RPA 1
In addition to the limitation of amounts for the purposes of taxation, what other requirements apply to loans from qualified profit-sharing plans?
(1) plan loans must be available to all participants on a reasonably equivalent basis (2) loans may not be made available to HCEs in a percentage greater than made available to other employees (3) the loan bear a reasonable rate of interest (4) the loan be adequately secured (5) the loan be made only by the plan;
4 basic steps involved in portfolio construction
(1) security valuation (2) asset allocation (3) portfolio optimization (4) performance measurement;
According to the Society of Actuaries, the components of retirement risks can be grouped into the following categories:
(a) Financial and economic risks (b) Business and employment risks (c) Public policy risks (d) Risks related to longevity, outliving assets and changes in family structure;
Reasons for the withdrawal of the aged from the labor force:
(a) Many older workers want to retire and do so voluntarily (b) Many individuals are physically unable to perform work duties as efficiently as they could at younger ages (c) Industrial and technological advances operate to the disadvantage of older persons. (d) Though created to alleviate the financial risk associated with excessive longevity, the OASDHI program and private retirement plans have tended to institutionalize age 65 as the "normal retirement age";
What is a rabbi trust and what is it used for?
A rabbi trust is an irrevocable trust for the benefit of an executive or a group of participating Executives. The terms of the trust limit the use of the assets to providing benefits for the participating Executives. Thus, the trust assets cannot be used by current or future management but remain subject to the claims of creditors in the event of the firm's insolvency.;
In which situations are premature distributions from Individual Retirement Accounts exempt from early distribution penalty taxes?
If they are 59.5, disabled, the taxpayer died and payment is being made to beneficiary or estate, first time home buyer expenses not to exceed $10,000.;
What factors should be considered in defining compensation for executive retirement arrangements?
Internal equity, cost and accounting, and taxes;
What are the disadvantages of a solo 401K plan?
It could be far too expensive if hiring additional employees. Because it must be non-discriminatory it could not be offered to the owner and his or her spouse without including the other employees.;
Primary insurance amount (PIA) basis:
PIA is based on "average indexed monthly earnings" (AIME) which updates worker's earnings based on increases in the average wage in the national economy. PIA is also increased by a specified percentage for each year benefits are delayed beyond the full retirement age, up to age 70.;
Under defined ____________ plans, the ___________ both receives the benefit of all positive investment returns and bears the risk of all unfavorable results. Under a defined ___________ plan, investment risk and reward are borne by the ____________.
contribution; employee benefit; employer;
Income-maintenance approach
could suggest the choice of a defined benefit pension plan integrated to the maximum extent with Social Security benefits or the choice of a death benefit that provides and income benefit but only to survivors of the employee's immediate family. the emphasis is on protection and continuation of a certain income level when active employment ceases;
employee catch-up contributions
increased elective deferrals permissible for employees who are at least aged 50 before the end of the tax year;
What type of fees generally represents the largest charge assessed against a 401(k) plan?
investment management fees often represents 80% and sometimes over 90% of total plan charges;
What types of entities are permitted to offer 403(b) plans?
nonprofit organizations public school systems public colleges & universities;
How the tax law treat money purchase plans as defined benefit plans:
they are subject to the minimum funding and joint-and-survivor requirements that apply;
Modern portfolio theory
is a theory instructing risk-adverse investors on a method to construct portfolios to optimize or maximize expected return base don a given level of market risk, emphasizing that risk is an inherent part of higher reward. pioneered by Harry Markowitz in his paper "Portfolio Selection";
Are employee's permitted to take loans or receive distributions from their money purchase pension plan while still working for the employer?
it is possible, but unusual. the plan generally cannot make distributions until the employee has severed employment, in-service withdrawals are not permitted;
Purpose of Section 415 compensation
limits the amount of benefits that can be paid to an individual under a defined benefit plan and the annual additions that can be made to an employee's account under a defined contribution plan. limits for both are restricted to the lesser of a dollar amount or a percentage of compensation used for determining which employees are highly compensated employees (HCEs) for plan nondiscrimination testing purposes;
Notion of retirement involves
the basic concept that individuals will work for a period of time during which they set aside assets or become entitled to benefits. Following this period, individuals will then cease working and use the assets or earned benefits to sustain their material resource needs;
business expediency
the establishment of plans (early retirement) was viewed as a a management prerogative and the primary motivation for the creation of plans was the economic benefit, direct or indirect, that accrued to the employer.;
Foundational features in designing a successful 401(k) plan:
the level of employer matching contributions the number and type of investment options offering the option of Roth 401(k) deferral contributions whether to adopt a safe harbor plan design whether and how automatic enrollment will occur how the plan will provide for adequate investment diversification the means by which investment education and investment advice may be provided to plan participants;
Concept of retirement
the phase of life that follows and extended period where individuals engage in some form of work activity attributable to labor most forms of work result in income generation, providing resources to sustain the necessities and amenities of life;
The maximum amount an individual may contribute on an annual basis to all 403(b) plans in 2013 was:
$17,500 [401(g) limit];
2013 limit on the amount of an employee's compensation in determining contributions or benefits under a qualified plan per Section 401(a)(17) of the IRC
$255,000;
Why is the aggregate amount of employer contributions allocated to younger employees usually much higher under a defined contribution plan than a defined benefit plan?
