Module 5: Retirement

Salary Continuation plan

nonelective, nonqualified deferred type of compensation plan that provides some deferred amount payable in the future. This plan provides additional benefits along with other benefits provided under other plans and requires no reduction in the covered employee's salary.

Taxable in-service (partial) distributions:

nontaxable amount = distribution x (employees cost basis / total account balance)

VEBAs

not exactly employee benefit plans, but something like prefunded welfare benefit plans, where employers make deposits that will be used to provide specified employee benefits in the future. It is a non-taxable trust *key issue with this type of trust is that the prefunding amounts must be tax-deductible and must meet the exception to the rules found in Code Section 419A(f)(6). The kinds of benefits encompassed in VEBAs include life insurance before and after retirement, sick and accident benefits, vacation and recreation benefits, severance benefits, unemployment and job training benefits, and disaster benefits.

Replacement Ratio

the ratio of post-retirement income to that received just before retirement -studies have indicated that replacement ratios of about 50% to 70% were adequate; some say 80-85%

parachute plan exceptions

they do not apply to corporations that have no stock that is readily tradable on an established securities market. The parachute rules also do not apply to payments from small business corporations or generally to payments from qualified retirement plans, and SIMPLE IRAs.

Supplemental Executive Retirement Plan (SERP)

A non-qualified deferred compensation plan that allows employers to provide additional retirement income to key, highly compensated employees. Provides benefits beyond those of traditional qualified plans. -can be set up for life or a just a set number of years; generally provide a flat amount per year. Traditionally used for highly compensated employees because of their loss in traditional retirements plans due to IRC or ERISA limitations. The employer provides a benefit amount equal to the difference between: -the full amount under its qualified retirement benefit formula, ignoring any limitations -the actual qualified plan and social security retirement benefits ADV: helps with recruiting, retaining & rewarding key employees, flexibility and selecting who will participate, minimal reporting for the plan, can also have other plans, survivor benefits for the employee DISADV: employer is not entitled to an income tax deduction until the amounts are actually or constructively received by the employee; investments cannot be separated from the company's general assets -Funding the plan: the employer purchases a life insurance policy on each covered participant. Employer is the owner and beneficiary of the plan -a SERP that is formally funded will trigger a current tax to the participant

Short Term disability pay

A sick pay or short-term disability plan is a plan that continues employees' salary or wages for a limited time during periods of illness or other disability. Generally, sick pay or short-term disability payments do not extend beyond about six months. Programs covering disabilities lasting longer than six months are generally considered long-term disability programs.

Group Disability Insurance

A type of insurance that covers a group of individuals against loss of pay due to accident or sickness. -long term: at least 5 years to life-term -short term: up to two years

Four "R's" of compensation policy

Recruit Reward Retain Retire

Educational IRA (Coverdell)

trust or custodial account that is created to fund the qualified education expenses of the designated beneficiary. -Distributions for qualified higher educational expenses from an education IRA are penalty free and tax-free. -Qualified higher education expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible higher education institution, and now also for elementary and secondary public, private or religious school expenses.

Traditional IRA

*used to protect earned income and investment income from taxation and when an alternative or a supplement to a qualified pension is needed. **Need earned income or alimony to contribution to IRA ADV: potential tax deductibility and deferral of taxes. DISADV: limitations on or no tax deduction for persons or spouses who have a tax-favored employer retirement plan. Moreover, traditional IRA withdrawals are subject to a 10% penalty on premature withdrawals, and these withdrawals are not eligible for averaging tax computation. Also, traditional IRAs cannot be established once an individual reaches the age of 70½. TAX IMPLICATIONS: A nonactive participant spouse filing a joint return may receive a full IRA deduction if joint income is less than $193,000. The nonparticipant spouse may receive a partial deduction if joint income is between $193,000 and $203,000. SPOUSAL IRA TAX IMPLICATIONS: same tax implications apply if one spouse is not covered by an employer retirement plan, provided they file a joint return. The non-covered spouse may be able to deduct all of his or her contributions to a traditional IRA in this situation as long as the couple's AGI is less than $193,000. A partial contribution may be possible if AGI is between $193,000 and $203,000.

Group Term Life Insurance

- Least expensive - Based on experience rating of group during the previous year - Use the ART method - Flexibility for insurer of being able to raise premiums yearly - Allows insured members the right to renew coverage without having to provide evidence of insurability **The cost of the first $50,000 of insurance is tax-free to employees. However, the cost of the first $50,000 will be taxable when the plan discriminates in favor of key employees with regard to eligibility to participate or amount of benefits. -A plan does NOT discriminate if: The plan benefits 70 percent or more of all employees of the employer or, At least 85 percent of all employees who are participants under the plan are not key employees or, The plan meets the requirements of a cafeteria plan under Section 125.

Limitations on plan benefits or employer contributions

-DEFINED BENEFIT PLAN: the highest annual benefit payment under the plan must not exceed the lesser of: *100% of the participants compensation averaged over the three highest consecutive years of highest compensation *$215,000 -DEFINED CONTRIBUTION PLAN: annual additions to each participants account are limited in this plan. they include: *employer contributions *employee salary reductions *forfeitures reallocated from other participants' accounts ...annual additions limit cannot exceed the lesser of: -100% of the participant's annual compensation of -$54,000 ***A further limitation on plan benefits or contributions is that only the first $270,000 of each employee's annual compensation can be taken into account in the plan's benefit or contribution formula.

Timing of Contributions to qualified plans

-DEFINED BENEFIT must be paid within 8.5 months after end of the plan year -DEFINED CONTRIBUTION must be paid within 2.5 months after the end of the plan year. This is subject to a six-month extension *penalties apply if the minimum funding requirements are not met. *profit sharing plans are NOT subject to the minimum funding rules. **If a defined benefit plan fails to meet certain funding requirements for a plan year, a quarterly payment requirement must be met in the following plan year. For a calendar year taxpayer, contributions are due April 15, July 15, October 15 and January 15 of the following year and corresponding dates apply to fiscal year taxpayers. Each qty payment must be 25% of the lesser of -90% of the annual minimum funding amount -100% of the preceding years minimum funding amount

Valuable Savings Medium for employees

-Defined Contribution Plans: use to maximize employee performance; employer contribution flexibility -cash balance plans: employer guarantees the principal and interest rate, so the employee assumes NO investment risk. However, cash balance plans tend to provide greater benefits to younger employees and those with shorter service, as compared to other defined benefit plans. use to maximize employee performance -plans with employee participation

Defined Contribution Plan - refresher

-ESOP/Stock Bonus Plan: use to maximize employee performance; One protective feature for ESOP participants is the requirement that those who have reached 55 and who have at least 10 years of participation in the plan be entitled to an annual election to diversify investments in their accounts. -Money Purchase Pension Plan -Profit Sharing Plan: use to maximize employee performance, employer contribution flexibility...most flexible of all the qualified plans that require employer contributions -Thrift Savings Plan -Section 401(k) Plan -Simplified Employee Pension (SEP) - A SEP is not a qualified defined contribution plan -SIMPLE IRA - A SIMPLE IRA plan is not a qualified defined contribution plan -Target Benefit Pension Plan -Tax Deferred Annuity (403b) - is not technically a qualified defined contribution plan, but from the employee perspective it works the same way.

Golden Parachute Plan

-compensation agreement that provides special severance benefits to executives in the event that the corporation changes ownership and the covered executives are terminated. -an executive who accepts employment with a company that is a potential target for acquisition will often insist on a parachute-type compensation arrangement as a matter of self-protection.

Group Health Insurance

-completely tax free form of employee compensation Two main types of health insurance plans 1. prepaid plans, health care providers are paid in adv of providing services 2. postpaid plans, providers get paid for services rendered or employee gets reimbursed #2 is most common

Design features of Section 457 plans

-Eligible employees: state & govt employees, township employees, school district or sewage authority. Tax exempt employers; any org exempt from fed income tax, except church or temple or org owned by these. Eligible 457 plans are plans that include limits on the amounts deferred & subject to favorable tax treatment -limit on amount deferred: Eligible plans do not exceed the limits on annual amount deferred in contrast to ineligible plans (designed for executives), which exceed the annual dollar limit. *For an eligible plan, the amount deferred annually by an employee cannot exceed the lesser of 100% of the employee's compensation or $19,000 in 2019. -timing of salary reduction elections: catch up contribution over 50, $6000. will increase with inflation; employee elections to defer comp must be made under agreement before beginning of month -distribution requirements: Distributions cannot be made before the calendar year in which a participant reaches age 70 1/2, severance from employment or an unforeseeable emergency. -coverage and eligibility: There are no specific coverage requirements for Section 457 plans. For a governmental organization, the plan can be offered to all employees or to any group of employees or even to a single employee. -funding: Formal Funding is not suggested for a nongovernmental tax-exempt organization, while governmental plans must be funded.

eligible vs ineligible 457 Plan

-For an ELIGIBLE plan, the amount deferred annually by an employee cannot exceed the lesser of 100% of the employee's compensation or $19,000 in 2019. -any elective deferral under a 457 plan will not decrease the amount that an employee can defer under other tax-advantaged plans. -plans providing greater deferral, generally designed for executives, are referred to as INELIGIBLE. Ineligible plans are also referred to as forfeitable plans. -Under this Section, if an employee defers more than the annual dollar limit, the additional deferred amount is not necessarily taxed immediately; it is taxed in the first taxable year in which there is no substantial risk of forfeiture.

