HS326

SEP IRA

-Small business retirement plan -tax deferred growth of contributions -not a QP but similar characteristics -employers that provide them must provide to all eligible employees -employer funded only -limited o 25% of employees come or$57k (lesser of) -Employees are 100% vested

Target Benefit Pension Plans

-Special type of money purchase plan -Annual contribution established using an actuary to create a target payout -Actuary preforms initial plan design -Contributions are higher for larger and older employees

Nonqualified Stock Option

-Ties an employee benefit to performance of stock -no tax on grant date -pay w-2 income for appreciation over exercise price upon exercise of stock -capital gain/loss with a holding period beginning at exercise date upon sale of stock

WLE RWLE RLE

-WLE: Period of time a person will be in the work force -RWLE: Remaining work life expectancy -RLE: Time from Retirement to death

Profit Sharing Distribution Options

-can do in service distributions -can take loans out of CODA/401k (can't exceed $50k or 50% of vested amount (less any outstanding balance) unless vested amount is less than $20k) -QDRO- spouse can receive some benefits after divorce

2-6 year graded vesting schedule

0% 20% 40% 60% 80% 100% by year 6

Stock Bonus Plans

Employer's contribute Stock to plan Distributions must begin in next year upon normal termination lump sum distributions allowed Participants have voting rights Can diversify public stock except on employer contributions less than 3 years old

RMD Formula

FMV of account at the end of the preceding year/distribution period determined based on participant's age dec. 31 of distribution year

Target Benefit Plan

Hybrid pension plan with similarities to both a defined-benefit plan and a money-purchase plan. Annual contribution designed for a specific target payout Requires an actuary only initially

ADP Testing

Ratio: $deferred/$total comp Calculate the average ratio for all NHCE and HCE Use an ADP schedule for comparisons Generally only applies to CODA 401k

Exclusion Limit on Employee Discounts

Service: 20% off Product: gross profit multiplied by the price charged to non employee customers

Anti Cutback Rule

employers are also prohibited from making changes to pension plans that reduce pension benefits already accrued by employees

Taxation of SS benefits

first hurdle (50%): $32,000 MFJ or $25,000 single Second hurdle (85%): $44,000 MFJ or $34,00 single

Cash Balance Plan

Vesting must be 3 yr cliff Payment is added to a hypothetical acct. Convert account into payments via annuity or lump sum Younger and Shorter Term Employees benefit Greater Mobility Needs an ongoing actuary

Definition of Earned Income

W-2 Income Schedule C Net Income Income as a general partner

WRR Top Down and Bottom up

WRR Top Down: Taking starting income and subtract all taxes and expenses that won't exist in retirement then divide for percentage WRR Bottom Up: budgeting tool to determine which expenses will not be used in retirement

Contribution Limits IRA

lesser of income or $6k ($7k if 50 yo)

SEP Contribution Rate

= Contribution rate to other participants / 1 + Contribution rate to other participants

Key Employees

> 5% Owner >1% Owner with Salary >$150k Officer with Salary >$185k

Max Distribution for DB Plans 2020

$230,000

IRA Contribution Limit

$6000 ($7000 for age 50+)

General requirements for participation in QP

-21+ and completed 1 year of service -employee can't wait more than six months once they are eligible

General Safe Harbor Test

% NHC Covered > 70%

Ratio Test

(% NHC / % HC) >70%

Money Purchase Pension Plans

-A percent of your earnings into separate account, along with any employer contributions -favors younger entrants -participant bears investment risk -not common after EGTRRA

Average Benefits Test

(Average benefit % for NHCE / Average benefit % for HC) > 70% & Nondiscriminatory Classification Test

CODA Plans

-Cash or deferred Arrangement (usually 401K) -Contributory plans -Either receive wages as taxable income or defer taxes by contributing to a QP -Must pass ADP and ACP -limited to $19,500 w/ $6500 catch up provision -govt units not allowed to establish

Cash Balance Pension Plans

-Commonly used by larger employers -Vesting must be 3 year cliff -Each year a credit applied to employees account using interest credit rate -Payout in annuity or lump sum -greater benefits to younger and shorter service employees

New Comparability Plan

-Contributions are allocated based on a classification scheme -Skews Benefits towards older owner group -require a minimum of 5% contribution to NHCE

Profit Sharing Distribution Limitations

-Generally in-service withdrawals allowed after 2 years -After tax contributions face no restrictions -Distributions from 401k generally not allowed unles 59 1/2, separation of service, or retirement (unless hardship including medical, funeral, or first time home)

Safe Harbor 401(k)

-No ACP or ADP testing -3% required deferral -Requires an employer matching contribution as well

