (not subject to tax or penalty): account must be held for at least 5 years, distribution must be made on account of disability, death, or on or after attainment of age 59 1/2 vs. same requirements for Roth IRA but also for first time home purchase -qualified distribution is determined under Section 72; each distribution will consist of basis and earnings vs. Roth IRA has specific ordering rules; contributions first, conversions second, and earnings third -follows minimum distribution rules (distributions must begin by April 1 in the year following the year in which the participant reaches 70 1/2) vs. Roth IRA is not subject to minimum distributions during owner's lifetime chart on pg 58

commingled vs. separate individual investment accounts

-defined benefit pension plans use COMMINGLED investment accounts but send individual summaries to participants showing what benefits they have accrued to a certain date -most defined contribution plans use SEPARATE, individual investment accounts and require that the individual participant invest their own retirement assets -the assets of a defined benefit plan are managed as a group, and it's impossible to segregate any individual participant's funds. benefits are paid from the pool of assets

actuary

-defined benefit plans require the use of ANNUAL actuarial services to determine the proper funding of the plan -the target benefit pension plan (a DC plan) uses actuarial assumptions only at the INCEPTION of the plan and does not require annual actuarial work -the money purchase pension plan has NO NEED for actuarial services b/c the annual contribution is predefined in the plan documents -use of an actuary allows for some limited discrimination in benefit -actuarial costs can drive up the administrative costs of a plan *actuary may look at mortality, turnover, disability, salaries, retirement ages, and interest rates to determine the funding range for a defined benefit plan

stock bonus plans

-defined contribution profit sharing plans that allow employers to contribute stock to a qualified plan on behalf of their employees -stock bonus plan and ESOPs are good when a company wants to establish a profit sharing plan, but is unable to contribute large amounts of cash stock bonus plans must satisfy these requirements: -unlike profit sharing plans, stock bonus plan participants must have pass through voting rights on er stock held by the plan -participants must have the right to demand er securities on plan distributions -participants must have the right to demand that the er repurchase the er's securities if they are not publicly traded (put option) -distributions must begin within 1 year of normal retirement age, death, or disability, or within 5 years for other modes of employment termination -distributions must be fully paid within 5 years of commencement of distributions

actual deferral percentage (ADP) test

-designed to test the elective deferrals of the ee's to ensure that the NHC employees are not being financially discriminated against -the goal is to either limit the HC from deferring significantly more than the NHC or to raise the amount being received by the NHC -if the ADP for NHC employees is 0%-2%, then the permissible ADP for HC employees is 2 times the ADP for NHCs -if the ADP for NHC employees is 2%-8%, then the permissible ADP for HC employees is 2% plus the ADP for NHCs -if the ADP for NHC employees is 8% and over, then the permissible ADP for HC employees is 1.25 times the ADP for NHC's -plans can choose either the Prior Year method or the Current Year method for ADP testing -the Prior Year method calculates the maximum permissible deferral for highly compensated ee's by using the NHC ee's ADP from the previous year -while not as certain about the deferral limits, the Current Year method will usually provide a greater deferral percentage to the HC. the current year method also provides more flexibility to the plan sponsor in the event of ADP failures how to calculate ADP: 1. separate the eligible ee's into HC and NHC groups 2. calculate the Actual elective Deferral Ratio (ADR) for each of the eligible ee's by dividing the elective deferral contribution by the ee's compensation 3. once the ADR is determined for each eligible ee, the amount of the ADP is calculated by averaging the ADRs for the ee's in each group (HC or NHC) 4. plug the ADP for the NHC into the chart above and calculate the maximum ADP allowed for the HC 5. compare the "desired/required" ADP to your actual ADP. if the HC are higher, employer failed the ADP test -failing the ADP test puts the plan at risk for disqualification -corrective action must be taken and the plan sponsor has several options to choose from or to use in conjunction with the other -the four alternative remedies available to bring the plan into compliance are: -corrective distributions -recharacterization -qualified nonelective contributions (QNEC), or -qualified matching contributions (QMC) *HC can defer up to the % required by the ADP testing plus catch-up of $5,500 if over age 50 ex on pg 62, 63

business disability plans

-disability overhead insurance is designed to cover the expenses that are usual and necessary expenses in the operation of a business should the owner become disabled -premiums are deductible as a business expense, and benefits payable from the plan are taxable income to the entity -disability buyout policies are policies to cover the value of an individual's interest in the business should they become disabled

distributions from qualified plans

-distributions are disbursements of assets with no intention by the participant of returning the assets to the plan -distributions include in-service withdrawals, payments made upon termination or retirement, and may also include certain distributions related to qualified domestic relations orders -loans taken from a qualified plan are not distributions unless the loan is not repaid and is considered a distribution -distribution options vary from lump-sum distributions, a rollover distribution, a single life annuity, or a joint life annuity option -the plan may also offer in-service distributions and hardship withdrawals before retirement

distributions from stock bonus plans

-distributions are generally made in the form of er stock, but the plan may provide the ee with the choice of receiving the cash equivalent -if cash is received, the deferral of income tax on the stock's appreciated value until the stock is sold is lost (the NUA benefit) -distributions are taxed depending on if taken as a lump-sum or as installments -if a lump-sum distribution is made, the ee is subject to ordinary income tax in the year of the distribution based on the securities' FMV at the time of the contribution -the NUA of the stock (the appreciation of the stock while being held in the plan) is not taxed at the time of the distribution but rather a long-term gain when the stock is ultimately sold -if the distribution is made in installments, the ee may only defer recognition of the appreciation on the stock purchased with AFTER-TAX EE CONTRIBUTIONS; everything else will be subject to ordinary income tax rates ex on pg 73 *long-term capital gain amount is difference between how much you sold it for and how much it was worth when the er contributed (the amount that was taxable as ordinary income) *if distribution of stock is held for less than 1 year until being sold, then only the NUA amount is treated as long-term capital gain; the rest is short-term

taxation of rollovers from qualified plans

-distributions are generally subject to ordinary income tax -generally, the plan custodian is required to withhold 20% from most distributions other than hardship distributions and loans -the withholding requirement is only for qualified plans and not for distributions of IRAS rollovers -the participant may elect to roll over or transfer the balance of the account into another tax-advantaged qualified plan or an IRA rather than taking a lump-sum distribution -the decision to roll over to an IRA should be considered carefully b/c although it allows the assets to continue to grow in a tax-deferred environment, IRAs are subject to certain limitations -rollovers may be accomplished in 2 ways: -direct rollover: when the plan trustee distributes the account balance directly to the trustee of the recipient account -the plan custodian is not required to withhold 20% of the distribution for federal income tax if a direct rollover is made -indirect rollover: occurs through a distribution to the participant with a subsequent transfer to another account -the original custodian issues a check to the participant in the amount of the full account balance reduced by 20% mandatory withholding -to complete the rollover, the participant must then reinvest the FULL original account balance of the qualified plan (including the 20% withholding) within 60 days of the original distribution into the new qualified plan or IRA ex on pg 91 *chart on pg 92 -if you rollover from a qualified plan to a Roth IRA, you must include it in income -you can rollover from a qualified plan to a Traditional IRA -if you rollover from a qualified plan to a 457b, you must have separate accounts after-tax contributions -if a qualified plan consists of ee after-tax contributions, these contributions may be rolled over into another qualified plan that accepts after-tax dollars or into a Traditional IRA. it also results in basis in the plan -in the case of a rollover of after-tax contributions from one qualified plan to another qualified plan, the rollover can only be accomplished through a direct rollover -a qualified plan can only accept rollovers of after-tax contributions if the plan provides separate accounting for such contributions and the applicable earnings on those contributions -conversely, after-tax contributions are not permitted to be rolled over from an IRA to a qualified plan

distribution options for pension plans

-distributions from pension plans are normally made because of the participant's termination of employment, early retirement, normal retirement, disability, or death early termination -a participant who terminates employment before normal retirement age may have up to three options: 1. receive a lump-sum distribution of the qualified plan assets, 2. roll the assets over to an IRA or other qualified plan, 3. leave the funds in the pension plan -if the participant's vested account balance is less than $5,000, then the plan may distribute the balance to the participant if the participant does not make a timely decision; this is called a forced payout -department of labor regulations require that forced payouts between $1,000 and $5,000 be directly rolled over to an IRA if the participant doesn't make a timely election normal retirement -at the participant's normal retirement age, the pension plan will typically distribute retirement benefits through an annuity payable for the remainder of the participant's life -the plan document dictates the distribution options available to the participant -a single life annuity is generally the automatic form of benefit for a single individual -married individuals must be offered a qualified joint and survivor annuity (QJSA) -regardless of the form, distributions from qualified plans are subject to ordinary income tax rollover -a distribution from a pension plan may be rolled over into another qualified plan or an IRA provided the participant is not required to begin taking the required minimum distributions -in certain situations when a distribution is taken as a lump-sum distribution, the recipient may receive favorable tax treatment on the distribution (NUA, 10-year forward averaging, pre-74 capital gains treatment); these favorable tax treatments will be lost if the distribution is rolled over

years of service used for vesting

-ee's earn a certain percentage benefit based on the applicable vesting schedule and after the ee attains a certain number of years of service -the years of service determination is based on the number of years, defined as a 12-month consecutive period with at least 1,000 hours worked for the employer -the determination of years of service is based on the ee's beginning date of employment and not on the date the ee becomes eligible to participate in the plan *an employer does not have to count for purposes of vesting: -years of service the ee acquired with the er before reaching the age of 18 if the ee was not participating in the plan at that time -years of service the ee attained before the er sponsored a qualified plan -years of service the ee attained during the years when he did not contribute to an employee-contributory qualified plan

contributions to ESOPs

-employer contributions to ESOPs are deductible by the er and are subject to the 25% limit of covered compensation -if the er's stock is obtained by a loan (leveraged ESOP), then the er is allowed to deduct all interest paid on the loan above the 25% deduction of total eligible payroll of the plan participants -the interest deduction is unlimited

deferred compensation and nonqualified plans

-employers establish deferred compensation arrangements to provide benefits to a select group of ee's without the limitations, restrictions, and rules of a qualified plan -these types of arrangements often discriminate in favor of key employees and can exceed the dollar limits imposed on qualified plans the general characteristics of the deferred compensation agreements are: -they do not have the tax advantages of qualified plans -they usually involve some deferral of income to the executive -the er generally does not receive an income tax deduction until the key ee receives the payment and it becomes recognizable as taxable income (follows matching principle of deduction) -there is generally a requirement that the ee/executive has a "substantial risk of forfeiture" or else the government will claim that the executive, while perhaps not having actual receipt of the money, has "constructive receipt" of the money, and therefore, current income subject to income tax deferred compensation arrangements are often used for these reasons: -to increase the executive's wage replacement ratio -to defer the executive's compensation -in lieu of qualified plans examples of deferred compensation agreements: -golden handshakes- severance package, often designed to encourage early retirement -golden parachutes- substantial payments made to executives being terminated due to changes in corporate ownership -golden handcuffs- designed to keep the employee with the company wage replacement ratio -executives who earn substantially more than the qualified plan covered compensation limit ($275,000) cannot attain a significant wage replacement ratio from qualified plans because qualified plans adhere to strict limits on contributions and benefits -the purpose of deferred compensation is to increase the executive's wage replacement ratio to a level that's appropriate with the executive's actual compensation instead of a wage replacement ratio limited by the qualified covered compensation limit and the other limits of qualified plans IRC Section 409a -the purpose of this section is to provide clear structure and guidance for deferred compensation plans -the new rules also enact harsh penalties for those plans that do not comply with Section 409a -plans failing to meet the requirements of this section are subject to acceleration of prior deferrals, interest, penalties, and a 20% additional tax on the amount of the deferrals deferred executive compensation -deferred arrangements may also be established simply to defer an executive's compensation to a future year -such agreements must be made prior to the compensation being earned -employee tax benefit: if the executive chooses to defer the compensation, the executive generally defers to a time when they expect to be in a lower marginal income tax bracket and will pay less income tax at the date of receipt -employer tax benefit: the IRC places a $1M limit on a public company's deduction for compensation payable to any one of the top 5 executives of a publicly traded company. if the executive defers any income over the $1M limit to a year in which the executive earns less than the limit, the employer would be able to deduct the total compensation -alternative to qualified plans: deferred comp. plans are also used where the er does not have a qualified plan because the er does not desire to cover a broad group of ee's -the er may nonetheless be compelled to provide retirement benefits to certain key executives and can accomplish this goal by using a deferred compensation plan

differences between ESOPs and stock bonus plans

-everything is the same except for deductible contribution limit and integration with social security -ESOP's deductible contribution limit: 25% of covered compensation plus interest paid on loan vs. stock bonus plan just 25% of covered compensation -ESOP integration with Social Security: NO vs. stock bonus plan YES chart on pg 78

allocation of forfeitures

-for a defined benefit plan, the forfeited funds can only be used to REDUCE FUTURE PLAN COSTS for the employer -for a defined contribution pension plan, the plan sponsor can CHOOSE between reducing future plan costs OR allocating forfeitures to other remaining participants in a nondiscriminatory manner ex on pg 42

taxation of contributions to SIMPLEs

-for both SIMPLE plans contributions are tax deductible for the er -the deductible amount includes the ee elective deferral contributions (as compensation) and any er match or nonelective contribution withdrawals and distributions -distributions from a SIMPLE are includable as ordinary income in the individual ee's taxable income in the year in which they are withdrawn -SIMPLE plan distributions are taxed in the same manner as distributions from a traditional IRA; the SIMPLE 401k does not have any lump-sum provision -a distribution or transfer made from a SIMPLE during the first 2 years of an ee's participation must be contributed to another SIMPLE to avoid taxation and penalty -if the distribution is subject to the early withdrawal penalty, the penalty increases from 10% to 25% -after the ee's first 2 years of plan participation, the 10% penalty will apply if the distribution is not because of penalty-excluded reason -after the 2 year participation period, a SIMPLE can be transferred or rolled over tax free to an IRA other than a SIMPLE IRA, a qualified plan, a 403b account or tax-sheltered annuity, or a deferred compensation plan of a state or local government (457 plan) ex on pg 154, 155

highly compensated employees

-for retirement plan test calculations, all "eligible" employees are segregated into two classifications: highly compensated (HC) and nonhighly compensated (NHC) a highly compensated ee is an ee who is either: -a MORE than 5% owner at any time during the plan year or year before, or -an ee with compensation in excess of $120,000 for the prior plan year -a 5% owner is anyone who owns MORE THAN 5% of a company's stock or capital; so if own 5% then NHC -in addition to direct ownership, the family attribution rules consider shares owned by certain relatives, including stock owned by an individual's spouse, children, grandchildren, or parents as is owned by one owner ex's on pg 10 -er's can elect (in the qualified plan document) to limit highly compensated ee's to those with compensation in excess of the annual limit AND who are in the top 20% of paid ee's, as ranked by compensation -this election may shift or reclassify some ee's as NHC who have income above the annual limit -this reclassification may help the er pass the coverage test or the ADP test -a greater than 5% owner is ALWAYS highly compensated ex on pg 11

distributions from Traditional IRAs

-generally, distributions from traditional IRAs are taxed as ordinary income -the one exception is for distributions consisting of return of adjusted basis that results from either nondeductible IRA contributions or rollovers of contributions from qualified plan balances that included after-tax contributions (such as thrift plans) -in such cases, distributions will consist of a combination of return of adjusted basis (AB) and ordinary income ratio of AB = AB before withdrawal / FMV of account at withdrawal

employer stock options

-gives the ee a right to buy stock at a specified price for a specific period of time -are usually granted to ee's for the purchase of stock of the er or a subsidiary -the option agreement must be in writing, and the option holder has no obligation to exercise the option -the terms of the option agreement must be stated (ex: 10 years) in the agreement option price -the option price (exercise price) is equal to the FMV at the grant date (the date of issuance) -if the option does not have a readily ascertainable FMV at the grant date, there is no taxable income to the option holder as of the grant date -if values were available and the value was ascertainable, it would be taxable income to the recipient -an option is a form of deferred compensation if the price of the stock increases -if the stock price declines, the option holder will simply allow the option to lapse -it's important to note that options granted at FMV are not subject to the rules under IRC Section 409a -options issued at a discount from FMV, however, are subject to IRC section 409a and its harsh tax results vesting -stock options vest over time, thus continuing to provide an incentive to the executive who is receiving the option to remain with the er and to be productive types of options -two types: Incentive Stock Options (ISOs) and Nonqualified Stock Options (NQSOs)

introduction

-if a plan is to be a qualified plan, it must follow a standard set of rules and requirements to attain "qualified" status under IRC Section 401(a) -qualified plans consist of pension plans and profit sharing planes, not just 401k plans -are further categorized as either defined benefit and defined contribution qualified plans