Incidental Death Benefit Test (Insurance in Qualified Plan)

-IRS considers any non-retirement benefit in a qualified plan to be incidental so long as the cost of the benefit is less than 25% of the total cost of the plan. incidental if: participant's insured death benefit must be no more than 100 times the expected monthly benefit; The aggregate premiums paid (premiums paid over the entire life of the plan) for a participant's issued death benefit are at all times less than the following percentages of the plan cost for that participant: Ordinary life insurance - 50% Term insurance - 25% Universal life insurance - 25%

Split dollar life insurance: cash value and death proceeds split

-In the event of the employees death or termination, the employer is reimbursed, in whole or in part, for its share of the premium outlay -any policy proceeds not used to reimburse the employer go to the employee's designated beneficiary

Group Term Insurance Features

-Nondiscrimination requirement: rules done apply to churches, temples, and certain related orgs. If rules are not met, key employees lose the tax exclusion for the first $50K. -coverage rules: *benefit at least 70% of all employees, *benefit a group of which at least 85% are not key employees, in a cafeteria plan (section 125) meet their own rules -benefits rules: must not discriminate in favor of key employees, all benefits made to key employees have to be available to all -exclusion rules: employees who have not completed 3 years of service, part time or seasonal, employees who are a part of a collective bargaining unit -Requirement of section 79 rules: require that general death benefit be provided, compensation for services to a group of employees be provided, insurance amounts for employees are determined, and the employer must carry it directly or indirectly.

Qualified Pre-retirement Survivor Annuity

-Once a participant in a plan requiring spousal benefits is vested, the nonparticipant spouse acquires the right to a pre-retirement survivor annuity, payable to the spouse in the event of the participant's death before retirement. This right is an actual property right created by federal law. -provides a monthly payment to the surviving spouse of a plan participant who dies before reaching retirement age. -The benefit received by the spouse is often equal to percentage (usually 50%) of what the plan participant would have received if they had retired. -may have lump sum option instead *If the plan is a defined contribution plan, the qualified pre-retirement survivor annuity is an annuity for the life of the surviving spouse. **the pre-retirement survivor annuity is an automatic benefit

Five Types of Qualified Plans

-Profit sharing plan: Defined Contribution plan; fed regulates how much money can be contributed. -money purchase plan: Defined Contribution plan; fed regulates how much money can be contributed. -target benefit plan: Defined Contribution plan; fed regulates how much money can be contributed. -cash balance plan: defined benefit plan -defined benefit plan: defined benefit plan

Types of Investments in Retirement Plans

-Providing at least 3 investment alternatives is considered a broad range of investments according to section 404c -Qualified plans may invest in a wide variety of options including cash, stocks, bonds, real estate, mortgages, life insurance, annuities, hard assets, collectibles and even more esoteric investment options. However, most plans offer stock, bond and cash equivalent options, which cover the three investment alternatives that are suggested in Section 404(c).

Internal Revenue Code Section 457

-Section 457 provides rules governing all non-qualified deferred compensation plans of governmental units and governmental agencies and also non-church controlled tax-exempt organizations Under this code, the employer makes an agreement with each employee to reduce his or her pay by a specified amount. The deferrals are placed in one or more investment outlets that may include insurance products. The deferred amounts and their investment earnings will be distributed to the employee upon retirement, death, termination of employment or if elected, the calendar year in which the participant attains age 70 ½.

function of buy and sell agreements in closely held corporations

-The death of a shareholder does not legally dissolve a corporation, but it may lead to business continuation problems. These include sale of stock at unreasonable prices, lawsuits against other shareholders and lack of income in the form of dividends. These and other difficulties can be avoided by a prearranged plan to retire a shareholder's interest following death or total disability with a properly drawn buy-and-sell agreement.

Deduction Limits for plans

-The maximum amount an employer can contribute and deduct to a defined CONTRIBUTION plan is 25% of covered compensation. *The definition of covered compensation includes employee elective deferrals. This has the effect of creating a higher total payroll amount which allows for greater employer contribution levels. -Employers max annual deduction for contributions to a defined BENEFIT plan is limited to the amount determines actuarially under standard set forth in section 404A of the code, or the amount required to meet the min funding standards, if greater *There is a full funding limitation within the minimum funding standards that limits this deduction. for COMBO, deduction limit is the greater of: -25% of the compensation of all participants or -the amount required to meet the minimum standard for the defined benefit plan. **PREVENTS A QUALIFIED PLAN FROM BEING USED PRIMARILY AS A TAX SHELTER FOR HIGHLY COMPENSATED EMPLOYEES.

Fully Insured Plans

-The plan is funded exclusively by the purchase of individual insurance contracts -The contracts provide for level annual (or more frequent) premiums extending to retirement age for each individual

factors to consider in choosing the type of corporate buy-and-sell agreement

-The relative tax brackets of the corporation and the shareholders influences whether the cross-purchase or stock-redemption approach is used. -In a business with many shareholders, the number of policies required in a cross purchase plan increases, whereas under a stock-redemption plan, the corporation need purchase only one policy per shareholder. -In a stock redemption plan, the cost basis of shareholders will remain the same while their taxable gain increases. -With a cross-purchase plan their cost basis increases while their taxable gain is reduced. -Other than these factors, the cross-purchase plan avoids several other issues that might arise with stock redemption. The IRC imposes an accumulated earnings penalty tax on corporations that gather earnings and profits in excess of their requirement. -Under a stock-redemption plan, the corporation is the owner and beneficiary of the life insurance policies. Therefore any policy cash values and death proceeds are subject to attachment by the creditors of the corporation. These problems are avoided under a cross-purchase plan. State laws that restrict redemptions, loan limitations in a business that runs mainly on credit, and the IRC's attribution rules that affect partial redemption of stock are other problems faced under a stock- redemption plan but avoided by a cross-purchase plan.

Life Insurance in a Qualified Plan

-When Is It Used? When a substantial number of employees covered in the qualified plan have unmet life insurance needs, when there are gaps and limitations in other company plans providing death benefits, when a defined benefit pension plan is overfunded, when highly compensated plan participants are potentially subject to substantial estate taxes on death benefits and when an employer wants an extremely secure funding vehicle for a plan. -ADV: tax treatment overall cost advantage as compared w individual life policies provides by the employer outside of the plan. -DISADV: may provide a rate of return on their cash values which may be relatively low. expenses and commissions may be greater than for comparable investments -Insurance coverage should be provided for all plan participants under a nondiscriminatory formula -May have to take a medical exam, but can't discriminate in favor of highly compensated employees

business overhead disability plan

-When business owners and professionals in private practice are disabled, their monthly business expenses can be taken care of by an overhead disability plan. covered expenses: those that the IRS accepts as deductible business expenses for federal income tax purposes - rent or mortgage payment for the business premises, employee salaries, equipment payments, utility and laundry costs, business insurance premiums that are not waived during disability benefits paid: major insurers pay benefits on a cumulative basis. benefits generally are available to insure up to $10K a month of covered expenses **if covered expenses are lower than the monthly benefit, money you don't use will be carried forward to the next month.

Keogh Plan

-a qualified plan for sole proprietorships and partnerships. -work like corporate qualified plans, BUT the keogh plan's contribution on behalf of the owner is based on earned income as opposed to compensation. -earned income = defined as the self-employed individuals net income from business after all deductions, including the deduction for the Keogh plan contributions -IRS says self-employment tax must be computed, and a deduction of one-half of the self-employment tax must be taken before determining the keogh deduction

Conversion from IRA to Roth IRA

-a traditional IRA or any part of a traditional IRA can be rolled over to a Roth IRA. -all money converted from an IRA to a Roth IRA will represent a taxable distribution for the year -5 year rule still applies if you take the money converted out of the new account within a Roth IRA, the order of withdrawals is: -contributions -coversions -gain *The chief DISADV of conversion is that the entire amount of the traditional IRA that is converted to a Roth IRA is generally taxable to the owner as ordinary income in the year of the conversion.

