Retirement Planning Midterm

Thibodeaux Company sponsors an integrated profit sharing plan with a base percent of 20%. Boudreaux, who is 60 years old, earns $330,000 per year. Assuming the plan uses the 2019 Social Security wage base as the integration level, how much more will Boudreaux receive because the plan is integrated over a plan that contributes a flat 20% of compensation?

$0

If a participant's accrued benefit from a qualified defined benefit pension plan is $2,000 per month, what is the maximum life insurance death benefit coverage that the plan can provide based on the 100 to 1 ratio test?

$200,000

Sheehan works for Andy Company and is a superior sales guy. His total compensation this year is $600,000. Andy sponsors an integrated profit sharing plan with a base percentage of 5.5% and a maximum of excess percentage. It uses the current wage base as the integration level. How much will the company contribute for Sheehan for 2019?

$23,491

Billy's company sponsors a 401(k) profit sharing plan with no employer match, but the company did make noncontributory employer contributions because the plan was top-heavy. Billy quit today after six years with the company and has come to you to determine how much of his retirement balance he can take with him. The plan uses the least generous graduated vesting schedule available. -Contributions: Employer $2,000, Employee $2,000 -Earnings: Employer $600, Employee $600 What is Billy's vested account balance?

$5,200

Soft Touch Construction sponsors a 401(k) profit sharing plan. In the current year, the company contributed 25% of each employees' compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC was 3.5%. If Jason, age 57, earns $100,000 and is a 6% owner, what is the maximum amount that he may defer into the 401(k) plan for this year?

$5,500

Repayment of Plan Loans

-5 years (up to 30 years if loan proceeds used to purchase principal residence) -substantially level amortization of the loan is required over its term -payments must be at least quarterly -plan sponsors often apply additional rules and requirements -failure to repay the loan as prescribed will consider the value of the loan a taxable distribution (possibly subject to the 10% early distribution penalty) -termination from employment generally causes entire loan to become due -loan is repaid with after-tax dollars

Which of the following statements are true for a defined benefit plan?

-A defined benefit plan generally favors older age entrants -The maximum retirement benefit payable from a defined benefit plan is the lesser of 100% of the participant's compensation or $245,000 (2022) -A defined benefit plan with 100 employees is required to pay PBGC insurance premiums

Interested Professionals in Retirement

-Actuaries -Pension Consultants -Valuation Experts -Financial Planners -Employee Benefit Consultants -ERISA Attorneys -CPAs -Plan Administrators

Which of the following are true regarding profit sharing plans?

-Allows employees to derive benefit from profits of the company -Profit sharing plans cannot discriminate in favor of officers and shareholders -Profit sharing plans provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan

Interested Institutions in Retirement

-Banks -Mutual Funds -Insurance Companies -Wire Houses -Brokerage Firms

Skatium, the city's most popular rolling skating rink, has a profit sharing plan for their employees. Skatium has the following employee information: -Brett, age 62, 14 years of service -Greer, age 57, 14 years of service -Jennifer, age 32, 6 months of service -Dan, age 22, 2 years of service -Karen, age 19, 2 years of service -Mike, age 17, 6 months of service -Craig, age 16, 1 year of service The plan requires the standard eligibility and the least generous graduated vesting schedule available. The plan is not top-heavy. All of the following statements are correct:

-Brett and Greer became 100% vested when they had been employed for 6 years -3 of the 7 people are eligible to participate in the plan -Craig is not eligible for the plan

Which type of defined benefit plans favor younger participants?

-Cash balance pension plan -Money purchase pension plan

Fennelly Company failed ADP testing for 2018. Which of the following are options available for correcting the failure?

-Contribute a nonelective contribution to all NHCEs -Withdraw money from HCE via a corrective distribution -Make an additional match contribution to NHCEs who participated

If a plan does not pass ADP testing, what options does an employer have to fix the situation?

-Corrective distributions -Recharacterization -QNEC -QMC

Exceptions to 10% Early Withdrawal Penalty for Distribution Prior to 59 1/2 (Qualified Plans)

-Death -Disability -Substantially Equal Periodic Payments -Separation from Service after the Participant Attains Age 55 -Dividends Paid from an ESOP -To Pay a Federal Tax Levy Medical Expenses in Excess of 10% of the Participant's AGI -Qualified Domestic Relations Order -Individuals Called to Active Duty -Qualified Public Safety Employee who Separates from Service after Age 50

Defined Benefit Pension Plans (2 types)

-Defined Benefit Pension Plan -Cash Balance Pension Plan

Investment Risk

-Defined Benefit Plans: investment risk with employer -Defined Contribution Plans: investment risk with employee

Accrued Benefit vs Account Balance

-Defined Benefit Plans: participant's accrued benefit is the present value of the vested expected future payments at retirement -Defined Contribution Plans: participant's accrued benefit is the vested account balance of the qualified plan

Which of the following qualified plans is a defined benefit plan?

-Defined benefit pension plan -Cash balance pension plan

Which of the following pension plans would allocate a higher percentage of the plans' current costs to a certain class or group of eligible employees?

-Defined benefit pension plan -Target benefit pension plan -Money purchase pension plan with permitted disparity

Which of the following phrases describes employer contributions within a profit sharing plan?

-Discretionary -Substantial and Recurring

Which of the following employer contribution formulas satisfy the gateway requirement for a new comparability plan?

-Each NHCE receives a 5% contribution -NHCE receive a 3% contribution and HCE receive 9%

All of the following are advantages of a 401(k) plan:

-Employees are permitted to shelter current income from taxation in a 401(k) plan -Earnings grow tax-deferred until distributed -Employers can establish 401(k) plans with minimal expense

All of the following statements concerning highly compensated employees are correct

-Employers can elect to limit highly compensated employees to those with compensation in excess of the annual limit and who are in the top 20% of paid employees, as ranked by compensation -A greater than 5% owner is always highly compensated -When an employer elects to classify the top 20% of paid employees, as ranked by compensation, as highly compensated, this reclassification may help the employer pass the coverage test or the ADP test

When considering the tax advantages of a qualified plan, which of the following would be considered a tax benefit?

-Employers receive a current income tax deduction for contributions made to qualified plans -Employees are not currently tax on pre-tax contributions; rather they are taxed when funds are distributed from the plan -Employers and employees are exempt from payroll taxes on employer contributions to a qualified retirement plan

Which of the following are common defined benefit plan funding formulas?

-Flat amount formula -Flat percentage formula -Unit credit formula

Allocation of Forfeitures

-Forfeitures: the unvested amount of a participant's benefit at his/her termination of service with the plan sponsor -Defined Benefit Plans: reduce future plan costs for the employer -Defined Contribution Plans: reduce future plan costs for the employer, or allocate to other plan participants (nondiscriminatory)

50/40 Test

-If 1 Nonexcludable Employee, 1 Employee must be covered -If 2-4 Nonexcludable Employees, 2 Employees must be covered -If <125 Nonexcludable Employees, 40% of Employees must be covered -If >125 Employees, 50 Employees must be covered

Mack Trucks, Inc requires employees to meet one year of service and to be 21 years old before being considered eligible to enter the plan. Which of the following employees is/are not eligible? -Justin, age 18, who has worked full-time with the company for 3 years -Roquan, age 22, who has worked full-time for the company for 6 months -Nagy, age 62, who has worked 500 hours per year for the past 6 years -J. Cutler, age 35, who has worked full-time with the company for 10 years

-Justin -Roquan -Nagy

Which of the following is true of both ESOPs and Stock Bonus Plans?

-Loans may be permitted -Date for contribution is due date of tax return plus extensions

Defined Contribution Pension Plans (2 Types)

-Money Purchase Pension Plan -Target Benefit Pension Plan

Which of the following actuarial assumptions is used by the actuary who determines the mandatory funding range for a defined benefit plan?