transfers from IRAs incident to divorce

-if an interest in an IRA is transferred from a spouse or former spouse (transferor) to an individual (transferee) by reason of divorce, QDRO, separate maintenance decree, or a written document related to such a decree, starting from the date of the transfer, the interest in the IRA is treated as the individual's (transferee's) IRA -if an owner receives a distribution from an IRA and subsequently transfer the distributed funds to the other spouse pursuant to a divorce decree, however, the distribution is subject to ordinary income tax, and potentially, a 10% premature withdrawal penalty -if an individual is required to transfer some or all of the assets of their traditional IRA to a spouse or former spouse, there are two commonly used methods to make the transfer: 1. instruct the custodian to change the name on the account to the name of the spouse or former spouse, or 2. direct the trustee of the IRA to transfer the funds directly to the trustee of the other spouse's IRA

substantially equal period payments

-if the distribution is part of a series of substantially equal period payments, also called Section 72t distributions, made at least annually for the life or life expectancy of the participant or the joint life expectancies for the participant and their designated beneficiary, the payments will not be subject to the 10% early withdrawal penalty the payments must begin after the participant has separated from service, and to be considered equal periodic payments, the payments must be made in any of the following 3 ways: -required minimum distribution method: the payments are calculated in the same manner as required under minimum distribution rules. note that payments are recalculated annually -fixed amortization method: the payment is calculated over the participant's life expectancy if single, or the joint life expectancies if married, and the interest rate is reasonable. this method creates a series of installment payments that remain the same in subsequent years -fixed annuitization method: the participant takes distributions of the account over a reasonable interest rate and mortality table. under this method, the payment does not change in future years -the payment calculated under one of the methods determined above must continue exactly as calculated for the later of 5 years from the date of the first payment or the participant attainting the age 59 1/2 -if the payments change in any way, the participant will be considered to have made a distribution equal to the full account balance of the qualified plan in the first year of the substantially equal period payments

death before required RMD beginning date

-if the participant dies before the required beginning date, the minimum distribution rules will depend on the designated beneficiary spouse beneficiary 1. if the surviving spouse is the beneficiary of the plan, the surviving spouse can receive distributions over the participant's remaining single-life expectancy, recalculated each year under the single life expectancy table; distributions must begin in the year in which the participant (owner) would have attained age 70 1/2 2. if the surviving spouse is the sole beneficiary, the surviving spouse can roll the plan balance over and wait until he attains age 70 1/2 to begin taking minimum distributions 3. the surviving spouse can also elect to distribute the entire account balance within 5 years after the year of the owner's death nonspouse beneficiary -two options if the beneficiary is someone other than the surviving spouse 1. the remaining single, nonrecalculated life expectancy of the designated beneficiary (using the beneficiary's age as the life expectancy minus 1 each year) 2. elect to distribute the entire account balance within 5 years after the year of the owner's death no beneficiary -if no beneficiary has been named by December 31 of the year following the owner's death (or the beneficiary is the decedent's estate or charity), the account must be fully distributed before the end of the 5th year following the year of death -the account balance may be distributed anytime before the end of the 5th year but may never extend beyond *know chart on pg 110

top-heavy vesting

-if the qualified defined benefit plan is top heavy, the plan must accelerate vesting from the standard vesting schedule to either a 2-to-6 year graduated or a 3-year cliff vesting schedule -all qualified defined contribution plans automatically meet these requirements b/c they already use that schedule

investment risk

-in a defined benefit plan, the PLAN SPONSOR bears the investment risk -in a defined contribution plan, the PARTICIPANT generally maintains their own account and bears the risk of investment

defined benefit 50/40 test

-in addition to meeting one of the three coverage tests, a defined benefit plan must satisfy the 50/40 coverage test -requires that the DB plan benefits the LESSER of 50 nonexlcudable/eligible employees or 40% of all nonexcludable/eligible employees -1 nonexcludable employee = 1 employee must be covered -2-4 nonexcludable employees = 2 employees must be covered -<125 noexcludable employees = 40% of employees must be covered ->125 nonexcludable employees = 50 employees must be covered ex on pg 19, 20

Section 457f "ineligible" plans

-ineligible plans are nonqualified deferred compensation plans for state and local governmental employers and for tax-exempt employers -these ineligible plans are called "top-hat" plans -only HC or top management may participate in a 457f plan -ineligible plans are those plans under Section 457 that fail to meet one or more requirements of the "eligible plan" -the amounts contributed to the 457f are subject to a "substantial risk of forfeiture" -taxation of funds in an ineligible plan occurs when there is no risk of forfeiture; amounts may therefore be taxable prior to the actual payment or distribution to the participant -have no limit for elective deferral contributions disadvantages of 457f plans: -if the participant terminates employment before the stated payment period, the participant may forfeit all of the 457f plan funds -even though a distribution may not occur, the participant may be taxed on the value of the plan once the funds vest or are no longer subject to substantial risk of forfeiture -no 3-year catch-up provisions or age 50 and over catch-up -no rollovers permitted

Employee Stock Purchase Plans (ESPP)

-intended to benefit all or a large portion of an er's employees (the plan can't be discriminatory) -gives ee's an incentive to buy er stock by allowing the ee's the purchase the stock at a discounted price and receive favorable tax treatment for any gains if the stock meets certain holding period requirements -the ee is able to purchase the er stock through the ESPP for a price equal to no less than 85% of a date-determined stock price or an average stock price employee dollar limit -an ee is limited to purchasing $25,000 of er stock per year as determined based on the FMV at the date of grant of the er stock through the ESPP qualifying disposition -if the ee holds the stock purchased through the ESPP for 2 years from the date of grant and 1 year from the date of exercise, any subsequent sale is a qualifying disposittion of the stock -the ee's gain on the sale of the stock will be ordinary income to the extent the gain is attributable to the discount at the date of purchase -any gain in excess of the ordinary income portion will be long-term capital gain disqualifying disposition -if an ee does not hold the stock purchased through the ESPP for at least 2 years from the date of grant and 1 year from the exercise date, any sale is a disqualifying disposition -the primary difference as compared to a qualifying disposition is that the gain attributable to the discount will be W2 income rather than ordinary income ex on pg 192, 193 loss -if the ee sells the stock purchased through the ESPP at a price less than the exercise price, the ee will have a short or long-term capital loss as determined based on the holding period beginning at the date of exercise and the difference between the exercise price and the sales price *the price may be as low as 85% of the stock value *when an ee sells stock at a gain in a qualifying disposition, only the gain in excess of the W2 income will be capital gain *there is an annual limit of $25,000 per ee

gifting of ISOs and NQSOs

-lifetime transfers of unexercised ISOs by the employee are not permitted -the requirement to obtain long-term capital gain treatment for the stock received upon exercise is that the stock must be transferred only after the holding period requirement -an NQSO can be gifted provided the NQSO plan permits transfer of ownership -there are no immediate income tax consequences on the transfer -upon exercise of the NQSO by the donee, the employee will have W-2 income for the difference between the exercise price and the FMV on the date of exercise -the donee's basis after the exercise will equal the FMV on the date of exercise (exercise price plus employee's tax recognition) -if the ee also pays the exercise price, it is an additional gift to the donee -any gift of a NQSO that is neither vested nor exercisable is an incomplete gift

qualified matching contributions (QMC)

-like a QNEC, it's a contribution made by the plan sponsor that increases the ADP of the NHC employees -unlike the QNEC, the QMC is only made to those eligible NHC ee's who participated in the plan during the plan year -the QMC is also treated as an additional deferral by the ee's to increase the deferral percentage of the NHC, and is immediately vested ex on pg 64

disadvantages of qualified plans

-limited contribution amounts -contributions cannot be made after money is received -plans usually have limited investment options -no or limited access to money while an active employee -distributions usually taxed as ordinary income (basis = $0) -early withdrawal penalties may apply -mandatory distributions at age 70 1/2 -only ownership permitted is by the account holder -cannot assign or pledge as collateral -cannot gift to charity before age 70 1/2 without income tax consequences -limited enrollment periods -considered to be an income in respect of a decedent asset, subjecting distributions to both income and estate taxes with no step-up in basis -costs of operating the plan

repayment of qualified plan loans

-loans from qualified plans are usually repaid through payroll deductions and must generally be repaid within 5 years from the date the loan commences -the 5 year repayment rule does not apply to loans that are used for the purchase of a principal residence -failure to repay the loan in accordance with the plan's term will result in the loan being treated as a distribution as of the date of the original loan -loans are not only required to be repaid within a specified period of time, but are also required to be repaid in a specific manner over the repayment period. substantially level amortization of the loan is required over the term of the loan impact of loans when an employee is terminated -most plan documents require that loans be repaid upon termination of employment; however, this is not a requirement under the law -plans may also provide a grace period for repayment -if loans are not paid back ratably, then they violate the exception for loans and must be treated as a deemed distribution (subject to income tax and possible 10% penalty) -loans not repaid at termination follow the same rules in that they will be deemed as a distribution -plans may provide that the outstanding loan balance reduce the amount of a direct rollover distribution. this is known as a plan offset amount, which can be subsequently rolled over to another qualified plan or IRA within the standard 60-day period -the 2017 TCJA has extended this rollover period in certain circumstances from 60 days to the due date of the return (including extensions) *a participant is NOT allowed to repay the loan any time within the 5-year period; require a level amortization of loan repayments of principal and interest being made at least quarterly *sham repayments are the reason that the rules were designed so that the $50,000 loan limit is reduced by the highest outstanding loan balance during the one-year period ending the day before the loan date

forfeitures of profit sharing plans

-may either be used to reduce plan contributions or be reallocated to the remaining participants' accounts -any such reallocations must not be discriminatory in favor of highly compensated employees, owners, or officers -forfeitures can be allocated based on current year compensation-the same as normal contributions for the plan -forfeitures CANNOT be reallocated to participants' accounts that have already reached their annual additions limit for the year -a forfeiture policy of reallocation can be combined with integration or an age-based approach to assist the owner in receiving the maximum contribution allowed

medical plans

-may er's use group health insurance plans as a part of the overall compensation package provided to their ee's -both private insurance plans and self-insurance plans are included -any payments made to these plans are deductible for income taxes by the er and excluded from the ee's gross income group medical insurance -the premiums paid by the er for health insurance are not includable in the ee's taxable income but are deductible business expenses for the er under IRC Section 162 -includes hospitalization coverage, major medical, indemnity coverage, health maintenance organization, preferred provider organizations, point of service plans, and dental and vision plans income tax implications -premiums paid by the er for accident, health, and disability insurance policies are deductible by the er and excluded from the ee's income -when the insurance benefits are paid, they are includable in the ee's income with the exception of payments received for medical care of the ee, spouse, and dependents; and payments for permanent loss or the loss of the use of a member or function of the body or permanent disfigurement of the ee, spouse, or dependent COBRA provisions -an er that maintains a group health plan and employs 20 or more people on more than 50% of teh calendar days in a year is required to continue the provide coverage under the plan to covered ee's and qualified beneficiaries following the occurrence of a statutorily defined qualifying event -period of coverage for worker, spouse, and dependent: 18 months for normal termination and switch from full-time to part-time -29 months for disabled ee or dependent (must meet Social Security definition of disabled) -36 months for death of ee, ee reached Medicare age, divorce, plan terminates and another plan is offered (if a plan is terminated and no other plan is being offered, then COBRA doesn't need to be offered), qualified dependent (child reaches age no longer eligible for plan) *max number of ee's that a company with a health plan can have and not be subject to COBRA rules: 19 ee's COBRA premiums -the er may pay for the COBRA coverage either directly or by reimbursing the ee, or the er may shift the burden of paying for the benefit to the beneficiaries -during the statutory COBRA period, the premium cannot exceed 102% of the cost of the plan for similarly situated individuals who have not incurred a qualifying event -if a qualified beneficiary receives the 11-month disability extension of coverage, the premium for the additional 11 months may be increased to 150% of the plans' total cost of coverage -COBRA premiums may be increased if the costs to the plan rise, but generally must be fixed in advance of each 12-month premium cycle

effect of participant's death on RMD's

-minimum distributions are still required to be taken even after a participant dies -an important distinction is made depending on whether the participant dies before or after beginning minimum distributions -in either case, in the year of the participant's death, the RMD is calculated as if the participant has not died -death after beginning RMDs -death before required beginning date

Qualified Preretirement Survivor Annuity (QPSA)

-must also be provided to married participants of a pension plan or a profit sharing plan, unless the benefit is payable to the surviving spouse upon the participant's death -provides a benefit to the surviving spouse if the participant dies before attaining normal retirement age -the nonparticipant spouse is offered the QPSA and may choose whether to accept or waive the option. the QPSA may be waived by the nonparticipant spouse via a written notarized waiver (only the nonparticipant spouse must sign the waiver; the waiver must be signed by the nonparticipant spouse and notarized or signed by a plan official) -the full value of distribution under the QPSA is subject to ordinary income tax in addition to estate tax

Qualified Joint and Survivor Annuity (QJSA)

-must be provided to married participants of a pension plan and must also be provided to married participants of profit sharing plans, unless the benefit is payable to the surviving spouse upon the participant's death -pays a benefit to the participant and spouse as long as either lives -at the death of the first spouse, the surviving spouse's annuity payments can range from 50% to 100% of the joint life benefit -the nonparticipant spouse beneficiary may choose to waive their right to the QJSA by executing a notarized, or otherwise official, waiver of benefits. the waiver may be made during the 90-day period beginning 90 days before the annuity start date

allocations/formulas of profit sharing plans

-must provide a definite predetermined formula for allocating plan contributions to employee's accounts -the standard method of allocating contributions is to simply allocate the contribution based on a percentage of each employee's compensation -typically, this type of formula benefits the highly compensated more than the nonhighly compensated in terms of absolute dollars but is nondiscriminatory with regard to percentages of total contribution ex on pg 51 permitted disparity (social security integration) -a method of allocating plan contributions to ee's accounts so that a higher contribution will be made for those ee's whose compensation is in excess of the SS wage base -profit sharing plans only allow the excess method -basically two profit sharing plan contribution rates are established, the base contribution percentage rate and the excess contribution percentage rate -the base rate is applied on income earned up to the integration level (usually the SS wage base), while the excess rate is applied to income earned above the integration level BUT only up the maximum covered compensation limit for the year, $275,000 -the excess rate is limited to the LESSER of twice the base rate or a difference of 5.7% -as a result, the excess rate is generally 5.7% higher than the base rate *know that the excess rate is generally 5.7% higher than the base rate *base rate + permitted disparity = excess rate; permitted disparity equals the lesser of the base rate or 5.7%

key employee life insurance

-not an employee benefit -the company/employer purchases life insurance on a key ee, making NONDEDUCTIBLE premium payments and receiving a TAX-FREE death benefit -if the ee is greater than a 50% owner, they are assumed to have incidents of ownership making the proceeds taxable in their estate -to proceeds may also be indirectly taxable in the decedent's estate to the extent their stock value in the company is increased due to the proceeds -life insurance death proceeds are not taxable to a corporation for regular tax purposes, but they are for AMT

pension plan characteristics

-on qualified pension plans, the government requires: -mandatory annual funding -disallows most in-service withdrawals -limits the investments of the plan assets in the employer's securities, and -limits the investment of plan assets in life insurance -the PBGC was established to provide additional protection to lower-wage participants of defined benefit plans

put options of ESOPs

-once a plan meets distribution requirements and a participant is entitled to a distribution from the plan, the participant has the right to demand that the benefits be distributed in the form of er securities -if the er securities are not readily tradable on an established market, the participant has the right to require that the er repurchase the er securities under a FMV valuation formula -the rank-and-file ee's are protected with the put option b/c the ee may force the corporation to buy back the stock at the FMV

lump-sum distributions from qualified plans

-participants may take a full distribution (a lump-sum distribution) from a plan upon termination of employment -may receive a special income tax treatment to be considered a lump-sum distribution, the distribution must meet these 4 requirements: -the distribution must represent the ee's entire accrued benefit in the case of a pension or the full account balance in the case of a defined contribution plan -the distribution must be on account of either the participant's death, attainment of age 59 1/2, separation of service (does not apply to self-employed individuals in the plan), or disability -the ee must have participated in the plan for at least 5 taxable years prior to the tax year of the distribution (waived if the distribution is on account of death) -the taxpayer must elect lump-sum distribution by attaching Form 4972 to the taxpayer's federal income tax return. this must be filed by the participant, or (in the case of the participant's death) by his estate within 1 year of receipt of the distribution -all 4 requirements must be med for the distribution to qualify for any of the special tax treatments: -10-year forward averaging -pre-1974 capital gains treatment -NUA treatment -the full value of a distribution from a qualified plan is usually subject to ordinary income tax at the date of the distribution (except for return of adjusted basis) -in certain circumstances, however, when an ee takes a lump-sum distribution from a qualified plan it may be eligible to receive favorable income tax treatment

pre-1974 capital gains treatment

-participants who are born before January 2, 1936 may be eligible to receive capital gain tax treatment on the portion of lump-sum distribution that is attributably to pre-1974 participation in a qualified plan -the capital gain rate for this type of tax treatment is 20% and the distribution must be a lump-sum distribution -to calculate the portion that will be considered long-term gain, the total lump-sum is multiplied by the ratio of the participant's number of months pre-1974 participation in the qualified plan to the total number of months of the participant's plan participation -the portion remaining of the lump-sum is eligible for ten-year forward averaging, or is otherwise taxed as ordinary income long-term capital gain portion = (months of pre-1974 participation / total months of participation) x taxable distribution