Life Insurance in Defined Benefit Plan

-adds to the limit on deductible contributions. This feature allows greater tax-deferred funding of the plan. Three common approaches to use life insurance in defined benefit plan: 1. Combination Plan: retirement benefits are funded with a combination of (1) whole life policies and (2) separate assets in a separate trust fund called the side fund or conversion fund. Appropriate for funding plans with less than 25 employees. 2. Envelope Funding Approach: insurance policies are simply considered as plan assets like any other assets. 3. Fully Insured Plan: funded exclusively by life insurance or annuity contracts. no trusteed side fund. used to be popular, but with higher int rates now not as much. user if someone has an overfunded plan

Parachute Payment definition

-any compensatory payment made to an employee of independent contractor who is an officer, shareholder, or highly compensated individual that meets certain requirements. -highly compensated = one of the highest paid 1% of company employees, up to 250 employees criteria for payment: 1. payment is contingent on a change: in the ownership of effective control of the corporation or in the ownership of a substantial portion of the assets of the corporation 2. the aggregate present value of the payment equals or exceeds three times the base amount

Base Amount (golden parachute plan)

-base amount means three times the individuals average compensation for the five taxable years ending before the date on which the change of ownership or control occurs. -excess payment is the amount of any parachute payment above the base amount

Group Permanent Life Insurance

-considered to provide a permanent benefit if it provides an economic value extending beyond one policy year. *EXAMPLE: a policy with a cash surrender value The type of policy may be treated as part of group term plan if: 1. the amount of death benefit considered part of the group term plan is specified in writing 2. the group term portion of the death benefit each year compiles with a formula in the regulations. *

Phantom Stock

-consists of units analogous to company shares. Their value is generally equal to the full value of the underlying stock. They can be settled in cash and/or stock with the settlement date or event. These would include termination of employment, and fixed in advance and not controlled by the individual. *Benefit to Employees: Phantom stock allows an employer to offer "equity" in the business to the employee without any cash outlay. In addition, there is no taxation until the benefit is paid or made available to the employee. -Phantom stock does not give an employee the opportunity for ownership in the company unless the payout is in the form of company stock, and it follows the nonqualified deferred compensation rules for taxation. -Tax Implications: An employee will have no tax consequences when he or she receives phantom stock units. Employees will recognize the income when the phantom stock units are paid or made available to them. The employer is allowed to take a deduction for the benefits in the year in which they are paid or made available to the employee.

Non-qualified deferred comp plans are subject to certain tax implications

-constructive receipt: amount is considered for taxation if it is put aside or credited to the employee's account unless the employees control of the receipt is subject to a substantial limitation or restriction -economic benefit: a compensation agreement that provides a current economic benefit to an employee is taxed as soon as the employee is vested in contributions made to the fund, even when the employee does not have a right to withdraw cash at that time. -taxation of benefits & contributions: Employees must pay ordinary income tax on benefits from unfunded nonqualified deferred compensation plans in the first year in which the benefit is actually or constructively received. -social security taxes: as soon as the covered executive cannot lose his interest in the plan, he will be subject to Social Security taxes. Could be earlier than the year actually received -federal estate taxes: commuted value of payments made to the employee's beneficiary are included in the employee's gross estate.

Tax implications of a section 457 plan

-deductibility: Since the employer sponsoring a Section 457 plan does not pay federal income taxes, deductibility is not an issue. -nonrefundable tax credit: may happen when employees make voluntary contributions -voluntary contributions: A plan may permit employees to make voluntary contributions. The contributions under this provision may also count toward the nonrefundable credit for lower-income taxpayers. -income: Employees or their beneficiaries include Section 457 governmental plan distributions in income when they are paid. Employees or their beneficiaries include Section 457 nongovernmental, tax-exempt plan distributions in income when they are actually paid or otherwise made available. -10 year averaging: Section 457 plan distributions are not eligible for the favorable lump sum 10-year averaging treatment available for qualified plans. -direct transfers -rollovers -no pre 59 1/2 10% tax penalty -ERISA requirements: Governmental employers and church-related organizations are not subject to ERISA. However, tax-exempt private employers will encounter the ERISA compliance problems discussed before. gov't employees can't have 401k plans gov't plans MUST be funded

When is a non-qualified plan used?

-designed for key employees without the sometimes prohibitive cost of covering a broad group of employees -can provide benefits to executives beyond the limits allowed in qualified plans -can provide customized retirement or savings benefits for selected executives.

Social Security Tax Dollars

-employee & employer pay 6.2% of earnings up to the taxable wage base to the Social Security Admin -Employee & employer also pay 1.45% to fund Medicare TOTAL 7.65% out of every dollar paid as SS taxes: -85 cents goes to a trust fund that pays monthly benefits to retirees and their families and to about eight mil widows, children of workers who have died -15 cents goes to a trust fund that pays benefits to people with disabilities and their families *self employed person: must pay total 15.3% of taxable income into SS up to the wage base limit of $132,900. if someone earns more than 132,900, they must continue to pay the medicare portion of the tax on the rest of the earnings

Cafeteria Plan

-employees may, within limits, choose the form of employee benefits from a cafeteria of benefit plans provided by their employer. -must include a cash option that is an option to receive cash in lieu of non cash benefits of equal value When used: when employee benefits need to vary within the group of employees (older needs vs younger), choice is paramount, when employer is large enough to afford this type of plan. *Complex tax requirements apply to the plan under Section 125 of the Internal Revenue Code.

Savings Plans (DC)

-employer & employee contributions towards the plan: -participant investment direction or earmarking: employees have a choice among several specified pooled investment funds such as mutual funds. regulations required at least 3 different choices. -used as an add on to the section 401K plan: they used to be more popular as a stand alone plan, but not anymore

SEPs (Simplified Employee Pension)

-employer sponsored plans under which plan contributions are made to the participating employees IRA. -Tax-deferred contribution levels are significantly higher than the maximum contribution limit for traditional IRAs -employer contributions only -easy and less expensive to administer over qualified profit sharing plans -it's easier and less expensive ONLY IF you have less than 10 employees. Other plans costs can be spread thin with another type of plan -completing using IRS Form 5305-SEP -regular contributions aren't required, so it makes a SEP not the most reliable retirement account -only employees with at least $5,000 in compensation for the preceding year are counted. *The 2019 annual SEP contributions are limited to the lesser of 25% of compensation (capped at $280,000), not to exceed $56,000.

Group Long Term Disability

-employer sponsored program to provide disability income to employees who are disabled beyond a period specified in the plan, usually 6 mos. -supplements social security disability coverage available to almost all employees -disability income under an employer plan usually continues for the duration of the disability, to age 65, or death. -usually funded through an insurance contract, particularly for smaller employees

two methods for integrating Defined Benefit formulas with Social Security

-excess method: the plan defines a level of compensation called the integration level. Plan then provides a higher rate of benefits for compensation above the integration level. A plan's integration level is an amount of compensation specified under the plan by a dollar amount or formula. *As a general rule, a plan's integration level cannot exceed an amount known as covered compensation, which is specified by the IRS in a table. *The excess benefit percentage cannot exceed the base benefit percentage by more than 3/4 of one percentage point for any year of service, or participant's years of service up to 35. **DEFINED CONTRIBUTION PLANS CAN BE INTEGRATED ONLY UNDER THE EXCESS METHOD -offset method: the plan formula is reduced by a fixed amount or a formula amount that is designed to represent the existence of SS benefits. There is no integration level. Rules provides that no more than half of the benefit provided under the formula without the offset may be taken away by an offset *For example, if a plan formula provides 50% of final average compensation with an offset, even the lowest paid employee must receive at least 25% of final average compensation from the plan.

Loans to executives

-extremely attractive supplement to compensation. offered at lower rates or even interest free. -special situations like buying a home when relocating for work, college tuition for executives child, life insurance, car or vacation home -no nondiscriminatory provisions. loans can be provided just to executives, or event just a single exec. -no tax adv for executive loans -high admin costs, employee has to include substantial portion as income in most cases -employer bears the cost of administering the loan

What is a buy-and-sell agreement, and what is it's purpose?

-legally binding contract that stipulates how a partner's share of a business may be reassigned if that partner dies or otherwise leaves the business. -most often, stipulates that the available share be sold to the remaining partners or to the partnership. -most often used by sole props, partnerships, and closed corporations in an attempt to smooth transitions in ownership when partner dies, retires, or exits business. Two forms of agreements: 1. cross purchase agreement: remaining owners purchase the share of the business that is for sale. 2. redemption agreement: business entity buys the share of the business (some mix the two)

Benefit structure of health benefits

-most health plans do not pay the full cost of covered benefits. Plans use = Deductibles: amount of initial expense specified in the plan that is paid by the employee toward covered benefits. example, if the plan has a $200 deductible, the participant pays the first $200 of covered expenses, and the plan covers the rest, up to a specified limit. Coinsurance: plan participant is responsible for a specified percentage, usually 20%, of covered expenses Maximum coverage limit on covered expenses: Current law prohibits health plans from putting annual or lifetime dollar limits on most benefits.

Defined Benefit Plan Distribution Provisions

-must provide a married participant with a joint and survivor annuity as the automatic form of benefit. -For an unmarried participant, the plan's automatic form of benefit is usually a life annuity, which is typically a series of monthly payments to the participant for life, with no further payments after the participant's death. -Defined benefit plans may allow a participant to choose a joint annuity with a beneficiary other than a spouse, for example, an annuity for the life of a participant with payments continuing after the parent-participant's death to a son or daughter. *a much younger beneficiary, except for a spouse, generally would not be allowed to receive a 100% survivor annuity benefit.

