Retirement Planning: Class & Exam Notes

Keogh plans: calculate 1/2 of FICA tax for an owner with net self employment income of $100k? If the company contributes 25% to profit sharing, what does the owner contribute to his own?

$100k x .9235 = $92,350 (net earnings subject to S/E tax) 92350 x .153 = $14,129.55 (Total FICA (14.13%)) 14129.55 x .5 = $7,064.78 100000 - 7064.78 = 92,935.22 .25/1.25 = .20 92935.22 x .20 = $18,587

What is the Social Security Wage Base cap amount?

$132,900

What happens if you receive earned income (worked for) while receiving Social Security?

- if earlier then the year your turn FRA & income greater than $17,640: benefits will be reduced by $1 for every $2 of earned income over limit - if from January of FRA year to actual FRA month & income greater than $46,920: benefits will be reduced by $1 for every $3 of earned income over limit - if FRA and beyond: no reduction for earned income

What are prohibited investments in traditional IRAs?

- life insurance - collectibles - hard assets

Social Security Benefits: what are the important things to remember for the exam about taxation of benefits?

- provisional income below $25k: benefits not taxable - provisional income above $44k: benefits are taxable up to 85%

How is the first $50k of employer paid life insurance coverage taxed?

- tax free to employee - tax deductible to employer

Employer Keogh deduction number to remember is what?

18.59%

Brad is considering adopting an FSA if the partnership adopts an HSA. What benefits or options are available from an FSA? 1. Dependent care (maximum of $5,000 per dependent) and long- term care. 2. Deferred compensation and life insurance. 3. FSA contributions can be made to a HSA, and the partnership can save on FICA & FUTA taxes on contributions to the FSA (and HSA). 4. Medical expense FSA benefits (but not HSA benefits) can continue under COBRA if a triggering event occurs and can allow the participant to avoid the 10% AGI floor that otherwise limits itemized deductions for medical costs.

3, 4 Answer I is wrong because the dependent care limit is $5,000 per year per employee, not per dependent. Answer II is wrong because deferred compensation is not available under an FSA. Some types of life insurance may be offered under a Section 125 (cafeteria) plan, but life insurance is not available under an FSA. FSAs may offer medical expense benefits without establishing an HSA.

John, an employee of ABC, Inc., is concerned because he has not received an annual addition to the ABC profit-sharing plan for the past two years. John, who makes $100,000 per year, is age 40 and married. Which of the following is/are true? 1. All defined contribution plans are subject to minimum annual funding rules. 2. He cannot contribute to an IRA because he is an "active participant" in an employer plan. 3. He can make a deductible contribution of $6.000 to an IRA. 4. He can make a combined deductible contribution of up to $13,000 by also contributing to a spousal IRA. 5. He can make a deductible IRA contribution because ABC hasn't made contributions to the profit-sharing plan.

3, 4 If ABC, Inc. does not make a contribution to a profit-sharing plan in a given year, John is not considered an active plan participant although he is covered under the plan. This is true as long as there were no "annual additions" made to the employee's account under the plan. Answer V says contributions not annual additions that makes Answer V incorrect. Money purchase and defined benefit plans are subject to minimum funding rules, but profit-sharing plans are not subject to minimum funding rules(Answer I). - If one spouse is an active participant and the other spouse is not an active participant, the non-active spouse can make a deductible IRA contribution if their combined modified adjusted gross income (MAGI) is less than $193,000 (2019) (phased out at $203,000).* - For active participants, deductible IRAs are phased out between the AGI limits shown.* Year Single taxpayers (active) Married filing jointly (active) 2019 $64,000 - $74,000 $103,000 - $123,000 *NOTE: In both of these cases, the spouses can do non-deductible IRAs if they are both above phaseout. Phaseout numbers are provided for the exam.

What percent does your Social Security FRA benefit increase for each year you go past your FRA without starting benefits?

8%

Sherry has a choice between two disability policies. She is healthy, has a professional and stable job, and is single. She will pay the premium and needs the coverage for a long time. Policy A Policy B $3,000 / month of benefits $4,000 / month of benefits 90-day wait 30-day wait Benefits to age 65 Benefits to age 65 Noncancellable Noncancellable Own occupation Any occupation Premium: $3,900 / year Premium: $3,000 / year Which policy would you recommend based on these descriptions? a. Policy A, because of its own occupation definition of total disability. b. Policy A, because a good, stable job should allow her to begin self-insuring for disability. c. Policy B, because she is healthy and the premium will be substantially less over time. d. Policy B, because it has a 30-day wait and the premium will be substantially less over time.

A "Own occupation" is the best answer on the Exam. If she has a professional and stable job, she must be educated and can do some other (any) occupation.