under a final-pay defined benefit plan is such that age and prior service are taken into account. Thus, the amount of aggregate employer contributions allocated to younger employees usually is much higher under a defined contribution plan than under a defined benefit plan;
Over short time periods there can be substantial ______________ and ____________ from historical rate-of-return means for defined contribution holdings.
variation; diversion;
Decision elements facing plan sponsors in the initial design and ongoing administration of a 401(k) plan:
ways to design the plan, handle continuing administrative tasks, communicate plan offerings and features, fulfill fiduciary responsibilities, control costs associated with managing the plan and implement technology to assist in streamlining plan operations;
Key employees, for purposes of top-heavy rules, include all:
An officer making over $175,000 for 2017 and 2018; ($170,000 for 2015, and 2016);A 5% owner of the business (a 5% owner is someone who owns more than 5% of the business), orAn employee owning more than 1% of the business and making over $150,000 for the plan year.;
The basic Section 415 limit for annual additions to a defined contribution plan is that the amount added to an employee's account each year cannot exceed the smaller of:
(1) 100% of the employee's compensation (2) $51,000. This $51,000 amount (as of 2013) is adjusted for changes in the CPI. The adjusted amount is then rounded down to the next lower multiple of $1,000;
The Section 415 limit for the maximum annual benefit that can be paid to a participant under a defined benefit plan is the lesser of:
(1) 100% of the participant's high three-year average compensation (2) $205,000 (as of 2013 and subsequently adjusted for inflation);
If contributions are to be returned because of an excess contribution problem, there are 2 critical dates:
(1) 2.5 months after the end of the plan year in which the excess has occurred - if excess or excess aggregate contributions are returned by that time the amount generally will be considered as income (2) the last day of the plan year following the plan year in which the excess occurred - if amounts are distributed after the first critical date and before the second, the amount returned is taken into income in the year of distribution (ER is subject to 10% penalty tax on the amount of principal);
3 basic profit-sharing approaches:
(1) Current (cash) - profits paid directly to employees in cash, check or stock as soon as profits are determined (2) Deferred - profits are credited to employee accounts to be paid at retirement or other stated circumstances (3) Combination - part of the profit is paid out currently in cash an part is deferred;
Starting in 1999, a CODA plan sponsor could avoid nondiscrimination testing for elective contributions by using either one of the following safe harbors:
(1) Providing mating contributions of NHCEs of at least 100% of the first 3%of pay contributed and 50% of the next 2% of pay contributed (2) Making a contribution of 3% of compensation for all NHCEs, regardless of whether these employees contributed to a plan;
ERISA's disclosure and and reporting provisions require these items to be automatically distributed to employees:
(1) The plan's summary plan description (SPD) (2) A summary of material modification (SMM) (3) A summary annual report (SAR) (4) A statement of benefits for all employees who terminate employment (5) A written explanation to any employee or beneficiary whose claim for benefits is denied (6)The employer may need to provide more than one benefit statement in a 12 month period;
To achieve tax-qualified status, a plan must observe 2 statutory limits on contributions and/or benefits:
(1) a limit on the amount of an employee's compensation that may be taken into account when determining the contributions or benefits made on his or her behalf (2) a limit on the annual additions that may be made to an employee's account in the case of a defined contribution plan, or on the benefits payable to an employee in the case of a defined benefit plan;
Two attributes important to facilitating decision making on managing retirement risks:
(1) adequate information available (2) mental competency to self-sufficiently manage the risks;
3 techniques that may be used to establish the relative standing of various retirement plans:
(1) compare the benefits actually payable to representative employees under different circumstances under the various plans (2) compare the actual costs to the employer for the different retirement plans (3) measure plans on a basis that uses uniform actuarial methods and assumptions and focuses on the relative value of the different benefits provided;
How is hardship withdrawal determined to be necessary under the safe harbor test?