Social Security number

-needed to get a job and pay taxes -not possible to pay into the system and receive benefits without a number -admin uses SSN to track people's earnings while they are working and to track their benefits once they start receiving -

Top Heavy Plan

-one that provides more than 60% of its aggregate accrued benefits or account balances to key employees. *If a plan is top-heavy for a given year, it must provide more rapid vesting than generally required. The plan can either provide 100% vesting after three years of service or 6-year graded vesting -In addition, a top-heavy plan must provide minimum benefits or contributions for non-key employees. *defined BENEFIT: the benefit for each non-key employee during a top-heavy year must be at least two percent of compensation multiplied by the employee's years of service, up to 20%. *defined CONTRIBUTION: employer contributions during a top-heavy year must be at least 3% of compensation.

Under ERISA, what are two types of employee benefit plans

-pension plan -welfare plan

Alternatives to Key Person Insurance

-personally owned insurance paid by additional compensation from the corporation in the form of a bonus can be used in place of key employee insurance to meet the needs of bene's or to provide estate liquidity. *extra compensation must meet the reasonableness test to be deductible.

PBGC: the pension benefit guarantee corporation

-provides termination insurance for participants in qualified defined benefit plans up to certain limits

Keogh Plan

-qualified retirement plan that covers one or more self-employed individuals -works like a corporate qualified plan in almost all situations **A Keogh plan can only be set up for an unincorporated business. -used when long-term capital accumulation, particularly for retirement purposes, is an important objective of a self-employed business owner. -An employee has self-employment income as well as income from employment and wishes to invest as much as possible of the self-employment income and defer taxes on it. -the maximum contribution under a defined contribution keogh plan is the lesser of 25% of compensation or $50K in 2012. -RMDs are a thing -Such plans include the profit sharing plan, money purchase plan, target benefit plan and defined benefit plan. -Keogh plan covers self-employed individuals, who are not technically considered employees. -amount of money contributed to a Keogh for the owner's benefit is based on earned income as opposed to compensation.

Qualified Retirement Plans

-receive more favorable tax benefits than non-qualified plans -subject to very stringent government regulations - The tax advantages of qualified plans means that an employer's dollar spent on qualified plan benefits is bigger than a dollar spent on cash compensation. -either defined benefit or defined contribution

closely held corporation

-referred to as a close corporation or a closed corporation -closely held business in corporate form -such corporations are typically owned by a small number of persons who manage the firms's operations -stock is not listed on an organized exchange -seldom sold, only because of death, disability, retirement or major corporate restructure. -The death of a shareholder does not legally dissolve a corporation, but it may lead to business continuation problems

Alternatives to 457 plans for GOVERNMENT employers

-simple IRA plans -governmental pension plans similar to qualified private plans NOT AVAILABLE: 401K plans, simple 401K plans, and 403B plans

Dependent coverage in Group term insurance

-small amount is treated favorably for tax purposes -regarded as "de minimis fringe" that is not included included in income if the face amount of employer provided group-life term insurance payable on the death of a spouse or dependent of an employee does not exceed $2K

Defined Contribution Plan Distribution Provisions

-sometimes must include options similar to defined benefit plans. -Annuity is computed based on the participant's plan account balance -As an alternative to annuity, the participant can also take a lump sum benefit at retirement or take out non-annuity distributions over the retirement years as needed.

Other tax adv retirement plans

-traditional IRA: type of retirement savings arrangement under which investment earnings are tax deferred. In some cases, the contribution is tax deductible. -Roth IRA: contributions may be made up to a specified limit on a nondeductible basis, but withdrawals may be tax free under certain conditions. -SEP IRA: employer-sponsored retirement plan that allows an employer to make contributions to their own as well as employees' retirement accounts. -Simple IRA: employer-sponsored plans. Tax-deferred contribution levels are significantly higher in this plan than they are for Traditional and Roth IRAs. -TDA or 403B: tax deferred employee retirement plan that is restricted to certain tax-exempt organizations and public school systems. -HR10 or Keogh Plan: qualified, tax-deferred retirement savings plan that is set up for a non-incorporated business entity such as a sole-proprietor or partnership. It differs from other qualified plans only in how the owner or partner is treated regarding contribution limits and distributions.

Need for business continuation plan in SOLE PROPRIETORSHIP

-unincorporated business, owned and managed by a single person -upon death, business is liquidated, leading to a possible loss of the business...but can be avoided with properly funded advance agreement -buy and sell agreement between the proprietor and a friendly competitor or an employee could be negotiated and funded by life and or disability income insurance on proprietors life. -ensure business could be sold to either of them

3 fundamental types of health insurance

1. Basic Plan: primarily provides health care services that are connected with hospitalization. in-patient, in-hospital visits, surgical fees. 2. Major medical plan: covers services excluded from the basic plan. sometimes referred to as supplemental major medical plan 3. Comprehensive plan: combines the coverage of basic and major in a single plan. most plans are this

How do employers fund the postpaid-type health plan?

1. Commercial insurance company contracts: provides reimbursement to employees for their expenses for covered medical procedures. usually limited to the usual, customary, and reasonable (UCR) charges for a given procedure in the employee's geographical area. 2. blue cross/blue shield contracts; Blue cross plans are used for hospital bills, blue shield for doctors' bills. They are non-profit orgs operating within a geographical area 3. self-funding of self insurance (w/o insurance contract): employer pays claims and other costs directly, either on a pay-as-you-go basis, or out of a reserve fund accumulated in advance.

non-qualified deferred comp common benefit formulas

1. Salary continuation formula 2. Salary reduction formula 3. excess benefit plan: highly compensated employees receive the difference between the amounts payable under their qualified plan and the amount they would have received if there were no benefit limitations under Code Section 415. 4. stock appreciation rights: future benefits are to be determined by a formula based on the appreciation value of the company's stock over the period between adoption of the plan and the date of payment.

Retirement Planning Process

1. Set goals 2. Estimate the amount of assets needed at retirement: est retirees may only require income equal to 70/80% of their pre-retirement income 3. Estimate income needed at retirement: calculate social security benefit 4. Calculate the annual inflation adjusted shortfall: take before tax income level they need, subtract SS benefits and then put that in financial calc with years till retirement and inflation rate. 5. Calculate the funds needed to cover this shortfall: subtract inflation rate from expected after tax rate as a whole number, divide result by 1 + rate of inflation expressed as decimal. use this percentage to calculate lump sum needed at retirement. subtract PV of pension or anything other income to figure out income shortfall. 6. Determine how much must be saved annually between now and retirement: take shortfall number and calculate what you need to save each year. PV is what they have saved for retirement now 7. Put the plan in play and save 8. Monitor the plan

Types of PPO plans

1. The gatekeeper plan: patients must chose their primary care provider from the PPO network. In order to see a specialist, they must get a referral from their primary care provider. If patients refer themselves they wont get PPO savings 2. the open panel plan: patients can see different primary care providers and refer themselves to specialists within the network. Financial penalties are not as great if the patient goes out of network 3. the exclusive provider plan: plan is very similar to an HMO and shifts all the costs onto patients if they see a non-network care provider

Two types of IRS ruling

1. The revenue rulings (RR): published by the IRS as general guidance to all taxpayers. IRS publishes its RR in IRS bulletins. RR are binding on IRA personnel on the issues covered in them 2. private letter rulings (PLR): addressed only to the specific taxpayers who requested the rulings. Private letter rulings are not published by the IRS, but are available to the public.

List the questions that must be answered to develop a tax-effective retirement distribution plan.

1. What kinds of distributions does the plan itself allow? Review Summary Plan Description 2. Should the distribution be made in a lump sum or in a periodic payout? Can or should the distribution be rolled over? 3. If periodic payments, what type of payment schedule should be chosen? 4. RMDs? Prepayment penalty? Tax on payments? 5. If a lump sum payment is chosen, is it eligible for 10-year averaging? If eligible, is the election of 10-year averaging beneficial? 6. If the participant was in the plan before 1974, is election of capital gain treatment beneficial? How much tax is payable? 7. What are the potential future estate tax consequences of the form of distribution chosen? TIP: All qualified plans are tax advantaged, but not all tax advantaged plans are qualified.

Premiums for commercial insurance contracts reflect 6 elements

1. admin expenses 2. commissions 3. state premium taxes 4. risk changes 5. return or profit on the insurer's capital allocated to the contract 6. expected benefit payments

Types of Deductibles

1. all-cause deductibles: cumulative over the year or other period, even though the medical bills may reflect many different illnesses or medical conditions 2. per-cause deductibles: amount must be satisfied for each separate illness or other medical condition 3. per-family deductible: used by employees to minimize the payment burden for families

Split-dollar Plan to insurance program - ways to pay off employer

1. at rollout, the employee simply buys out the employer's policy rights for cash 2. at rollout, the employer provides, as additional deductible compensation, a relinquishment to the employee of the employer's rights in the policy 3. The split-dollar plan provides for gradual buyout of the employer's rights by using policy dividends for this purpose. Dividends so used appear to be taxable income to the employee as they are so used. At some point, the employer's rights are fully paid off and the employee is full owner of the policy.