If you had to suggest a plan to an employer, which plan would provide employer the maximum contribution and the maximum deductible contribution flexibility? a. Profit-sharing 401(k) plan b. Defined benefit plan c. Money purchase plan d. Cash balance

A All the other plans require a contribution to be made each year. With a profit-sharing 401(k), the employer could contribute nothing at all or the maximum 415 limit. This would allow maximum flexibility and maximum contributions be made.

Nick works for XYZ corporation as a sales manager. The company has a salary continuation disability insurance program, and it pays the full premium. Nick's benefit under the plan is 10,000 per month. Calculate Nick's net-of-tax monthly benefit if his tax bracket is 36% during disability. a. $6,400 b. $3,600 c. $5,000 d. $10,000

A Benefits are taxed at 36. He nets 64%

Rabbi Trust

Also known as a grantor trust. Nonqualified deferred-compensation plan designed to provide retirement income for officers, directors, and highly compensated employees (HCEs).

An employer is looking to: - maximize benefits for older employees, - give long-term employees a secure and specified retirement income, and - tie employees to the company through the benefit program. Which of the following plans is least appealing? a. Target-benefit pension plan b. Profit sharing c. Cash-balance pension plan d. Defined Benefit pension plan

B A maximum of 25% of the firm's total payroll.

Under ERISA, which organization is charged with the administration of defined benefit plan termination rules? a. DOL b. PBGC c. PWBA d. IRS e. ERISA

B PBGC insures against loss of benefits and also oversees plan terminations. The Department of Labor (DOL), through the Pension and Welfare Benefits Administration (PWBA), is charged with the enforcement of reporting, disclosure, and fiduciary provisions of ERISA.

Chip Murray works for Quality Tools, Inc. He is 48 and earns $35,000. Chip's wife is a successful consultant with substantially higher income. Because the company offers a 100% match up to 10% of pay, Chip contributes the maximum to his 401(k). Quality Tools, Inc. also plans on making a 10% Profit Sharing contribution. How much will Chip receive in total annual additions? A. $19,000 B. $26,000 C. $34,000 D. $38,000

B. $26k Chips elective deferrals = $19k QUality Tools Match = $3.5k Profit Sharing Contribution = $3.5k

A plan participant takes a 401(k) loan to purchase a house. When is the interest deductible? a. The participant, a rank-and-file employee, secures the loan with both the primary residence purchased with the loan and elective deferrals. b. Home mortgage interest is always deductible. c. The participant, a rank-and-file employee, secures the loan only with the primary residence purchased with the loan. d. The participant, a key employee, secures the loan with the primary residence purchased with the loan.

C 401(k)s [and 403(b)s] do allow principal residence loans to key employees and non-key employees. However, interest paid on a plan loan for a principal residence is only deductible under two conditions. 1) The loan is secured by the residence for which the loan is made, and 2) the participant is not a key employee. Interest on plan loans (even if for a primary residence) will be considered consumer interest if secured by elective deferrals. Home mortgage interest isn't always deductible. Consumer interest is not deductible.

Which of the following types of funding vehicles is not approved for 403(b) plans? a. Variable annuity contract b. Mutual fund c. Unit investment trust d. Cash value life insurance

C Cash value life insurance must be an incidental benefit. Only open-end mutual funds are allowed, not UITs, closed-end funds, or individual securities.

A company can purchase and own a life insurance policy in all the following circumstances except which of the following? a. Buy-sell b. Deferred compensation arrangement for a key person c. Dependent of a key person d. Key person

C No insurable interest exists on the dependent of an employee.

What is added to AGI when determining the taxation of Social Security benefits? a. Net passive losses b. Workers' compensation c. Municipal bond interest d. Gifts

C Tax-exempt interest is added to AGI.

A simplified employee pension (SEP) does not have which of the following characteristics? a. Age-weighting or cross-testing is not permitted. b. Employer matching is not permitted. c. Loans and hardship withdrawals are not available. d. Social Security integration is not permitted.

D A SEP uses individual IRA accounts. Individual IRAs do not have hardship or loan provisions. SEPs cannot be age-weighted. SEPs can be integrated with Social Security. A one-person sole proprietorship can install a SEP. It does not have to be a stand-alone plan like a SIMPLE.

How to calculate the reduction in FRA social security benefit?

First 36 months: decreases by 5/9% for each month. 20% for full 36 months For each month over 36 months: decreases by 5/12% for each month

How is incentive stock option taxed at grant, exercise & sale?

Grant - no taxable event Exercise - stock is purchased for stock price. No income taxes for bargain element. Might be preference item for AMT Sale - Capital gain or loss on difference from the strike price if "Qualifying Disposition"

What is the maximum permitted disparity in social security integration?