(1) distribution must not exceed the amount in need (2) the employee must have obtained all distributions and all nontaxable loans currently available under all plans maintained by the ER (3) The plan (and other plans maintained by the ER) must provide that the employee's elective and after-tax contributions will be suspended for at least 6 months after receipt of the distribution (4) The plan and all other employer plans must limit the employee's elective contributions for the calendar year immediately following to no more than the excess;
If excess contributions arise because of the ADP or ACP tests, the problem can be addressed by the following:
(1) employer to make additional contributions to the extent necessary to satisfy the test requirements (2) the employer can "recharacterize" the excess deferrals as after-tax employee contributions (subject to ACP test requirements) (3) refund the excess contributions using the method prescribed in the regulations *corrective distributions for failure to satisfy these tests are taxable in the year of distribution and need not include the differential period income if distributed within the period prescribed to avoid the 10% excise tax;
401(k) sponsors can comply with nondiscrimination testing requirements in 1 of 3 ways:
(1) engaging in the normal means of testing involving the examination of each participant's deferrals (2) utilizing the safe harbor plan designs first made available in 1999 where the employer uses either formulaic plan matches or nonelective contributions (3) implementing formulaic employer matching or nonelective contributions in conjunction with an automatic enrollment feature;
For determining "immediate and heavy financial need" the following events are acceptable:
(1) incurring certain medical expenses by the employee, employee's spouse or certain dependents (2) purchase (excluding mortgage payments) of the employee's principal residence (3) payment of room and board, tuition and related educational fees for the next 12 months of postsecondary education for the EE, EE's spouse or dependents (4) need to prevent either the eviction or foreclosure from the employee's principal residence;
The Internal Revenue Code (IRC) primarily segments qualified plans into 3 major types of plans:
(1) money purchase pension plans (2) profit-sharing plans (3) stock ownership plans;
Items which must be given to employees on request and/or made available for examination at the principal office of the plan administrator include:
(1) supporting plan documents (2) complete application made to IRS for determination of the plan's tax-qualified status (3) complete copy of the plan's annual financial report (4) personal benefits statement (5) plan termination report (IRS Form 5310) should the plan be terminated;
Qualified nonelective contributions (QNECs)
(1) the contribution must be fully vested at all times (2) it generally may not be distributed to the employee on an in-service basis for any reason before the employee reaches the age of 59.5;
ACP testing is not required for matching contributions (though the ACP test still is required for after-tax employee contributions) if:
(1) the plan provided for a safe harbor matching contribution (2) no match was provided on contributions in excess of 6% of compensation;
Unless otherwise requested by the participant, benefit payments must commence within 60 days of the latest of the following 3 events:
(1) the plan year in which the participant terminates employment (2) the completion of ten years of participation (3) attainment of age 65 or the normal retirement age specified in the plan;
A plan will be considered nondiscriminatory by the 410(b) or coverage tests, if it meets one of the following two tests:
(1) the ratio percentage test (2) the average benefits test;
The basic requirement found in Section 401(a)(9) of the IRC is that distributions to a participant must commence by April 1 of the year following the later of:
(1) the year in which the participant retires (2) the year in which he or she attains age 70.5, and must be made by December 31 each year thereafter;
Two of the most important attributes of 401(k) plan design involve:
(1) whether an employer will provide an employer contribution and, if provided, the level of the employer contribution (2) the menu of investment options offered through the plan The employer has total discretion of these items;
Minimum vesting schedules for a defined contribution plan since passage of the PPA of 2006:
(a) 100% vesting after 3 years of service (b) graded vesting, with 20% vesting after 2 years of service, increasing by 20% multiples for each year until 100% vesting is achieved after 6 years;
Minimum vesting schedules for a defined benefit plan since the passage of the Tax Reform Act of 1986:
(a) 100% vesting after 5 years of service (b) graded vesting with 20% vesting after 3 years of service, increased by 20% multiples for each year until 100% vesting is achieved after 7 years;
Steps for applying the ADP test:
(a) Determine the ADP for each eligible employee (1) divide the amount of contribution deferred at the employee's election by the amount of the employee's compensation (2) This percentage is determined for all eligible employees (b) Divide the eligible employees into 2 groups - highly compensated employees (HCEs) and all nonhighly compensated employees (NHCEs) (c) For each of these groups, the ADPs are mathematically averaged (d) If the average ADP for HCEs does not exceed the average ADP for NHCEs by more than the allowable percentage, the test is satisfied for the year (1) ADP for HCEs cannot be more than 125% of the ADP for NHCEs (2) alternative limitation permits the ADP for HCEs to be as much as two times the ADP for NHCEs, but no more than 2 percentage points higher;
The classification used in the Employee Benefits Security Administration (EBSA) of DOL segregated fees in the following categories:
(a) Set-up and conversion fees (b) recurring and administrative costs (c) communications expenses (d) investment management fees (e) distribution fees (f) mortality and expanse risk fees;