integration with social security-permitted disparity for defined benefit plans

-permitted disparity (Social Security Integration) allows a higher contribution or allocation of benefits to employees whose compensation exceeds the social security wage base for the plan year- a sort of reverse discrimination -all qualified pension plans may utilize permitted disparity -there are two methods: the offset method and the excess method -defined benefit plans can use EITHER method -defined contribution plans are only permitted to utilize the EXCESS method excess method-defined benefit pension plans and defined contribution plans -provides an increased percentage benefit, referred to as the excess benefit, to plan participants whose earnings are in excess of an average of the SS wage bases over the 35-year period prior to the individual's SS retirement age. this average is called the compensation limit (different than the usual covered compensation limit) -the increased percentage benefit only applies to income that exceeds the covered compensation limit and is limited to the LESSER of: 0.75% per year of service or the benefit percentage for earnings below the covered compensation limit per year of service -this additional benefit only applies up to 35 years; therefore the maximum increase in benefits for compensation over the covered compensation limit is 26.25% which is found by multiplying 0.75% by 35 years ex on pg 43 offset method- only for defined benefit pension plans -applies a benefit formula to all earnings and then reduces the benefit on earnings below the covered compensation limit -the reduction of the benefit is limited to the LESSER of 0.75% per year of service up to 35 years x covered compensation limit or 50% of the overall benefit funding percentage per year of service ex on pg 44

investing plan assets of qualified plans

-plan assets will either be managed by the plan sponsor (or an asset management firm hired by the plan sponsor) or individually by the participants -defined contribution plan participants bear the investment risk for the assets in their accounts. despite this, plan sponsors may choose to manage the plan assets or hire an outside asset management firm to manage the assets for the plan participants -most often, defined contribution plan assets are managed by the plan participants (self-directed) -plan sponsors are considered fiduciaries of the qualified plan; being classified as a fiduciary requires a certain level of responsibility and prudence the plan must therefore provide the participants with a least 3 alternatives in which to invest within the retirement plan. these alternatives must meet all of the following criteria: -be diversified -have materially different risk and return characteristics, and -each alternative, when combined with investments in the other alternatives tends to minimize through diversification the overall risk of a participant's or beneficiary's portfolio

distributions from 401k plans

-plan participants of CODA accounts, including 401k plans, allow distributions for hardships distributions may occur after: -the retirement, death*, or separation from service and attainment of age 55* -the termination of the plan without the establishment of another plan -certain acquisitions of the company or company assets -the attainment of age 59 1/2 by the participant* -certain hardships * = not subject to 10% penalty -distributions on account of any of these items are taxable as ordinary income to the extent the participant does not have an adjusted basis in the 401k plan and may also be subject to a 10% penalty hardship distributions -distributions on account of hardship must be limited to the maximum distributable amount -the max distributable amount is equal to the ee's total elective deferral contributions as of the date of distribution, reduced by the amount of previous distributions of elective contributions -thus, the max distributable amount does not include earnings, qualified nonelective contributions (QNECs) or qualified matching contributions (QMCs) -taxed as ordinary income and may be subject to the 10% early withdrawal penalty -distributions are not subject to the 20% statutory withholding requirements since hardship distributions are not eligible for rollover treatment

qualified transportation and parking

-prior to 2018, the regulations provided for an exclusion of the value of qualified transportation benefits from an ee's gross income -if the value of the benefit was more than the limit, then any excess amount above the limit, less any amount the employee paid, was included in the ee's income; the excess could not qualify as a de minimis benefit -the 2017 TCJA disallows the er a deduction for expenses associated with providing any qualified transportation fringe to ee's except for ensuring safety of an ee -however, there is not requirement to treat the benefit as taxable income to ee's unless the er wants the deduction (effective after 2017) (if the er wants to take a deduction, the benefit has to be taxable to the ee) ex on pg 200

distributions of profit sharing plans

-profit sharing plans generally do not permit employees to receive distributions from the plan except upon termination, hardship, disability, or retirement -may permit in-service withdrawals after the participant has fulfilled two years of service in the plan

prohibited transactions of qualified plans

-prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law *a disqualified person is any of the following: 1. a fiduciary of the plan 2. a person providing services to the plan 3. an employer, any of whose ee's are covered by the plan 4. an employee organization, any of whose members are covered by the plan 5. any direct or indirect owner of 50% or more of any of the following: -the combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation that is an employer or employee organization described in 3 or 4 -the capital interest or profits interest of a partnership that is an employer or employee organization described in 3 or 4 -the beneficial interest of a trust or unincorporated enterprise that is an employer or an ee organization described in 3 or 4 6. a member of the family of any individual described in 1, 2, 3, or 5 (a member of a family is the spouse, ancestor, lineal descendant, or any spouse of a lineal descendant) *prohibited transactions generally include actions by a disqualified person that potentially could have adverse consequences to the plan or participants including: -transfer of plan income or assets to, use of them by, or fore the benefit of a disqualified person -self-dealing by a fiduciary -receipt of consideration by a fiduciary for his own account when working with a party dealing with the plan (ex: attorney, accountant) -selling, exchanging, leasing, buying, as well as lending or borrowing between a disqualified person and the plan -in the past, ERISA fiduciary standards and prohibited transaction rules often discouraged er's from furnishing investment advice and information to plan participants -the PPA of 2006 created a new exception to the prohibited transactions rule permitting plan fiduciaries to be compensated for giving participants investment advice through an eligible investment advice arrangement, subject to rules intended to limit the possibility of abuse -the initial penalty on a prohibited transaction is a 15% excise tax on the amount involved for each year (or part of year) in the taxable period -under the PPA 2006, no excise tax will be assessed if the transaction is corrected within 14 days of the date the disqualified person (or other person knowingly participating in the transaction) discovers, or reasonably should have discovered the transaction was a prohibited transaction -if the transaction is not corrected within the taxable period, an additional tax of 100% of the amount involved is imposed

flat percentage formula

-provides all plan participants with a benefit equal to a specific percentage of the participant's salary, usually the final salary or an average of highest salaries -the percentage remains the same throughout participation in the plan and does not increase based on additional years of service or age -incentive to increase compensation through raises but not to continue employment after attaining a desired benefit

flat amount formula

-provides an amount that each plan participant will receive at retirement, such as $250 per month -the formula is not based on years of service or salary -from the highest paid plan participant to the lowest, each participant will receive the same amount at retirement -no incentive for participants to continue employment after attaining maximum flat amount

tax-free distributions from IRAs for charitable purposes

-qualified charitable distributions from a traditional or Roth IRA may be excluded from gross income -the exclusion may not exceed $100,000 per taxpayer per taxable year -a qualified charitable distribution is any distribution from an IRA directly by the IRA trustee to a charitable organization -the distribution is not taken into account in determining the amount of the taxpayer's charitable deduction for the year ex on pg 145

qualified plan loans

-qualified plans are permitted, but not required, to provide loans from the plan to participants -plan loans must be made available to all participants and beneficiaries on an effectively equal basis, must be limited in amount, must be paid back within a certain time period, must bear a reasonable rate of interest, must be adequately secured, and the administrator must maintain proper accounting for the loans characteristics of plan loans: -qualified loans may permit loans up to the lesser of 1/2 of the vested accrued benefits up to $50,000 -if the vested accrued benefit is less than or equal to $20,000, then a loan is permitted up to the lesser of $10,000 or the vested accrued benefit -reduce $50,000 maximum by the highest outstanding loan balance within the prior 12 months -loans are usually associated with 401k and 403b plans -loans must generally be repaid within 5 years with an exception for loans associated with the purchase of personal residences, which must be reasonable and could be as long as 30 years

coverage of qualified plans

-qualified plans are required to provide benefits under the plan to a minimum number of nonhighly compensated ee's -ee's who do NOT meet the eligibility rules (age and service) can be excluded from coverage requirements -ee's who are part of a collective bargaining agreement (like union ee's) can also be excluded -an ee is covered under a qualified plan when they receive a benefit from the plan; a benefit means an er contribution, an accrued benefit, or the right to participate in a 401k plan nondiscriminatory classification -while all "eligible" ee's must be considered, not all must be covered by the plan for it to maintain its qualified status -however, the selection of nonexcludable employees who will benefit from the plan must be reasonable and established based on the facts and circumstances of the business under objective business criteria coverage tests -the general rule is that the plan must cover at least 70% of nonhighly compensated employees -however, there are exceptions (ratio percentage test and average benefits percentage test) -therefore to be qualified, the plan must meet at least ONE of the THREE following tests: the general safe harbor test, the ratio percentage test, or the average benefits test -in addition, Defined Benefit plans must ALSO pass the 50/40 test *a retirement plan must annually satisfy at least one of the following tests to be considered a qualified retirement plan: general safe harbor test, ratio percentage test, or average benefits test (both tests) *noncontributory plans do not need to pass the ADP test

advantages of qualified plans

-qualified plans under Section 401a provide employers with: current income tax deductions and payroll tax savings -benefits for plan participants: income tax deferrals, payroll tax savings, and federally provided creditor asset protection -the trade-offs for the tax advantages are the cost of the plan (both operational expenses and contributions) and compliance including vesting, funding, eligibility, nondiscrimination testing, IRS reporting, and employee disclosure

nondiscrimination testing for 401k plans

-qualified plans with CODA are REQUIRED to meet two additional nondiscrimination tests -the Actual Deferral Percentage (ADP) and the Actual Contribution Percentage (ACP) tests -because of the burdensome nature of annually complying with these rules, the IRC provides a safe harbor provision that eliminates the need for annual testing -in addition, the PPA of 2006 has provided an optimal nondiscrimination safe harbor for automatic enrollment plans -employers will have 3 options with respect to 401k nondiscrimination testing: they can 1. perform the ADP and ACP tests and take corrective action if the plan fails the test, 2. institute a qualified automatic enrollment feature and comply with the new safe harbor, or 3. comply with the old safe harbor

administration of qualified plans

-qualified retirement plans require ongoing administration and maintenance operating the plan -covering eligible ee's: qualified plans require annual coverage testing to ensure that the rank-and-file ee's (NHC and non-key) are sufficiently covered -making appropriate contributions -minimum funding requirement: sponsors of pension plans must contribute enough money into the plan to satisfy the minimum funding requirements as determined by an actuary for each year -a qualified plan is generally funded by er contributions (often called noncontributory plan b/c ee's don't contribute to the plan), but ee's participating in the plan may also be permitted to make contributions (a contributory plan) -a company can make deductible contributions for a tax year up to the due date of their tax return (plus extensions) for the year of contribution -a promissory note made out to the plan for contributions is a prohibited transaction and is not a payment that qualifies for an income tax deduction -the er generally applies contributions in the year in which they are paid however, the er may apply the payment to the previous year if all of the following requirements are met: 1. the contributions are made by the due date of the tax return for the previous year (plus extensions) 2. the plan was established by the end of the previous year (plan year) 3. the plan treats the contributions as though it had received them on the last day of the previous year 4. the company specifies in writing to the plan administrator or trustee that the contributions apply to the previous year, or the company takes a deduction for the amount of the contributions on the tax return for the previous year -self-employed individuals can make contributions on behalf of themselves only if they have positive net earnings (compensation) from self-employment in the trade or business for which the plan was established -catch-up contributions for those participants over age 50 and over are not subject to the annual defined contribution limit and thus can be in addition to these limits -in the event that more money is contributed to a DC plan than is allowed, the excess amount is called the excess annual addition -a plan can correct excess annual additions if the excess was caused by a reasonable error in estimating a participant's compensation, determining the elective deferrals permitted, or because of forfeitures allocated to participants' accounts a plan can correct excess annual additions by using one of these methods: -allocate the excess annual additions to other plan participants -hold excess annual additions in a separate account and allocate in future years -make corrective distributions taking employer deductions: -the deduction for contributions to a defined contribution plan cannot exceed 25% of the compensation paid or accrued during the year to eligible ee's participating in the plan -the deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. an actuary must calculate the appropriate amount of mandatory funding -in the case of an er who maintains both a DB and DC plan, the funding limit set forth is combined. the maximum deductible amount is the greater of 25% of the aggregate covered compensation of ee's, or the required minimum funding standard of the DB plan -this limit does not apply if the contributions to the DC plan consist entirely of ee elective deferrals; the ee elective deferrals do not count towards the deduction limit carryover of excess contributions: -if the er contributes more to the qualified plan than the permitted deduction for the year, the excess contribution can be carried over and deducted in future years, combined with or in lieu of, contributions for those years -the amount that can be carried over and deducted may be subject to an excise tax -a 10% excise tax applies to nondeductible excess contributions made to qualified pension and profit sharing plans -the 10% excise tax does not apply to any contribution made for a self-employed individual to meet the minimum funding requirements in a defined benefit plan. even if that contribution is more than the earned income from the the trade or business for which the plan is set up, the difference is not subject to this excise tax

stock appreciation rights (SARs)

-rights that grant to the holder cash in an amount equal to the excess of the FMV of the stock over the exercise price -essentially a way to achieve a "cashless exercise" -payments received for the stock appreciation rights are includable in gross income in the year the rights are exercised -SARs are granted with NQSOs or ISOs and may be used to provide cash to the executive, which is necessary to exercise the NQSO or ISO -usually, the number of NQSOs or ISOs is reduced by any exercised SARs

SIMPLEs

-savings incentive match plans for employees -retirement plans for small employers (100 or fewer ee's) -attractive to er's because they are NOT required to meet all of the nondiscrimination rules applicable to qualified retirement plans, and they do not have the burdensome annual filing requirements -less administrative costs and fewer set up procedures than qualified plans characteristics of SIMPLEs: -er establishes written SIMPLE plan -er contracts with ee's to have salary reduction -er withholds ee deferral over the course of a year -ee elective deferrals are not subject to income tax but are subject to payroll tax -er deposits match on a regular basis tax deferred without payroll tax -earnings grow tax deferred on all contributions *SIMPLEs are predominately contributory plans and SEPs are noncontributory plans *provide 100% vesting; not subject to vesting rules and contributions are always 100% vested *the early withdrawal penalty is 25% for distributions taken within the first 2 years of participation *a SIMPLE IRA can only be rolled over into another SIMPLE IRA if still within 2 years of participation to avoid income tax (can roll over into a traditional IRA after 2 years of participation *maximum deferral is $12,500 with $3,000 catch-up

automatic enrollment safe harbor 401k plans

-some 401k plans have an "automatic enrollment" or "negative election" feature -such plans provide that elective contributions by the ee are made at a specified rate unless the ee elects otherwise -the ee must have an effective opportunity to elect to receive taxable wages in lieu of contributions -a negative election clause can assist a 401k plan in meeting the ADP test because it automatically deems that an ee defers a specific amount unless he elects out of the automatic deferral amount ex on pg 66 -under the PPA 2006, plans that contain a "qualified automatic enrollment feature" are eligible for a new nondiscrimination safe harbor and are treated as meeting the ADP, ACP test and are not subject to top-heavy rules -a qualified automatic enrollment feature must meet certain requirements with respect to automatic deferral, matching or nonelective contributions, and notice to employees to satisfy the automatic deferral requirement, a qualified automatic enrollment feature must provide that, unless an ee elects otherwise, the ee is treated as making an election to make elective deferrals equal to a stated percentage of compensation not in excess of 10% and at least equal to: -3% of compensation for the first year the deemed election applies to the participant -4% during the 2nd year -5% during the 3rd year -6% during the 4th year and thereafter -the stated percentage must be applied uniformly to all eligible employees matching contribution requirement -a plan must provide a nonelective contribution of 3% or a matching contribution -a plan generally satisfies the matching contribution requirement if: -the employer makes a matching contribution on behalf of each nonhighly compensated employee that is equal to 100% of the employee's elective deferrals up to 1% of compensation and 50% of the employee's elective deferrals between 1-6% of compensation, and -the rate of match with respect to any elective deferrals for highly compensated employees is not greater than the rate of match for nonhighly compensated employees -the nonelective or matching contributions must vest at least as fast as a 2-year cliff vesting

vesting of profit sharing plans

-standard 3-year cliff or 2-to-6 year graduated vesting -if the plan requires a 2 year eligibility/waiting period, contributions must be 100% vested -same for top heavy profit sharing plans

eligibility for qualified plans

-standard eligibility requirements state that an employee is considered eligible to participate in the plan after completing a period of service that extends beyond the later of either turning age 21 or the completion of one year of service (a FULL 12-month period in which the ee works at least 1,000 hours) (eligible after whichever happens last) -employers can be more generous, such as having an age requirement of 19 or 20, instead of age 21, or having a service requirement that's less than 1 year -more general eligibility rules are often found in 401k plans plan entrance date -the er may require ee's to wait until the next plan entrance date after the ee has become eligible to join the plan as long as the next available entrance date is not more than 6 months after the date of eligibility -because of this rule, most qualified plans establish two plan entrance dates per year ex on pg 7-9 special eligibility rules (an exception) -as an exception to the eligibility rule, a qualified retirement plan may require that an ee complete 2 years of service to be eligible -if the er elects this exception, then the plan participants are immediately vested in their accrued benefit or account balance upon completion of 2 years of service -this exception is NOT available to 401k's ex on pg 8 *reasons to delay eligibility of employees: b/c employees don't start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service) and b/c of turnover

features of stock bonus plans vs. profit sharing plans

-stock bonus plans are a particular type of profit sharing plan and share profit sharing characteristics and requirements -like profit sharing plans they are subject to all the eligibility, coverage, and vesting requirements -if a CODA provision is attached, then they must comply with the ADP/ACP testing also special issues unique to stock sharing plans: -portfolio diversification- unlike profit sharing plans, stock bonus plans are usually funded with 100% employer stock -the PPA 2006 requires that stock bonus plans of publicly traded companies allow plan participants to diversify their pretax deferrals, after-tax contributions, and er contributions that have been invested in er securities -voting rights- participants in a stock bonus plan must have pass-through voting rights on er stock that is held by the plan on their behalf -"pass-through" voting rights means the participant can vote the shares of stock allocated to his stock bonus plan *chart on pg 72: -stock bonus plan and profit sharing plan establishment: December 31 -stock bonus plan and profit sharing plan date of contribution: due date of tax return plus extensions -stock bonus plan type of contributions: generally stock vs. profit sharing plan: generally cash -both deductible contribution limit: 25% of covered compensation -stock bonus plan valuation: generally needed annually vs. profit sharing plan: generally unnecessary -both eligibility: same as other qualified plans (age 21 and 1 year of service or 2 years with 100% vesting) -both allocation method: % of compensation or formula based on age, service of classification -both vesting: 2-to-6 year graduated or 3-year cliff -stock bonus plan portfolio diversification: NO (but may be required as a result of PPA 2006) vs. profit sharing plan: generally YES -stock bonus plan voting rights vs. profit sharing plans generally no voting rights -stock bonus plan type of distributions generally in STOCK vs. profit sharing plan generally in CASH -both in-service withdrawals: may be allowed after 2 years -both loans: may be allowed (but not usually) -stock bonus plan taxation of distributions: lump-sum distributions will qualify for NUA treatment. other distributions are treated as ordinary income vs. profit sharing plans generally full distribution is ordinary income *differences: type of contributions, valuation, portfolio diversification, voting rights, type of distributions, taxation of distributions