The Disparity is equal to the lesser of: • The base rate or 5.7%

Withdrawing from a ROTH tip

You can take out contributions (basis) at any time without regard to the 5 year rule or being older then 59.5

In a defined contribution plan annual additions in any year may not exceed what?

• 100% of Compensation • or • $56,000 (Indexed)

What is the aggregated salary deferral limit and what plans are taken into consideration?

$19k plus $6k annual catchup • 401(k) • 403(b) • SIMPLE-IRA • SIMPLE 401(k) • SAR-SEP Section 457 plans do NOT aggregate

Is the Coverdell limit $2k per beneficiary or $2k per donee?

$2k per beneficiary

Each Employee in a defined contribution plan is limited to "Annual Additions": the lesser of 100% of the employee's compensation or $___________

$56,000.00

Rita Alsom, a widow, is collecting Social Security Benefits of $13,000 and a teacher's pension of $26,000. Is the benefits taxed?

$6,500 +$26,000 = $32,500 Provisional Income The lesser of $6,500 (1/2 of Social Security) or $7,500 (amount of excess over first threshold) is taxable. (First threshold is $25k)

Taxation of SS Benefits: Provisional Income

(50% of Social Security Benefits) + AGI + (Tax Free Interest)

Highly Compensated Employee

- Is discrimination • An employee is considered highly compensated in a plan year if he or she: -- Owned more than 5% of the company in the current or past year -- Received compensation more than $125,000 (indexed) in the prior year • An employer may choose to replace the second option by declaring the top twenty percent of employees ranked by compensation will be declared highly compensated. (Note that more than 5% ownership still applies)

When can ROTH IRA contributions, conversions and earnings be withdrawn?

- contributions: whenever - conversions: 5 years or older then 59.5 - earnings: 5 years and older than 59.5

How are divorced spouses eligible to receive benefits from the other divorced spouse?

- have been married for 10 years - must not have remarried

What is the 457(b) special catch up?

-- Based on last three years of service (at retirement age) -- Unused deferrals from past service -- Up to twice the normal contribution limit

Target Benefit Plan

-Combines DC and DB plan features -Employee still bears investment risk -Employer makes annual contributions -Amounts are actuarially allocated based upon participant's age and compensation -Plan allows older employees to accumulate wealth faster -Deduction limited to 25% of participating payroll -Annual additions limited to lesser of 100% of compensation or $53,000 per participant per year in 2016 -Ideal client - Has stable cash flow and wants additional funds allocated to older employees -Probably won't be the right answer - age-weighted profit sharing is better

Which statement is true concerning incidental safe harbor rules for death benefits in retirement plans? 1. They apply to qualified plans (defined contribution and defined benefit) and 403(b) plans. 2. They do not apply to SEPs; therefore, there is no limit to the amount of life insurance that can be held by a SEP.

1 The incidental rules for death benefits do not apply to SEPs (and SIMPLEs). However, the reason they do not apply is that SEPs (and SIMPLEs) cannot have life insurance. They are IRAs.

Tim Owens, CFP®, works for a money management type firm. The firm has developed various financial products to fit client's needs. The firm has a mathematical method of fitting a client into products. The company has told him that he should follow the computer guidelines. What does the firm not understand? 1. This method will not deal with particular investor biases or fears. 2. This is not the appropriate way to meet client's needs.

1, 2 There is a danger if advisors and their clients concentrate on financial products as a consequence of implementing behavioral finance principals. Rather than products, self-determination is the most important part of applied behavioral finances. It is about building a decision making process to get people to make their own decisions. This means working closely with clients.

Which of the following is true about a nonqualified deferred compensation plan? 1. The contribution may be structured as additional compensation to the employee. 2. The contribution may be paid from the current compensation. 3. The plan may provide for benefits in excess of qualified plan limits. 4. The plan may not discriminate.

1, 2, 3 I is correct. It describes a salary continuation plan. II is correct. It refers to a pure deferred compensation plan. III is correct because that is the purpose of nonqualified deferred compensation.

The major differences between HSAs and MSAs are which of the following? 1. HSAs have smaller deductibles than MSAs. 2. HSAs have smaller maximum out-of-pockets than MSAs. 3. HSAs have catch-up provisions; MSAs do not. 4. HSAs can be written after 2004; MSAs can be written until the end of 2006.

1, 3 HSAs have larger maximum out-of-pockets than MSAs. After 2005, no new MSAs can be created. 2006 is wrong. Answer II is incorrect.