Basic economic problems facing the aged:
(a) The desire to maintain, to a high degree, their preretirement standard of living in their retirement years (b) The declining employment opportunity available to the aged (c) The relatively low individual savings of the aged because of higher income taxes, increased consumption patterns, inflation pressures in the recent past and other factors (d) The improvement in longevity experienced during the 20th century;
It is logical to assume an employee's aggregate tax payment often will decrease after retirement for the following reasons:
(a) a retired employee is no longer paying a SS tax unless he or she is in receipt of earned income (b) SS benefits are income tax-free for many individuals (c) the standard deduction for federal taxes is increased for individuals aged 65 or over (d) retirement income is not subject to state or local taxes in many jurisdictions;
Critical factors upon which the success of a defined contribution type of retirement system depends:
(a) adequacy of contributions (b) the right array of investment options (c) financial education for plan participants (d) plan features that assist in protecting against poor decision making by participants (e) important policies and practices related to eventual distribution of plan assets;
Department of Labor (DOL) requirements that permit a plan sponsor to receive statutory relief from liability of poor investment choices by participants in a qualified profit-sharing plan:
(a) at least 3 diversified categories of investment with materially different risk and return characteristics (b) participants have the right to change investments at least quarterly - more often if needed because of the volatility of a particular fund;
Conflicting attitudes concerning the coordination of retirement benefits with SS benefits:
(a) because of the very nature of SS benefits and their relatively larger value for lower paid employees, it would be impossible to achieve equitable balancing of benefits and costs for employees at all pay levels without integrating retirement and disability income plans in some fashion (b) others believe that the communication and admin costs associated with integrated plans are such that integration is not desirable;
Distinguishable characteristics of social insurance programs:
(a) with few exceptions, they are compulsory (b) they are generally designed to provide only a floor of income with risks that are covered (c) they pay benefits based largely on social adequacy rather than individual equity (d) their benefits are loosely related to the worker's earnings, are prescribed by law and are paid as a matter of right without any demonstration of need (without a means test) (e) it is unnecessary for the programs to be fully funded and they are designed to be financially self-supporting;
The primary advantages of a defined benefit plan are:
(a) can be structured to achieve specific income replacement objectives (b) can be integrated on the basis of SS benefits; are forced to adjust contribution levels if integration is desired (c) since typically payable in full in the event of death or disability; an employer interested can use available funds more efficiently for this purpose (d) may result in an equitable allocation of employer contributions since the employee's age, past service and pay all may be taken into account implicitly (e) risk of inflation may be transferred from the employee to the employer by relating the benefit to the employee's final pay (f) investment risk will be borne by the employer, not the employee (g) benefits for employees who terminate employment at younger ages can be more costly under defined benefit contribution plans than under defined benefit plans;
Environment changes include:
(a) changes in tax structure (b) alterations in social insurance systems (c) modifications of employer or self-maintained benefit programs (d) adaptations in the economy or investment risk;
Cataclysmic events are caused by:
(a) changes to existing family unit or system (b) adverse health consequences (c) need for long-term case services (d) interruption of ability to live independently (d) major shocks to retirement resource systems;
The principal tax advantages of a qualified retirement plan are:
(a) contributions made by the employer are deductible as a business expense (b) investment income on these contributions normally is not subject to income tax until paid out in the form of benefits (c) an employee is not considered to be in receipt of taxable income until the benefits are distributed -- even though the employee may be fully vested and even though the employee has the right to receive the amounts involved without restriction **to obtain these tax benefits, the plan must achieve qualified status by meeting the requirements of the Internal Revenue Code and rulings issues by the IRS;
The primary advantages of a defined contribution plan:
(a) deferred profit-sharing plans offer employers maximum flexibility in terms of cost commitment as well as opportunities to increase employer productivity (b) through the use of employer securities as a plan investment, greater employee identification with the company and its goals can be achieved (c) if the employee group is young, the plan is apt to have greater employee relations value (d) the ability of employees to make contributions on a before-tax basis under Section 401(k) (e) these plans do not pay premiums to the Pension Benefit Guaranty Corp (PBGC) and therefore, may have lower admin costs than defined benefit plans.;
Environmental factors that should be taken into consideration in the retirement plan design process include:
(a) employer's legal status (b) basic characteristics of the employer and its industry (c) characteristics of the individuals employed by the employer (d) employers with diversified operations must determine the appropriate degree of uniformity for the retirement program (e) size of the community in which the employer does business (f) presence of collective bargaining units;
PPA modified the requirements for benefit statements that need to be fulfilled more than once per year for the following scenarios:
(a) if a participant in a defined contribution plan is entitled to direct plan investments, he or she must receive a benefit statement once per quarter (b) if a participant in a defined contribution plan is not entitled to direct plan investments, he or she must receive a benefit statement once per year (c) for an active, vested participant in a defined benefit plan, the plan sponsor must provide either (1) a benefit statement once every 3 years, or (2) an annual notice describing the availability of a benefit statement and then manner in which the participant can obtain a benefit statement;
If a profit-sharing participant invests in life and health insurance with funds that have accumulated for less than 2 years, IRS requires that amounts used to purchase life or health insurance be "incidental". IRS has defined incidental as being one of the following:
(a) if only ordinary life insurance contracts are purchased, the aggregate premiums must be less than 1/2 of the total contributions and forfeitures allocated to his or her account (b) if only accident and health insurance contracts are purchased, the payments for premiums may not exceed 25% of the funds allocated to the employee's account (c) if both ordinary life and accident and health insurance contracts are purchased, the amount spent for premiums plus 1/2 of the amount spent for the ordinary life premiums may not, together, exceed 25% of the funds allocated to the employee's account;
Resource shortfalls may occur from:
(a) inadequate planning and provision for resource needs (b) resource erosion or elimination (c) need expansion or enhancement (d) longevity risk;
Key changes by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made to retirement plans:
(a) increased contribution, benefit and deduction limits for all retirement savings vehicles (b) provided business credits for the start-up of retirement plans (c) provided tax credits to lower and middle-income employees making contributions to retirement plans (d) created greater parity among corporate, nonprofit and governmental plans (e) created greater contribution limits permitted for retirement plan participants who were aged 50 and over (f) created a new provision to allow certain retirement plans to incorporate a feature called a "qualified Roth contribution program" (g) allowed greater portability for all types of retirement programs by providing for easier rollover of distributions bw various types of plans;
Section 401(k) defines a qualified CODA as any arrangement that possesses the following characteristics:
(a) is part of a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan or a rural electric cooperative plan (b) allows covered employees to elect to have the employer make contributions to a trust under the plan on behalf of the employees, or directly to the employees in cash (c) amounts held by the trust that are attributable to employer contributions made pursuant to an employee's election to certain withdrawal limitations (d) provides that accrued benefits derived from such contributions are nonforfeitable (e) does not require, as a condition of participation, that an employee complete a period of service with the employer maintaining the plan in excess of one year;
Factors in determining an employee's benefit plan under the defined contribution approach:
(a) level of the employer's (and, if applicable, employee's) contribution (b) age at entry (c) retirement age (d) investment earnings (or losses);
Ways to minimize or eliminate the possibility that a plan will not meet the ADP and ACP tests
(a) make safe harbor contributions (b) use prior year deferral percentages of NHCEs and closely monitoring or limiting the ADPs for HCEs in the current year (c) design for automatic compliance (d) design the plan to encourage maximum participation by NHCEs (e) place limits on maximum amounts that might be deferred or contributed (f) require a mandatory minimum deferral on contribution for participating employees (g) include a provision allowing the employer to adjust prospective deferrals or after-tax contributions (h) make additional QNECs or QMACs at the end of the plan year to the extent necessary (i) determine contributions for a plan in advance of a plan year;
Loss of ability to independently manage risks and living needs is brought about by:
(a) ongoing difficulties or lack of adequate skill sets (b) deterioration of abilities (either rapidly occurring or progressive in nature) (c) cataclysmic events affecting ability to function independently;
Operational functions involved in 401(k) plan management:
(a) plan compliance (b) plan communication (c) investment management services (d) recordkeeping services (e) directed trustee services;
Provisions of the Pension Protection Act of 2006 related to defined contribution plans:
(a) provided employers with incentives to automatically enroll employees in defined contribution plans and to default auto-enrollees into certain balanced long-term investments or managed accounts (b) made employer contributions subject to faster vesting schedules (c) allowed financial service providers to give personal investment advice to 401(k) participants and individual retirement account participants (d) instituted diversification requirements for certain defined contribution plans holding publicly traded employer stock (not applicable to employee stock ownership plans);
Factors that contribute to retirement insecurity:
(a) resource shortfalls (b) cataclysmic events (c) environmental changes (d) loss of ability to independently manage risks and living needs;
Arguments presented by those opposed to the deferred wage concept:
(a) some employers that pay the prevailing cash wage rate also provide a retirement benefit. The retirement benefit is offered in addition to, rather than in lieu of, a cash wage increase (b) the concept ignores the possible argument that the employer willingly accepts a lower profit margin to provide a retirement plan to it's employees (c) if retirement benefits are a type of wage, then terminated employees should be entitled to the part of the benefit that has been earned to the date of termination (only a small # provide for full and immediate vesting);