-Mortality -Turnover -Disability Rate

Step 1: Determine need for first year of retirement

-N = number of years until retirement -I = inflation rate -PV = Amount of income to be replaced (WRR) -PMT = 0 -FV = ? (what we're solving for)

Step 2: Determine the lump sum needed at the beginning of retirement to fund all years

-N = number of years you plan to live in retirement -I = ((expected rate of return/inflation rate) - 1) x 100 (adjusts interest rate for inflation) -PV = ? (what we're solving for) -PMT = FV solution from step 1 -FV = 0

Step 3: Determine the savings needed each year to reach the goal

-N = years until retirement -I = expected rate of return -PV = $0 -PMT = ? (what we're solving for) -FV = PV solution from step 2

Highly Compensated Employee

-Owner Employees: either an owner of >5% (current or prior plan year) or compensation in excess of $130,000 for 2020 (prior plan year) -Non-Owner Employees: compensation in excess of $130,000 for 2020 (prior plan year)

Distribution Period

-Participant and/or spouse where a spouses is NO MORE than 10 years younger than participant: use the uniform lifetime table -Participant and/or spouse where a spouse is MORE than 10 years younger than participant: use the joint and survivor table -Beneficiaries: use single life table

Stock Bonus Plan Characteristics

-Plan Establishment: December 31 -Date of Contribution: due date of tax return plus extensions -Type of Contribution: generally stock -Deductible Contribution Limit: 25% of covered compensation -Valuation: generally needed -Eligibility: same as other qualified plans (age 21 & 1 year of service or 2 years with 100% vesting) -Allocation Method: % of compensation or formula based on age, service, and classification -Integration with Social Security: yes -Vesting: same as other defined contribution qualified plans (3-year cliff or 2 to 6 year graduated vesting) -Portfolio Diversification: no -Voting Rights: generally yes -Distributions: generally stock -In-Service Withdrawals: may be allowed after 2 years of participation -Loans: may be allowed (but not usually) -Taxation of Distribution: ordinary income with NUA treatment available

Qualified Plan Eligibility

-age 21 and one year of service (1,000 hours worked during one plan year) -special election to require two years of service - 100% vesting requirement -tax-exempt educational institutions can require age 26 -plan entrance date-6 month rule

Age-Based Profit-Sharing Plans

-allows you to set your employees up into certain age-based classifications -allows for discrimination while a 401(k) does not

Qualified Domestic Relations Order (QDRO)

-an order, judgement, or decree set forth by a judge that details the right of a third party to receive benefits from another individual's qualified plan (ex. child support, divorce) -nontaxable distribution as long as assets are deposited into an IRA or another qualified plan

Defined Contribution Characteristics

-annual contribution limit is 25% of covered compensation -employee assumes investment risk -forfeitures are allocated to reduce plan costs or allocate to other participants -plan is not subject to Pension Benefit Guaranty Corporation (PBGC) coverage -plan usually has separate investment accounts -credit cannot be given for prior service for the purpose of benefits

Defined Benefit Characteristics

-annual contribution limit is the greater of (1) the sum of the plan's funding target, target normal cost, and a cushion amount, over the value of the plan assets or (2) the minimum required contribution for the plan year -employer assumes the investment risk -forfeitures are allocated to reduce plan costs -plan is subject to Pension Benefit Guaranty Corporation (PBGC) coverage except in professional firms with less than 25 employees -plan does not have separate investment accounts (commingled) -credit can be given for prior service for the purpose of benefits

In-Service Withdrawal

-any withdrawal from a pension plan while the employee is a participant in the plan other than a loan -after PPA 2006, pension plans can provide for in-service distributions to participants who are age 62 or older -the SECURE act reduces this age 62 to age 59 1/2 years

Contributions to ESOPs

-cash (ESOP uses to purchase employer stock, or ESOP uses to pay bank debt) -stock -employer tax deduction: the value of the stock or the cash at the date of the contribution, subject to 25% of employee compensation limit (leveraged ESOP - interest also deductible), dividends paid are deductible)

Profit Sharing Plans

-cash is contributed to employee -employee gets a share of the company's profits (percentages based on employee salary) -does not include employee contributions, only employer contributions

Stock Bonus Plans

-company stock is contributed to employee -same as profit sharing plan, but awards shares of stock instead of cash

New Comparability Plan

-contributions are based on employee classification -designed to skew benefits towards owner classification -IRC states that "either contributions or benefits must not be discriminatory" -plan must generally pass one of two minimum allocation gateways: -NHCE allocation rate is at least 1/3 of the HCE with the highest allocation rate, or -each NHCE receives an allocation of at least 5%

CODA Contributions Tax Issues

-contributions are not currently subject to income tax -employee deferral contributions are subject to payroll taxes (FICA) and Federal Unemployment Tax Act (FUTA) -employer contributions are not subject to payroll taxes -payroll tax = 6.2% SS tax (up to the wage base) and 1.45% Medicare tax

Profit Sharing Contributions and Deductions

-contributions must be made by the due date of the company's income tax return -contributions are discretionary but must be "substantial and recurring" -no requirement of company profit for contribution -limited to 25% of total employer covered compensation -limited to the lesser of 100% of compensation, or $58,000 for 2021 per employee per year

Credit for Prior Service

-credit for years of service with a plan sponsor attributable for years prior to the establishment of the retirement plan -Defined Benefit Plans: may give credit for prior service -Defined Contribution Plans: no credit for prior service

Cash Balance Pension Plans Notes

-defined benefit pension plan -mandatory funding -pension benefit based on an annual guaranteed contribution rate and guaranteed earnings on the contributions -quasi-separate accounts (participants sees hypothetical account with hypothetical earnings, actuarially determined) -favors younger plan entrants -eligibility/coverage same as other qualified plans -vesting: 3-year cliff

Money Purchase Pension Plan Notes

-defined contribution pension plan -mandatory annual funding of a fixed percentage of the employee's compensation - up to 25% -participant bears investment risk -separate accounts -favors younger plan entrants -not likely to be established after EGTRRA 2001

Profit Sharing Characteristics

-defined contribution plan -established and maintained by an employer -provides for employee participation in profits -utilizes a definite predetermined formula for allocating the contributions to the plan - must be nondiscriminatory -either noncontributory or contributory -noncontributory: employee does not contribute to the plan and all contributions to the plan are from the employer -contributory: employee contributes to the plan

Stock Bonus Plans Notes

-defined contribution profit sharing plans -employers contribute stock to the plan -contributions are discretionary, but must be substantial and recurring -allocations to the plan must be nondiscriminatory -employers can deduct the value of the stock contributed to the plan

Actuary

-determines required plan funding range -required annually in defined benefit pension plans and cash balance pension plans -required at inception in target benefit pension plan -no other plans require an actuary

Qualified Domestic Relations Order (QDRO) Taxation of Distributions

-distribution deposited into recipient's IRA or qualified plan is not taxable to recipient -distribution not deposited into an IRA or qualified plan -is taxable to recipient (except children) as ordinary income and is not subject to a 10% early withdrawal penalty -distribution to child or dependent is taxable to the plan participant

CODA Employee Contributions

-elective deferral contributions -limited to $19,500 for 2021 per year -additional $6,500 for 2021 for age 50 and older -subject to payroll taxes (but not federal or state income tax) -after-tax contributions available -Roth contributions are allowed after 2005

Qualified Automatic Contribution Arrangement (QACA)

-eligible for new nondiscrimination safe harbor -not required to pass ADP, ACP tests or the top-heavy rules -a qualified automatic enrollment feature (QACA) must meet automatic deferral, matching or nonelective contributions, and notice to employees

Put Option

-employee can require employer to repurchase stock at the fair market value on the distribution date within 60 days after distribution or within a 60 day period during the following plan year -the put option reduces the employee's risk but increases the employer's cash requirements

Stock Bonus Plan Disadvantages

-employee has the risk of a non-diversified portfolio -put option could create cash flow problems for employer -employer incurs valuation costs at contribution of stock

Employee Stock Ownership Plans (ESOPs)

-established as a trust -participant receives allocations of the employer stock from the ESOP -employer receives a tax deduction for the value of the stock contributed to the plan

Minimum Distributions

-first minimum distribution must begin by April 1 of the year following the year in which the participant attains the age of 72 -exception: a participant who is still employed by the plan sponsor may delay the first minimum distribution until April 1 of the year after the participant terminates employment (a >5% owner cannot use the exception) -all other minimum distributions must occur by December 31 of the year

ESOPs

-good way for owner to slowly transfer ownership to their employees -shares of stock ownership are slowly transferred to owners

ESOP Trustee

-holds ESOP assets in trust for the benefit of the plan participants -held to the standard of fiduciary: must operate with the care, skill, prudence, and diligence of a prudent man -must act in best interest of plan beneficiaries -otherwise, resign and appoint neutral trustee

Advantages of Qualified Plans

-income tax deferred -payroll taxes avoided on employer contributions (no avoidance for employee elective deferrals) -tax deferral of earnings and income ERISA protection

Cash Balance Pension Plans

-involves employer using assumed rate of interest to credit employee's account each year -becoming very popular because they can be paired with a 401(k) -hypothetical account (employee doesn't have a personal account) -if employee doesn't meet vesting requirements, the account is unable to be claimed