IRS Publication 560 specifies the following steps in determining the Keogh deduction

1. determine net income from schedule C income 2. subtract one half of the actual amount of the self-employment tax. 3. multiply the result by the net contribution rate from the table alternate fraction = plan contribution rate / 1 + plan contribution rate

Tax Implications of long-term disability insurance

1. employer contributions are deducted as employee compensation 2. if employees pay part of the cost of the plan through payroll, these payments are NOT deductible 3. employer payments of premiums under an insured disability plan do not result in taxable income to the employee 4. benefit payments under an employer plan are fully taxable to the employee. For example, if the employer paid 75% of the disability insurance premiums and the employee paid the remaining 25%, only 75% of the disability benefit received by the employee is taxable. 5. If employee receiving benefits meets the total and permanent disability definition, a limited tax credit reduces the tax impact of disability payments for lower income recipients 6. premiums paid arent subject to taxes 7. benefits are subject to federal income tax if paid directly by the employer 8. benefits attributable to employer contributions are subject to ss taxes for a limited period, generally 6 mo after beginning of disability. after not considered wages subject to ss tax.

methods of arranging policy ownership under a split-dollar plan

1. endorsement method: the employer owns the policy and is responsible to the insurance company for paying the entire premium. the bene designation provides for the employer to receive a portion of the death benefit equal to its premium outlay or some alternative share, while the remainder of the death proceeds goes to the employee's designated bene. ADV: greater control by the employer over the policy and outright ownership of the cash val, simpler installation and admin, avoidance of any formal agreement, 2. collateral assignment method: the employee or a third party is the owner of the policy and is responsible for premium payments. The employer then makes int-free loans of the amount of the premium the employer has agreed to pay under the split dollar plan. ADV: gives more protection to the employee and the employees beneficiary, easier to implement using existing insurance policies owned by the employee, and employee may ultimately generate tax-free income from the policy via withdrawals to basis or loans

Penalties for breaking tax laws

1. failure to file returns: 20% to 40% of the underpayment 2. substantial valuation overstatement: 20% of underpayment 3. negligence to tax laws compliance: 75% of underpayment 4. Fraud: 5% of the underpayment for each month, but not more than 25%

alternatives to cafeteria plans?

1. fixed benefit program 2. flexible spending account (FSA) 3. cash compensation

HMOs are organized in one of three ways

1. group practice or medical group: contract is between the group and the HMO, not individual doctors 2. individual practice association: individual doctors or medical groups that practice in their own offices 3. staff model: an HMO org that directly employs doctors and other health care providers who provide the HMOs service to subscribers

Alternatives to group life insurance

1. life insurance in qualified plan 2. split dollar life insurance 3. death benefit only (employer death benefit) 4. personally owned insurance

excess parachute payment is subject to two tax sanctions

1. no employer deduction is allowed 2. the person receiving the payment is subject to a penalty tax equal to 20% of the excess parachute payment excess parachute payment formula = parachute payment - (present val of parachute payment / present value of all parachute payment expected) X base amount

Potential business continuation problems of a partnership

1. not possible to raise the necessary cash, 2. even if surviving partners can raise cash to purchase interest of the deceased, they must prove that the price paid for the interest is fair. 3. owners special talents are no longer available to the partnership, so not going to function 4. he or she becomes a drain on the business financially 5. nondisabled partners must assume the disabled partners responsibilities and duties but with inadequate compensation

Health Coverage options for retirees

1. pay as you go 2. earmarked corporate assets 3. corporate owned life insurance 4. increase pension benefits 5. incidental benefit in qualified plan 6. VEBA (voluntary employees beneficiary association) or other trust fund

Since most plans are unfunded, employees try to increase benefit security with one of these approaches:

1. reserve account maintained by employer: The employer maintains an actual account, invested in securities of various types. There is no trust in this case. Funds are fully accessible to the employer and its creditors. The plan is considered unfunded for tax and ERISA purposes. 2. Employer reserve account with employee investment direction: employee has the right to direct or select investments in this account. 3. corporate owned life insurance: helps provide funding the employers obligation under nonqual deferred comp plans. Of value to younger employees. this is common because the cash value build up is tax deferred. 4. Rabbi trust: set up to hold property used for financing a deferred comp plan where the funds set aside are subject to the employers creditors 5. third party guarantees: receiving third party funding of a plan

Pension plan reporting and disclosure requirements

1. summary plan description (SPD): intended to describe the major provisions of the plan to participants in simple language 2. annual report (form 5500): must be filed with the IRS each each by the end of the seventh month after the plan year ends. filed with DOL 3. summary annual report: brief summary of financial information from the Annual Report (Form 5500 series) that must be provided to plan participants each year within nine months of the end of the plan year. 4. individual accrued benefit statement. can be requested by a plan participant under the plan, and the plan admin must provide it within 30 days.

Government Regulation on employee benefits

1. the statutory law: basis for all other rules, highest level of authority 2. the law as expressed in court cases 3. regulations of government agencies 4. rulings and other information issued by government agencies

Qualified Domestic Relations Order (QDRO)

A court-issued order that instructs a plan administrator how to pay all or a portion of a pension plan benefit to a divorced spouse or child. -QDRO may specify that benefits from a plan be assigned to an alt payee as a settlement. However, a QDRO cannot assign a benefit that the plan does not provide. It also cannot assign a benefit already assigned to someone else or a cash benefit when the participant has no right to cash payments. -Alternate payee is a person who receives a distribution enforced by QDRO, such as a spouse or former spouse of the participant. The recipient of the QDRO can roll over the distribution or can just take the money

Plans exempt from ERISA

A) govt plans B) certain church plans C) plans subject to state law incl WC, disab, and UE D) foreign plans established primarily for non resident aliens E) unfunded excess benefit plans F)unfunded payroll practices - vacation, sick or PTO G)voluntary insurance if certain criteria are met

Employee stock purchase plan

Allows employees to buy company stock at a discount (usually at 15% less than market price) -brought about by deductions in salary in the offering period ranging from 3 to 27 months -sometimes referred to as a 423 plan bc the regulations that govern plans are in section 423 of the internal revenue code. -exclusions from the plan: highly compensated, only worked a short period of time, only work part time -stock allowed to be purchased relates to compensation -cant exceed $25,000 in fair market value

Split Dollar Life Insurance

An arrangement between employer & an employee that involves a sharing of the costs and benefits of the life insurance policy. Can also be adopted between parent corp and a subsidiary, or between parent and a child or in-law. *Usually these plans involve a splitting of premiums, death benefits, and/or cash values. **provides cost effective life insurance pre-retirement death benefits, fringe benefits and to help shareholder employees. When is it used? -when employer wishes to provide execs with a life insurance benefit at low cost and low outlay to the executive. Best suited for execs from 30s-60s. Costs are more excessive for older people. -when a pre-retirement death benefit for an employee is a major objective, split dollar can be used as an alternative to an insurance financed non-qualified deferred compensation plan. -attractive in a low interest rate environment -When an employer wants to make it easier for shareholder-employees to finance a buyout of stock under a cross purchase buy-sell agreement, or make it possible for non-stockholding employees to effect a one-way stock purchase at an existing shareholder's death ADV: plan allows an executive to receive a benefit of current value, namely life insurance coverage, using employer funds, with possible minimal tax cost to the executive. DISADV: employer receives no tax deduction for its share of premium payments. The employee has to pay income taxes each year on the current cost of life insurance protection under the plan, or for an employee owned policy, the employee mjst pay taxes on the imputed income less any premiums paid by the employee. Also, the plan must remain in effect for a reasonably long time, that is, 10 to 20 years, in order for policy cash values to rise to a level sufficient to maximize plan benefits.

Split dollar life insurance

An arrangement between two parties where life insurance is written on the life of one party who names the beneficiary of the net death benefits (death benefits less cash value), and the other party is assigned the cash value, with both sharing premium payments. -can be adopted for purposes other than providing an employee benefit, for example, between a parent corp and a subsidiary or between a parent and a child or in-law.

ERISA requirements for Split Dollar Life Insurance

As a split dollar plan is considered an employee welfare benefit plan, it is subject to the ERISA rules applicable to such plans. A welfare plan can escape the ERISA reporting and disclosure requirements, which include Form 5500 filing and the summary plan description (SPD) requirement, if it is an insured plan maintained for a select group of management or highly compensated employees. If the plan covers more than a select group, it has to provide SPDs to participants. If it covers fewer than 100 participants, the SPD need not be filed with the DOL. ERISA also requires a written document, a named fiduciary, and a formal claims procedure for split dollar plans.

Investment Risk in Plans

Defined Benefit Plan: Employer assumes all risk Defined Contribution Plan: Employee assumes all risk

Design Features of Group Disability Insurance

Eligibility Criteria: not subject to nondiscrim rules, so a lot of flexibility. most long-term plans require waiting period of three months to a year before an eligible employee becomes covered. Definition of Disability: this is very important in establishing cost to the employer. Social security or total and permanent, qualified for, & regular occupation or own occupation. Benefit formulas: Disability income amounts of 50% to 70% of pre-disability income are typical.