A large financial organization wants to hire Tom. Tom is a successful financial planner with a large practice. To entice Tom, the company is proposing a large nonqualified stock grant. The grant will be based on Tom's ability to build the financial planning division over the next five years. When will the grant be taxable to Tom? 1. The grant will be taxable in five years when the substantial risk of forfeiture expires. 2. The grant will be taxable now. 3. The grant will be taxable when Tom can freely transfer the stock. 4. The grant of restrictive stock will not be taxable until Tom sells the stock.

1, 3 The two major determinants of taxation are the following: -the free transferability of the employee's interest and -the presence of a "substantial risk of forfeiture"

Mr. and Mrs. Yelson have been married 40 years. They live in the same town they grew up in. They attend the same church they got married in 40 years ago. Mr. Yelson has worked at the GM plant in town since he graduated from high school and is now a supervisor at the plant. Which of the following issues do you think Mr. and Mrs. Yelson discuss? 1. Their children 2. Retirement goals 3. GM 4. Their grandchildren 5. Moving to Florida

1, 3, 4 Various surveys concluded that couples are not discussing their retirement goals. 62% do not even agree on what the expected retirement age should be. The husbands seemed to be more involved with money. This is a very subjective behavioral finance type question. All of the above is not an impossible answer.

What are three ways for an employee to be defined as a key employee?

1. Owns more than 5% of the company 2. Owns more than 1% with compensation in excess of $150,000 3. An officer with compensation greater than $180,000 (indexed) Key employee deals with vesting

Victoria Sanderson, an outside director of a publicly traded corporation, receives a $75,000 fee for her services as a director. She wants to shelter as much of her director's fees as possible. What do you tell her? 1. As a director, she is not eligible to establish a qualified retirement plan because no employer/employee relationship exists between her and the corporation. 2. She is eligible to fund an IRA because director fees are earned income.

2 An outside director (an individual that is not an employee of the corporation for which he or she is a director) may establish a qualified retirement plan on the basis of director fees. Board of Director fees qualify as compensation.

Which plans are generally considered more advantageous for younger employees? I. Profit Sharing and Defined Benefit Plan II. Money Purchase and Target Benefit Plan III. Profit Sharing and Money Purchase Plan IV. Defined Benefit and Cash Balance Plan

2, 3 Defined contribution plans are considered more advantageous for younger employees as they have many years for assets to grow

Larry and Roberta Young have been told that using a straight-line calculation they will have to save $20,000 per year to meet their retirement goal. Between paying off college debt, raising two children, and just plain living, their budget indicates they can only save $10,000 today. However, they feel they can bring their college debt down and their employment earnings are increasing. What do you suggest they do? 1. Save $10,000 and not worry about the projection 2. Find another financial planner who can do a serial payment 3. Work more years until they retire 4. Increase the projected after-tax return of the projection

2, 3 With a serial payment, the amount of savings increases from year-to-year based on an inflation projection. A serial payment would start smaller today*. *For example, $10,000 today could be $10,800 next year then $11,664 the 3rd year which means they will save 8% more each year. No calculation, concept question only.

Which of the following employers can adopt a 457 plan? 1. Public accounting firm 2. State government 3. Municipal government 4. United Way 5. A church

2, 3, 4 A state, city, and any agency of a state or political subdivision of a state( for example, a school system or the water authority) are eligible. Any organization that is exempt from federal income tax, except a church or a synagogue, is eligible.

Mrs. Kittel was a fully-insured worker. She is survived by the following persons. Who will receive Social Security benefits? 1. 19 year old son in college 2. 15 year old daughter in high school 3. Mr. Kittel, age 55 4. Ex-husband, age 62, married to her from 1992-2003. He never remarried

2, 3, 4 The daughter is Mr. Kittel's. She divorced her first husband in 2003. The 15-year-old daughter has to be Mr. Kittel's daughter. Mr. Kittel is caring for his child under age 16. The 19 year old is too old.

Which of the following IRA distributions is exempt from the 10% early withdrawal penalty? 1, Hardship withdrawal 2. First home acquisition cost of $10,000 3. Qualified loan of $10,000 for first home 4. Qualified education cost for participant's child 5. Separation from service at age 55

2, 4 First home purchase and qualified educational cost are exempt. Hardship withdrawals are in 401(k)s; loans and separation from service apply to qualified plans. IRA loans are not allowed.

Employer contributions in defined contribution plans are capped at _____% of "Covered Compensation"

25%

Under the endorsement form of split-dollar life insurance, which of the following is true concerning the insured's wife? 1. She is the the owner of the policy. 2. She is the primary beneficiary of the policy. 3. She is the premium payor. 4. She is like a secondary beneficiary. 5. She is the absolute assignee.