403b plans or tax sheltered annuities (TSAs)

-tax sheltered or deferred annuities (403b plans) are available to certain qualified nonprofit organizations or to employees of public educational systems -a retirement plan for certain ee's of public schools, certain ministers, and ee's of various tax-exempt organizations -a tax-sheltered retirement plan, but NOT a qualified plan -like a 401k, a 403b plan is established by the er and the ee has an individual account -there are two basic types of 403b plans: 1. a salary reduction plan, which only accepts ee deferrals, and 2. an employer-funded plan, which accepts employee and employer contributions entities that can establish 403b plans: -only er's can set up 403b accounts; individuals cannot set them up on their own -self-employed ministers, however, are considered both ee's and er's, and thus are able to contribute to a 403b income account for their own benefit -two types of entities that can establish 403b plans are: 1. tax-exempt organizations under IRC Section 501C3, or 2. public schools or public educational organizations ERISA applicability -it's very common for a 403b plan to be a part of an overall pension or retirement plan; the 403b portion may be referred to as the supplemental retirement plan -if this is the case, then the plan IS subject to ERISA requirements -403b plans are NOT subject to ERISA rules if the following are true: -ee participations is voluntary -there are no er contributions -ee has solely enforceable rights under the plan -er's involvement is limited in scope, and -sponsored by a government or religious institution -if a 403b plan only provides for salary reduction agreements, then the plan is not considered to be established or maintained by the er, and ERISA is inapplicable -a 403b plan must pass the ACP test if it's an ERISA plan -only a contributory 403b plan has to pass the ADP test -403b plans are not required to meet the ADP test, but 403b plans with employer contributions are required to meet the ACP test

Net Unrealized Appreciation (NUA)

-taxpayers who receive a lump-sum of employer securities (such as stock) may benefit using a special tax treatment on the distribution -the tax treatment allows the more favorable capital gain tax rates used instead of ordinary income tax rates on the NUA portion of the distribution as well as deferral of recognition of the gain on the NUA portion until the distributed er securities are sold NUA = FMV at date of distribution - value of securities used at the date of ER contribution -the portion of the lump-sum distribution attributable to the cost of the er securities (the value of the er's tax deduction) will be taxable as ordinary income (eligible for 10-year forward averaging) to the participant in the year of the distribution and this value is considered the participant's adjusted basis in the er securities -at the date of the sale of the er securities, the participant will be required to recognize long-term capital gains deferred since the date of the distribution -any subsequent gain after the distribution date will be treated as either short-term capital gain or long-term capital gain based on the holding period beginning at the date of distribution issues regarding this type of transaction: -the participant must qualify for lump-sum distribution treatment -the NUA portion must be relatively high in comparison to the cost basis portion; otherwise, the recipient may be paying too much immediate ordinary income tax for the benefit of future long-term capital gain treatment -whether the stock is to be held by the recipient; if so, then the investment risks of holding a large concentration of a single security must be considered -cash flow considerations must be evaluated to determine the impact of holding the securities vs. selling the securities. note: the amount subject to ordinary income tax is subject to a penalty if there is no exception in the IRC inherited securities with NUA resulting from a qualified plan distribution: -the inherited stock will receive an adjustment of basis to FMV at date of death less any unrecognized NUA -the tax will be paid when the assets are disposed of by the heirs

amending and terminating a qualified plan

-terminating or changing a qualified plan may also make good business sense -employers may (and should) reserve the right to change or terminate the plan and to discontinue contributions within the plan document -terminations often occur when a law change occurs that makes one type of plan less advantageous than it was previously, if the company can no longer financially maintain the plan, or if the company realizes the plan no longer meets the needs of the ee's or the company reasons to amend or terminate a plan: -qualified plans, especially for small employers, are often changed to maximize the provision of benefits to key ee's. some plans allow forfeitures to be reallocated to other plan participants or may be used to reduce plan costs. small business owners frequently change this election based on the benefits they are able to receive from the plan -a law change may make an entire plan or plan provision obsolete -may also be terminated when the er finds that it can no longer financially support the plan it has in place. sometimes the decision is made by the er, while other times the decision is made by the PBGC -a plan may also be terminated simply because the er finds that the plan is not meeting the needs of the ee's or the company amending a qualified plan: -plan changes are very common due to tax law changes, business changes, or to solve a defect in the plan -changes are often easily implemented by amending the plan document -when the plan document is amended, the administrator must also revise the Summary Plan Description terminating a qualified plan: -when a qualified plan is terminated, and presuming that sufficient funds are available, all of the participants in the plan become fully vested in their benefits as of the date of termination -permanency requirement: although qualified plans are required to be permanent, permanency does not necessarily require that the plan never terminate or continue in existence forever -permanency in this context just means that the plan must not be established as a temporary program -the goal behind the permanency requirement is to dissuade owners from creating plans that will only benefit the owners and key ee's and then having the plan vanish before benefits can be accrued by rank-and-file ee's -the abandonment of the plan for any reason other than business necessity within the first few years after it's established will be evidence that the plan was not a bona fide program for the exclusive benefit of employees defined benefit plan terminations: -because the PBGC is responsible for underfunded defined benefit plans, there are more requirements for terminating a DB plan than for a DC plan -Title IV of ERISA requires that a defined benefit plan terminate under a standard, distress, or involuntary termination -standard termination: voluntary and may occur when the er has sufficient assets to pay all benefits (liabilities) at the time of final distribution -distress termination: voluntary and occurs when the er is in financial difficulty and is unable to continue with the plan financially (generally occurs when the company has filed for bankruptcy, either Chapter 7 liquidation or Chapter 11 reorganization) -involuntary termination: may be initiated by the PBGC for a plan that is unable to pay benefits from the plan in order to limit the amount of exposure to the PBGC defined contribution plan terminations: -compared to DB plans, terminating a defined contribution plan is relatively easy -defined contribution plans are already funded and not subject to PBGC -all the er must do to terminate the plan is pass a corporate resolution to do so -at that point, any final promised contributions must be completed and the assets must be distributed from the plan *reasons for an er to terminate a qualified retirement plan: the er is no longer in a financial position to make further plan contributions, the plan benefits are not meaningful amounts, and the participants are limited in their ability to make deductible IRA contributions, and to lower plan costs and ease administrative complexity the employer wants to switch plan designs *not a reason: the employer no longer wants to maintain the plan because it must cover other ee's other than just himself plan freeze: -in some cases, an er may find that it no longer wants to contribute to a plan but does not want to fully terminate the plan -this can be accomplished by freezing the plan -for DC plans, a freeze means that the er will no longer make any contributions -for DB plans, participants will no longer accrue additional benefits but the plan sponsor must maintain the previously accrued benefits

qualified moving expense reimbursement

-the 2017 TCJA suspends the deduction for moving for taxable years 2018-2025 -however, the provision is retained for active duty members of the military that move pursuant to a military order and incident to a permanent change of station (subject to the rules) -er's may continue to reimburse such moves but the reimbursement will be taxable income qualifying move -the move must be to a new principal place of work at least 50 miles from the ee's former home -the employer needs to be either: 1. full time in the new location for no less than 39 weeks during the 12-month period immediately after arrival or 2. full time or self-employed at least 78 weeks during the 24-month period immediately after arrival and at least 39 weeks during the 12-month period immediately after arrival deductible moving expenses -moving household goods and personal effects from the former home to the new home ($0.18 per mile) -traveling and associated lodging DURING the move from the former home to the new home -any portion or amount of deductible expenses that is not reimbursed by an er may be deducted as an above-the-line (FOR AGI) deduction -nondiscrimination rules DO NOT apply ex on pg 202

dependent care assistance

-the IRC allows an ee to exclude the value of dependent care assistance provided by an er from the ee's gross income (this is not an FSA item) -applies to household and dependent care services paid for or provided by the er to an ee under a dependent care assistance program -the services must allow an ee to work the services must be provided for one of the following qualifying persons: -dependent children under age 13 -dependent children who are physically or mentally incapable of caring for themselves, or -an ee's spouse who is physically or mentally incapable of caring for themselves an ee may exclude up to the lesser of: -$5,000 annually ($2,500 for married couples filing separate returns), or -the earned income of the ee or their spouse -the plan must provide beneficiaries with advance notice of the program to permit them to make informed decisions about dependent care -nondiscrimination requirements apply!

qualification requirements for qualified plans

-the IRC imposes requirements regarding eligibility, coverage, vesting and plan funding limits for ERs sponsoring qualified retirement plans

safe harbor 401k plans

-the IRC provides a safe harbor provision whereby the employer is not required to comply with the ADP test, ACP test, or the top-heavy testing -an election must be made 60 days prior to the beginning of the plan year to convert a 401k plan to safe harbor status -to comply, the plan must provide a minimum contribution that must be immediately 100% vested -the permissible contributions can either be a 3% minimum nonelective contribution or a matching contribution -under the nonelective contribution, all eligible ee's would receive a 100% vested contribution equal to 3% of their compensation from the employer each year -if the employer elects to use a match, the standard safe harbor match formula requires the employer to match 100% of the first 3% of ee elective deferrals and 50% of ee elective deferrals greater than 3% and less than 5% -if ee elective deferral is 1%, then er match has to be 1% -if ee elective deferral is 2%, then er match has to be 2% -if ee elective deferral is 3%, then er match has to be 3% -if ee elective deferral is 4%, then er match has to be 3.5% -if ee elective deferral is 5%, then er match has to be 4% -many safe harbor 401k plans provide a 100% match up to 4% of compensation in lieu of the standard match formula

Health Savings Account (HSA)

-the Medicare Act of 2003 created HSAs, which are very similar to MSAs but less restrictive -HSA's can be established by anyone with a high deductible health insurance plan -allow a higher contribution limit, and -reduce the penalty for non-medical distributions -to qualify for an HSA, the individual's health insurance plan's deductible must be at least $1,350 for single coverage and the annual out-of-pocket costs cannot exceed $6,650 -for family coverage, the health insurance plan deductible must be at least $2,700 and the annual out-of-pocket costs cannot exceed $13,300 -contributions can be made by the ee or the er -the aggregate contributions cannot exceed the health insurance plan deductible subject to a maximum contribution of $3,450 for individuals and $6,900 for families -individuals between age 55-64 can make a catch-up contribution of $1,000 -earnings within the HSA are not taxable, and amounts distributed are also not taxable if used for qualified medical expenses -if not used for qualified medical expenses, the whole distribution is taxable as ordinary income -if the distribution is taken before the owner is 65, the distribution is subject to a 20% excise tax chart on pg 210

affiliated service groups

-the affiliated service group rules were established because the ownership of companies could be arranged to avoid the controlled group rules -the rules treats all employees of the members of an affiliated service group as if a single employer employed them -an affiliated service group means a group consisting of a service organization ("First Service Organization" or "FSO") and one or more A or B Organizations -an affiliated service group may also involve a Management Organization

limited investment in employer securities

-the asset of a pension plan may be invested in the securities of the employer/plan sponsor BUT the aggregate value of the er securities cannot exceed 10% of the FMV of the pension plan assets at the time the er securities are purchased -er securities are any securities issued by the plan sponsor or an affiliate of the plan sponsor, including stocks, bonds, and publicly traded partnership interests -the Pension protection act of 2006 also requires defined contribution plans holding publicly traded er securities to allow plan participants to diversify their pretax deferrals, after-tax contributions, and employer contributions; the er must offer a choice of at least 3 investment options other than employer securities

death after beginning RMDs

-the calculation of subsequent minimum distributions uses the designated beneficiary's life expectancy factor as determined on the last day of the year following the year of the participant's death -this life expectancy factor is reduced by 1 in each succeeding year to determine the required distribution amount -if there is more than one designated beneficiary, the beneficiary with the shortest life expectancy (usually the oldest beneficiary) is used as the measuring life, but the plan may also be divided into a separate account for each beneficiary to utilize the life expectancy of each beneficiary to calculate the RMD if a trust is named as the beneficiary, the beneficiaries of the trust will be treated as the designated beneficiaries provided: -the trust is valid under state law -the trust is irrevocable, or will become so upon the participant's death (inter vivos trust) -the trust beneficiaries are identifiable from the trust instrument -appropriate documentation has been provided to the plan administrator spouse beneficiary -if the surviving spouse is a beneficiary of the plan, then the surviving spouse can receive distributions over his remaining life expectancy, recalculated each year based on the single life expectancy table -distributions must begin in the year following the year of the participant's death -alternatively, if the surviving spouse is the sole beneficiary, the surviving spouse may rollover the plan balance to his own account and wait until he attains age 70 1/2 to begin taking RMDs utilizing the uniform life table for his own life expectancy at that point ex on pg 107 nonspouse beneficiary -if the beneficiary is someone other than the participant's surviving spouse, then the distribution period is the remaining single, nonrecalculated life expectancy of the designated beneficiary -if the beneficiary is significantly younger than the decedent, the minimum distribution rules permit the beneficiary to "stretch out" the distributions taken ex on pg 108 (life expectancy age used of the beneficiary is reduced by 1 each year after the first year the nonspouse beneficiary takes the RMD) (the beneficiary can withdraw all of the account balance after the death as a lump sum or in payments larger than the RMD, but not less than the RMD in any year) no beneficiary -if no beneficiary has been named by December 31 of the year following the owner's death (or if the beneficiary is the decedent's estate or a charity), then distributions must continue over the remaining distribution of the deceased owner -the remaining distribution period is reduced by 1 each year ex on pg 109

controlled groups

-the controlled group rules were designed to prevent an owner from splitting their business into multiple parts and creating multiple plans allowing for increased retirement contributions -a controlled group is a combination of two or more trades or businesses that are under common control -all ee's of companies in the controlled group must be considered to determine if a plan maintained by a control group member meets the controlled group requirements a control group relationship exists if the businesses have one of the following relationships: -parent-subsidiary -brother-sister -combined group

establishing a qualified plan

-the employer-sponsor is responsible for setting up and maintaining the qualified plan -a qualified plan must be detailed in a written plan that is adopted by the company -the take an income tax deduction for contributions for a particular tax year, the plan must be adopted by the last day of that particular tax year -master or prototype plans: the majority of qualified plans follow standard forms called master or prototype plans -these plans have been pre-approved by the IRS and are available for er's to simply adopt -individually designed plans: if the company has specific needs that are not addressed in a master or prototype plan, or if they so choose, the company can have their own individually drafted plan -in order to be considered a qualified plan, the plan must be permanent and for the exclusive benefit of the ee's and their beneficiaries -determination letters: may be used when a retirement plan is adopted, amended, or terminated -they may be filed in advance of the plan being adopted or immediately thereafter, usually by filing Form 5300 -a qualified plan which receives a favorable determination letter from the IRS may still be disqualified at a later date -determination letters are issued by the IRS at the request of the plan sponsor; the plan sponsor is not required to request a determination letter notifying eligible employees: -information regarding the qualified plan must be distributed to ee's who might be eligible for the plan and for those ineligible employees, too -before the IRS can issue a determination letter on the qualified status of the retirement plan, the er must provide the IRS with satisfactory evidence that it has notified the persons who qualify as interested parties -proper advance notice can be made in person, via e-mail or mail, or by posting a notice in a location generally used for posting notices to ee's -the er is required to provide, free of charge, a summary of the details of the qualified retirement plan, called a Summary Plan Description, to ee's, participants, and beneficiaries under pay status (receiving benefits) -the er is also required to provide the plan participants notices of any plan amendments or changes (this can be done either through a revised Summary Plan Description or in a separate document, called a Summary of Material Modifications) -in addition to the summary plan description, the er must automatically provide the participants, free of charge, a copy of the plan's Summary Annual Report each year qualified trust: -the assets of the qualified plan must be placed in a qualified trust or custodial acocunt -custodial accounts are generally maintained by a bank or other financial institutions