ERISA

Employee retirement income security act - its a federal law to protect the interests of the participants and beneficiaries regarding their pension, group insurance and welfare benefit plan - There's an appointed fiduciary that manages benefit plans, must communicate benefit offerings, govern the plan per ERISA guidelines - reports are available to dept of labor and irs and must file annually

Employee Benefit Plans (insurance, plans, etc.)

Group Life Insurance: insuring group of people/employees Group Disability Insurance Group Medical Insurance Cafeteria Plans & FSA Other Employee Benefits

ERISA Administration and Enforcement

IRS: administers the taxation of contributions and benefits and, in the retirement-plan area, enforces funding, participation an vesting schedules. PBGC: the pension benefit guarantee corporation is responsible for pension insurance provisions DOL: the US Dept of Labor oversees reporting and disclosure and the fiduciary requirements of ERISA that regulate the mgmt of plan assets

Qualified Joint and Survivor Annuity

If the plan is subject to these requirements, it must automatically provide, as a retirement benefit, an annuity for the life of the participant with a survivor annuity for the life of the participant's spouse.

Combination of defined benefit & defined contribution plans

It is now possible to have a defined contribution plan and a defined benefit plan for a participant that provides the maximum benefit under both plans, subject to an overall limitation on employer deductions equal to 25% of covered payroll, with certain exceptions.

Uses or life insurance and disability income insurance

Life insurance is commonly used to fund buy and sell agreements entity approach: partnership itself applies for, owns and is beneficiary of a life insurance policy on each partner's life. The face amount of each policy usually equals the value of the insured partner's ownership interest. cross purchase approach: each partner applies for, owns and is beneficiary of a life insurance policy on each of the other partners' lives. The face amount of each policy usually equals the agreed-upon value of the interest that the surviving partner/policy owner would purchase from the deceased partner's estate. n(n-1) number of parties needed in agreement *true stms about insurance buy-and-sell agreements for sole props: premiums are not deductible, death proceeds are income tax free.

lump sum distribution versus deferred payments - retirement distributions

Lump sum: 10 year averaging, freedom to invest plan proceeds at the participant's discretion instead of having to accept the plan administrator's method and/or choice of investment. Deferred Payout: Deferral of taxes until money is distributed, tax shelter, security of retirement income Factors involved in determining alternatives are not only tax considerations, but also age and health of the participant, return on investment, expected tax rates, income requirements and the size of the total amount of the benefit.

Qualified Plan rules that must be satisfied: age and service or waiting period requirements, & the overall participation and coverage requirements

Minimum waiting period & age requirement - done to avoid burdening the plan with employees who terminate after short periods of service -the plan cannot require more than 1 yr of service -21 year old age min -As an alternative, the plan's waiting period can be up to two years if the plan provides immediate 100% vesting upon entry. (This option is not available to 401(k) plans.) -no plan can have a max age A highly compensated employee: higher than 5% owner top paid: top 20% compensated

Defined Contribution Plans

Money Purchase Plans: the employer is required to contribute a fixed and stated amount to the plan. The contribution may be up to 25% of covered compensation. Employers usually avoid this because of the mandatory nature Target Benefit Plans: employer must make annual contributions to each participant's account under a formula based on compensation. age at plan entry is also taken into account in determining the contribution percentage; actuarial basis so that older entrants can build up retirement accounts faster. Profit Sharing Plan: employer can decide not to contribute to the plan at all in certain cases. The contribution may be up to 25% of covered compensation.

Types of partnerships

PARTNERSHIP: voluntary association of two or more individuals for the purpose of conducting a business for profit as co-owners LLC is General partnership: each partner is actively involved in the management of the firm and is fully liable for partnership obligations limited partnership: at least one general partner and one or more limited partners. Limited partners are not actively engaged in partnership management. They are liable for partnership obligations only to the extend of their investment in the partnership. LLC is a good alternative - LLC can be taxed as a partnership, which is usually preferred, but the liability of each partner is limited.

Continuing Health Coverage for Retirees

Pay as you go: no advance funding or financing; health insurance premiums are simply paid each year after the covered employee retires. This alternative is simple and offers the lowest initial cost. no non-discrim requirements Earmarked Corporate Assets: pay-as-you-go arrangement, but provides a better indication of responsible financial management Corporate owned life insurance: also a pay as you go approach. The insurance is maintained on the life of each covered employee, with the corporation as owner and beneficiary. Increase pension benefits:

403(b) plans

Plans that allow employees of certain tax-exempt organizations & public schools to contribute pretax dollars toward retirement savings. -employees contribute through salary reductions (and/or employer contributions) -most commonly used by tax-exempt entities such as public schools, colleges, universities, churches and hospitals -403(b) funds are in large part invested in low risk annuity contracts. Only the mutual fund (custodial account) type of 403(b) investment (and possibly some variable annuity contracts) involves significant investment risk, and employees are given a choice of mutual fund investments so that they are able to control the degree of risk. -The 403(b) Lifetime Catch-up is called the 15-year rule in IRS publication 571 and allows for an additional $3,000 to be contributed. This is in addition to the over 50 catch-up provision of $6,000.

Tax Implications of SERPs

SERPS hold good for both employers and employees in the case of non-qualified retirement plans. -Premium payments or contributions made toward a non-qualified retirement plan informally are not deductible currently by the employer. -When payments are made to the employee, upon retirement or otherwise, or to his or her heirs in the case of death, the employer gets a deduction for the payments. -There are no tax obligations to the employee during the deferral period. If the promise to pay is secured in any way, the employee is taxed on the economic benefit of the security interest. -To minimize taxation under the economic benefits doctrine, these agreements have provisions that rights to payments will be nonassignable and nontransferable.

SIMPLE IRA

Savings Incentive Match Plan for Employees A retirement plan sponsored by companies with fewer than 100 employees; though it may be structured as a 401(K), it avoids some of the administrative fees and paperwork of those plans. -contribution levels are significantly higher than IRAs ($13,000 in 2019, plus catch up which is $3K) -feature employee salary reduction contributions (elective deferrals) coupled with employer matching or non-elective contributions -adopted by completing the IRS Forms 5304-SIMPLE or 5305-SIMPLE -SIMPLE IRAs can be funded in part through salary reductions by employees if certain conditions are met. -doesn't promise regular contributions, not the best in securing retirement -If an organization maintains a SIMPLE IRA plan, it has restrictions in maintaining other plans. -only employees with at least $5,000 in compensation for the preceding year are counted. -10% penalty on premature distributions is increased to 25% during the first two years of participation. -10-year averaging provisions are not available for SIMPLE IRA distributions. -Employees must make salary reduction elections during a 60-day period prior to January 1 of the year for which the elections are made.

Different Types of Annuities

Single Life Annuity: set monthly payment for the persons entire life. The payment ends upon the death of the annuitant Annuity for life with period certain: person will receive payments for life, but if he or she dies before the end of a certain period, payments will continue to beneficiaries until the end of that period. This annuity pays a smaller amount than a single life annuity. Joint and survivor annuity: provides payments over the life of both the annuitant and his/her spouse. Joint and survivor annuity payout options from qualified retirement plans must be investigated carefully. The client will receive a lower monthly payment while he or she is living so that income can go to the surviving spouse when he or she dies. If the person's spouse dies first, the monthly amount probably will not go up.

IRA Active Participant AGI Phase out Ranges (2019)

Single: $64K - $74K Married Filing Jt: $103K - $123K Married filing separate: $0 - $10K *Participation in a 457 Plan will not affect the deductibility of an IRA contribution. A participant in a Section 457 plan is not considered an active participant for IRA contribution deduction purposes *Active participant = taxpayer either received any annual additions within a defined contribution plan during the year or was eligible for any benefits in a defined benefit plan during the year. Annual additions consist of employer contributions, employee contributions or forfeitures

Types of non-qualified plans

Supplemental executive retirement plans: provides benefits for selected employees only split dollar life insurance: employer and an employee share the costs and benefits of the life insurance policy. These plans can be used between a parent corporation and a subsidiary, or a parent and a child. Stock option: stock to compensate executives. incentive stock option plans and non-statutory stock options employee stock purchase plans: The purchase of these is brought about by salary deductions during the offering period. They are offered at a price lower than the market price. The plans are usually tax qualified under Section 423. Phantom stock: units similar to company shares. The value generally equals the full value of the underlying stock. loans to executives: restricted to loans for specified purposes. Typically, such loans are interest-free or made at a favorable interest rate.

Roth IRA contribution limits

The Roth IRA contribution is limited each year for each individual. The limit is reduced for single annual Adjusted Gross Income (AGI) above $122,000 and eliminated entirely for single AGI of $137,000 or more. The corresponding limits for joint-return filers are $193,000 and $203,000.

Qualified Plan Coverage Requirements

The Safe Harbor Test: If the plan covers at least 70% of all eligible non-highly compensated employees, it passes the safe harbor requirements The Ratio Percentage Test: If the percentage of non-highly compensated employees covered by the plan is at least 70% of the percentage of the highly compensated employees covered by the plan, the test is passed The Average Benefits Test: if the avg benefit enjoyed by the non highly compensated employees covered by the plan is at least 70% of the avg benefit enjoyed by the highly compensated employees covered by the plan, it passes the test.