Profit Sharing Plan Characteristics

-legal promise of plan is deferral of compensation and taxation -in-service withdrawals permitted after 2 years if plan document permits -not subject to mandatory funding standards -up to 100% of plan assets available to be invested in employer securities -does not have to provide QJSA & QPSA

Pension Plan Characteristics

-legal promise of the plan is paying a pension at retirement -in-service withdrawals are not permitted -plan is subject to mandatory funding standards -10% of plan assets available to be invested in employer securities -must provide QJSA & QPSA

Life Insurance Tax Issues

-life insurance purchased in a qualified plan results in income to the employee: creates basis -proceeds: generally, not subject to tax. however, taxable to the extent of cash value if the policy is purchased in a qualified plan -distribution of life insurance: subject to tax unless converted to an annuity

Actual Contribution Percentage (ACP)

-like ADP, but determined utilizing employee after-tax contributions and employer matching contributions -uses same scale as ADP -uses same corrective procedures as ADP

Limited Investment in Employer Securities

-limit of 10% investment of pension plan assets in employer securities -in addition, the PPA 2006 requires defined contribution plans holding publicly traded employer securities to allow plan participants to diversify their contributions -protects the ability of the plan to pay the promised retirement benefit -protects the employer's promise to pay a pension to the employee

Actual Deferral Percentage Test (ADP Test)

-limited the employee elective deferrals for the HC based on the elective deferrals of the NHC -if the ADP for NHC employees is 0% to 2%, the permissible ADP for HC employees is 2 times ADP for NHCs -if the ADP for NHC employees is 2% to 8%, the permissible ADP for HC employees is 2% plus ADP for NHCs -if the ADP for NHC employees is 8% and over, the permissible ADP for HC employees is 1.25 times ADP for NHCs

100 to 1 Ratio Test for Life Insurance

-limits the death benefit amount of life insurance coverage purchased within a qualified plan to 100 times the monthly-accrued retirement benefit provided under the qualified plan -usually only used with defined benefit pension plans

Termination of Service Before Normal Retirement Age - Pesnion Plan

-lump sum distribution -rollover plan assets to IRA or other qualified plan -leave assets in plan (value must be greater than $5,000) -Qualified Preretirement Survivor Annuity (QPSA): an annuity benefit payable to the surviving spouse of a participant if the participant dies before attaining normal retirement age

Net Unrealized Appreciation (NUA)

-lump sum distribution of employer securities -usually from ESOP or Stock Bonus Plans, but could be from any qualified plan -any other assets in plan may be rolled over -determination of NUA: fair market value at date of distribution less the value of stock at date of employer contribution equals net unrealized appreciation

Pension Plans

-mandatory funding -disallowance of most in-service withdrawals -limited investment in employer securities -QJSA and QPSA required -limited investment in life insurance

CODA Employer Contributions

-matching contributions -profit sharing contributions -contributions to meet ADP/ACP testing -CODAs are not permitted to use Social Security integration

Profit Sharing Plan Distribution Options

-may permit in-service withdrawals after 2 years of participation in the plan -401(k) plans may permit loans -at termination of service: lump sum distribution, rollover plan assets to IRA or other qualified plan, or purchase annuity

401(k)s

-most common retirement plan -good starting point for many employees -can be teamed with many other types of plans -growth is also dependent on the performance of individual investments within the 401(k)

Cash or Deferred Arrangements (CODA) 401(k)

-most prevalent type of plan established today -predominantly funded by employee deferral contributions -attaches to a profit-sharing plan or stock bonus plan -permits employees to defer compensation to a qualified plan (limited to $19,500 for 2021 per year, or $26,000 for 2021 (age 50+)) -employers may (but are not required to) match employee deferrals

Loan Summary for Failure to Repay Loan or Termination of Employment

-most qualified plans treat an outstanding loan as a distribution from the plan and issue the participant a Form 1099R, which is treated as ordinary income, and may be subject to the 10% early withdrawal penalty -a qualified plan may provide that the employee has a certain period of time to repay the loan after termination, or it will otherwise treat the loan as a distribution -finally, qualified plans may provide that the loan is simply an offset of the distribution, and this offset can either be treated as a taxable distribution or may be rolled over by the participant to another qualified plan

Pension Plan Distribution Options

-no in-service withdrawals for participants under age 62 -at participant's death: distributed to beneficiary or participant's estate -at participant's disability: distributed to participant

US Government Thrift Plan

-not a qualified plan -limits (and most features) are the same as with a 401(k) plan -the contribution limit is the same as with 401(k) plans at $19,500 (2021) with a maximum deferral of $26,000 (2021) for those who have attained age 50 -includes traditional and Roth accounts -total contributions are also limited to the IRC Section 415(c) limit of $58,000 (2021)

Safe Harbor 401(k) Plans

-not required to pass ADP or ACP tests -employer must provide any one of the following: -3% nonelective contribution to all eligible employees -matching contribution of 100% up to 3%, and 50% from 3% to 5% -employer contributions are 100% vested at all times

Money Purchase Pension Plan

-not very common anymore, advent of 401(k) made then begin to become obsolete -similar to 401(k) but with required contributions

Distributions and Annuities

-partially tax-free return of adjusted basis -partially ordinary income (determined by inclusion/exclusion ratio) -Exclusion Ratio = cost basis in the annuity / Expected Benefit

Roth Accounts

-participation: anyone who is a participant in a 401(k), 403(b), or 457 plan that permits Roth contributions -contribution limits: deferral limit for the year -rollovers: in plan Roth rollover permitted but no recharacterizations -minimum distributions: required because the plan is a qualified plan, avoid by rolling to an IRA -requirements for qualified distribution: 2 prong test (5 years + death, disability, or 59 1/2) -treatment for nonqualified distribution: prorate between basis and earnings (same as any distribution from a qualified plan)

Plan Loans

-permissible by any qualified plan -usually only found with CODA type plans -loan may not exceed the lesser of $50,000 or 1/2 of the participant's vested account balance -exception: when vested account balance is <$20,000, the maximum loan is limited to the lesser of $10,000, or the vested account balance -the $50,000 limit is reduced by the highest outstanding loan balance within the previous 12 month period

Ashley is a participant in her law firm's defined benefit plan. Ashley, who is an aggressive attorney, is 44 years old and earns $150,000. She has 4 years of service for purposes of the plan and has worked at the firm for 4 years. The plan provides a benefit of 1% for the first 3 years of service and a benefit of 1.5% for all additional years of service. The plan has the least generous vesting schedule possible. Almost 80% of the accrued benefits are attributable to the 2 equal owners, Martin and Bob, who have been working at the company for decades. If Ashley were to leave, what percent of her salary (as defined by the plan) could she expect to receive at normal retirement?

4.8%

The average deferral limit for Jackson St.'s NHCE group is 2.87%. What is the maximum that their HCEs can contribute to the plan?

4.87%

A feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.

401(k)

Jeanine, a small business owner from Oregon, is considering implementing a qualified plan. She has no desire to manage the plan's investments for her employees and does not want to be locked into mandatory payment arrangement. She does not offer stock in her company, so the plan would offer cash contributions. If she has a year of negative cash flow, she does not want to be required to contribute on behalf of her employees. Ideally, since she has quite a bit of turnover, she wants to have the maximum vesting schedule. Which qualified plan would you recommend?

401(k)

JJ is a Marine, who served our country for the last 25 years. He has $250,000 in his US Government Thrift Savings Plan. Which of the following plans is JJ's Thrift Plan most similar to?

401(k) plan

Which of the following is not a qualified plan?

403(b) Plan

Ralf, a 40-year-old nurse who earns $80,000 a year, saves 14% of his annual gross income. Assume that Ralf wants to maintain his exact pre-retirement lifestyle. Calculate Ralf's wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars.

78%

Harold Baines earns $103,000 a year, pays 7.65% of his gross pay in Social Security payroll taxes, and saves $14,110 of his gross income. What is Harold's wage replacement ratio?

78.65%

Margaret, a 35-year-old client who earns $45,000 a year, pays 7.65% of her gross pay in Social Security payroll taxes, and saves 8% of her annual gross income. Assume that Margaret wants to maintain her exact pre-retirement lifestyle. Calculate Margaret's wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars.