4, 5 Under the endorsement form, the owner and premium payor is the corporation. The corporation is the primary beneficiary to the extent of premiums paid or cash value, so the insured's wife is functionally a secondary beneficiary. The benefits of the policy can be absolutely assigned. Absolute assignment means the insured gives up the right to change the beneficiary. He assigns all rights away. Therefore, he has no incidents of ownership (the right to change the beneficiary), and the policy is removed from his estate. The 3-year rule is still applicable at the time the absolute assignment is signed.

• John, age 45, earns $140,000 with no ownership • Kathy, age 34, earns $79,544, owns 10% of company • Mariel, age 51, earns $98,000, with no ownership Which of these three are considered HCE's? 1. Kathy and Mariel 2. Kathy Only 3. John and Mariel 4. John and Kathy 5. None are HCE

4. John & Kathy

457b Plan vs 457f Plan

457(b) Plan - A salary reduction plan used by government and certain non-profit organizations 457(f) Plan - A deferred compensation plan funded by employers as a "Top Hat" plan. Only to top executives

Horace Jones has asked a financial planner to do a projection based on a reasonable return but an exceptionally long retirement period plus a large dollar amount remaining when he dies at the end of that period. His concern is that both he and his wife have had family members live well beyond normal life expectancies. The result with inflation is a dollar amount at normal retirement age that is way beyond what Horace can save per year. The financial planner showed both level savings and a serial payment (increased savings each year) but neither could reach the client's goals. What should the financial planner suggest? a. Horace should increase his age to retire b. Horace should work a second job c. At retirement, Horace should buy a single life (pure life) annuity. d. Horace should invest more aggressively to achieve a higher return.

A Buying a single life (pure life) annuity at retirement will be a level payment for his life but there is no inflation hedge or residual value for his wife. If he increases his years to retirement, he can save more. Then his years in retirement are fewer with more money available to fund his goals

Sally Smith, age 63, has been divorced for 12 years. She earned $15,000 annually when she began working 20 years ago, and now makes $150,000. She is debating whether to retire now, wait until her FRA, or see if she can elect more coverage from Social Security because her ex-husband makes $1,000,000 per year. What do you recommend she do? a. Wait until NRA and collect her benefits. b. Retire now and claim 50% of her ex-husband's benefits. c. Retire now and collect 100% of her benefits. d. Retire at NRA and claim 50% of her ex-husband's benefits.

A Her benefits are the greater of her benefits or 50% of his. But she has been making well over the Social Security maximum threshold and should receive more than 50% of his benefits. If she retires now, she is retiring 4 years early and will lose well over 20% of her NRA benefits. Nothing indicates she must retire now. Waiting to NRA increases benefits by 7-8% per year because she will have a higher 35 year average wage base.

Mr. Adams, age 68, had just been considering retiring. He had discussed his retirement options with his wife before he died. A participant in a profit sharing 401(k) plan, he had accumulated $1.5 million. Mr. and Mrs. Adams had very little invested outside the plan except their home and personal property. He had not taken Social Security benefits. Mrs. Adams, age 65, also had not taken Social Security benefits. Mrs. Adams has no investment knowledge and has trouble making basic decisions. If she applies for benefits under Social Security, what do you suggest she do with his retirement plan a. Roll it into an IRA and take a guaranteed lifetime income option. b. Roll it into an IRA in her name and hire a good money manager. c. Leave it in his 401(k) account until she needs the income. d. Roll it into a Roth IRA in her name and use the money manager who was handling the 401(k).

A His Social Security benefits may not be enough to support her lifestyle. While living, Mr. Adams never saved any money. By taking the guaranteed lifetime income, she will not be forced to make a decision. Hiring a money manager or leaving in the 401(k) does not address her needs for money now. Rolling into a Roth IRA and using the same money manager who handles the 401(k) would be subject to income tax.

Which of the following types of business cannot establish an ESOP? a. Partnerships (KEOGH) b. S corporations c. Public traded corporations d. Closely held C corporations

A Partnerships may offer other types of qualified plans, but they cannot have stock bonus or ESOP plans because partnerships do not issue stock. Any business established as a corporation may establish ESOPs.

Aero Space rewards its employees for ideas by giving them ISOs. John (employee) was given a $50,000 option for company stock some years ago. At the time of exercise, the market value was $100,000. John exercised the option and sold the stock for $200,000 thirteen months later. What were the tax implications? a. $0 was subject to ordinary income tax at exercise, $150,000 capital gain at sale. b. $50,000 was subject to ordinary income tax at exercise, $100,000 capital gain at sale. c. $100,000 was subject to ordinary income tax at exercise, $50,000 capital gain at sale. d. $150,000 was subject to ordinary income tax at exercise, $0 at sale.