group term life insurance

-the er can deduct the amounts paid for the insurance, and the ee can exclude a portion, if not all, of the value from their income -to receive such favorable tax treatment, the life insurance must provide a general death benefit to a group of ee's, and the coverage must provide an amount of insurance to each ee based on a formula that prevents individual selection -this formula must use factors like age, years of service, pay, or position -life insurance provided by the er is not considered group term life insurance unless the er provides it to at least 10 full-time ee's at some time during the year -if the er does not meet the general 10-ee rule, the er may still be eligible to recognize the deduction of LI coverage if the er's provision of the coverage meets these 3 requirements: 1. the er provides coverage under the plan to all of its full-time ee's who provide evidence of insurability 2. the coverage provided under the plan must be based on either a uniform percentage of pay or a set amount of coverage depending on age, years of service, compensation, or position 3. the required evidence of insurability must be limited to a medical questionnaire (completed by the ee) that does not require a physician -group life insurance premiums paid by the er on the first $50,000 of death benefit are deductible by the er and are excludable from an ee's gross income -the cost, as determined under the Uniform Premium Table provided by the IRS, of any death benefit coverage over $50,000 is taxable to the er ex on pg 205, 207 -nondiscrimination rules apply -to be nondiscriminatory, the plan must cover either: -70% or more of all eligible ee's, or -85% of the non-key ee's -disability insurance provides benefits in the form of periodic payments to a person who is unable to work due to sickness or accidental injury -the cost depends on occupation, age, sex, as well as the benefit term, coverage, and the length of the waiting period (elimination period) -can be provided under a group or individual plan and as either short-term (up to 2 years) or long-term coverage (over 2 years) -the premiums paid by the er are deductible by the er and are not included in the ee's gross income -HOWEVER, when the er pays the premium, any disability income benefit received by the ee is taxable to the ee -if the ee pays the entire premium with after-tax income or the er pays the premium and the ee includes the premium payment in income, any benefits received will be considered tax exempt

no-additional-cost services

-the exclusion applies to ANY service provided by an er to an ee that does not cause the er to incur any substantial additional cost or lose revenue -the service provided must be offered to customers in the ordinary course of business in which the ee performs substantial services -examples: providing free airline, bus, or train tickets, and hotel accommodations or telephone services either free or at reduced prices to ee's working in those lines of business -caution- foregone revenue or substantial costs associated with providing these services could deem them taxable. for example, whether the no-additional-cost exclusion would be available for an airline ee may depend on whether they fly stand-by or reservce. if the airline had to forego revenue to provide the fringe benefit it will not be excludable *-nondiscrimination rules apply! -er's may not exclude the value of the services to HC ee's if the value of the no-additional-cost service is not available, on the same terms, to most ee's

group benefits

-the federal government promotes er insurance arrangements by allowing the er to pay the premiums for the ee's and immediately deduct the cost for income tax purposes without requiring the participant ee to include the premium cost in their taxable income -any group insurance premium amounts paid by the er are generally deductible by the er or included in the ee's gross income -medical plans -group term life insurance -cafeteria plans -flexible savings accounts (FSAs)

minimum distributions

-the minimum distribution rules require individuals to begin taking minimum distributions when the participant attains the age of 70 1/2 -if the funds are not distributed by the required date, a 50% excise tax will be levied on the participant -the penalty is on an amount equal to the RMD less any distribution that was taken, but the result cannot be less than 0 *must know the minimum distribution rules -minimum distributions apply to assets in a qualified plan, IRA, 403b, SEP, SIMPLE, or 457 plan -while minimum distribution rules do not apply to Roth IRAs, they do apply to Roth accounts (in a 401k, 403b plan, or governmental 457b plan), and to inherited Roth IRAs -the first distribution must be taken by April 1 of the year following the year the participant attains the age of 70 1/2 -for each year thereafter, however, the RMD must be taken before December 31 of the tax year -if the participant delays taking the first RMD until April 1 of the year following the attainment of age 70 1/2, the second RMD must still be taken by December 31 of that same year; the delay results in a bunching of two RMDs in the same year -EXCEPTION- there is an exception to the general RMD for qualified plans if a participant is still employed by the plan sponsor of a qualified plan upon attainment of age 70 1/2 -a participant that is still employed by the plan sponsor of the qualified plan does not have to begin taking RMD until April 1 of the year after the participant terminates employment with the plan sponsor -this exception is not available for any participant that owns more than 5% of the ownership of the plan sponsor in the year they reach age 70 1/2 calculating the RMD -the RMD is determined each year by dividing the account balance as of the close of business on December 31 of the year preceding the distribution year by the distribution period determined according to the participant's age as of December 31 of the distribution year in the Uniform Lifetime Table -if a question is asked on the exam, the Table will be given ex on pg 103, 104, 105 *age used is as of the END of the year for which you are taking the distribution, value of portfolio is the value as of the end of the previous year

restricted stock plans

-the plan pays executives with shares of the er's stock -the executive does not pay any amount towards the allocation of the stock and is restricted by the er from selling or transferring the stock -the restriction most often gives the er the ability to repurchase the stock during a set period of years or prohibits the executive from selling the stock during a set number of years or until a defined occurrence or event (ex: the executive attains 10 years of service with the company) -at receipt of the restricted stock, the executive will not recognize any taxable income (Section 83b) as the restrictions generally create a substantial risk of forfeiture. in addition, the er will not have a deductible expense -when this substantial risk of forfeiture is eliminated, the executive recognizes W2 income equal to the value of the stock at the grant date, and the employer will have a tax deductible expense for the same amount -the amount recognized by the executive becomes the executive's adjusted basis in the stock for purposes of any subsequent gain or loss calculation Section 83b Election -if property is transferred in connection with the performance of services, the person performing such services may elect to include in gross income under IRC Section 83b the excess (if any) of the FMV of the property at the time of transfer over the amount (if any) paid for such property as compensation for services -in computing the gain or loss from the subsequent sale or exchange of such property, its basis is the amount paid for the property plus the amount included in gross income under Section 83b -if property for which a Section 83b election is in effect is forfeited while substantially nonvested, such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of the amount paid (if any) for such property over the amount realized (if any) upon such forfeiture

pension benefit guaranty corporation insurance (PBGC)

-the plan sponsors of a defined benefit plan pension plan pay premiums for insurance coverage designed to pay the "promised pension" in the event the plan is underfunded or unfunded -the PBGC pays only a limited retirement benefit ($5,420.45 per month or $65,045.40 per year) in the event of a plan completely or partially terminating with an unfunded or underfunded liability -the PBGC does NOT insure defined contribution pension or profit sharing plans, AND it does not insure defined benefit pension plans of professional service corporations with 25 or fewer participants -the PBGC does insure that all other defined benefit plans and covered plans are required to pay a flat-rate, per participant premium *only defined benefit plans and cash balance defined benefit plans can be covered by PBGC

group long-term care insurance

-the premium payments for qualified group long-term care insurance are tax deductible if paid by the er and tax free to the ee to be a qualified long-term care insurance plan, the plan must: -only provide long-term care insurance coverage -not duplicate benefits paid by Medicare -the plan must be guaranteed renewable, and -only pay benefits when the ee or beneficiary of the plan is certified by a licensed health care practitioner as chronically ill -long-term care premiums cannot be paid for within a cafeteria plan or FSA nor can the premiums be made with pretax ee salary deferral -if the ee pays the premium with after-tax dollars, the ee may deduct, as an itemized medical expense deduction, the costs on their income tax return for the year

Saver's credit

-the purpose of this nonrefundable credit is to encourage low-income and middle-income taxpayers to establish and maintain savings for retirement -the amount of the credit is equal to the applicable percentage times the amount of qualified retirement savings contributions (up to $1,000 if single and $2,000 if MFJ) made by an eligible individual in the tax year

pension plans

-the traditional pension plan pays a formula-determined benefit beginning at retirement, usually in the form of an annuity, to a plan participant for the participant's remaining life -the legal promise of a pension plan is to pay a pension defined benefit pension plans: -defined benefit pension plans -cash balance pension plans defined contribution pension plans: -money purchase pension plans -target benefit pension plans -traditional pension plans promise a certain benefit amount available at the time of a participant's retirement -this benefit, the present value of which can be calculated at any given time during the ee's service, is most commonly based on a combination of the participant's years of service with the company and the participant's salary ex of a common formula used: 1.5% per year x # of years of service x average of the 3 highest consecutive years salary = annual pension benefit amount ex on pg 38 *the maximum amount payable from a defined benefit pension plan is the lesser of $220,000 or 100% of the average of the employee's 3 highest consecutive years compensation ex on pg 38

qualified employee discounts

-the value of "qualified employee discounts" on property or services offer to an er's customers in the ordinary course of the er's business may be excluded from an ee's income the exclusion for an ee discount is limited to the lesser of: -20% of the price at which the SERVICE is offered to non-employee customers, or -for MERCHANDISE or other property, the er's gross profit percentage multiplied by the price the er charges non-employee customers for the merchandise ex on pg 198 *if the discounts are discriminatory, any discount taken by an offer/HC ee will be included in their gross income; but not for the nonofficer ee's (they can still exclude the benefit from income even it's discriminatory)

educational assistance programs

-the value of an educational assistance program provided by an er for the benefit of an ee is excluded from gross income subject to requirements -to be considered qualified, the plan must be a separately written document which provides ee's with educational assistance -the program doesn't need to be funded, and the er doesn't need to apply to the IRS for a determination of whether the plan is qualified -the gross income exclusion is limited to $5,250 educational assistance includes: -expenses incurred by an ee for education including books -the er's providing of education to an ee it does NOT include: -the er's payment for tools or supplies, other than textbooks, that the ee may retain -the er's payment for meals, lodging, or transportation -the er's payment for education involving sports, games, or hobbies, UNLESS the education involves the er's business or is required as part of a degree program -nondiscrimination rules apply -if the program discriminates in favor of officers, shareholders, self-employed, or HC ee's, then the exclusion from gross income is lost

athletic facilities furnished by the employer

-the value of any "on premises athletic facility" provided by an er to an ee is not included in the er's gross income -to be considered an "on premises athletic facility," it MUST meet these requirements and may include a gym, tennis court, pool, or golf course: 1. operated by the employer 2. located on premises owned or leased by the er, and 3. "substantially all" of the use of the facility is by ee's of the er, their spouses, or their dependent children ex on pg 197

working condition fringe benefits

-the value of working condition fringe benefits provided by an er are excludable from ee's gross income -any property or service provided to an ee that enables the ee to perform their work, and if paid for by the ee, would be deductible as a trade or business expense -it may even include cash reimbursements for such items purchased by the ee -NOT subject to nondiscrimination rules -example: a common working condition fringe benefit is the provision of a company car. if the ee utilizes the car for both personal and business purposes, the portion used for business is considered the value of the working condition fringe benefit, whereas the personal use value of the car will be included in the ee's gross income qualified vehicles for non-personal use -if an ee is provided a vehicle that is deemed to be a qualified non-personal use vehicle, the value of the provision will be excluded from gross income -qualified non-personal use vehicles may include: -clearly marked police or fire vehicles -unmarked vehicles utilized by law enforcement individuals if the use is fully authorized -an ambulance or hearse -any vehicles designed to carry cargo with a loaded gross weight over 14,000 pounds -delivery trucks with seating for the driver only or the driver with a folding jump seat -a passenger bus with the capacity of at least 20 passengers -school buses -tractors or other farm-type vehicles

funding of profit sharing plans

-there is no mandatory funding of a profit sharing plan -contributions are generally discretionary but funding must be "substantial and recurring" -there is no requirement that a company must contribute to the plan in a year in which it has profits nor is there a prohibition against contributions in years in which the company has no profits -generally have an employer plan contribution limit of 25% of covered compensation -must be established by year end (12/31) but can be funded as late as October 15th for sole proprietors or September 15th for all entities of the following year if all extensions have been filed -if their fiscal year is different than a calendar year, the plan must be established by the last day of the fiscal year, but can be funded 8 1/2 or 9 1/2 months later if all extensions have been filed

recharacterization

-to recharacterize the excess deferrals (pretax) as after-tax employee contributions -must be completed within 2 1/2 months after the end of the plan year, at which time these recharacterized contributions are taxable to the employee -if not done within 2 1/2 months of the plan year end, then the er is subject to a 10% excise tax (penalty) on the amount of excess contributions (the amount that should have been recharacterized) -recharacterization of the pretax contributions to after-tax contributions may cause a problem for the plan's ACP testing

top-heavy plans

-top-heavy rules were designed to ensure that qualified plans that significantly benefit owners and executives of the company (the key employees) must provide some minimum level of benefits for the rank-and-file employees key employee: a key employee is any employee who is any one or more of the following: -a greater than 5% owner, -a greater than 1% owner with compensation in excess of $150,000, or -an officer with compensation in excess of $175,000 -note that a key employee must either be an owner or officer; compensation by itself will not make an ee a key ee officer: -whether an individual is an officer shall be determined upon the basis of all the facts, included the source of his authority, the term for which elected or appointed, or the nature and extent of his duties -generally, the term officer means an administrative executive who is in regular and continued service -no more than 50 employees must be treated as officers -if the number of officers exceeds 50, then only the first 50 ranked by compensation will be considered officers under the key employee definition ex on pg 26 a plan is considered top heavy under EITHER of the following two definitions: -a defined benefit plan is considered top heavy when the present value of the total accrued benefits of key employees in the defined benefit plan exceeds 60% of the present value of the total accrued benefits of the defined benefit plan for all employees -a defined contribution plan is top heavy when the aggregate of the account balances of key employees in the plan exceeds 60% of the aggregate accounts of all employees -simply stated, if >60% of the benefits or contribution are going to key employees- top heavy! -if the qualified retirement plan is determined to be top-heavy, the plan MUST use top heavy vesting schedules and provided a minimum level of funding to non-key employees review chart on the bottom of pg 27 *in a defined contribution plan, the participant's accrued benefit at any point is the participant's present account balance. the accrual for the specific year is the amount contributed to the plan on the employee's behalf for that year *in a defined benefit plan, the accrued benefit is the benefit earned to date, using current salary and years of service. the accrued benefit earned for the year is the additional benefit that has been earned based upon the current year's salary and service

required minimum distributions from IRAs

-traditional IRA distributions can be taken at anytime, but the RMD rules state that the distributions must (except Roth IRAs) begin by April 1st of the year following the year in which the owner attains age 70 1/2 (just like qualified plans) -required distributions that are not taken are subject to a 50% excise tax

10% penalty and exceptions for early withdrawals from IRAs

-traditional and Roth IRA distributions before the age of 59 1/2 will be subject to the 10% penalty unless a specific exception applies exceptions to the 10% penalty: (both qualified plans & IRAs) -death -attainment of age 59 1/2 -disability -substantially equal periodic payments (Section 72t) -medical expenses that exceed 7.5% of AGI (2017 & 2018) (only IRAs) -higher education expenses -first time home purchase (up to $10,000) -payment of health insurance premiums by unemployed (only qualified plans) -QDRO -attainment of age 55 and separation from service -public safety ee who separates from service after age 50 -where there is a distribution from divorce an the payee is under 59 1/2, the use of a QDRO distribution will result in a taxable event, but will not incur the 10% penalty. under the same circumstances except that the distribution is from an IRA, the result is both a taxable event and the application of the 10% penalty -however, the payee in any case can choose to rollover the distribution in which case the rollover rules would apply or the payee can take substantially equal period payments under Section 72t

summary of 457 plans

-type of plan: nonqualified deferred compensation plan -application: employees of state and local government, tax-exempt governmental agencies, and 501 agencies -style: self-reliant, ee elective tax-deferred savings -qualified plan: no -established by: end of year -characteristics: deferred compensation plan -elective deferral contribution limit: lesser of $18,500 or 100% of compensation + $6,000 catch-up for age 50 (public only) -final 3-year catch-up: $18,500 -available employer contribution: permitted, but very unusual -additional after-tax contributions permitted: no -investment risk: employee selects investments and bears risk -investment alternatives: broad -penalties: generally no -loans permitted: may be permitted for public 457b plans -rollovers: public 457b plans may be rolled over to 457, 403b, 401k, or IRA plans permitting; private 457b plans can only be rolled over to other 457b plans; 457f plans cannot be rolled over -ERISA protected: no -in-service withdrawals: yes