84%

Failing the ADP Test

1. Corrective Distributions (decreases ADP of HC) 2. Recharacterization (decreases ADP of HC) 3. Qualified Non-elective Contributions (QNEC) (increases ADP of NHC, 100% vested) 4. Qualified Matching Contributions (QMC) (increases ADP of NHC, 100% vested)

Capital Needs Analysis Steps

1. Determine need for first year of retirement 2. Determine the lump sum needed at the beginning of retirement to fund all years 3. Determine the savings needed each year to reach the goal

ESOP Contribution Allocations

1. Percentage 2. Age-based 3. Cannot use Social Security integration

Non-Recognition of Gain Treatment

1. the ESOP must own at least 30% of the corporation's stock immediately after the sale 2. the seller must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale and hold such securities 3 years 3. the company cannot be a public company 4. ESOP must hold stock for at least 3 years 5. sellers must have owned stock for at least 3 years -Qualified replacement securities: securities in a domestic corporation, including stocks, bonds, debentures, or warrants, which receive no more than 25% of their income from passive investments

Roth Conversion

-pre-tax funds in an IRA can generally be converted to a Roth IRA -pre-tax funds in a 401(k) plan, 403(b) plan, or governmental 457(b) plan can generally be converted to a Roth IRA or be converted to a Roth Account via an in-plan Roth rollover -as a result of the 2017 TCJA, recharacterization can no longer be longer used to unwind a Roth conversion. However, recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution for a year to a Rothe IRA and, before the due date for the individual's income tax return for that year, recharacterize it as a contribution to a traditional IRA. Effective for years after 2017

ESOP Diversification Requirements

-qualified participant may force investment diversification within his account -qualified participant: at least age 55 and completed 10 years of participation in the plan -may diversify up to 25% once determined a qualified participant for the first 5 years of their qualified election period AND 50% of their post-1986 stock balance during their 6th and final year

Rollovers to Roth IRAs & Accounts

-qualified plan assets can be rolled directly to a Roth IRA or Roth Account -potential benefits of converting: -tax reduction/tax diversification -tax deferred funds transfer -minimum distributions are not required from Roth IRAs (during life) -estate tax reduction

Target Benefit Pension Plan

-relies on the time value of money -calculation is done once when the employee starts working -differs from a cash balance plan, where TVM calculation is done every year

Target Benefit Pension Plans Notes

-special type of money purchase pension plan -determines the contribution based on the participant's age -participant bears investment risk -favors older plan entrants

Basil's organization has 60 employees. What is the minimum number of Basil's colleagues the organization must cover in their defined benefit plan to conform with the requirements set forth by the Internal Revenue Code?

24

Key Employee

One of: -a greater than 5% owner -a greater than 1% owner with compensation in excess of $150,000 (not indexed) -an officer with compensation in excess of $185,000 for 2020 and 2021 (officer determined based on all facts and circumstances)

Stock Voting Rights

Publicly Traded Corporations: -participants have voting rights as regular shareholders -participants earn dividends Privately Held Corporations: -participants must be allowed to vote in major corporate decisions -mergers, acquisitions, consolidation, reclassification, liquidation, dissolution, recapitalization, or a sale -trustee of the ESOP votes in all other matters

Shelley saves $3,000 per year, for ten years, at the end of each year starting at age 26 and ending at age 35. She invests the funds in an account earning 10% annually. Shelley stops investing at age 35, but continues to earn 10% annually until she reaches the age of 65. In contrast, Kevin saves $3,000 per year at the end of the year between the ages of 36 and 65 inclusively and invests in a similar account to Shelley, earning 10% annually. What is the value of Shelley's and Kevin's separate accounts at age 65?

Shelley $834,296; Kevin $493,482

Danny would like to determine his financial needs during retirement. All of the following are expenditures he might eliminate in his retirement needs calculation except:

The $1,500 mortgage payment he makes that is scheduled to end five years into retirement

Southside Hitman, Corp has 125 employees. One hundred of these employees are nonexcludable and 25 of those are highly compensated (75 are nonhighly compensated). The company's qualified profit sharing plan benefits 21 of the highly compensated employees and 55 of the nonhighly compensated employees. Does the plan meet the safe harbor coverage test?

Yes, percent covered is 73.3%

The Monsters of the Midway have a qualified profit sharing plan that covers 60 of the 100 (60%) nonexcludable NHC employees and 40 of the 50 nonexcludable HC employees. Do the Monsters of the Midway pass the ratio percentage test?

Yes, percent covered is 75%

Jeter is 56 years old and owns "Over-rated" Short Stop Sandwiches, a very successful deli in NYC. He sponsors a 401(K) plan with a dollar-for-dollar match up to 4%. The NHCEs deferred 3% this year, while the HCEs deferred 6% Should he be concerned?

Yes. He can fix the problem with a qualified nonelective contribution.

Target Normal Cost

value of plan benefits earned by employees during the current year

2 to 6 Year Graduated

-Year 1: 0% -Year 2: 20% -Year 3: 40% -Year 4: 60% -Year 5: 80% -Year 6: 100%

Contributing $1,500 to his retirement fund at the end of each year beginning at age 18 through age 50, with an average annual return of 12%, how much does Juan have in his retirement account at this time to use toward a possible early retirement?

$457,271.58

Pension Benefit Guaranty Corporation

-a federal corporation that acts as an insurance provider to maintain the benefits promised to employees by their defined benefit pension plans -plan sponsors pay premiums for the insurance coverage -PBGC maximum monthly insured benefit it $6,034.09 for 2021

Jimmy is a salesperson at a local car dealership. His company has a defined benefit plan with a unit benefit formula of 1.5% x years of service x last year's compensation. Jimmy has been employed with his company for 25 years and he made $315,000 last year in salary and commission. Based on his company's formula, what is Jimmy's present retirement benefit?

$108,750

Stephanie wants to plan for retirement. She is currently 34 years old and plans to retire at age 62 and live for another 35 years. Her current salary is $90,000, and she thinks her wage replacement ratio will be 75% during retirement and that Social Security will provide $12,000 of income during retirement. She believes she can earn a 9% return on her investments and that inflation will be 2%. How much must Stephanie save at the beginning of each year, to meet her investment goals?

$11,022

Robin is planning for her retirement. She is currently 37 years old and plans to retire at age 62 and live until age 97. Robin currently earns $100,000 per year and anticipates needing 80% of her income during retirement. She anticipates Social Security will provide her with $15,000 per year at age 62, leaving her with required savings to provide $65,000 ($100,000 x 0.8 - $15,000) annually during retirement. She believes she can earn 11% on her investments and inflation will be 2% per year. Robin would like to preserve the purchasing power of her capital balance during retirement. How much must Robin save at the end of each year, if she wants to make her last savings payment at age 62 to meet her retirement goal and maintain the purchasing power of her retirement savings until age 97?

$11,464.44

WHR, LLC sponsors a defined contribution plan. Vaughn, age 44, has compensation of $160,000 for the year. WHR has made a $25,000 profit sharing plan contribution on Vaughn's behalf and $5,000 of plan forfeitures were allocated to Vaughn's high profit sharing plan during the year. How much can Vaughn defer into his CODA plan (401K)) to maximize his annual contributions to the qualified plan for 2019?

$19,000

Nobelle is 43 years old and a participant in her company's 401(k) plan. What is the maximum amount she can personally contribute to her 401(k) based on 2022 numbers?

$20,500

Aztec Clay Distributor is a family owned business that is owned by Alice, Bill, Chad, and Zion. Alice and Bill are over 50. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. Aztec sponsors a 401(k) plan. If Aztec established a profit-sharing plan, what is the most that Aztec could contribute for 2019 to the profit-sharing plan?

$280,000

Basil's organization sponsors a defined benefit pension plan which utilizes a funding formula that considers years of service and average compensation to determine the pension benefit payable to the plan participants. Basil has 30 years of service with the organization and an average annual compensation of $75,000. Basil's organization has a pension formula of 1.5% x years of service x average annual compensation. What is the maximum face amount of life insurance the organization can purchase for Basil using plan assets?

$281,250

Pete participates in his company's ESOP plan. The company initially transferred 1,000 shares of stock at $3 per share into Pete's account. 4 years later, when the stock was worth $10 per share, Pete retired. If he elected to receive the stock at retirement and sells it today (6 years later) for $15,000, what are the tax consequences?

$3,000 ordinary income at distribution, $12,000 capital gain

Charlie would like to retire in 11 years at the age of 66. He would like to have sufficient retirement assets to allow him to withdraw 90% of his current income, less Social Security, at the beginning of each year. He expects to receive $24,000 per year from Social Security in today's dollars. Charlie is conservative and assumes that he will only earn 9% on his investments, that inflation will be 4% per year and that he will live to be 106 years old. If Charlie currently earns $150,000, how much does he need at retirement?