A There is no ordinary income tax at exercise. The basis is $50,000, and the difference is a capital gain. The grant was some years ago (more than 2).

Tom, age 58, and Tom, Jr., age 35 own a corporation together. They have decided to do a buy-sell arrangement. Unfortunately, Tom is uninsurable for both life and disability insurance. What type of arrangement can they enter into, if any? a. Tom, Jr. should enter into an installment sale agreement to buy Tom's stock. b. Tom, Jr. should enter into a naked promise to pay if Tom dies or becomes disabled. c. Tom, Jr. should enter into an installment sale agreement to buy Tom's stock from the corporation. d. None, they are father and son. The IRS disallows buy-sells between family members.

A Tom owns Tom's stock, not the corporation. An installment sale would allow Tom, Jr. to buy his ownership over time - in case Tom, Sr. dies, becomes disabled, or retires. As he purchases Tom's shares, Tom, Jr.'s basis increases.

Brad, a school teacher, takes a summer job with a local government agency each summer. Brad is contributing $19,000 into his 403(b)/TSA. Can he defer a portion of his salary into the local government agency's Section 457 plan? a. Yes, up to $19,000 b. No, he has to be a full-time employee c. Yes, up to one-third of his compensation d. No, he has already exceeded $19,000 of aggregate deferrals

A Under the new rules, he can defer the lesser of $19,000 (2019) or 100% of compensation.

Hal, age 63, decides to take Social Security retirement benefits 30 months early. How much will his PIA be reduced? a. 13.333% b. 20% c. 16.667% d. 12% e. 10%

C His benefits will be reduced by 30/180 or 16.667%. The reduction formula is 5/9ths of 1% for up to 36 months a worker is retiring early, plus 5/12ths of 1% for the next 24 months. Currently, the maximum reduction is 30% for a worker with a FRA of age 67 who retires at age 62. (5 / 9) x .01 x 30 months = .1667

Ken, a CFP® registrant, has been asked to give advice for a fee on a Professional Association (A PA is a corporation.) buy-out arrangement. Which of Ken's statements is inaccurate? a. The PA should make cross-purchase arrangement to give the surviving officers a step-up in basis. b. Whether a cross-purchase or redemption method is used, the premiums for the insurance are not deductible. c. If the PA uses a redemption type (entity) buy-out, the life insurance proceeds may be subjected to the corporate AMT. d. The PA should use a Business Overhead policy to fund the disability buy-out arrangement. e. Cross-purchase life insurance policies may be subject to the transfer for value rule at the death of one of the officers (multiple owners).

D "The PA should use a Business Overhead policy to fund the disability buy-out arrangement" is inaccurate. This type of policy covers the costs of operating a business while the owner is totally disabled, not the owner's salary. Corporate policy ownership affects corporate AMT.

Mrs. Ball has accumulated $500,000 in her Section 457 non-governmental plan. She is approaching retirement. Which one of the following is not a correct statement? a. She can take a full distribution and have her employer withhold regular income and FICA taxes. b. She can defer taxation by leaving the $500,000 in the Section 457 plan. c. She cannot defer taxation by rolling the 457 into a Roth IRA. d. She can defer taxation by rolling the 457 into an IRA.

D A nongovernmental 457 cannot be rolled either an IRA or into a Roth IRA. A governmental can be rolled directly into a Roth IRA. "She cannot defer taxation by rolling the 457 into a Roth IRA." is incorrect, because it says cannot.

Which of the following characteristics is not included in a profit-sharing plan? a. It can allow for in-service distributions. b. The employee assumes the risk of preretirement inflation, investment performance, and adequacy of retirement income. c. The employer can deduct up to 25% of the compensation of all eligible participants. d. It cannot invest the plan's assets in the sponsoring company's stock.

D A plan subject to ERISA may not acquire or hold qualifying securities if the total fair market value of such assets exceeds 10% of the plan's portfolio at the time of acquisition. The plan can invest up to 100% of the plan's assets in the sponsoring company's stock if, and only if, the plan document allows it.

A company has a 401(k) plan where the participants are allowed to choose among several alternative funds in accordance with DOL Reg. 2550. Funds range from money market funds to aggressive, highly volatile growth funds. Several of the participants have lost substantial amounts of their elective deferrals in the highly volatile funds. What is the company's liability according to the "prudent man" rule? a. A 5% penalty and replacement of lost funds b. The employer is relieved of fiduciary responsibility for any investment directed by the participant. c. No liability d. The fiduciary may be liable under the prudent man rule. e. The company is responsible to pool employee accounts; therefore, the company must replace lost funds.