Carve-out in Group Term Insurance

This plan is used for group term insurance in amounts in excess of $50K. -the first $50K is term insurance and the remaining carve out is provided by a permanent life insurance policy. -can be provided to all or just key employees -disadvantage will be the additional premium that corporations will have to pay

Specific buy-and-sell agreements of partnerships

Two forms of agreements: 1. cross purchase agreement: remaining owners purchase the share of the business that is for sale. 2. redemption agreement (entity): business entity buys the share of the business

Stock Options

a formal, written offer to sell stock at a specified price, within specified time limits. Employers often use stock options for compensating executives. Options are generally for stock of the employer company or subsidiary. -granted as additional compensation. -granted at a favorable price, either below or near the current market value, with an expectation that the val will rise. -typically remain outstanding for 10 years -not taxed upon the grant of an option, taxation is deferred to the time when the stock is purchased or later. Thus, form of deferred compensation, and the amount of compensation is based upon increases in the value of the company's stock. -popular with executives, as it gives them some of the advantages of business ownership Two types: Non-qualified stock option plans, or Incentive stock option plans

Preferred Provider Organization (PPO)

a health care delivery system through which providers contract to offer medical services to benefit plan enrollees on a fee-for-service basis at various reimbursement levels in return for more patients and/or timely payment. -They are groups of health care providers that contract with employers, insurance companies, union trust funds, or others to provide medical care services at a reduced, negotiated fee. differ from HMOs: 1. provide health benefits on a fee-for-service basis as their services are used. fees are usually subject to a schedule that is the same for all participants in the PPO. 2. plan participants have financial incentives to use the preferred provider network. The primary care physician does not control a participants access to, as in the case in most HMO plans

Age weighted profit sharing plan

a profit sharing plan with an age-weighted factor in the allocation formula. Like all profit sharing plans, the employer's annual contribution can be discretionary, so the participants have no assurance of a specific annual funding level. However, since the plan allocations are age-weighted, older plan entrants are favored.

Cash Balance Pension Plan

a qualified defined benefit retirement plan where employees are credited with a percentage of their pay, plus a predetermined rate of interest. The employer credits a hypothetical individual account for each participant with these two types of credit, the pay credit and the interest credit. Employees don't get to make investment decisions, but also don't bear investment risk. -appropriate for young employees, because they start to build up significant benefits much earlier.

Defined Benefit Pension Plan

a traditional pension plan under which the employee receives a promised or defined pension payout at retirement. The payout is based on a formula that takes into account his or her age at retirement, salary level and years of service. -Some of the formulas used for determining the benefit are the flat amount, the flat percentage or the unit credit types. -employer bears investment risk associated to the plan and the employee gets the promised amount at retirement. -the plan provides benefits at adequate levels for all employees regardless of age at plan entry, but is especially advantageous for older highly compensated employees.

social security survivor benefits

benefits that are payable to the family of a worker who dies. These payments include a small automatic one-time payment at the time of death, as well as continued monthly payments to the spouse and/or children if they meet the requirements. Parents of a worker may also qualify for survivor benefits if they were dependent on the worker for at least half of their support and satisfy some additional criteria.

taxable part of a plan distribution

determined by the total cost basis divided by the total payment. The cost basis includes employee after-tax contributions, cost of life insurance reported as taxable income, employer contributions taxed to employee and plan loans included as taxable income. However, rollovers are not included in cost basis because they are not taxed at the time of being rolled over. They are generally made to defer tax until the time the funds are actually withdrawn from the plan

Flexible Spending Account

employees can choose between cash and specified benefits that are funded through salary reductions elected by employees each year *benefits CANNOT be provided to self-employed people, sole props, & partners

Defined Contribution Plan

employer established and maintains an individual account for each plan participant. Employee usually becomes eligible to receive benefits when they retire or terminate employment. employer contributions + employee contributions + earnings Types of DC plans: money purchase pension plan, profit sharing plan, savings plan, 401K plan, target/age weighted plan annual addition to each employees account is limited to the lesser of: 100% of compensation or $55,000

legal services plan

employer-sponsored plan provided to employees to make legal services available to them when needed. It is a much-desired benefit, as many employees are not adequately funded to hire legal services when required. The expenses of the plan are deductible to the employer and the benefits are taxable to the employees. Generally, all employees are covered in such plans and the design feature includes benefits, such as legal consultations and advice on any matter, personal bankruptcy, adoption proceedings, preparation of wills, deeds, powers-of-attorney and other routine legal documents, and divorce, separation, child custody, and other domestic matters.

Non-Qualified Stock Options

enable the employee to purchase shares of company stock at a stated price that is the option price for a given period of time, frequently 10 years. The price normally equals 100% of the stock's fair market value on date of grant, but there could be a discount or premium. The vesting period normally is of one to four years. The option term may be shortened if the recipient's employment terminates before exercise. NQSOs can be exercised by cash payment or by tendering previously owned shares of stock, depending on plan terms. They can be granted in tandem with stock appreciation rights or other devices.

1035 exchanges

existing life insurance policies and annuity contracts can be exchanged for new policies and contracts with different insurance companies as a tax-free exchange -conversion analysis must be done to ensure it's good to switch need to consider: new expenses & commissions, early surrender charges, higher premium on the new policy due to older age when issued, higher premium as health declines as get older, new contestability period, tax consequences on existing policy that has an outstanding loan

Who is a key employer

for purposes of top-heavy rules, an employee who, at any time during the plan year: -an officer of the employer having annual compensation greater than $175K -more than 5% owner of the company -A more-than 1% owner of the employer having annual compensation from the employer of more than $150,000. For these purposes, no more than 50 employees will be treated as officers KNOW THE DIFFERENCE: Highly Compensated - more than a 5% owner or received compensation in excess of $120,000(2017) (indexed). Key Employee - more than a 5% owner or an officer of the employer having annual compensation greater than $175,000 or a greater than 1% owner whose salary exceeds $150,000. ****Generally speaking, use highly compensated employees for discrimination tests and key employees for Top Heavy testing.

Roth IRA

form of IRA under which contributions may be made up to a specified limit on a nondeductible basis, but withdrawals are tax free within certain limitations Why Used: when is is desirable to defer taxes on investment income, long-term accumulation, especially for retirement purposes is an important objective, when a supplement to other retirement or pension plan is needed. Restrictions based on AGI: Yes, contribution limit phased out between $122,000 and $137,000 (single); $193,000 and $203,000 (joint). -Roth IRA contribution is not restricted by active participation in an employers retirement plan -contributions can be made after 70 1/2 & there's no RMD -you can withdraw from Roth IRA if it's existed for at least 5 years or for an unforeseen situation. -you cannot contribute full contribution to both an IRA and Roth IRA, both will need to equal the contribution limit for your age. -largest contribution you can make in 2019 is 7000 (that's for the catch up contribution) -the first time home buyer distribution has a lifetime limitation of $10K

Medicare

health insurance program for those age 65 years and above and for some with disabilities under 65 years of age. Medicare has two parts. Part A is hospital insurance that helps to pay for care in a hospital and certain follow-up services. Part B is medical insurance that helps to pay for doctors, outpatient hospital care and some other medical services that Part A does not cover. While participation in Part A is compulsory and there is no monthly cost to insureds, participation in Part B is voluntary and insureds must pay a monthly premium. **Even if a person has not paid into the system, a person can enroll in Medicare Part A by paying the required premium.

Vesting in qualified plans

if a qualified plan provides for employee contributions, the portion of the benefit or account balance attributable to employee contributions must at all times be 100% vested, or non-forfeitable Employer vesting *Def Contribution plans: three year cliff vesting or two to six year graded vesting *Def Benefit plans: five year cliff vesting or three to seven year graded vesting

Key Employee Life insurance

insurance on the life of a key employee to cover the possibility of an income loss and/or an increase in expenses resulting from the key employee's death Tax implication to employees: corporate owned key employee life insurance may have some effect on the federal estate tax payable by the deceased key employee's estate. This can happen when the key employee is a shareholder. Tax implications to employers: premiums are not deductible for federal income tax purposes, but the death proceeds are tax free, except for applications of AMT. Accumulation of income beyond a certain limit for the purpose of paying premiums might be subject to accumulated earning tax.

Split-dollar plan tax consequences

loan or non-loan application: if the plan is considered to be a loan, the below market rules of section 7872 apply death benefits: both the employee's beneficiary's share of death benefits from a split dollar plan are generally income-tax free. employee ownership: If employee does not own the policy, the death benefit is not included in his or her estate for federal estate tax purposes unless the policy proceeds are payable to the employee's estate federal gift tax consequences: there may be federal gift tax consequences if a person other than the employee owns the insurance policy used in a split dollar plan. transfer of policy from the employee to another party is a gift subject to tax. Gifts made to beneficiaries generally qualify for the annual gift tax exclusion.