$3,155,768

412(e)(3) Plans

-a specific type of defined benefit pension plan that is funded entirely by a life insurance contract or annuity -employer claims tax deduction for contributions made to pay premiums

BigCorp LLC has a 401(k) plan that allows for hardship distributions. Sandra would like to return to school to get a Masters degree. She has $3,000 in her savings account to use, but would like to take a hardship distribution from her 401(k) plan for the maximum amount available. Sandra's program will take 2 years and cost $7,000 per year. Sandra's 401(k) account balance is $20,000. Sandra has never made any hardship distributions and her elective contributions to the plan total $10,000. How much can Sandra withdraw as a hardship distribution?

$4,000

Tyrone, age 25, expects to retire at age 60. He expects to live until age 90. He anticipates needing $45,000 per year in today's dollars during retirement. Tyrone can earn a 12% rate of return and he expects inflation to be 4%. How much must Tyrone save, at the beginning of each year, to meet his retirement goal?

$4,585.46

Michael Jordan wants to plan for retirement (again). He is currently 39 years old and plans to retire at age 63 and live for another 32 years. His current salary is $115,000, and he thinks his wage replacement ratio will be 75% during retirement and that Social Security will provide $14,000 of income during retirement. He believes he can earn a 6% return on his investments and that inflation will be 2.5%. How much must Michael save at the beginning of each year, to meet his investment goals?

$40,221

Plans that Cannot Use Permitted Disparity

-401(k) plan -457 plan -403(b) plan -SARSEP -Traditional IRA -Roth IRA -ESOP -SIMPLE

Kwame and Rosa, both age 40, have $80,000 of combined retirement assets. They both expect to retire at the age of 65 with a life expectancy of 100 years old. They expect to earn 10% on the assets within their retirement accounts before retirement and 8% during their retirement. If they did not make any additional contributions to their account and they receive a fixed monthly annuity benefit for life, what is the monthly benefit (annuity due) amount they will receive during retirement?

$6,115.60

Charles earns $400,000 per year at Home Cleaning Services, Inc where he has been employed for the last ten years. Home Cleaning Services sponsors a defined benefit plan that provides its employees with a benefit equal to 1.5% per year of service of the employee's final compensation. At the current time, what is Charles' retirement benefit payable from the defined benefit plan?

$60,000

Steve and Roslyn are retiring together today and they wish to receive $40,000 of income (in the equivalent of today's dollars) at the beginning of each year from their portfolio. They assume inflation will be 4% and they expect to realize an after tax return of 8%. Based on life expectancies, they estimate their retirement period to be about 30 years. They want to know how much they should have in their fund today.

$731,894.20

Basil's organization sponsors a defined benefit pension plan which utilizes a funding formula that considers years of service and average compensation to determine the pension benefit payable to the plan participants. Basil has 30 years of service with the organization and an average annual compensation of $75,000. What is the maximum pension benefit that can be payable to Basil at retirement?

$75,000

Urlacher is an employee participant in a profit-sharing plan which follows the 2-to-6 year graduated vesting schedule as permitted under PPA 2006. He is in his third year of his Hall of Fame career and employment with the Chicago Bears. His account balances are as follows: -Employee Contributions: $32,500 -Employer Matching Contributions: $12,750 -Rollover from Urlacher's Previous Employer: $45,250 If Urlacher leaves at the end of his third year, what is his vested account balance?

$82,850

3 Year Cliff

-Year 1: 0% -Year 2: 0% -Year 3: 100% -Year 4: 100% -Year 5: 100% Year 6: 100%

3 to 7 Year Graduated

-Year 1: 0% -Year 2: 0% -Year 3: 20% -Year 4: 40% -Year 5: 60% -Year 6: 80% -Year 7: 100%

Bowie, age 52, has come to you for help in planning his retirement. He works for a bank, where he earns $60,000. Bowie would like to retire at age 62. He has consistently earned 8% on his investments and inflation has averaged 3%. He is expected to live until age 95 and has a wage replacement ratio of 80%. Bowie wants to determine the amount of money necessary to provide him with the necessary capital balance at retirement. How much more of a capital balance would he need at retirement if he were to use the capital preservation model instead of the straight annuity model assuming has a zero balance today?

$86,921.67

A defined benefit pension plan has a funding formula equal to 1% x years of service x final salary. If Jim's final salary is $600,000 and Jim has earned 30 years of service, what is Jim's retirement benefit in 2019?

$87,000

Roy and Barbara are near retirement. They have a joint life expectancy of 25 years in retirement. Barbara anticipates their annual income in retirement will need to increase each year at the rate of inflation, which they assume is 4%. Based on the assumption that their first year retirement need, beginning on the first day of retirement, for annual income will be $85,000, of which they have $37,500 available from other sources, and an annual after-tax rate of return of 6.5%, calculate the total amount that needs to be in place when Roy and Barbara begin their retirement.

$906,131.31

Ratio % Test

% of NHC Covered / % of HC Covered > 70%

General Safe Harbor Test

-% of NHC Covered > 70%

Which of the following vesting schedules may a top-heavy profit sharing plan use?

-1 to 4 year graduated -35% after 1 year, 70% after 2 years, and 100% after 3 years -2 to 6 year graduated

Which of the following employer contributions satisfies the safe harbor test?

-100% match up to 3%, 50% match on the next 2% -3% nonelective contribution

Vesting Requirements for Top-Heavy Defined Benefit Plans

-2 to 6 Year Graduated -3 Year Cliff

Vesting Requirements for Defined Contribution Plans

-2 to 6 year graduated -3 year cliff

Vesting Requirements for Defined Benefit Plans

-3 to 7 Year Graduated -5 Year Cliff

ESOP Characteristics

-Plan Establishment: December 31 -Date of Contribution: due date of tax return plus extensions -Type of Contribution: generally stock -Deductible Contribution Limit: 25% of covered compensation plus interest paid on loan -Valuation: generally needed plus dividends (in certain circumstances) -Eligibility: same as other qualified plans (age 21 & 1 year of service or 2 years with 100% vesting) -Allocation Method: % of compensation or formula based on age, service, and classification -Integration with Social Security: no -Vesting: same as other defined contribution qualified plans (3-year cliff or 2 to 6 year graduated vesting) -Portfolio Diversification: yes, up to 50% if at least 55 years old and 10 years of participation -Voting Rights: generally yes -Distributions: generally stock -In-Service Withdrawals: may be allowed after 2 years of participation -Loans: may be allowed (but not usually) -Taxation of Distribution: ordinary income with NUA treatment available

Defined Contribution Profit Sharing Plans (7 Types)

-Profit Sharing Plan -Stock Bonus Plan -ESOP -401(k) -Thrift Plan -New Comparability Plan -Age Based Profit Sharing Plan

Which of the following are defined contribution plan?

-Profit sharing plan -Target benefit pension plan -New comparability plan -Thrift plan

Government's Role in Retirement

-Promotes social change through tax legislation -Sponsors the Social Security and Medicare systems which act as a safety net for individuals -Has a vested interest in taxing deferred accounts

Termination of Service at Normal Retirement Age - Pension Plan

-Qualified Joint Survivor Annuity (QJSA): an annuity benefit payable to the participant and his spouse as long as either lives -Qualified Optional Survivor Annuity (QOSA): alternative option when QJSA is waived -lump sum distribution -rollover plan assets to IRA or other qualified plan

Which of the following contributions is always 100% vested?

-Qualified non-elective contribution -Employee elective deferrals -Qualified matching contribution

Social Security Integration

-Social Security integration (permitted disparity) allows for there to be a disparity between the contribution rate (or benefit) for income above and below an integration level -the reason for this disparity is that the employer contributes to the SS system on income up to the SS wage base (but not over) ($142,800 in 2021) -since there is no employer contribution above that level, there can be a higher contribution rate within the retirement plan

Profit Sharing Allocations of Contributions

-Standard Allocation: equal percentage to all participants -Social Security Integration: provides higher allocations to employees whose earnings are greater than the Social Security wage base (profit sharing plans can only use the excess method) -Age-Based Profit-Sharing Plans: use a combination of age and compensation to allocate the plan contribution -New Comparability: contributions are based on employee classification

An actuary is required to establish and/or administer which of the following retirement plans:

-Target benefit -Defined benefit plan

25% Test for Life Insurance

-Term or Universal Life: the aggregate life insurance policy premiums cannot exceed 25% of the employer's aggregate contributions -Whole Life: the aggregate life insurance policy premiums cannot exceed 50% of the employer's aggregate contributions -for any permanent life insurance policy (not term), the entire life insurance policy must be converted to cash or annuity at or before the participant's retirement date

As mentioned previously, Basil makes $75,000 per year. Over her 30 years with the company, Basil has accumulated enough company stock to own 3% of the organization. Based on the recent year-end plan census and actuarial report, approximately 70% of the total accrued benefits of the plan are for the benefit of the organization's key employees. What two changes must be made to the plan design in order to comply with PPA 2006?