D As long as the company (the fiduciary) contracts for the investment services, it may be liable. investments tend toward bonds, money market, and liquid cash-type media. Small plans use a "family of funds." Highly volatile growth funds may exceed the prudent man rule. If the portfolio of investments available to the employees only included four non-equity investments, the correct answer would reflect that the fiduciary is responsible because there was no diversification of investments. This is opinion based on "highly volatile" growth funds.

Mr. and Mrs. Nan now have $130,000 in their retirement savings account. They hope to retire in 20 years and want to accumulate sufficient assets to support a 25-year post-retirement period. Assume they make no more additions to the retirement account. They expect to earn on average 10% on the account until they retire and then 7% on the account during retirement. What amount of income should they expect to receive each month during retirement? a. $6,254 b. $9,955 c. $9,897 d. $6,145

D Begin Mode HP 10BII/17BII+ 1 P/YR, $130,000 ± PV, 10 I/YR, 20 N, FV = $874,575 12 P/YR, $874,575 ± PV, 7 I/YR, 25 gold xP/YR, PMT = $6,145 HP 12C $130,000 CHS PV, 10 I, 20 n, FV = $874,575 $874,575 CHS PV, 7 enter 12 ÷ i, 25 enter 12 x n, PMT = $6,145 Score: 100% • Weight in test: 100% × 2 = 2%

Which of the following qualified plan distributions is exempt from the 10% early withdrawal penalty? a. Distribution for purchase of principal residence b. Hardship withdrawal c. Distribution due to a husband and wife legal separation d. Distribution due to separation from service at age 55

D Legal separation, even a divorce, does not prevent the penalty. A QDRO is necessary to avoid the 10% early withdrawal penalty. Principal residence distributions are not exempt from the penalty. For IRAs, it is first home not primary residence.

Apex, Inc. wants to reward its employees but does not have cash to contribute for year-end 2019. The company feels it will be in a very profitable position during the year 2020. What would you suggest Apex do? a. Adopt a profit-sharing plan and, in lieu of a cash contribution, give the plan a promissory note. b. Adopt an ESOP and fund the contribution with company stock. c. Do not start the plan until 2020 d. Adopt a profit-sharing plan and borrow the necessary contribution from a bank.

D This option allows Apex to put money in the plan now and get a tax deduction now. Adopting an ESOP and fund the contribution with company stock is a good answer, but there is no indication in the question that Apex is interested in using company stock. This is the best answer.

Normal life insurance benefits within a defined contribution plan and a defined benefit plan?

Defined Contribution: - term or universal life = 25% - whole life = 50% Defined Benefit - 100 times the anticipated monthly benefit

What is the only plan that provides guaranteed retirement benefit?

Defined benefit plans

What are the employer contribution arrangements for profit sharing plans?

Discretionary • Employer decides each year subject to the "Substantial and Recurring" rule • Profits are not necessary Formula • Employer may contribute some portion or percentage of compensation Stock Bonus Plan • In either arrangement, the employer can contribute stock instead of cash

Which of the following plans has the maximum allowable contribution and a mandatory contribution? a. SEP b. TSA c. Profit-sharing d. SIMPLE 401(k) e. Money purchase

E A money purchase plan can allow for a $55,000 contribution and is subject to the minimum funding standard (mandatory contribution). A SEP or a profit-sharing plan can allow for a $55,000 contribution, but the contribution isn't mandatory.

Bill age 59 works for the State of Florida and has been for 40 years. He has been contributing to a Section 457 plan and wants to take a full distribution of $400,000. Which of the following is true with regard to the $400,000 distribution? a. He can roll over the distribution into an IRA. b. He will be eligible for 10-year averaging. NOTE: Had to attain age 60 by 1/1/96. c. He will have a 20% mandatory withholding on the distribution but will not be subject to the 10% early withdrawal penalty. d. He can't take any distributions until age 59-1/2. e. None of the above.

E The problem does not indicate separation from service. He's still employed. Therefore, he cannot take an in- service withdrawal until he reaches age 70-1/2. Since he is still employed, he cannot take a distribution now. Once he separates from service, he can take a distribution. Governmental 457 can be rolled into an IRA but not until age 70-1/2 or separation from service. 457s do not qualify for 10-year averaging. 10-year averaging is a special tax treatment. It is still in effect. Doubtful, it will be tested. In addition, he was not 60 by 1/1/1996. 457s are not qualified plans subject to mandatory withholding.

Net Unrealized Appreciation (NUA)

If a lump-sum distribution includes employer securities, the NUA in the value of the securities is not taxed to the employee at the time of distribution -This amount of appreciation will be taxed to the employee when the employer securities are sold --At LTCG tax rates -Any additional appreciation will be taxed as short-term or long-term capital gain, depending on the holding period Employee can elect to have the NUA included in income at the time the distribution is made Must be a lump-sum distribution (can't be 72t)

Denver - 26 Employees (8 HCE's) El Paso - 30 Employees (6 HCE's) Now..it would not pass the Safe Harbor Test Only 43% of Non-HCE's are covered by the plan (18+24=42 NHCE's) 18/42=43% Does it pass the ratio test? Why?