457 plans

-under Section 457 of the IRC, ee's of state and local governments and of nongovernmental tax-exempt entities may participate in tax-free deferred compensation plans to aid ee's in saving for retirement -ee elective deferrals into a 457 plan do not count against deferrals into 401k's or 403b's, because it's a deferred compensation plan, not a retirement plan -not "qualified plans" and thus are not subject to requirements for nondiscrimination, minimum participation, and funding/vesting standards -a nonqualified deferred compensation plan -3 types of plans: 1. eligible governmental plans 2. eligible tax-exempt plans 3. ineligible plans -the main distinction between eligible plans (457b) and ineligible (457f) plans is that ineligible plans provide for greater deferral of funds chart on pg 163: -457 plans = eligible 457b plans or ineligible 457f plans/top-hat plans -eligible 457b plans = funded, governmental or "public" 457b plans; all eligible employees OR unfunded tax exempt or "private" 457b plans; HC or management entities that can establish 457(b) plans: -eligible employers are defined as: a State, a political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state, and any other organization other than a governmental unit that is exempt from tax -these tax-exempt organizations include trade associations, religious organizations, private hospitals, rural electric cooperatives, farmers' cooperatives, private schools and foundations, labor unions, and charitable organizations -churches and qualified church-controlled organizations are not considered eligible employers under Section 457 ERISA applicability -457b plans sponsored by governmental employers are also called "public 457b plans" -457b plans for tax-exempt employers are called "private 457b plans" -public 457b plans are required to be funded through a trust holding all assets and income for the exclusive benefit of plan participants and their beneficiaries (protected by trust) -under private 457b plans for tax-exempt employers, ERISA limits participation to a select group of highly compensated ee's or management -private 457b plans are offered only to HC ee's or top management b/c funds in the plan are not placed in a trust; the private 457b plan is "unfunded" and remains vulnerable to the er's creditors (not protected by trust; available to er's creditors) -an er does not have to make public 457b plans available to all ee's but can selectively choose which ee's may participate in the plan *the funds deferred to a 457 plan established for a tax-exempt entity do not have ERISA protection *TSAs and 457 deferred compensation plans require contracts between an er and ee, and both plans must meet minimum distribution requirements that apply to qualified plans; both not considered as "active participant" for deductibility of traditional IRA contributions

allocations/funding for age-based profit sharing plans

-use both age and compensation as the basis for allocating contributions to an employee's account -chosen when the ee census is that the owner or key ee is older than most or all other ee's and the company wants to tilt the contribution towards those older employees -use of an actuary would allow for this "tilting" of contributions

unit credit formula

-utilizes both a participant's years of service and salary to determine participant's accrued benefit -provide a fixed percentage of a participant's salary multiplied by the number of years (the unit) the participant has been employed by the employer -incentive to attain additional years of service and additional compensation to increase ultimate benefit

vesting

-vesting is the transfer of ownership of employer contributed assets to the employee over a specific period of time -as the ee accrues years of service the ee will begin to have ownership of contributions/associated earnings according to a vesting schedule -if the ee terminates before becoming fully vested, then they will forfeit a portion of the employer's funds -an ee's elective deferral contributions are always 100% vested as are any related earnings -er contributions vest using a cliff or graduated vesting schedule -a cliff vesting schedule provides an ee full rights to the plan's assets immediately upon passage of a certain number of years of service, usually 3 years -a graduated vesting schedule gives ee full rights to a certain percentage of benefit after completing a certain number of years and provides the ee with an additional percentage for additional years of service -remember- deferred eligibility requires immediate vesting after 2 years of service -employers may always elect to provide employees with vested benefits faster than the standard schedules -when an er elects a faster vesting schedule, the vested benefit must always be comparatively better than one of the approved vesting schedules and cannot provide a greater vested percentage as compared to one of the schedules in some years and in other years fulfill the requirement by providing a greater vested percentage as compared to another vesting schedule ex's on pg 22,23 -two advantages of choosing a restrictive vesting schedule are to reduce costs attributable to employee turnover and to help retain employees -three advantages of choosing a liberal vesting schedule in which there is immediate full vesting are to foster employee morale, keep the plan competitive in attracting employees, to meet the designs of the small employer who desires few encumbrances to participation for the "employee family" -can't have a 6 or 7 year cliff for any plan

corrective distribution

-when a plan fails the ADP test, the easiest (and usually the cheapest) solution is to reduce the elective deferrals of the HCs by distributing or returning funds to the HCs -corrective distributions must be completed within 2 1/2 months after the end of the plan year, otherwise a 10% excise tax is imposed on the amount that should have been distributed -in addition to the excess contributions being returned to the HC employees, any earnings on those contributions must also be returned or distributed to the HC employees

deduction limit for self-employed individuals (Keogh Plans)

-while self-employed individuals may adopt basically any qualified plan (generally not a stock bonus plan or ESOP since there is no stock involved with sole props, partnerships, or LLCs), the plan they choose to adopt is a Keogh plan -a Keogh plan is a qualified plan for self-employed individuals -an important distinction of Keogh plans is the reduced contribution that can be made on behalf of the self-employed individual -since self-employed individuals do not have W-2's the IRC uses the term "earned income" to denote the amount of compensation that is earned and can be considered by the self-employed individual -earned income is defined as net earnings from self-employment less one-half of self-employment tax less the deduction for contributions to the qualified plan on behalf of the self-employed person *know this calculation: self-employed contribution rate = contribution rate / (1 + contribution rate) calculate self-employment tax: net self-employment income x 92.35% = net earnings subject to self-employment tax x 15.3% up to $128,400 + 2.9% over $128,400 = self-employment tax calculate the self-employed individual's contribution: net-self employment income - 1/2 self-employment tax = adjusted net self-employment earnings x self-employed contribution rate = self-employed individual's plan contribution ex on pg 118-120

defined contribution plan vesting schedules

2-to-6 year graduated: -all vested employer contributions go up by 20% for each year of service, after the first year of service -0% at 1 year of service, 20% at 2 years of service, 40% at 3 years of service, 60% at 4 years of service, 80% at 5 years of service, until 100% at 6 years of service 3-year cliff: -0% vesting until year 3, which is 100% vested -0% year 1, 0% year 2, 100% year 3, 100% year 4, etc

defined benefit plan vesting schedule

3-to-7 year graduated: -er contributions go up by 20% after 2 years of service -0% at 1 year of service, 0% at 2 years of service, 20% at 3 years of service, 40% at 4 years of service, 60% at 5 years of service, etc until 7 years of service 5-year cliff: -0% vested until year 5, which is 100% vested -0% year 1, until 100% year 5 top-heavy plan: 2-to-6 year graduated with 3-year cliff cash balance: 3-year cliff -cash balance plans use a 3-year cliff vesting schedule; there is no impact to the vesting for a cash balance plan if the plan is top heavy ex on pg 24, 25

ERISA and filing requirements for qualified plans

ERISA -places several burdens on retirement plan administration -one of the key obligations ERISA imposes is that of fiduciary responsbility periodic pension benefit statements -as a result of the PPA of 2006, the administrator of a defined contribution plan is required to provide a benefit statement: 1. to a participant or beneficiary who has the right to direct the investment of assets in their account, at least quarterly 2. to any other participant or other beneficiary who has his or her account under the plan, at least annually 3. to other beneficiaries, upon written request, but limited to 1 request during any 12-month period -for both a DC and a DB plan, a benefit statement must be written in a manner calculated to be understood by the average plan participant Department of Labor -the DOL is charged with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law, and workers' benefit rights as regulated by ERISA Pension Benefit Guaranty Corporation -acts to guarantee pension benefits -does not cover DC plans or plans of professional services corporations with 25 or fewer participants -covers all other defined benefit plans -cost to the plan sponsor of $74 per plan participant per year and $38 per $1,000 of plan underfunding for the year *ERISA requires the plans summary annual report and a terminating employee's benefit statement to be distributed automatically to defined benefit plan participants or beneficiaries

types of SIMPLEs

SIMPLE IRA -utilizes an IRA account as the funding vehicle of the plan -employees contribute through salary deferral, much like a 401k, although the deferral limit is $12,500 -REQUIRE the er to either match the ee contributions of those that participate or provide nonelective contributions to all ee's who are eligible -all contributions made under a SIMPLE IRA must be paid to a SIMPLE IRA, not to any other type of IRA -can be established by for-profit entities, tax-exempt employers, and governmental entities SIMPLE 401k's -utilizes a 401k plan as the funding vehicle of the plan -unlike the SIMPLE IRA, plan loans are permitted -must be maintained by an eligible er and satisfy contribution, eligibility and vesting requirements -NOT subject to nondiscrimination requirements or top-heavy restrictions if it meets certain contribution and other requirements -the administrative requirements are greater than SIMPLE IRAs

brother-sister relationship

a brother-sister controlled group is a group of two or more corporations, in which 5 or fewer common owners (a common owner must be an individual, a trust, or an estate) own directly or indirectly a controlling interest of each group and have "effective control" -controlling interest means 80% or more of the stock of each corporation -effective control means more than 50% of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation ex on pg 30, 31

combined group

a combined group consists of 3 or more organizations that are organized as follows: -each organization is a member of either a parent-subsidiary or brother-sister group, and -at least one corporation is the common parent of a parent-subsidiary; and is also a member of a brother-sister group ex on pg 31

parent-subsidiary relationship

a parent-subsidiary controlled group exists when one or more corporations are connected through stock ownership with a common parent corporation, and -80% of the stock of each corporation, (except the common parent) is owned by one or more corporation in the group, and -the parent corporation owns 80% of at least one of other corporation ex on pg 30

adjusted basis in qualified plans

a participant will have an adjusted basis in distributions received from a qualified plan if: -the participant made after-tax contributions to a contributory qualified plan, or -the participant was taxed on the premiums for life insurance held in the qualified plan annuity payments -amounts distributed as an annuity are taxable in the year the annuity payments are received -each annuity payment is considered partially tax-free return of adjusted basis and partially ordinary income using an exclusion ratio cost basis in the annuity / total expected benefit = exclusion ratio -one the participant has recovered the entire cost basis of the annuity, all future monthly payments will be fully taxed -distributions that are not lump-sum and are not part of an annuity are taxed pro rata to the account balance in comparison to the pretaxed portion ex on pg 93

general safe harbor coverage test

a qualified retirement plan satisfies the general safe harbor coverage test if the plan benefits 70% or more of the nonexcludable (eligible), nonhighly compensated (NHC) employees -if you pass this, move one % of NHC covered ≥ 70% (# of NHC benefiting / # of NHC nonexcludable) ≥ 70%

advantages and disadvantages of stock bonus plans

advantages to employees -er's reduced cash outlay may encourage regular contributions -ee's efforts may be rewarded at retirement by increased stock value -ee's are eligible for preferred Net Unrealized Appreciation (NUA) tax treatment on lump-sum distributions of er stock advantages to the employer -the FMV of contributions of employer stock are tax deductible to the er, which can result in decreased income tax costs for the corporation with virtually no cash outlay since the contribution is made with er stock -the ee's now share a vested interest in the success of the company, which irrevocably binds their financial well-being to the er's disadvantages to employees -there is risk associated with the non-diversified investment portfolio of er stock disadvantages to the employer -the ownership and control of the corporation is diminished or "diluted" as shares are granted to the employees -the required repurchase option (put option) would deplete the cash of the corporation -a repurchase option allows a terminating ee the choice to receive the cash equivalent of the er's stock if the stock is not readily tradeable on an established market

advantages and disadvantages of ESOPs

advantages to the employer -the shareholder is often the owner who is looking to retire. the ability to sell shares to the plan, which is a ready and available buyer with deferred income tax consequence is a HUGE benefit -without the ESOP, there may not be a market for the privately held corporate stock -the corporation or trust is allowed to borrow money in order to provide contributions resulting in funds being provided immediately to the ESOP, while the er repays the loan to the ESOP with tax-deductible contributions -helps retain ee's and improves ee loyalty -er-owners may create a diversified portfolio without recognition of capital gain -corporation can improve the current cash flow of the corp by taking a tax deduction on stock contributions advantages to the employees -the ESOP provides ee's with a type of retirement vehicle as well as ownership in their employer -provides a vehicle to acquire a business when ee's may have little or no cash available to do so- job preservation -the ee may also benefit from NUA at the time of stock distributions because of favorable capital gains rates and deferred recognition -ee's have better perception of er corporation -can force er to repurchase stock at the end of employment -receives stock as form of compensation disadvantages to the employees -there is an inherent lack of diversification b/c the ESOPs must invest primarily in the stock of the corporation (non diversification - risk of er's insolvency) -there is some limited relief on this, once ee reaches age 55 and 10 years of service, the er must offer some diversification options -value of stock subject to appraiser -stock value subject to fluctuation -stock not liquid disadvantages to the empoloyer -ESOPs dilute ownership in the corporation by reducing the concentration of shares from the sellers to broaden the employees' holdings -the repurchase option for stock (put option) that is not readily tradable can create cash flow problems and administrative concerns -plan administration can also be costly, and the annual appraisals create significant expenses for closely held corporations. these appraisals are necessary to determine the value of the tax deduction for the er and to determine the price that an er or trust would pay for the repurchase of the ESOP distributed shares -personal liability concerns for officers or managers who also serve as trustees of ESOPs -creates cash flow uncertainty in the future

actual deferral percentage/actual contribution percentage

any qualified plan that includes a Cash or Deferred Arrangement (CODA), such as a 401k plan, must also satisfy each of the two following tests: -the Actual Contribution Percentage (ACP) Test for employer-matching contributions (and employee after-tax contributions), and -the Actual Deferral Percentage (ADP) Test for employee elective deferrals

qualified plan selection

business objectives: steps in selecting a qualified retirement plan: 1. establish the objectives for the plan -to benefit owners of small businesses -to benefit all ee's -to benefit select ee's -to attract, retain, or reward ee's -to encourage early retirement -to provide a tax-advantaged benefit 2. prepare an ee census to identify the beneficiaries of various plans and the financial impact of alternative plans on the er sponsor 3. identify the types of plans that can meet both the qualitative and quantitative objectives 4. assess each plan's financial characteristics: -contribution costs -costs of administration -flexibility of contributions -burden of investment risks -necessity of mandatory funding 5. select plan employee census: -an important first step to consider when selecting a qualified plan is to prepare an ee census -the census will identify each ee, their age, compensation, number of years of employment, and any ownership interest -the census helps to identify which ee's will benefit (and to what extent) from using various types of plans -a review of ee turnover can help determine the appropriate vesting schedules and how to deal with forfeitures resulting from ee termination cash flow considerations: -consider the company's financial stability and the predictability of its cash flows prior to plan selection administration costs: -there are numerous costs associated with adopting and administering a plan owner's business and personal objectives: -if the company is a small or closely held company, then the owner's personal and business objectives are critical in plan selection -small business owners typically want to reduce their current taxes and save for their own financial future *chart on pg 112; shows characteristics of all plans *chart on pg 113; know that (has the steps in choosing a plan) ex on pg 113 -if it says the company might have shaky cash flows, then they should choose a plan that's not mandatory funding for er's (no pension plans) -older age entrants have less time to accumulate, therefore they require higher funding levels

types of qualified plans

chart on pg 1 -pension plans and profit sharing plans -defined benefit plans vs defined contribution plans pension plans (4 types) -defined benefit pension plans (2 types): defined benefit pension plans and cash balance pension plans -defined contribution pension plans (2 types): money purchase pension plans and target benefit pension plans profit sharing plans (7 types) -all defined contribution profit sharing plans (all 7): profit sharing plans, stock bonus plans, employee stock ownership plans (ESOP), 401k plans, thrift plans, new comparability plans, and age-based profit sharing plans *403b plan is not a qualified retirement plan

qualified plans vs. other tax-advantaged plans

chart on pg 131 -tax-advantaged plans: IRAs, SEP, SIMPLEs, 403b plans -all plans provide for tax deferral for deposits and savings and provide shelter for current income -only qualified plans have annual reporting- Form 5500 (employer maintained 403b plans must file Form 5500) -vesting only required for qualified plans -loans only permitted for qualified plans and 403b plans -only qualified plans are protected under ERISA (many 403b plans have ERISA protection but some do not) (federal bankruptcy protection is available under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) -10-year avg forwarding, pre-74 capital gain treatment, and distributions eligible for NUA only available for qualified plans -broad employee participation (as opposed to selective participation) is a requirement of tax-advantaged retirement plans -plan documentation, employee vesting, and employee communications are requirements for qualified plans

summary of 403b plans

chart on pg 161-162 -application: non-for-profit institute (large universities) -style: self-reliance plans; employee-only contributions -subject to ERISA: maybe (if organized as a qualified plan) -established by: end of year -characteristics: self-reliant savings plan -elective deferral contribution limit: $18,500 + $6,000 catch-up contribution -15-year rule catch-up: $3,000 -available contribution: $55,000 or 100% of compensation including elective deferrals -additional after-tax contributions permitted: permissible by plan document -investment risk: ee has investment choices and risks investment alternatives: limited to insurance annuities and mutual funds -penalties: 10% early withdrawal if applicable -loans permitted: yes (regular qualified plan rules on loans if plan permits) -rollovers: yes, to IRA, qualified plan or other 403b -ERISA protected: yes, if ERISA plan. ERISA is not applicable if governmental or church TSA -in-service withdrawals: generally no, except hardships, which are plan specific -veting: 100% at all times for contributions and earnings

difference between ISOs and NQSOs

chart on pg 191; guaranteed to be tested -at grant date: ISO and NQSO-no taxable income to holder if issued at the current or greater share price -at exercise: ISO and NQSO- executive gives options and exercise price to company. company issues stock to executive to replace option -taxation: ISO- at exercise, executive does not recognize any regular taxable income but will have an AMT adjustment for the appreciation over the exercise price. NQSO- at exercise, executive recognizes W2 income to extent of difference between current stock price and exercise price -adjustable basis: ISO- executive's adjusted basis in stock is equal to the exercise price. NQSO- executive's adjusted basis in stock is equal to the FMV of stock (exercise price plus the recognition of W2 income) -when stock is sold: ISO and NQSO- capital gain or loss treatment

ratio percentage test (people test)

compares the % of covered NHC ee's to the % of covered HC ee's -satisfied if at least 70% of nonexcludable (eligible) NHC ee's are covered -if the test passed, the coverage requirement is met (% of NHC covered / % of HC covered) ≥ 70% ex on pg 13, 14