COBRA Continuation Coverage provisions

many employers have plans that continue health insurance coverage for employees and their dependents for a period of time after term of employment. COBRA = Consolidated Omnibus Budget Reconciliation Act of 1985. *apply for a given year if the employer had 20 or more employees on a typical business day in the preceding year. *gov't and church plans are exempt *self-employed people, independent contractors & directors are not counted and exempt from COBRA

Social Security benefits - not just for retirement

many receive social security benefits bc they are: -disabled -spouse, former spouse, or a dependent of someone who is receiving social security -widow caring for a child -a child under 18 -widow age 60 or older -dependent parent of someone who has died *pays more benefits to children than any other government program.

Social security retirement benefits

monthly payments received from Social Security during the recipient's lifetime. A full retirement benefit is available at normal retirement age, which is currently age 65. When a worker retires between the ages of 62 and 65, a reduced retirement benefit is available. Those who wish to work full-time beyond their retirement age without receiving Social Security benefits get a special credit that can increase their eventual Social Security benefits. Those continuing to work can also receive full retirement benefits if they choose to do so. A person who has a substantial income in addition to Social Security benefits may have to pay taxes on the benefits.

Funded vs unfunded non-qualified deferred plans

most plans are unfunded - meaning they don't necessarily have the funds set aside.

Target/Age Weighted Plan (DC)

much like money purchase plans, but the employer contribution percentage can be based on age at plan entry, which would be higher for older entrants. favorable where the employer wants to provide adequate benefits for older employees. limits on possible actuarial assumptions for a target pension plan: -table must be a unisex table -investment return assumption must not be less than 7.5% or more than 8.5% -actuarial assumptions must be reasonable. In a target plan, however, the participant's age at plan entry is also taken into account in determining the contribution percentage. This is done on an actuarial basis so that older entrants can build up retirement accounts faster. The target provides approximately the same benefit level as a percentage of compensation for each participant at retirement. The employer does not guarantee this level, however, and the employee bears the risk and also reaps the benefit of varying investment results.

Medical Insurance

must be included in the calculation of retirement needs, especially if a person is planning to retire before he or she is eligible for medicare Medicare Coverage Part A: provides hospital insurance benefits Part B: allows for voluntary supplemental insurance Medicare usually does not cover prescription drugs, custodial nursing home care, dental costs, and hearing aids and glasses, among other items. -client may want LTC insurance

Requirements of Code Section 72(p)

must be met by loans from qualified plans, otherwise they will be treated as a taxable distribution. The loan must be the lesser of $50,000 reduced by last year's highest outstanding loan balance, or half the present value of the vested account balance. In any case a loan of up to $10,000 is allowed, but the loan must be repayable within five years except for loans used to secure a principal resident of the participant.

Requirements of Code Section 4975(d)(1)

must be met for a loan to be exempted from penalties. These requirements ensure that loans are available to all participants on an equivalent basis and prevent discrimination in favor of highly compensated employees with regard to loan amounts. The loans must also bear reasonable rates of interest and be adequately secured.

The Fringe benefits

noncash compensation benefits to employees, governed by Code Section 132, and include benefits such as employee discounts, company cafeterias and meals plans, qualified transportation, and de minimis fringes. Each of the fringe benefits has some advantages and disadvantages, and is under tax implications.

Health Maintenance Organization (HMO)

org of physicians or other health care providers that provides a broad and nearly complete range of health care services on a prepaid basis. Alternative to traditional health insurance -attractive to younger employees and employees with many dependents, because the HMO typically covers all medical expenses without significant deductibles or co-pay provisions. -HMOs typically cover more health care services than traditional health insurance, with fewer deductibles and lower co-payments. -must get care from an HMO doc

Title 29 section 1106 of the U.S. Code of Law

outlines transactions that are prohibited between the retirement plan and other parties.

Social security benefits for the family

payable to family members when a worker is eligible for retirement or disability benefits. Family members may include spouses, ex-spouses and children. Each family member may be eligible for a monthly benefit that is up to 50% of the worker's benefit amount. The maximum benefits that can be paid to one family are about 150% to 180% of a worker's retirement benefit. If the family member is entitled to a benefit due to his or her own covered employment, he or she may take the larger of the two benefits, but not both.

Defined Benefit Plan

plan provides a specific amount of benefit to the employee at normal retirement age. -These plans are funded actuarially, which means that, for a given benefit level, the annual funding amount is greater for employees who are older at entry into the plan, as the time to fund the benefit is less in the case of an older entrant. *Defined benefit plans typically provide the maximum possible proportionate benefits for key employees when key employees, as a group, are older than rank and file employees **projected benefit, not the contribution, is subject to a limit of the lesser of 100% of the employee's high three-year average compensation or $225,000. ***there is a crossover age at which the defined benefit plan is more favorable to adopt. The crossover age is somewhere between 45 and 50 approx employer contribution flexibility

What is a non-qualified plan?

provide employees additional retirement benefits. -plans do NOT meet the requirements under ERISA. -employer decides who is included in the plan -not tax deductible by employer, only when the employee receives the benefits of the plan or benefits have been made available. -"top hat" plans: benefits must be forfeit-able in full at all times subject to current taxation to the employee -The earnings of plan assets set aside to informally fund a non-qualified deferred compensation plan are taxed currently to the employer unless the use of assets that provide a deferral of taxation is used. Also, there is no tax deduction to the employer currently. -vesting rules only apply if the plan covers rank and file employees.

Profit Sharing Plans (DC)

provide more employer flexibility in contributions but less security for participants. The limit on employer deductible contributions to a profit sharing plan is 25% of covered compensation. Employer decides when they want to contribute to the plan. Some years, there may be no contribution appropriate for businesses with unpredictable cash flow.

Disability Benefits

provide protection for those who experience a physical or mental impairment that is expected to result in death or keep them from doing any substantial work for at least a year. Only those who satisfy the Social Security Administration's stringent requirements may receive disability benefits. To avail of these benefits a person must provide certain required medical and vocational information. He or she will start receiving benefits from the sixth full month of disability. Those who wish to work despite their disabling condition are eligible to receive certain incentives. **Persons are considered disabled if they cannot do the work they did before. The Social Security administration must then decide that the disabled cannot adjust to other work because of their medical condition(s). Moreover, the disability must last or be expected to last for at least a year or to result in death. In contrast the dictionary defines disability as a physical or mental condition that prevents a person from leading a normal life, which is not specific and therefore can be debated from person to person.

Objective of social security system

provide universal coverage for all workers

Section 409A

purpose is to determine whether at the date of grant the fair market value of the underlying stock options is less than the exercise price. If so, the rules of this section apply.

Money Purchase Pension Plan (DC)

qualified employer plan that's the simplest of all qualified plans. -each employee has individual account in the plan. employer makes annual contributions to each employees account under a nondiscriminatory contribution formula. may total 25% or the employers covered comp -benefits consist of the amount accumulated in each participant's account at retirement or termination of employment. -plan may provide that the employee's account balance is payable in one or more forms of annuities equivalent in value to the account balance. good for young employees, willing to accept investment risk, reward long term employee relationships Adv: tax deferred retirement savings, simple and inexpensive to design and administer, 25% of covered comp, flexible withdrawal, benefit from good investment results Disadv: inadequate benefits for older people that go into the plan, employees bear investment risk **benefit formula requiring an employer contribution that is a flat percentage of each employee's compensation ***RARELY USED ANYMORE

Interest on Loans from retirement plan

secured by first and second homes and rental properties may be deductible interest, however, interest for personal loans (e.g. a 401k plan loan) is not deductible. -Permitted in 403B and 401K plans, NOT simple IRAs or SEPs

long-term care plan

similar to health insurance and is again one of the employer-sponsored benefit packages that provide coverage for nursing homes and home health expenses for chronically ill beneficiaries. Employers usually provide this as an additional tax-favored benefit to employees, which might be too expensive for the employees to consider without the employer's involvement. The tax benefits for long-term care are ruled by the Health Insurance Portability and Accountability Act of 1996.

Medigap insurance

sold by private insurance companies. Medicare does not cover all aspects of medical and health insurance. Medigap bridges this gap in coverage. There are 10 standard Medigap plans from which to choose. Depending on the type of plan selected, the coverage may include coinsurance, deductibles, travel emergency, at-home recovery, preventive care and prescription drugs.

Incentive Stock Option

tax-favored plan for compensating executives by granting options to buy company stock. -Unlike regular stock options, ISOs generally do not result in taxable income to executives either at the time of the grant or the time of the exercise of the option. If the stock option meets the Internal Revenue Code Section 422 requirements, the executive is taxed when the purchased stock is sold. ADV -The ISO provides greater deferral of taxes to the executive than a nonqualified (nonstatutory) stock option. Income from the sale of the stock obtained through exercise of an ISO may be eligible for preferential capital gains treatment, enhancing the value of the tax deferral. -The ISO is a form of compensation with little or no out-of-pocket cost to the company. The real cost of stock options is that the company forgoes the opportunity to sell the same stock on the market and realize its proceeds for company purposes. DISADV: -corp never gets tax deduction, must meet complex requirements