It does pass the Ratio Percentage Test Percentage of Non-HCE's covered = 43% = 75% Percentage of HCE's covered 57%

How long do you have to repay a loan on a qualified plan?

Loan payments must be made at least quarterly and be sufficient to repay the loan within five years (longer if the loan is used to purchase a primary residence)

What is the max loan you can take from a qualified plan?

Loans may not exceed the lesser of $50,000 or 50% of the plan balance (or up to $10,000 if balance <$10,000)

Fred and Martha have MAGI of $105,000. Fred is an active participant, Martha is not. Both are age 48. How much can they each deduct if wanting to max out allowable contributions? (this is in regards to traditional IRAs)

Martha can contribute the full $6k. Fred: $123K (top end of scale) - $105K = 18k / 20k = .9 .9 x 6k = $5,400

What is a top heavy defined benefit plan? Actions to solve it?

More than 60% of benefits in the plan are attributable to the Key Employees Action • Use a faster Top Heavy vesting schedule • Increase retirement benefits for non-key employees by 2% per year to a maximum of 20%

What is a top heavy defined contribution plan? Actions to solve it?

More than 60% of the plan assets are attributable to the Key Employees Action • Use a faster Top Heavy vesting schedule • Non-key Employees receive additional 3%

Can employees contribute to a SEP?

No only employers can contribute

Are profit sharing plan contributions subject to FICA tax?

No the employer does not pay FICA on contributions. This is different from 401ks where they do

Is there a limit on deduction of contributions for the employer in a defined benefit plan?

No there is not. Unlike defined contribution plans that can deduct up to 25% of compensation

What is a qualifying distribution for an incentive stock option?

Sale occurs at least two years from grant and one year from exercise

Ackimation Corporation has two locations, an office in Denver, CO with 26 employees (8 are HCE's) and a production facility in El Paso, TX with 12 employees (6 are HCE's). All employees are eligible. Ackimation would like to install a plan in Denver where the labor market is competitive, but not in El Paso where labor is plentiful. Will this pass the safe harbor test? Why?

The proposed plan would cover a total of 18 non-highly compensated employees. This represents 75% of the total of the 24 non-highly compensated employees. It passes the Safe Harbor Test

Can you take a hardship withdrawal out of a profit sharing plan while in service? If so what are the tax implications?

Yes and they are taxed as if it were a normal distribution. Also subject to early withdrawal penalty if applicable

Can the $19,000 (2019) 401(k) deferral limit be exceeded by a person age 40? a. No b. Yes

a The deferral amount can be supplemented by direct employer contributions up to the lesser of 100% of compensation or $56,000 (2019), but the deferral is $19,000 (2019).

Money Purchase Plan

a pension plan in which the employer contributes a set percentage of employees' salaries to their retirement plans annually default payout is annuity

What is an 83(b) election?

choosing to pay income taxes on a restricted stock now instead of when it is made available to you. Once the restricted stock is made available to you the gain will be taxed at capital gain tax rates and not taxed as income

What type of plans are backed by Pension Benefit Guarantee Corporation (PBGC)?

defined benfit plans

Benefits to highly compensated employees of social security integration?

it allows you to discriminate based on wages

The biggest thing to know about profit sharing plans is what?

that they're flexible

What is the important cost of Medicare Part B to know?

the monthly premium for couples married filing jointly is $135.50 if income is $170k or below

What is the early withdrawal penalty in 457(b) plans?

there is not an early withdrawal penalty

What is the biggest thing to remember about 457 plans?

they assets in the plan are subject to creditors

In a defined benefit plan an employer may not fund more than what?

• 100% of Compensation or • $225,000 (whichever is less)

403(b) Plan Special Catch Up

• Employee must have worked for the present employer at least 15 years • Employee must not have contributed more than an average of $5,000 per year back to 1987 • Allows an additional contribution of $3,000/yr • During the last 3 years before retirement an extra $18,000 is allowed

What are the different parts of medicare?

• Medicare Part A - No Cost - Facilities • Medicare Part B - Monthly Cost - Professionals • Medicare Part C - Fills in the "gaps" • Medcare Part D - Prescription Drug Coverage

What are the two methods to integrate social security?

• Two methods to integrate: • Excess Integration - Defined Contribution plans or Defined Benefit plans • Offset Integration - Defined Benefit plans only