-The plan's participant's benefits must vest at least as rapidly as a 2-to-6 year graduated vesting schedule or a 3-year cliff vesting schedule -Funding level must be at least 2% x years of service x average annual compensation

Which of the following statements regarding retirement analysis is true?

-To be more conservative in planning for an individual's retirement, extend the individual's life expectancy -A Monte Carlo Analysis uses a random number generator to provide the advisor with an array of possible outcomes utilizing the same fact pattern -The capital preservation model assumes that at life expectancy the client will have exactly the same account balance as he did at retirement

Tyler's Bike Shop has a 401(k) plan that offers an employer match of dollar-for-dollar up to 4% of employee compensation. Although the plan provides for the least generous graduated vesting schedule available, it does allow employees to enter the plan on their hire date. Tyler established the plan 10 years ago to benefit him and his only employee, his son Timmy. Since then Tyler hired his other son, Tom, and his new wife Tanya. Tyler wanted to establish the 401(k) plan to encourage his children to save for the future. he also wanted a vesting schedule to ensure that they would learn the responsibility of sticking to their employment commitments. The family has come to you for recommendations to help them maximize their plan contributions. Since both of his sons have shown commitment over the past years, Tyler is willing to make some alterations to the plan in order to increase the retirement savings for all of them. Which of the following would be your recommendations?

-Tyler and Tom should increase their contributions in order to reach the total maximum deferral limit -Tom is not 100% vested in the employer match, thus he should stay employed at least 1 more year -Tyler should consider adding a profit sharing contribution to the plan in order to increase the contributions

All of the following characteristics of plan vesting are correct

-Vesting is the transfer of ownership of employer contributed assets to the employee over a specific period of time -If an employee terminates before being fully vested, then he or she will forfeit a portion of the employer's funds (and associated earnings) -Employers may always elect to provide employees with vested benefits faster than the standard schedules

Which factors may affect an individual's retirement plan?

-Work life expectancy -Retirement life expectancy -Savings rate -Investment returns -Inflation

5 Year Cliff

-Year 1: 0% -Year 2: 0% -Year 3: 0% -Year 4: 0% -Year 5: 100% -Year 6: 100% -Year 7: 100%

Distributions from ESOPs

-the distribution of the participant's account balance in the plan will commence not later than 1 year after the close of the plan year: -in which the participant separates from service by reason of the attainment of normal retirement age under the plan, disability, or death -which is the 5th plan year following the plan year in which the participant otherwise separates from service -exception: the account balance of a participant shall not include any employer securities acquired with the proceeds of an ESOP until the close of the plan year in which such loan is repaid in full -participant can demand distribution of employer securities -if a participant elects, he may demand equal distributions from the ESOP for a period no longer than 5 years, unless his account is valued at more than $1,165,000 for 2021, in which case the distribution period may be extended one year for each additional $230,000 for 2021 of account value up to a total of 10 years

Top Heavy

-the present value of the total accrued benefits of key employees in the defined benefit plan exceeds 60% of the present value of the total accrued benefits of the defined benefit plan for all employees -the aggregate of the account balances of key employees in the plan exceeds 60% of the aggregate of the accounts of all employees

Defined Benefit Pension Plan

-traditional pension plan -up to the company to pay out -employee has an account that can be withdrawn from if the employee leaves

In-Plan Roth Rollovers

-transfer from a qualified plan to a Roth account in the same plan. applies to 401(k) plans, 403(b) plans, and 457 plans -Roth rollover results in taxation on the amount transferred to the Roth account -ATRA 2012 expanded the in-plan Roth rollover availability to amounts "not yet distributable." this modification allows for any vested amount to be rolled over via an in-plan Roth rollover

Stock Bonus Plan Advantages

-value of the employer stock contributed is tax-deductible for the employer -gives participants vested interest in performance of company

Provide a fixed, pre-established benefit for employees at retirement. Employees often value the fixed benefit provided by this type of plan. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans

Defined Benefit Plan

The school operates a profit sharing plan on behalf of its employees. The plan has entrance dates on the first day of the first month and the first day of the seventh month of the plan. The plan operates on a calendar year basis. On April 12, 2019, Sam turned 21 years old and celebrated three years of service. On November 15, 2019, Martha, age 25, celebrated her one-year anniversary of employment. On what date was Martha eligible to enter the plan?

1/1/2020

Funding Target

100% of the PV of all benefits accrued or earned under the plan as of the beginning of the plan year

Tony started working in 1979 and retired in 2015. Unfortunately, our crystal ball says he will pass away in 2028. What is his retirement life expectancy?

13 years

Substantially Equal Periodic Payments

3 Methods of Calculating: -Required Minimum Distribution Method -Fixed Amortization Method -Fixed Annuitization Method -must continue for the greater of 5 years or age 59 1/2

Tiffany, a self-employed dentist, currently earns $100,000 per year. Tiffany has always been a self proclaimed saver, and saves 25% per year of her Schedule C net income. Assume Tiffany paid $13,000 in Social Security taxes. Tiffany plans to pay off her home mortgage at retirement and live debt free. She currently spends $25,000 per year on her mortgage. What do you expect Tiffany's wage replacement ratio to be at retirement based on the above information?

37%

Janine is a small business owner and is considering implementing a qualified plan. She comes to you, as her CFP professional, for advice. Above all, Janine does not want to assume the investment risks of her employees and she does not want to be forced into mandatory funding of the plan. Which qualified plan retirement plan do you feel is the best option?

A Profit Sharing Plan

Johnny is 56 years old and owns Bench's Catchers Equipment, a very successful baseball equipment manufacturer. He sponsors a 401(k) plan with a dollar-for-dollar match up to 3%. Alex is an executive that works at the company and earns $230,000. He defers the maximum into the plan. The NHCEs deferred 3% this year, while the HCEs deferred 6%. After the end of last year, he received $1,200 back for the plan.

A corrective distribution

Which of the following statements regarding defined benefit plans is true?

A defined benefit plan can use forfeitures to reduce future plan costs

Which of the following is true regarding negative elections?

A negative election is a device where the employee is deemed to have elected a specific deferral unless the employee specifically elects out of such election in writing

Which of the following is not a characteristic of pension plans?

In-service withdrawals for employees under the age of 62

Andi, the 100% owner of Andi's Day Care, would like to establish a profit sharing plan. Andi's Day Care's tax year ends July 31 to coincide with the school year. What is the latest day Andi can establish and contribute to the plan?

Andi must establish the plan by July 21 of the year in which she would like to have the plan and contribute by April 15 of the following year assuming she filed the appropriate extensions

Average Benefits % Test

AB % of NHC Covered / AB% of HC Covered > 70%

White Sox Incorporated sponsors a qualified plan that requires employees to meet one year of service and to be 21 years old before being considered eligible to enter the plan. Which of the following employees are not eligible? 1. Abreu, age 18, who has worked full-time with the company for three years 2. Moncada, age 22, who has worked full-time with the company for six months 3. Renteria, age 65, who has worked 500 hours per year for the past six years 4. Giolito, age 35, who has worked full-time with the company for ten years

Abreu, Moncada, and Renteria

Allows employers to allocate a greater percentage of profit-sharing contributions to older employees, under the logic that they have less time to save.

Age-Based Profit Sharing Plan

Business owner John wants to choose a plan that he can have 50% of his company stock invested in. Due to the nature of his company he wants to have the flexibility of not being required to contribute funds if he has a bad fiscal year. Finally, he has a variety of ages of employees. His older employees do not have large company sponsored retirement funds right now. John wants to be able to help his older employees by contributing more to them than his younger employees as they are closer to retirement. John only ever wants to discriminate by age and no other factors such as rank, salaries, years of service, ownership, etc.

Age-Based Profit Sharing Plan

Aztec Clay Distributor is a family owned business that is owned by Alice, Bill, Chad, and Zion. Zion is not a employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. Who are the highly compensated employees, assuming Aztec does not use the exception as part of the definition of highly compensated employee?

Alice, Bill, Chad, Dave, and Erin

Nex sponsors a DB(k) plan that provides benefits for all employees. Nex adopted the plan 4 years ago. Kleen , who is age 55 and earns $100,000, has been employed for the last 10 years with Nex. Which of the following statements is correct regarding Kleen's benefits under Nex's DB(k) plan?

All benefits provided under the DB(k) plan will be 100% vested for Kleen

Vandalay Industries operates a qualified retirement plan on behalf of its employees. The plan has entrance dates on the first day of each calendar quarter, based on the plan year. The plan operates on a calendar year basis. On January 5, 2018, Jason turned 21 years old and celebrated four years of service. On July 27, 2018, Jennifer, age 23, celebrated her one-year anniversary of employment. On which date was Jason eligible to enter the plan?