How did TCJA effect deductability

-No deductibility for entertainment, amusement, or recreation, membership to clubs, expenses for qualified transportation expenses -food for an employee through a facility no longer deductible after 2025 -new definition of awards to tangible personal property -removes moving expense reimbursements

Pension Plan Distribution Options

-No option before age 59 1/2 -Normal: age 65 and lifetime annuity offered -Early: before age 65 life time annuity amount is reduced -if married plan must offer survivor annuity options -also: disability, death, or divorce Payout options: Single life annuity, joint annuity, lump sum, rollover, married benefit

ACP Testing

-Ratio: Add the employee's deferrals with employer's contribution and divide by contribution -Determine averages for all NHCE and HCE -Use same schedule as the one for ADP Test

50/40 test

1 must cover 1 employee 2-4 must cover 2 employees <125 40% employees > 125 must cover 50 employees

Four Step Annuity Method (Capital Needs Analysis)

1) Find amount in today's dollars 2) Inflate 3) Determine Funding Needs 4) Required Annual Savings

Three DB funding formulas

1) Flat Amount: Equal dollar amount 2) Flat Percentage: Equal Percentage 3) Unit Credit: Combo of Service and compensation

Lump Sum Distribution Tax savings

10 year forward averaging Pre-1974 Capital Gain treatment

Life Insurance Tests (25% or 100-1 Ratio)

25% Test: Term /UL premiums can't exceed 25% of employer's contributions (50% for WL) 100 to 1: DB Can't exceed 100 times the accrued monthly pension

What percent of income does social security represent for the elderly

30-39%

What Part of US workers are covered by SS

90%

412 e3 Plans

A plan funded entirely by life insurance Premiums are deductible the fair value of the life insurance minus any basis is taxable income (basis established by premiums that have already been taxed)

Adjusted Basis and Exclusion Ratio

After Tax contributions to a qualified plan -or premiums towards life insurance taxed as income Exclusion ratio: Cost Basis of Annuity / Total Benefit

Exclusion Ratio

Amount that can be excluded for tax Cost Basis / Total Expected Benefit

CODA

An arrangement that attached to a profit sharing plan

Medicare part a

Hospital and skilled nursing care -Also covers a small amount of nursing care from day 21-100 Deductible $1408 for first 60 days $352 for 61-90 $703 for 91-150

Capital Needs Analysis

Calculating Investment Need at Retirement 1) 4 step annuity method 2) Uneven Cash Flow Method 3) Capital Preservation Model (same capital at death) 4) PP Preservation Method (same PP at death) 5) Serial Payment Method (savings increase each year) 6) Sensitivity Analysis: changing assumptions to see effect 7) Monte Carlo: Computer gives probabilities

Capital Needs Analysis

Calculating the amount of funding needed at retirement

Plan Loans Max

Can't be greater than $50 or 1/2 Vested Balance

DB Pension Plans

Common in Governmental employers Three main funding formulas Favors older and Key employees

COBRA

Consolidated Omnibus Budget Reconciliation Act; law to provide terminated employees or those who lose insurance coverage because of reduced work to be able to buy group insurance for themselves and their families for a limited amount of time.

nQDC

Contractual arrangement where employer promises to pay executibe a predetermined amount in the future -not a QP -unfunded: tax deferred if risk of forfetiure -funded: plan assetts set aside in a trust (secular or rabbi)

List all four pension plans

DB Cash Balance Money Purchase Target Benefit

Top heavy plan

DB: PV of key employees exceeds 60% of PV of all employees. If top heavy plan must provide 2% per years of service (cap 20%) times the annual comp DC: When account balance of key employees exceeds 60% of total employees account balance. If top heavy non key employees must be provided at least 3% contributions

Differences between DB and DC

DB: contributions limited to funding target or minimum required contribution, Employer assumes risk, minimum funding requirements, PBGC, commingled accounts, forfeitures reduce plan costs, credit for prior service DC: annual contributions limited to 25% of covered comp, employee assumes risks, no minimum funding requirements, separate accounts, forfeitures reduce costs or allocate to other participants

Employee covered comp limit for 2020 DB Plan Benefit limit for 2020 DC Plan Contribution Limit Pension Plan Contribution Limit

Employee Covered Comp: $285,000 DP Benefit Limit: $230,000 DC Plan Contribution limit: $57k or salary PP Contribution Limit: 25%

Methods for calculation SS permitted disparity

Excess Method: Provides excess benefits for participants whose earnings exceed SSI (DB and DC plans) Offset Method: Reduces Benefits to those whose earnings are below the SSI level (DB only)

Self Employed Taxation

Figure out formula...