SEP provides to employees with:

compensation >$600

average benefits test

consists of 2 tests: -average benefits percentage test -nondiscriminatory classification test average benefits percentage test: AB% of NHC / AB% of HC ≥ 70% *benefit % = benefit/salary average benefit = average of benefit % of HC and NHC ex on pg 14, 15 nondiscriminatory classification test (not likely to be tested) -to satisfy this requirement, the method in which an er chooses ee's to cover under a qualified plan must meet both of the following requirements: -the classification must be reasonable and established, based on the facts and circumstances of the business, under objective business criteria that identify the category of of ee's who benefit under the plan, and -the classification must be nondiscriminatory. in order for the classification to be nondiscriminatory, the plan must meet one of the following two tests: -safe harbor test- a plan satisfies the safe harbor test for a plan year if and only if the plan's ratio percentage is greater than or equal to the er's safe harbor percentage -facts and circumstances test- to meet this test the plan's ratio percentage and the classification must satisfy a factual determination

income tax issues for deferred compensation and nonqualified plans

constructive receipt -income, although not actually in a taxpayer's possession, is nonetheless constructively received by the taxpayer in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given (the taxpayer exercises "dominion and control" over the asset- even if it's not to receive it) -deferred compensation plans are structured so that ee's benefiting under the plan will AVOID constructive receipt, and will be allowed the deferral of income taxation examples of what is NOT considered constructive receipt: -an unsecured promise to pay -the benefits are subject to substantial limitations or restrictions, and -the triggering event is beyond the recipient's control (ex: company is acquired) substantial risk of forfeiture -exists when rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining of performance) of substantial services by any person, or the occurrence of a condition related to a purpose of the transfer and the possibility of forfeiture is substantial if the condition is not satisfied -as long as there is substantial risk of forfeiture, the taxpayer is NOT required to include the income as taxable income economic benefit doctrine -provides that an ee will be taxed on funds or property set aside for the ee if the funds or property are unrestricted and nonforfeitable, even if the ee was not given a choice to receive the income currently -defined compensation plans may provide for a trust to hold the funds for the ee prior to retirement or termination -to be subject to income tax, the funds simply have to be unrestricted and nonforfeitable, which could occur once the ee becomes partially or fully vested -an exception to this rule can be achieved through the use of a rabbi trust IRC Section 83: property transferred in connection with performance of service -when an er transfers property to an ee in connection with performance of service, the ee will be taxed on the difference between the FMV of the property and the amount paid for the property -the gain or difference between the FMV of the property and any amounts paid by the ee will be taxed as ordinary income to the ee -these rules are typically applicable to grants of stock, especially restricted stock, and ee stock options but can also be applied to other transfers of property to an ee payroll tax -deferred compensation is considered to be earned income at the time it's earned or at the time a substantial risk of forfeiture expires (for restricted stocks) and, therefore, is subject to payroll taxes at that time even though the ee may not receive payment until sometime in the future -when the income is later paid to the executive, it will be subject to income tax -the payments will not constitute "earned income" in the period received, and therefore, will not be subject to payroll tax and will not qualify for the earned income test for IRAs and other qualified plans employer income tax deduction -the er is entitled to receive an income tax deduction for contributions to the plan only when the ee is required to include the payments as taxable income (matching principle)

plan limitations on benefits and contributions

covered compensation -the maximum amount of compensation that can be considered for the plan year 2018 is $275,000 (the covered compensation limit) -any plan funding formula that requires the use of the ee's compensation cannot consider any compensation amount above the covered compensation limit defined benefit plans -statutory requirements generally limit the er to providing an ee with a maximum annual expected benefit at retirement equal to the LESSER of: -$220,000, or -100% of the average of the ee's three highest consecutive years compensation during the time of plan participation (considering the covered compensation limit) defined contribution plans -the maximum contribution per participant to a defined contribution plan is the LESSER of: -100% of an ee's compensation for the plan year, or -$55,000 (not including the catch-up contribution of $6,000 for those 50 and older) -the maximum contribution is an aggregate amount, known as the 415c limit, consisting of the employer contributions to the plan, the employee contributions to the plan, plus any forfeitures (amount to be allocated from nonvested ee's who terminated employment) employer contributions to the plan -the total er contributions to a defined contribution plan include any mandatory, discretionary, and matching contributions -if the er maintains multiple defined contribution plans, the limit is based on the aggregate of all contributions to all of the qualified retirement plans employee contributions to the plan -the total ee contributions to a defined contribution plan include any mandatory contributions, elective deferral contributions, and any after-tax contributions -the maximum ee elective deferral is included within the defined contribution account maximum annual contribution -catch-up contributions are not limited by the $55,000 limit and could allow an individual who is age 50 or older to have contributions over $55,000, totaling $61,000 forfeitures from nonvested employees -any forfeiture allocated to an ee's defined contribution plan account during the year is included as a contribution to the plan when determining the maximum annual limit employer contribution limit -an employer cannot deduct contributions to defined contribution plans in excess of 25% of the er's total covered compensation limit -covered compensation includes the compensation up to $275,000 for all those ee's included in the plan -the 25% rule does not apply to defined benefit pension plans b/c the er is required to fund the plan to a minimum funding standard given by the actuary calculation for the max defined contribution limit: employer contributions + employee contributions + plan forfeitures = lesser of $55,000 or 100% of compensation

mandatory funding

defined benefit plans: -the mandatory funding requirements help ensure that the future benefits promised by the DB formula in the plan document are sufficiently funded and that the er only deducts (shelters from tax) the amount necessary to fund the future promised benefit defined contribution pension plans: -require that the plan sponsor fund the plan annually with an amount defined in the plan document

chart on pg 156

difference between SIMPLE IRA, SIMPLE 401k, and 401k's

IRA rollovers

distributions from qualified plans -when an individual terminates employment with the plan sponsor of a qualified plan, the individual may roll the qualified plan balance over into an IRA -an IRA that holds funds that have been transferred from a qualified plan is referred to as a "conduit" IRA or an IRA rollover account -the funds in a conduit IRA are allowed to be rolled back into another qualified plan, assuming the new plan permits such rollovers rollover to qualified plans -although it's permissible to roll an IRA balance into a qualified plan, 403b, or 457 plan, these plans are not required to accept such rollovers -indirect IRA rollovers: 1. an indirect rollover is a distribution to the participant with a subsequent transfer by the participant to another account (must be completed within 60 days) 2. individuals are permitted only 1 annual 60-day rollover from any one of the individual's IRAs 3. there is no limit on the number of DIRECT rollovers between IRAs

employee/employer contributions to 457 plans

employee contributions -ee's are able to contribute the lesser of: 1. $18,500 ee elective deferral, or 2. 100% of includable compensation two catch-up provisions: -age 50 catch-up contributions for Governmental 457b public plans: $6,000 catch-up for ee's 50 and older -this catch-up benefit is ONLY available for governmental (public) 457b plans; not available for ee's of tax-exempt (private) 457b plans -special "final 3-year" additional catch-up provision: applies to BOTH public and private 457b plans -3 year prior to normal retirement age (as defined by the plan) an ee may contribute an additional amount equal to the elective deferral limit $18,500 -thus, an ee with adequate compensation could defer $18,500 under the regular deferral limitation and $18,500 as catch-up for a total of $37,000 -the final 3-year is further limited to prior UNUSED maximum deferral amounts -employers are not required to offer the final 3-year catch-up option -participants who utilize the final 3-year catch-up cannot simultaneously use the age 50 or older catch-up employer contributions -an employer may make matching contributions or nonelective deferrals into the 457 plan -the 457b contribution limit of $18,500 includes BOTH employee contributions and employer matching contributions; this is a significant difference between 457b plans and 401k's or 403b's -as a result, matching contributions by er's in 457 plans are very infrequent compared to those for 401k or 403b plans -many 457 plans do not offer a matching contribution at all *employer contribution goes against the $18,500 limit; whereas er contributions do not go against the $18,500 limit for 401k and 403b plans

employee/employer contributions to 403b plans

employee contributions -employees' elective deferral contributions to 403b accounts are very similar to ee elective deferral contributions to 401k's, SARSEPs, and 457s -permissible contributions (but not required) for 403b accounts: ee elective deferrals, nonelective contributions, after-tax contributions, and any combination of the above -the maximum ee elective deferral is $18,500 -all ee contributions and related earnings are 100% vested catch-up contributions- DIFFERENT, VERY IMPORTANT -a 403b has 2 different catch-up provisions that can be used, in some circumstances, simultaneously -age 50 catch-up provisions: an ee is eligible to make catch-up contributions if the ee has reached 50 by the end of the year, and the maximum amount of elective deferrals that can be made to the ee's account have been satisfied for the year -if these two elements exist, then the total amount of catch-up contributions for the ee age 50 and over would be the lesser of $6,000 OR includable compensation subtracted by other elective deferrals for the year -15-year rule exception-KNOW THEM BOTH: applies only for ee's age 50 and over who have worked for the same employer for 15 years (not required to be consecutive) -if an ee has worked for 15 years with an organization that qualified for eligibility under a 403b plan, then the limit of elective deferrals is increased by the LESSER of: 1. $3,000 2. $15,000 reduced by increases to the general limit that were allowed in previous years due to the 15-year rule, or 3. $5,000 times the number of years of service for the organization, subtracted from the total elective deferrals made by the er on behalf of the ee for earlier years -if an ee qualifies for the 15-year rule, the maximum elective deferrals for the 403b plan for the plan year may be as high as $27,500 ($18,500 maximum deferral plus $6,000 for the 50 and over catch-up rule plus $3,000 max from the 15-year rule) -in order to qualify for the 15-year rule, the business has to be a Health, Education, or Religious organization (HER) Roth contributions (Roth accounts) -both 403b plans and 401k plans may allow ee's to make Roth contributions to the 403b plan -the contribution limit for Roth accounts in a 403b is $18,500, significantly higher than the limits for contributions to Roth IRAs outside a qualified plan -contributions to Roth IRAs are also limited based on annual income, but Roth accounts within 403b's do not have such income limitations employer contributions -the limit on annual additions: the limitation applies to an aggregate of all contributions. the total contributions are comprised of elective deferrals, nonelective contributions, and after-tax contributions -the maximum is the lesser of $55,000 or 100% of the ee's covered compensation of the ee's most recent year of service -includable compensation for the most recent year of service: the amount of taxable wages and benefits that are received by the ee from the er considered includable compensation: -elective deferrals -amounts contributed by an er under a Cafeteria Plan -amounts contributed under an eligible Section 457 nonqualified deferred compensation plan -wages, salaries, and fees for personal services earned with the er maintaining the 403b plan -income excluded under the Foreign Earned Income exclusion -qualified transportation or fringe benefits not considered includable compensation: -the er's contributions to the ee's 403b account -compensation earned while the ee was not eligible -the er's contributions to a qualified plan on behalf of the ee that are excluded from income -the cost of incidental life insurance

employee contributions to 401k plans

employee deferrals -employee elective deferral contributions are limited to the following amounts: -annual elective deferral limit- $18,500 -catch-up contribution (age 50 or older)- $6,000 -total elective deferral- $24,500 -note that the same annual deferral limits apply to SARSEPs, 403b plans, and 457b plans -tax impact: funds deferred in a 401k plan are not currently subject to federal income tax (although payroll taxes are still paid) -exception: Roth 401k and thrift plan contributions are subject to all taxes -catch-up contributions: ee's who are at least 50 years old during the plan year may increase their elective deferral limit by up to $6,000; there must be sufficient earned income to make the catch-up contribution -catch-up contributions are not limited by plan limits, limits on annual accumulations, or by the ADP/ACP testing employee after-tax contributions-thrift plans -thrift plans allow ee's to make after-tax contributions -these plans are utilized by ee's who want to save more than the elective deferral limit or more than the amount allowed under the ADP/ACP test Roth contributions (roth accounts) -a plan may permit an ee who makes elective contributions under a qualified cash or deferred arrangement to designate some or all of those contributions as Roth contributions -the same dollar limits that apply to ee pretax deferrals also apply to Roth contributions in total -therefore, an ee could contribute up to $18,500 to a Roth 401k account or to a pretax account, but not to both

SIMPLE IRAs

employee elective deferral contributions -with the exception of certain rollover contributions, the only contributions that may be made under a SIMPLE IRA plan are the ee's elective deferral contributions and the required er matching contributions or nonelective contributions -ee's may make annual elective deferrals to a SIMPLE IRA plan in the amount of $12,500 adjusted for inflation -for ee's who have attained age 50 by the end of the calendar year there is a catch-up of $3,000 if the ee has sufficient earned income employer contributions -er's who sponsor a SIMPLE IRA are required to make either matching contributions for ee's who make elective deferrals OR nonelective contributions to all eligible ee's employer-matching contributions -if the er elects to make matching contributions, the er is generally required to match the ee's elective deferral contributions on a dollar-for-dollar matching basis up to 3% of the compensation of the ee (without regard to the covered compensation limit) for the entire calendar year -note: this is different than a SIMPLE 401k -er's may elect to reduce the 3 percent matching contribution requirement for a calendar year, but only under ALL of the follow circumstances: 1. the limit is reduced to no less than 1% 2. the limit is not reduced for more than 2 years out of the 5 year period that ends with (and includes) the year for which the election is effective, and 3. ee's are notified of the reduced limit within a reasonable period of time before the 60-day election period for a salary reduction agreement -this only applies to SIMPLE IRAs (not available for SIMPLE 401k's) AND this generally makes SIMPLE IRAs considered "more flexible" nonelective contributions by employer -if the er chooses not to match ee elective deferrals, they MUST make nonelective contributions for all eligible ee's -must be 2% of each eligible ee's compensation (up to covered compensation $275,000) to the SIMPLE IRA *employer contributions: 3% match or 2% nonelective contribution for all eligible ee's *employee elective deferrals: % or $ contribution up to $12,500 plus $3,000 for over 50

summary of nonqualified deferred compensation plans

employer viewpoint -unfunded promise to pay -not a qualified plan -cash outflows are deferred -employer saves on payroll taxes -income tax deduction deferred until paid -sometimes used if compensation exceeds $1M and therefore nondeductible -may discriminate among employees employee viewpoint -ee is at risk for nonpayment -fund by using a rabbi trust; if unfunded, best with a financially secure company -no current taxable income -ee saves on payroll taxes (for earnings) -may provide future cash flow at lower income tax rate *under IRS regulations an amount becomes currently taxable to an executive even before it is actually received if it has been "constructively received" *payroll taxes are due on deferred compensation at the time the compensation is earned and deferred, not at the date of distribution *they can provide for deferral of taxation until the benefit is received, not a fully secured benefit promise (risk of forfeiture), and don't always give an employer an immediate tax deduction

establishing a 401k plan

entities that can establish and sponsor a 401k plan: -corporations -partnerships -LLCs -proprietorships -tax-exempt entities