April 1, 2018

Ansley's Art Gallery has a profit sharing plan. The plan requires employees to be employed 2 years before they can enter the plan. The plan has 2 entrance dates per year, January and July 1. Assume today is December 1, 2021 and the Gallery has the following employee information. -Ansley, age 42, start date 1/1/2019 -Ginny, age 37, start date 5/1/2019 -Max, age 31, start date 8/12/2019 -Alex, age 29, start date 6/4/2020 Which of the following statements is true?

As of today, 3 individuals are eligible for the plan

Top-Heavy Plan Minimum Funding

Defined Contribution Plans -employer must provide non-key employees with a contribution equal to at least 3% of employees compensation (except if key employee's contributions is less than 3%) Defined Benefit Plans -employer must provide non-key employees with a benefit equal to 2% per years of service (limit 20%) times employees average annual compensation

This type of defined benefit pension plan requires an annual guaranteed contribution rate and guaranteed earnings on the contributions

Cash balance plan

Cathy and her twin sister Carley, both age 25, each believe they have the superior savings plan. Cathy saved $5,000 at the end of each year for ten years then let her money grow for 30 years. Carley on the other hand waited 10 years then began saving $5,000 at the end of each year for 30 years. They both earned 9% on their investment and are 65 years old today and ready to retire. Which of the following statements is correct?

Cathy's strategy is better because she has a greater account balance at age 65

Which of the following statements is true regarding CODAs?

CODAs are employee self-reliant plans

John is a small business owner who has used an ESOP employee retirement plan. Recently employees have complained about varied return of the company's stock and are looking for more consistent return out of their retirement plan. In John's search he is looking for a plan with no employee contributions, deferred tax treatment, opportunity for early lump sum payout, ability for employees to roll over accounts, and he cares little about maintenance costs. What Qualified plan best fits John's needs?

Cash Balance Pension Plan

Under which type of qualified plan does an employer assume the investment risk?

Cash Balance Pension Plan

One in which participants receive a set percentage of their yearly compensation plus interest charges. This type of plan is maintained on an individual account basis, much like a defined-contribution plan. The benefit of such plans is that contribution limits increase with age.

Cash Balance Plan

Rollovers to IRAs

Causes a loss of: -ERISA Protection (although will be protected under federal bankruptcy law as a result of BAPCPA 2005) -10-year forward averaging -NUA -Pre-1974 Capital Gain Treatment Direct Rollover Defined: -a distribution from a qualified plan trustee directly to the trustee of the recipient account -no 20% income tax withholding Indirect Rollover Defined: -a distribution to the participant with a subsequent transfer to another account within 60 days -mandatory 20% income tax withholding

Jennifer is a small business owner who is not afraid of risk and liability. She feels strongly her employees should be compensated for their many years of work for her advertising agency. She wishes to give credit for prior service to her company. Her annual cash flow has been consistently positive, so mandatory funding would not be an issue. She desires to pay a pension to her employees at retirement that is equal to their years of service x 1.5% x average last three years salary. What type of qualified plan would you recommend?

Defined Benefit Pension Plan

Actuary Assumptions

Direct Relationships -if expected inflation increases, plan costs increase -if expected wages increase, plan costs increase -if life expectancy increases, plan costs increase Indirect Relationships -if expected investment returns increase, plan costs decrease -if expected mortality increases, plan costs decrease -if expected forfeiture/employee turnover increases, plan costs decrease, plan costs increase

What legislation was enacted by Congress in 1974 in order to limit various abuses by retirement plan sponsors?

ERISA

Grants company stock to employees, often based on the duration of their employment. Gives the sponsoring company-the selling shareholder-and participants various tax benefits, making them qualified plans, and are often used by employers as a strategy to align the interests of their employees with those of their shareholders/

ESOPs

Which of the following is true about Employee Stock Ownership Plans (ESOPs)?

ESOPs can use Social Security integration

Max is a new employee at Fidelity and has recently graduated with a bachelor's degree in finance. He's always had an interest in investments, specifically the commodities market. He has learned about the many benefits in which the company offers, with one really catching his eye. The employer is giving Max the opportunity to translate the company success into financial rewards, specifically shares of Fidelity. This benefit is established as a trust fund and doesn't have to be contributed to by the employee. What qualified plan is this?

Employee Stock Ownership Plan (ESOP)

What is true of the put option within an ESOP?

Employee can require employer to repurchase stock at the fair market value on the distribution date

Andrew is a small business owner and wants to install a qualified plan that has specific requirements. Which of the following plans meets the following list of requirements? 1. Qualified under IRC Section 401(a) 2. Permits at least 25% of employer securities to be invested in the plan 3. Can use forfeitures to reduce plan contributions 4. Does not require a joint and survivor annuity distribution option

Profit Sharing Plan

Social Security Integration Methods

Excess Method -provides an excess benefit to those participants whose earnings are in excess of the Social Security wage base -used by both Defined Benefit and Defined Contribution plans Offset Method -reduces the benefit to those employees whose earnings are below the Social Security wage base -used only by Defined Benefit plans

Calculating the Required Minimum Distribution

Fair Market Value of Participant's Account at December 31 of the preceding plan year / Distribution period determined based on participant's age at December 31 of the distribution year

Mikael opened a fabulous restaurant 10 years ago. The food is exceptional that the restaurant has become one of the top spots in the city. Mikael, age 55, is the sole owner with compensation of $280,000. Mikael's son Jamel, age 28, is the master chef with compensation of $100,000. Jamel has been with the restaurant full time since he turned 18. Mikael also employs 15 other individuals whose ages range between 25 and 35 and have compensation on average of $40,000 per year. Mikael wants to establish a profit sharing plan. Which of the following statements is true?

If Mikael selected the permitted disparity method and the plan contributes 10% per individual, the contribution the company makes for Mikael will be increased

Taxation of Distributions

General Rule - distribution is ordinary income -Exceptions: -direct rollovers of plan assets to IRAs or other qualified plans -adjusted basis in plan -annuities -lump sum distribution options -Qualified Domestic Relations Orders (QDRO) -taxable distributions (from qualified plans) are subject to 20% income tax withholding

Kathi's Cheerleading Uniforms has 4 employees. The company has a profit sharing plan that has made contributions every year. The plan is designed to maximize the contribution to Kathi and has reached Kathi's 415(c) limit each year. The company made a 20% contribution yesterday on behalf of all employees. Today, after a huge blow up, Kathi fired Carroll. Which of the following statements regarding forfeitures is correct (assume the plan meets all necessary testing requirements)?

Given the company census and plan information, the appropriate plan choice for forfeitures is to use them to reduce future plan contributions

Which of the following entities is unable to establish a 401(k) plan?

Government entity

Which of the following needs generally increases in retirement?

Health Care

Charles is an employee at a large firm, and he does not know much about investing or retirement. He has heard his coworkers talk about plans where the employee does not need to contribute yet can still earn large returns when they retire. He doesn't want to have to decide how much to contribute, and he would like to earn some of his company's returns without the stress of buying stock. What plan would be most suitable for him?

Profit Sharing Plan

Defined Benefit Plan Contribution Limit

Lesser of: -$230,000 for 2021 -100% of the average of the employee's three highest consecutive years salary

Defined Contribution Plan Contribution Limit

Lesser of: -100% of an employee's compensation -$58,000 for 2021 -limit consists of employer contributions, employee contributions, and any forfeitures allocated to participant's account

Mack Trucks, Inc has 52 employees. 47 of these employees are nonexcludable - 17 are HCE, and 30 are NHCE. The company's profit-sharing plan benefits 12 of the HCE and 18 of the NHCEs. Does Mack Trucks, Inc meet the safe harbor coverage test?

Mack Trucks, Inc does not pass the safe harbor coverage test

Yasko, who owns Y2 Consulting, wants to establish a retirement plan that allows him to contribute, but that also shares the burden with the employees. Which of the following is the best plan for Yasko?

Profit sharing plan with a cash or deferred arrangement

Which of the following statements regarding profit sharing plans is true?

Profit sharing plans allow annual employer contributions up to 25% of the employee's covered compensation

A type of defined contribution plan in which an employer makes fixed contributions to a tax-deferred retirement account. Unlike profit-sharing plans in which employer contributions are discretionary, employer contributions are fixed in advance.