Exceptions to early withdrawal penalty

For non-IRA plans: Separation from service after age 55, public safety officers, ESOP dividen pass throughs, QDRO For only IRA: Higher education, health insured premiums while unemployed, First time home buyers, Returned IRA contributions

Incentive Stock options

ISOs -ties employee benefit to the stock price of the company and may provide special taxation -may only be granted to employees -individual must hold stock two years from grant, one year from exercise no taxable income in grant date -amt tax on upon exercise -long term gain tax for appreciation over price

Investments not permitted in IRAs

Life insurances Collectibles Other Coins

Life Expectancy Method for RMDS

Lookup the beneficiary life expectancy RMD: FMV of account at the end of the preceding year / life expectancy

Early Retirement Penalty

Lost 5/9 of 1% for first 36 mos.

Medicare Part C

More expensive: Managed care plans HMO, PSO, PPOs

457 Plan

Non-qualified, deferred compensation plan established by state and local governments for tax-exempt government agencies and tax exempt employees. -Eligible and Ineligible -eligible max contribution is $19,5k with the $6500 catch up

HCE

Owner: >5% OR Comp $130k (5% includes spouse, children, grandchildren, parents)

Medicare Part B

Pay a premium which can go up with income which covers: doctor, ambulance transport, test, outpatient, medical equipment and supplies

PBGC

Pension Benefit Guaranty Corporation insures payment of certain pension plan benefits as promised (covers all DB pension plans except small professional services i.e. attornies etc.) Per participant rate $83 per participant or $30 for multi plans)

Which QPs must provide QJSA and QPSA?

Pension plans

Medicare Part D

Prescription drug coverage

List all Profit Sharing Plans

Profit Sharing Stock Bonus Employee Stock Ownership 401k Thrift New Comparability Age Based

RBD

Required Beginning Date For participants 70 1/2 before Jan. 1 2020 RBD is 70 1/2 For participants 70 1/2 after Dec. 31 2019 RBD is April 1 of the year after attaining age 72

Retirement Distribution Planning

Retiree determines retirement income 1) 4% percent per year: take certain percent from portfolio each year 2) Money for life: tranches of buckets with different Irors

403(B) Plans

Retirement Plan for certain organizations including: schools/educational organizations, tax exempt orgs, certain ministries -Govt and church related TSAs are exempt from ERISA -if ERISA applies: nondiscrim testing, ACP, form 5500, QJSA and QPSA -Must be universally available -Salary Reduction ($19.5k limit with $6..5k catchup) and Employer funded -Funds only invested in annuities and mutual funds

SIMPLE Plans

Savings incentive match plans for employees of small employers, a type of qualified retirement plan. Employer mustn't have another RP -max contribution of $13,500 with $3k catchup -Employees make salary deferrals and Employer matches up to 3% -Contributions tax deductible -Withdrawals subject to income tax and no in-service -$5,000 earnings min. -no rollover restrictions after 2 years -easier plan termination

ESOP- Employee Stock Ownership Plan

Special form of stock bonus plan- primarily invests in employer stock -only employer contributions allowed -common for owners nearing retirement -only QP that allows participant to borrow money from bank to purchase stock -employer receives tax deduction -normally held in a trust -voting rights permitted -put option can be required -No SSI -Some plan diversification for qualified participants

Net Unrealized Appreciation (NUA)

Special tax treatment if stock distribute from a qualified plan in a lump sum -participant must be 59 1/2 -at distribution FMV is calculated. -contribution value is taxed as ordinary income -whenever the stock is sold the NUA is taxed at long term capital gains

Eligible Designated Beneficiaries

Spouse, Individual no more than 10 years younger than decedent, disables, chronically ill. minor children, certain trusts

Profit Sharing Allocation Methods

Standard Allocation Method: Equal Percentages based on employee comp Permitted Disparity: Social Security Integration Age Based Allocation: Uses both age and compensation for allocation benefits (favors older employees)

Controlled Groups

Two or more commonly owned corporations treated as one employer for purpose of nondiscriminatory testing -Parent subsidiary -Brother sister

Age Based Profit Sharing

Uses both age and compensation to allocate Shifts contributions to older employers/owners Likely to be top heavy

SEP Plans

for professionals or small business owners with few or no employees; simple to administer -tax deferred growth -employer funded only -Contributions lesser of 25% of $57k -Withdraws treated as ordinary income -$600 earnings min.

Pre retirement reduction in SS

reduced by 5/9 of 1% for the first 36 months then 5/12 of 1 for the next 12 months

Fica Taxes

total: 7.65% (6.2% up to $137,700k and 1.45% of total comp) -additional medicare tax of .9% on wages, compensation or self employment income excess $250k MFJ or $200k single or MFS $125k