Courses of action the employer has if an employee can no longer meet the requirements of the job:
(a) terminate the employee (b) retain the employee in the same position at the same salary (c) retain the employee, but move him to a less demanding position at the same or lessor salary (d) create a retirement plan;
Plan design alternatives available to an employer that wishes to achieve maximum tax advantages for a retirement program:
(a) the choice of benefit formulas (b) the degree to which the plan is integrated with SS benefits (c) the level of funding needed (d) the funding instrument chosen (e) the adoption of both a defined benefit and a defined contribution plan (f) the use of a target benefit plan;
Characteristics of money purchase plans:
(a) the employer agrees to make a fixed contribution each year for each eligible employee (b) the plan may require employees to make contributions to participate. These contributions can be made only from after-tax income (no salary deductions or elective deferral contributions) (c) both employer and employee contributions are transferred to a trustee, where they are invested on behalf of the employee (d) individual accounts are established with employer and employee contributions, proportionate share of investment gains/losses (e) employees frequently are given a choice of several investment funds to invest (f) employee's benefit is whatever can be provided by his or her vested account balance at that time (g) employee's account balance usually is payable in full in the event of the employee's death;
Impetus for growth of private retirement plans:
(a) the increased productivity and morale of the employee group when a formal retirement plan is offered (b) tax considerations, especially the significant tax advantages associated with qualified retirement plans (c) wage stabilization programs enacted during WWII that limited higher wages but allowed establishing benefit programs including retirement plans (d) pressures from unions for additional and expanded fringe benefit programs (e) the necessity of business firms to offer employer retirement plans in order to attract and retain qualified human resources in a competitive labor market (f) the desire of employers to reward employees for long periods of service (g) the efficiency of the formal group savings approach in providing economic security for the aged (h) the sales efforts of funding agencies such as insurance companies, bank trust departments, corporate trustees and mutual funds;
Reasons for adopting social insurance programs include:
(a) they are enacted to solve complex social problems (b) they are necessary because certain risks are difficult to insure privately (c) they provide a base of economic security to the population;
Employers set income-replacement objectives with several factors in mind:
(a) usually take the employee's (but not spouses) SS benefits into account (b) the objectives usually are higher for lower paid employees than for higher paid employees (c) the objectives usually are set for the employee's pay level during the final year of employment or over a three- or five-year average just prior to retirement, when the employee's earnings are highest (d) full income-replacement objectives are set only for individuals who have completed what the employer considers to be a "career" of employment;
Common groups of employees covered under Social Security
(a) virtually all private-sector employees (b) federal civilian employees hired after 1983 are covered on a compulsory basis (c) state and local government employees can be covered by a voluntary agreement between the state and local gov't;
An employee is deemed a highly compensated employee (HCE) if he or she:
(a) was a 5% owner of the employer during the current or preceding year (b) had compensation in the preceding year of $115,000 and was in the top 20% of employees in terms of compensation for that year;
What events can expand retirees' needs for greater financial resources during retirement years?
- catastrophic health event - divorce - job loss of grown children - death of a spouse - divorce of a spouse in retirement;
What are the requirements that a qualified CODA must satisfy under IRS code section 401 k?
1. Is part of a profit-sharing or stock bonus plan, ERISA money purchase plan or a Rural Electric Cooperative plan that meets the requirements of section 401 a of IRC. 2. Allows covered employees to elect to have the employer make contributions to a trust under the plan on behalf of the employees or directly to the employees in cash. 3. Subjects amount held by the trust that are attributable to employer contributions made pursuant to an employee's election to certain specified withdrawal limitations. 4. Provides that accrued benefits derived from such contributions are nonforfeitable. 5. Does not require, as a condition of participation in the arrangement, that an employee complete a period of service with the employer maintaining the plan in excess of one year. also, as a tax-qualified plan, a CODA must meet all of the non-discriminatory requirements generally applicable to such plans.;
The maximum deductible contribution for profit-sharing plans is
25% of the compensation paid or otherwise accrued during the employer's taxable year for years beginning after 2001 as a result of the EGTRRA or 2001 excess contribution is subject to a 10% penalty tax;
Under a percentage of earnings per year of service formula what is the typical range for the percentage of earnings credited?
25% to 50%??;
If the vesting schedule in a qualified profit-sharing plan is changed, any participant with at least ______ years of service must be given the election to remain under the preamendment vesting schedule
3;
Which Internal Revenue code section generally mandates that, except for certain exceptions that meet specific requirements, income from deferred compensation arrangements may no longer be deferred beyond the year in which such compensation is earned?