Money Purchase Pension Plan

Xavier is considering implementing a qualified plan for his business. He likes the idea of a 401(k), but, for budgeting and planning purposes, he doesn't mind being required each year to a certain percentage payment. Though he is not opposed to a mandatory payment, he does not want to make investment decisions for his employees nor assume the liability for their investment decisions. What qualified plan offers a mandatory payment, but retains the flexibility of a 401(k)?

Money Purchase Pension Plan

Due to the mandatory funding requirement and a more flexible option within the defined contribution plans, this type of pension plan has been very rarely used (and doesn't make much sense for the employer to implement) since 2001 EGTRRA

Money purchase plan

Lump Sum Distributions

Must meet ALL four: -a distribution of the participant's entire account balance or accrued benefit, -within one taxable year, on account of the participant's death, attainment of age 59 1/2, separation from service, or disability, and -the employee participated in the plan for at least 5 years prior to the date of distribution

Divides employees into 2 or more groups on the basis of objective standards. An IRS-approved formula allows a greater percentage of profit-sharing contributions to be allocated to one group (e.g., "the owner") versus the other group(s).

New Comparability Plan

Jim is a small business owner, who has owned the air conditioning company for many years. The company has been highly profitable; however, Jim is concerned as there are new companies entering the market and wants to be compensated largely compared to his employees. He still wants to give them the option for a plan but wants a lot more for himself as he is the owner and found of the company. Jim has a vision of retiring in the next few years and wants to max his contribution out. What plan would be best for him?

New Comparability Plan

J'Nelle Co sponsors a 401(k) plan with 10 eligible employees. Each employee can defer up to 100% of their compensation limited to the annual deferral limit. Based on the census below, does J'Nelle Co pass the ADP test without using the 20% election for the definition of highly compensated employee?

No, the plan exceeds the maximum limit by 2.31%

Stock Bonus Plan Special Requirements

Participants must have: -pass through voting rights of stock -the right to demand employer securities when taking distributions -a put option to the employer -distributions that begin within one year of normal retirement, death or disability, OR within five years for other modes of employment termination -distributions that are paid within five years of commencement of distributions

What is a qualified retirement plan that pays a benefit, usually determined by a formula, to a plan participant for the participant's entire life during retirement?

Pension Plan

Stock Bonus vs Profit Sharing

Primary Differences: -contributions -valuation requirement -investment diversification -voting of employer stock -distributions from the plan Similarities: -establishment of the plan -eligibility -contributions: date, amount, and allocation -vesting -loans

A way for employers to provide employees with a portion of the business's profits, based on quarterly or annual earnings. Contributions are given out on a regular basis, or are put into a fund that is made available at a later time, such as when the employee retires.

Profit Sharing Plan

When calculating a retirement needs analysis, what rate of return is required in determining the lump sum needed on the first day of retirement?

Real rate of return

Susie has the following expenditures during the current year: -Health Care, $800 -Savings, $4,000 -Travel, $500 -Gifts to Grandchildren, $1,000 Which of these expenditures would you expect to decrease during Susie's retirement

Savings

Minimum Distribution After Death - Before Distributions Begin

Spouse Beneficiary 1. Distribution over surviving spouse's remaining single life expectancy as recalculated using single life expectancy table beginning when the participant would have turned 72 2. Distribute participant's account within 5 years 3. Roll plan assets to an IRA in surviving spouse's name and wait until surviving spouse is 72 to begin RMD Non-Spouse Beneficiary 1. Distribute participant's account within 5 years 2. Distribute over remaining single life expectancy (not recalculated) of designated beneficiary (reduced by one year) 3. Roll plan assets to an IRA in the name of the deceased IRA owner for the benefit of the beneficiary and then distribute within 5 years or over the remaining single life expectancy of the beneficiary (not recalculated) No Beneficiary 1. Distribute participant's account within 5 years

Minimum Distribution After Death - After Distributions Begin

Spouse Beneficiary 1. Spouse can receive distributions over the surviving spouse's remaining single life expectancy as recalculated using the single life table 2. Rollover plan balance to an IRA in surviving spouse's name and delay distributions until spouse is 72 Non-Spouse Beneficiary 1. Distribution period is the longer of the remaining single life expectancy (not recalculated) of the designated beneficiary (reduced by one year) or the remaining life expectancy of the participant 2. Rollover plan balance to an IRA in the name of the deceased IRA owner for the benefit of the beneficiary and distribute over the longer of the remaining single life expectancy of the beneficiary or the remaining life expectancy of the participant (not recalculated) No Beneficiary 1. Distributions must continue over the remaining distribution period of the deceased owner, reduced by one each year

Which of the following information is most important to gather from an employer before making a recommendation for a qualified retirement plan?

Stability of cash flows

Which of the following profit sharing allocation options provides for a combination of age and compensation to allocate the contributions?

Standard

A type of retirement plan designed to increase employees' vested interest in a company's success. This is a type of profit-sharing plan paid in employer stock instead of cash.

Stock Bonus Plan

Joe is the owner of a small business and really values his team. He has been open for 10 years and has 30 employees. He wants to incentivize investment in the company for his employees in their benefit plan. For this profit-sharing plan, he wants to award ownership in the company to his employees instead of cash. What is this plan?

Stock Bonus Plan

Joe owns a shipping distribution company that employs both corporate and warehouse workers. He would like to offer a retirement plan to his workers. Because of the steady cash flows in the shipping industry, Joe is open to a plan that requires mandatory funding. He knows that some of his employees are going through hard times, so he does not want them to be liable to fund the plan. At the same time, because the employees are receiving their full pay, in-service employee withdrawals are not a priority. He likes the idea of a plan that can grow with the economy, but does not want the company to assume the investment risk. Joe would also like to limit additional company costs, including actuary fees. Which qualified plan would be the best for these circumstances?

Target Benefit Pension Plan

Offers contributions that are based on projected retirement benefits. It is similar to a defined benefit plan, yet, unlike a defined benefit plan, the retirement distributions paid to participants are not guaranteed. The market impacts this plan.

Target Benefit Plan

Which of the following expenditures will most likely increase during retirement?

Travel

ABC Company has 3 employees: Ann, Brenda, and Curtis. Their compensation is $50,000, $150,000, and $200,000 respectively. ABC is considering establishing a straight 10% profit sharing plan or an integrated profit sharing plan using a 10% contribution for base compensation and 15.7% for excess compensation. Which of the following statements are correct?

The effect of the integrated plan results in an increase in Brenda's contribution of $975

Sew What, the best seamstress shop in town, sponsors a 401(k) plan. The plan provides a dollar-for-dollar match for employee contributions up to 6% and has immediate vesting for all contributions. For ADP purposes, the company has not made the top 20% election for the determination of who is highly compensated. Which of the following statements in correct?

The plan passes the ADP test if Joyce and Kali are not eligible

Kopech Factory has 100 non-excludable employees, 10 of whom are highly compensated. 8 of the 10 highly compensated and 63 of the 90 non-highly compensated employees are covered under Kopech's qualified plan. The average accrued benefits for the highly compensated is 4% and teh average accrued benefit for the non-highly compensated is 1.5%. Which of the following statements is true regarding coverage? 1. The plan passes the ratio percentage test 2. The plan passes the average benefits test

The plan passes the ratio percentage test.

Which of the following statements regarding the plan sponsor of a money purchase pension plan is correct?

The plan sponsor is required to make an annual contribution to the plan

Of the following statements regarding target benefit pension plans, which is true?

The plan sponsor of a target benefit pension plan does not guarantee that the participant will receive an amount, expected to be the "target benefit" amount, at his retirement

Jose is a federal employee who is starting to plan his retirement. He is contributing a portion of his after-tax pay to a trust fund. He is looking for a plan with automatic payroll contributions as well as agency matching. A plan that has a flexible amount of risk would be ideal for Jose as well. He would also like control over his investment plans.

Thrift Plan

2% x 30 years of service x $40,000 in final year salary This is an example of which type of defined benefit funding formula?

Unit credit

Rex, age 47, an employee at Water Waste, is considering contributing to a 401(k) plan during 2019. Which of the following statements are true?

Water Waste must deposit Rex's elective deferral contribution to the plan as soon as reasonably possible

What is the term for the period of time a person is expected to be in the work force?

Work Life Expectancy

Does Mack Trucks, Inc pass the ratio percentage test?

Yes

Basil's daughter, Jamie, started working for the organization four years ago. However, Jamie recently found a better opportunity at another business. Basil's organization uses the least generous vesting schedule allowable under PPA 2006. Can Jamie take any of her pension with her to the new job? If so, what percentage?

Yes, 40%

Shortfall Amortization

ratio of plan assets to benefit obligations is less than 100%, then amortize the difference

Thrift Plans

generally government/military plans