IRA rules

excess contributions -contributions that exceed the limits are subject to an excise tax of 6% -this penalty is charged each year that the excess contribution remains in the IRA ex on pg 134 timing of contributions to IRAs -contributions must be made to both types of IRA accounts by the due date of the individual federal income tax return WITHOUT extensions -due date is April 15th of the year following the tax year end -the contribution to an IRA must be made in cash with an exception for rollover contributions -no other type of asset may be contributed to an IRA deductibility of IRA contributions -deductibility depends on several factors, including coverage or participation in a qualified plan or other retirement plan (active participant rule) AND the individual's AGI no qualified or other retirement plan -an individual who is not an active participant and whose spouse isn't an active participant has no income limitation for purposes of deducting IRA contributions -therefore contributions are fully deductible active participants of qualified or other retirement plans -for individuals or married couples filing jointly who are considered active participants of a qualified plan or other retirement plan, there is an income test to determine the deductibility of IRA contributions -if the taxpayer's AGI is greater than the upper limit of the phaseout, no deduction is permitted -if the taxpayer's AGI is less than the lower limit of the phaseout, then a full deduction is permitted -if the taxpayer's AGI is between the limits, then the deduction is ratably phased out -married couples filing separately are effectively phased out between an AGI of $0 and $10,000. individuals falling within these phaseout ranges must calculate the deductible amount of the contribution using the calculation -solo spouse participant- one spouse being covered by a qualified plan does not prohibit the other spouse from deducting a contribution to a traditional IRA -this ability to deduct the contribution is partially phased out for married individuals with AGI beginning at $189,000 and is completely phased out over $199,000 (given under spousal IRA limit) calculation of IRA deduction -an individual who is an active participant in a retirement plan and has an AGI within the phaseout range will have a reduced maximum deductible contribution -the deduction limit ($5,500) will be reduced based on a proportion equal to the amount by which the individual's AGI exceeds the lower limit of the phaseout range divided by $10,000 (or $20,000 in the case of a joint return) ex on pg 135-136 nondeductible IRA contributions -contributions to an IRA can be nondeductible -when an individual makes a nondeductible contribution to an IRA, the individual has an adjusted basis in the IRA -withdrawals from the IRA will consist partially of account earnings that have not been subject to income tax and partially of return of adjusted basis for which the individual has already paid income tax

advantages of qualified plans

for employer: -employer contributions are currently tax deductible -er contributions to the plan are not subject to payroll taxes for employee: -availability of pretax contributions -tax deferral of earnings on contributions -ERISA protection -lump-sum distribution options (ten-year averaging, NUA, pre-1974 capital gain treatment)

NQDC plan rules

funding with insurance -for NQDC plans that have funds set aside to pay obligations under the plan, the er will be responsible for paying income tax attributable to earnings on assets held in the plan -as assets accumulate for executives and remain "at risk", earnings will be subject to taxation by the employer -ultimately the employer will receive an income tax deduction when the funds are distributed to the executives; however, er's will often use insurance products because the increase in cash surrender value is not taxed if payments are not made from the policy phantom stock plans -a nonqualified deferred compensation arrangement where the er grants fictional shares of stock to a key ee that is initially valued at the time of the grant -the stock is later valued at some terminal point (usually at termination or retirement), and the executive is then paid the differential value of the stock in cash (no stock actually changes hands) *benefits are paid in cash *there is no equity dilution from additional shares being issued types and applications of NQDC plans -there are several types of NQDC plans that can be established to benefit key executives 1. salary reduction plans allow ee's to elect to reduce their current salary and defer it until future years, generally until retirement or termination 2. salary continuation plans typically provide benefits after retirement on an ongoing basis or for a predetermined period of time -supplemental executive retirement plans (SERPs) are nonqualified deferred compensation agreements designed to provide additional benefits to an executive during retirement -these plans are referred to as top-hat plans because they are designed to benefit a select group of top management or key employees -excess-benefit plans are a type of SERP that is designed solely to provide benefits in excess of the benefits available in qualified plans -salary-reduction plans are common with professional athletes. a large signing bonus, or a part thereof, is frequently transferred to an escrow agent to defer the receipt of taxable income until the athlete is beyond their peak earning period, thereby helping to assure the athlete's future financial security 401k wrap plan -a form of salary reduction plan that enables executives who are subject to salary deferral limits due to the nondiscrimination rules to contribute higher amounts than otherwise permitted under a 401k plan

valuation rules for fringe benefits

general valuation rule -the FMV should be the value assigned to a fringe benefit -most fringe benefits are valued under this rule cents-per-mile rule -valuation requires multiplying the standard mileage rate by the total miles the ee drives the vehicle for personal purposes -standard mileage rate is $0.545 per mile commuting rule -determined by multiplying each one-way commute from home to work or from work to home by $1.50 -this value applies to more than one ee irrespective of whether one or more ee's ride in the vehicle during the commute -the commuting rule is allowed if all of these requirements are satisfied: 1. the er provides the ee the vehicle for use in the er's business and the er requires the ee to commute in the vehicle for bona fide noncompensatory business reasons 2. a written policy is established and implemented whereby the er does not permit the ee to use a vehicle for personal use other than for commuting or minimal personal use 3. other than de minimis personal use and commuting, the ee does not use the vehicle for personal use 4. if the vehicle used is an automobile, the ee who uses the automobile for commuting must not be a control ee; er can define a control ee as a HC ee lease value rule -the value of an er-provided automobile is determined by using the auto's annual lease value -determined by first ascertaining the automobile's FMV on the first day it's available to an ee for personal use -personal use of a leased luxury car provided by an er may increase the amount of income that is included in the W2 due to the lease value rule unsafe conditions commuting rule -determines the value of commuting transportation provided by an er to a qualified ee solely because of unsafe conditions as $1.50 for a one-way commute -requires that a "qualified ee" be provided with the subject commuting transportation -for the unsafe conditions rule to apply, the ee must ordinarily walk or use public transportation, the er must have a written policy against transportation for personal purposes other than commuting because of unsafe conditions, and the ee does not use the transportation for personal reasons beyond commuting due to unsafe conditions -whether other "unsafe conditions" exist is determined based on the facts and circumstances of each individual situation

Traditional IRA deduction phaseouts

given

key employee officer

greater than $175,000

taxation of qualified plan contributions

income tax -employers receive a current income tax deduction for contributions made to plans; they're an ordinary and necessary cost of business -employers are limited to a maximum of 25% (or as actuarially determined for defined benefit plans) of the total of covered compensation paid to its employees as a contribution to a qualified plan -employees are not currently taxed on the related plan contribution; they will be taxed when the funds are distributed from the plan -this tax structure is an exception to the "normal" matching principle payroll taxes -in addition to income taxes, employees pay payroll taxes on their wages of 6.2% for OASDI up to $128,400 and 1.45% for Medicare tax on 100% of compensation -the employer matches any payroll taxes paid by the employee creating a combined total payroll tax of 12.4% for OASDI up to $128,400 and 2.9% for Medicare on 100% of compensation -however, er's and ee's are exempt from payroll taxes on employer contributions to a qualified retirement plan, providing up to a 15.3% (combined OASDI and medicare tax) savings on taxes for ER contributions to a qualified plan -an individual is liable for Additional Medicare Tax of 0.9% if the individual's wages, compensation, or self-employment income (together with spouse of MFJ) exceeds the threshold amounts (threshold amounts given on exam) -this payroll tax exclusion does not apply to employee elective deferrals to retirement plans such as 401k, 403b, SIMPLEs, SARSEPs, and 457 plans -tax deferred funds are taxable when distributed; there will be taxable income but no payroll taxes ex on pg 5

earned income-individual & spousal IRA

individual IRA -annual contributions are limited to the lesser of an individual's earned income or the annual limit -earned income includes any compensation where the individual has performed such level of services for an employer or is considered self-employed -earned income also includes alimony received by the taxpayer -note: TCJA 2017 made alimony subject to a divorce agreement signed after 2018 not income and thus not earned income spousal IRA -individuals who do not have any earned income may still be eligible to establish an IRA if their spouse has sufficient earned income -an IRA for a spouse who has no earned income is generally referred to as a spousal IRA and can be established provided the other spouse has sufficient earned income ex on pg 132 -the necessary level of earned income is equal to the total amount that is to be contributed to both IRAs -spousal IRAs can be established up to the contribution limit for the year in question ($5,500) -the catch-up contribution is also available earned income: -W-2 income -Schedule C net income -K-1 income from an LLC -K-1 income from a partnership where the partner is a material participant -alimony (if divorce agreement signed prior to 2019) not earned income: -earnings and profits from property, such as rental income, interest income, and dividend income -capital gains -pension and annuity income -deferred compensation received (compensation payments postponed from a past year) -income from a partnership with no material participation (limited partner) -any amounts excluded from income, such as foreign income and housing costs -unemployment benefits -investment returns as a limited partner in a partnership -income flowing from an S-corporation via Schedule K-1 -social security benefits -worker's compensation ex on pg 133 earned income- attainment of age 70 1/2: -contributions to a traditional IRA are not permitted in the year or any years after the year in which an individual attains age 70 1/2 -does not apply to Roth IRAs; individuals who have sufficient earned income may continue to contribute to a Roth IRA after age 70 1/2

403b plan rules

investment choices and limitations- restricted investment choices! -funds within a 403b account can only be invested in either insurance annuity contracts or mutual funds (can indirectly be invested in stocks/bonds) loans -loans are allowed and are subject to the same limitations and requirements applicable to loans from qualified plans (401ks) distributions -distributions can be paid from a 403b account only after the following events: -the ee turns age 59 1/2 -the ee is separated from service -the ee dies -the ee becomes disabled, or -for salary reduction contributions, the ee endures a severe hardship -hardship distributions are permitted in 403b's rollovers to/from 403b plans -participants can generally roll over tax free all or any part of a distribution from a 403b plan to a qualified plan, a traditional IRA, a Roth IRA, or to another 403b retirement plan -any rollover that is not a direct rollover will be subject to 20% withholding and 100% of the distribution must be deposited into the new account by 60 days of receiving the distribution *er can't take a deduction for contributions b/c tax-exempt organization *salary reduction contributions are subject to payroll/SS tax, but not W2 income

SEP contribution limit

lesser of 25% of compensation or $55,000

defined benefit maximum limit

lesser of: $220,000, or 100% of the average of the ee's three highest consecutive years compensation during the time of plan participation (considering the covered compensation limit)

employer contributions to 401k plans

matching contributions -plan sponsors often provide a matching contribution available only to those who contribute to the 401k -must vest at least as rapidly as either a 3-year cliff vesting schedule or a 2-to-6 year graduated schedule nonelective contributions -plan sponsors may elect to contribute to ALL eligible employees, whether they elect to defer or not profit sharing (stock bonus) contributions -because 401k plans consist of a CODA attached to a profit sharing plan or stock bonus plan, er's may also make a contribution to the profit sharing (or stock bonus) plan -the ee elective deferral contributions do not count against the plan contribution limit of 25%, so the er has the flexibility to make profit sharing plan contributions -the annual additions limit (415c), however, still limits the contributions to $55,000 per person ($61,000 if age 50 or over) ex on pg 59

meals and lodging provided by the employer

meals -an ee may exclude from gross income the value of all meals provided in-kind (not as cash reimbursement) to him, his spouse, or any of his dependents as long as the meals meet both of the following conditions: -the meals are furnished for the convenience of the er, and -the meals are furnished on the er's business premises -meals for the convenience of the er are now limited to a 50% deduction for years 2017-2025 -ex's of meals furnished for the convenience of the er on pg 196 IRS provided examples that are NOT considered for the convenience of the employer: -any meal provided to promote the morale or goodwill of the ee or to attract prospective ee's does not qualify for the exclusion -if the er charges the ee for the meal, the meal will not be regarded as furnished for the convenience of the er if: the ee has a choice of accepting the meal and paying for it, or of not paying for it and providing his own meals lodging -the IRC provides an exclusion from an ee's gross income for the value of lodging furnished by an er to an ee if ALL 3 of the following requirements are met: 1. the lodging is furnished on the er's business premises 2. the lodging is furnished for the convenience of the er, and 3. the ee is required to accept the lodging as a condition of employment -if any of the requirements are not met, then the ee must include the value of the lodging in gross income irrespective of whether the value exceeds or is less than the amount charged

top-heavy funding

minimum funding for top-heavy defined contribution plans: -must provide each of its nonexcludable, non-key employees a contribution equal to at least 3% of the employee's compensation -exception: when the largest funding made on behalf of all key employees is less than 3%; if this is the case the employer must provide non-key employees with a contribution equal to that of the key employees ex on pg 27 minimum funding for top-heavy defined benefit plans: -must provide a benefit to its nonkey employees equal to 2% per the employee's years of service multiplied by the ee's average annual compensation over the testing period (2% x years of service x compensation factor)

457 plan rules

no integration with other salary deferral plans -a huge benefit of contributing to a 457 plan is that the contributions to the 457 plan are NOT aggregated or combined with contributions to other tax-deferred retirement plans -an ee may contribute the maximum amount to a 401k plan, 403b plan, SARSEP, or SIMPLE IRA, in addition to the deferral limit for 457b's distributions -457b distributions must be included as ordinary income in the calendar year in which the distributions are made -a distinct advantage of a public 457b plan is that the age 59 1/2 withdrawal rule does not apply -there is generally no 10% early withdrawal penatly from 457 plans, except for distributions attributable to rollovers from another type of qualified plan or IRA -withdrawals from a 457b plan must begin by age 70 1/2 -loans may be permitted from public 457b plans, which function very much like traditional 401k plans or 403b plans rollovers -the rules for rollovers from 457b plans are the same as those that apply to rollovers from qualified plans -the important distinction is whether the 457 plan is a public (governmental) or private 457b plan -public 457b plans allows funds to be rolled over into a new employer's 403b, 401k, or 457b plan if that plan accepts such transfers; otherwise, the assets can be rolled into an IRA -457b plans for nongovernmental tax-exempt entities may allow funds to ONLY be rolled over from the 457b plan into another tax-exempt organization's 457b plan if the plan accepts such transfers; these funds cannot be rolled into an IRA or any other type of employer-sponsored retirement plan -for public 457b plans: rank-and-file ee's and key management participate -for private 457b plans: key management and HCs for tax-exempt organizations participate and all employees participate if it's a church-related organization -for 457f plans: key management and HCs participate

Roth IRA contribution phaseout

single: $120,000-$135,000 MFJ: $189,000-$199,000 MFS: $0-$10,000

practical uses of ESOPs and nonrecognition of gain treatment

the establishment of ESOPs allow owners of closely held businesses to sell all or part of their interest in the corporation and defer recognition of the capital gain *to qualify for nonrecognition of gain treatment, these requirements apply: -the ESOP must own at least 30% of the corporation's stock immediately after the sale -the seller must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale and hold such securities for 3 years (qualified replacement securities are securities in a domestic corporation, including stocks, bonds, debentures, or warrants, which receive no more than 25% of their income from passive investments; can be in the form of stock in an S corp) -the corporation that establishes the ESOP must have no class of stock outstanding that is tradable on an established securities market -the sellers, relatives of the sellers, and 25% shareholders in the corporation are precluded from receiving allocations of stock acquired by the ESOP through the rollover -the ESTOP may not sell the stock acquired through the rollover transaction for 3 years -the stock sold to the ESOP must be common or convertible preferred stock and must have been owned by the seller for at least 3 years prior to the sale -if the seller purchases and retains qualified replacement securities, there will be no taxable event (no long-term capital gain or ordinary income in the year of the sale) (if the seller dies the heirs will receive the securities with an adjusted taxable basis equal to the FMV at the seller's date of death or alternate valuation date) ex on pg 75

participation of 401k plans

the most popular form of election under a CODA is a salary reduction agreement in which the ee agrees to reduce compensation in exchange for the elective deferral contribution into the plan

defined benefit pension plans vs defined contribution pension plans

the primary differences of the plans include the following: -actuary -commingled vs. separate individual investment accounts -investment risk -allocation of forfeitures -pension benefit guaranty corporation insurance (PBGC) -benefits-accrued benefit/account balance -credit for prior service -integration with social security-permitted disparity for defined benefit pension plans -younger/older *chart on pg 45

formulas for benefits for defined benefit pension plans

to determine the retirement benefit provided under a defined benefit plan, the plan's funding allocation formula must be established the most common formulas used are: -the flat amount formula -the flat percentage formula -the unit credit formula *chart on pg 45

valuation of er stock in ESOPs

valuations are necessary because: -when contributions are made to an ee's account, the er must know the value of the contribution for the tax deduction purposes and so the ee knows the value of the contribution for future NUA calculation -if a lender lends money to leverage the ESOP, the lender must know the value of the stock to determine if an how much money to lend to the corp -if an ee exercises their put or repurchase option, the value of the stock must be determined -needed for financial statements and reports

establishing a SIMPLE

who can establish a SIMPLE? -can only be established for companies who employ 100 or fewer ee's who earned at least $5,000 of compensation from the er for the preceding calendar year -whether the employees are eligible to participate in the SIMPLE or not, all ee's who earned $5,000 or more in the previous year are taken into consideration for purposes of counting the 100 ee limitation, regardless of whether or not they meet other eligibility requirements entities that can establish SIMPLE plans: -C corps -S corps -LLCs -partnerships -proprietorships -government entities 2 year grace period for er's who cease to comply with 100 employee limit: -if an er meets the 100 ee limitation in a given year, then the er will have a 2 year "grace period" where the er can exceed the limitation without losing eligibility to maintain the SIMPLE other plans not allowed- very important -an employer may not establish a SIMPLE if the er contributes to a defined contribution plan for it ee's during the year, if the ee's accrue a benefit from a defined benefit plan during the year, or if the er contributes to a SEP or 403b during the year eligibility -eligible employees: -employees who earned $5,000 during any two preceding calendar years, and -employees who are expected to earn $5,000 during the current calendar year -the er and ee eligibility for a SIMPLE is determined based on the calendar year vesting -all contributions to a SIMPLE on behalf of ee's and the related earnings are fully (100%) and immediately vested and cannot be forfeited by the employee