457 states that deferred income must be taken into account at its current value in the plan year deferred, unless the deferred income is subject to substantial risk of forfeiture. In that event, the deferred income would be taken into account in the plan year in which the risk of l forfeiture lapses.;
An employee investing ______ of salary throughout his career could see income replacement ratios at the age of 62 ranging from ______ to ______ of peak earnings.
7%; 51% to 115% This variation demonstrates the possible effects of major capital market correction on the commencement of retirement income disbursements.;
Principal tax advantages possessed by qualified retirements plans:
;(a) employer contributions (within prescribed limits) can be deducted as a business expense (b) investment income earned on retirement plan assets is tax-deferred (c) there is no current income taxation to the employee on employer contributions to the retirement fund made on the employee's behalf (d) an employee may be in a lower income tax bracket when income distributions are received (e) under limited circumstances, distributions from retirement plans may be taxed on a favorable basis;
The annual limit on deferral amount for an ineligible section 457 plan is:
EGTRRA increased the plan ceiling to $11,000 or 100% of incurable compensation, whichever is less. The amount was increased to $15,000 in 2006 and is subsequently adjusted annually an amount rounded down to the nearest $500 (based on general cost of living increases). As of 2017, the limit was $18,000.;
Which tax-deferred retirement savings Vehicles could receive a tax-free rollover from a Keogh plan?
From Keogh to Keogh, an employer-sponsored retirement plan, a 403b plan, a governmental 457b plan or an IRA.;
Which participants would be prohibited from receiving a plan loan from a Keogh plan?
Loans were not permitted to self-employed individuals who were owner employees prior to 2002. Owner employees are sole Proprietors and partners owning more than 10% of either the capital or profit interest in a partnership. This prohibition on loans to owner employees was changed by egtrra. Effective for plan years beginning after December 31st 2001 to prohibited transaction exemption that applies to participant loans under qualified plans was expanded to cover owner employees. This change in the law and now allows owner employees to take loans. Owner employees include owners of sole proprietorships Partnerships or S Corp.;
An employee with 4 years of service participates in a retirement plan. The vesting schedule is changed by plan amendment. Under tax law, this plan participant:
Must be given the election to remain under the pre Amendment vesting schedule (for both pre and post amendment benefit accruals).;
To receive a tax preferred treatment under an ineligible section 457 plan, amounts deferred must be:
No limit. The plan must be unfunded.;
Qualification of profit-sharing plans for tax exemption under Section 401 of the IRC is restricted to _____________ or ___________ type plans.
deferred; combination;
Describe the tax treatment of non-qualified stock options for the employer.
The employer gets a corporate income tax deduction for the amount of compensation income the employee realizes at exercise of the option.;
Which Black-Scholes factor is typically deemed to have the most relative impact on the value of the option?
The expected volatility of the underlying stocks market price.;
The limitation on exclusions for elective deferrals under 401K plans is:
The limit was initially set at a fixed dollar amount however egtrra passage in 2001 scheduled it to increase each year. The limit in 2017 was $18,000. It should be noted that any excess amounts are included in the employee's gross income. This limitation applies to the aggregate elective deferral made in a taxable Year to all CODA's.;
Why were 457 plans created?
They allow State and municipal government employees tax deferral opportunities by using a nonqualified Deferred Compensation Plan through IRC section 4 5 7.;
Which IRS code sections' provisions control non-statutory Employee Stock compensation plans?
They are not governed by any special provisions of the IRC but are interpreted under Section 83 and Section 61. ??;
Advantages of using a definite predetermined formula in making contributions to a profit-sharing plan:
a formula raises employee morale and feelings of security since they can readily calculate anticipated plan contributions based on measured operating results;
Strategic asset allocation
a portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation the value of assets can change given market conditions, so the portfolio constantly needs to be readjusted to meet the policy;
Actuarially reduced Social Security benefits are available as early as:
age 62;
Excess deferrals caused by exceeding the elective deferral limit my be allocated:
among the plans under which the deferrals were made by March 1 following the close of the taxable year, and the plan may distribute the allocated amount back to the employee by April 15 such a contribution will be treated as taxable income, it will not be subject to the 10% excise tax that might apply to distributions prior to the age of 59.5;
elective contributions
amounts an employee authorizes the employer to contribute to a CODA on a pretax basis;
How are elective contributions to a CODA treated for Social Security taxation purposes:
are considered wages FICA taxes are paid on such amounts under the taxable wage base and are taken into account when calculating an employee's SS benefits;
safe harbor contributions
are made by the employer to allow a plan to meet the requirements to avoid the need for ADP testing they must be fully vested and are subject to distribution restrictions;
What are stock ownership plans?
created to invest primarily in employer securities. Whereas most prudently diversify plan assets to comply with ERISA. Leveraged employee stock ownership plan is used in conjunction with debt financing.;
What are profit-sharing plans?
defined contribution-type plans that can be structured with either a discretionary formula or a predetermined formula for employer contributions. Often allow employee contributions as well and sometimes are structures with an employer matching formula. Used as the employer's primary retirement plan or can be coupled with plans that qualify under Section 401(k). Employer contributions could range up to 25% of compensation.;
IRS does not require a profit-sharing plan to include a _____________________________ for qualification, it is necessary that a profit-sharing plan include a ____________________________ to become qualified
definite contribution formula; definite allocation formula;
Employee involvement in a private retirement plan may take the form of _______________________________ or it can be recognized in _____________ ways such as when ________________________ objectives in a ________________________________ are consciously set below what might otherwise be desired levels
direct employee contributions indirect; income-replacement noncontributory retirement plan;
What is a money purchase plan?
each participant maintains an individual account, employer contributions, generally made on an after-tax basis are either a fixed percentage of pay or a fixed dollar amount and annual additions are limited. EGTRRA changed the law allowing a full 25% into profit sharing plans. The use of money purchase plans has declined because of this.;
Alternatives plan sponsors have to dispense forfeitures
either to reduce employer contributions or may reallocate the forfeitures among remaining plan sponsors profit-sharing plan sponsors typically reallocate forfeitures among remaining participants;
defined benefit plan
employer provides a determinable benefit, usually related to an employee's service and/or pay the employer's cost is whatever is necessary to provide the benefit specified;
defined contribution plan
employer's contribution is fixed and accumulates to provide whatever amount of benefit it can produce;
An excess due to failure of the ACP test is called:
excess aggregate contribution;
An excess attributable to a failure of the ADP test is called:
excess contribution;
Recordkeeping components of a 401(k)
for each participant there can be several subaccounts such as salary deferral; matching contribution; discretionary employer contribution; QNEC or QMAC, Roth 401(k) contribution; and rollover contribution, as well as earnings for each account;
How the tax law treat money purchase plans as defined contribution plans:
individual accounts must be maintained for employees; the plans are subject to the annual addition limits of Section 415 of the IRC they are not subject to the plan termination provisions of Title IV of ERISA;
Maximum repayment period for loans from qualified profit-sharing plans:
loans must be repaid within 5 years and payments must be made at least quarterly if the loan is used to acquire a principal residence of the participant and meets the amount limitation, the 5 year time limit does not apply;
compensation-oriented approach
might suggest the use of a defined contribution plan as the basic program for providing retirement benefits emphasis is on deferred compensation and the potential for asset accumulation;
The point at which the contribution percentage changes is called the _______________________________ and the maximum is the Social Security taxable wage base.
plan's integration level;
The only qualified, DC plan that cannot be established as a CODA is a
post-ERISA money purchase or DC pension plan;
The monthly Social Security retirement benefit is based on the worker's:
primary insurance amount (PIA);
Advantages offered by the discretionary approach
provides contribution flexibility contributions can be adjusted to reflect a firm's current financial position and capital needs assures that contributions will not exceed the maximum amount allowed as a deductible expense for federal income tax purposes;
For nondiscrimination testing, an employer may be able to test a plan in a controlled group separately if it can show that the employees covered by the plan are in a ____________________________________.
qualified separate line of business;
Major results of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) on the design process for private retirement funds:
reduced the maximum limits of retirement benefits and contributions brought parity between corporate plans and plans for self-employed introduced special restrictions on plans considered "top-heavy";
What constitutes "hardship" for purposes of CODA withdrawals?
regulations define it in a very narrow way and require it to be caused by "immediate and heavy financial needs" of the employee;
Tax Reform Act of 1986 (TRA '86)
represented the most pervasive changes to retirement plans since ERISA imposed new coverage tests and accelerated vesting requirements changed the rules under which plans could be integrated with Social Security lowered limits for retirement benefits that begin before age 65 changed the timing and taxation of plan distributions terminated IRA deductions for many qualified plan participants changes were also made with respect to employee stock ownership plans and executive compensation;
What are the major legal requirements for a retirement plan to achieve a tax - qualified status?
see Module 2 page 10;
Which legal entities can establish a Keogh plan?
self-employed individuals or unincorporated businesses;
The ACP Test
similar to ADP but applies to any after-tax employee contributions and any employer matching contributions;
Small employer private retirement plans:
simplified employee pensions (SEPs) savings incentive match plans for employees (SIMPLEs) *Keogh plans allow unincorporated employers to receive the same benefits as incorporated employers offering qualified plans.;
The most important social insurance program in the U.S.
the Old-Age, Survivors and Disability Insurance Program (commonly known as Social Security);
