HS326 Chapter 4 and 5: Profit Sharing Plans, Stock Bonus Plans, Stock Ownership Plans/// Distributions From Qualified Plans

With respect to nondiscrimination testing for 401ks what are ADP and ACP tests?

All qualified plans face nondiscrimination testing but plans with a CODA also face two special tests, the Actual Deferral Percentage Test (ADP Test) and Actual Contribution Percentage Test (ACP Test). These tests are burdensome! Plan sponsors want to avoid these annual tests. Safe Harbor 401(k) rules eliminate test requirements and Safe Harbor automatic enrollment plans also avoid test requirements. If plan doesn't incorporate safe harbor rules the Annual ADP and ACP testing must be performed. Also if the plan fails testing, corrective actions must be taken.

Give a layout of in service distribution options for pension plans:

No distributions are allowed for pension plans before age 59 ½*. This plan allowed by law after age 59 ½* and is intended to promote phased retirement. Refer to the plan document for options, if any. * Was age 62 before Bipartisan American Miners Act of 2019.

With respect to safe harbor 401(k) plans what is the qualified automatic contribution arrangement?

The Qualified Automatic Contribution Arrangement (QACA) exempts the 401(k) workplace plan from annual ADP / ACP testing. Deferrals as a percentage of employee compensation automatically rise according to this schedule:

When should one adopt a 401(k) plan?

The employer needs a workplace savings plan to attract new employees, but also wants to restrict associated costs. Pension plans and pure profit sharing plans cost the employer more to appropriately fund. Employers prefer taking less responsibility for helping employees meet their retirement savings needs. CODA plans shift savings responsibility towards employees. Employees now select the amount to defer based on individual preferences and employer matching contributions can provide participation incentive as well as creating good will with employees. Employers enjoy some cost savings by shifting compensation package. The employer may save on unemployment and workers comp insurance. Employer matching contributions escape payroll taxes.

Give a layout of non-participating spouse restrictions and other payout options for pensions:

With pension annuity options, the non-participating spouse can waive his or her right to a joint and survivor annuity, which elevates retirement income risk since pension benefits will stop upon death of the participating spouse. Strict rules surround accomplishing this waiver such as that the NP spouse must read and sign a written explanation (warning!). The NP spouse signature must be notarized, or witnessed by plan official and the waiver completed within 90 days before start of pension annuity. All qualified pensions must offer a Qualified Pre-retirement Survivor Annuity (QPSA) if the participant is married. It provides benefits to the spouse if participant dies before normal retirement age. The NP spouse can waive this right after P spouse reaches age 35 (waiver rules same as before). The Waiver carries significant financial risk to NP spouse. Below is an example of what this waiver might look like.

What type of 401(k) accounts are available within plans?

401(k) Accounts - What types of 401(k) accounts are available within plans? -Traditional account: Deferrals are pre-tax and will be subject to income tax when withdrawn from the plan. -Roth account: deferrals are subject to income tax before being added to the account and won't be taxed when withdrawn. A $19,500 limit applies to sum of both deferral types (2020). Many employer plans allow employees to split deferrals between accounts. Any employer matching contributions must go into traditional account.

What is a safe harbor 401k plan and what does it provide?

If adopted by employer, annual ADP and ACP testing is not required. A Safe Harbor 401(k) plan must provide one of the following: -3% nonelective contribution from employer to all plan-eligible employees, -An employer matching contribution of at least: -100% match up to 3% of compensation, and -50% match from 3% to 5% compensation. Employee contributions must be 100% immediately vested.

what happens when you fail repay loans from a qualified plan?

If the loan balance is not repaid within the prescribed time it will be treated as a taxable plan distribution and the loan balance may also be subject to a 10% penalty tax. When loan balances remain in cases where the employee is terminated, the plan document will specify one of two treatments. It will be deemed distribution or loan offset. A deemed distribution is a non-rollover eligible, taxable distribution. A loan offset is rollover eligible and can avoid tax if repaid into receiving plan or IRA by the due date for the federal income tax return.

Give a layout of death distributions for pension plans:

If the participant is single, refer to plan for beneficiary options. If the participant is married, the plan must offer Qualified Pre-retirement Survivor Annuity.

The timing and/or cause of the distribution must be considered. Common causes of distributions include:

Death Disability Divorce In-service Early retirement Normal retirement Termination of employment (non-retirement)

What entails contributions in profit sharing plans?

Profit Sharing Contributions Must be "Substantial and Recurring" -The IRS might disqualify a plan without recurring contributions. -Rule of thumb: Contributions in 3 out of 5 years, or 5 out of 10 years.

What is a profit sharing plan?

Profit Sharing Plan is a term defined by the IRC that provides for participation in company profits by employees & beneficiaries. Employer contributions to the plan are generally discretionary and there are predefined formulas for nondiscriminatory distribution of contributions among the plan participants.

What is the big difference between profit sharing plans and pension plans?

Pension Plan: Annual plan contributions are mandatory. Profit Sharing Plan: Annual plan contributions are discretionary.

What is a non-qualified distribution from a roth account?

A non-qualified distribution is any distribution made before both qualification rules are met. The earnings are no longer withdrawn tax-free and each distribution is classified as a pro-rata mix of tax-free contributions and taxable earnings.

With respect to a profit sharing plan what is a new comparability plan?

A profit sharing plan in which contribution are allocated based on an employee classification scheme. The company develops the custom classification scheme, which is typically an "owner group" and an "employee group." They are designed to skew benefits towards owner group and are designed for classification to pass discrimination test for benefits. The plan must generally pass one of two minimum allocation gateways and the NHCE allocation rate is at least 1/3 of the HCE with the highest allocation rate, or each NHCE receives an allocation of at least 5%. Top-heavy plan requirements will also likely apply.

What is a rollover and why perform it?

A rollover is a transfer of an account balance into another qualified plan, a workplace savings plan such as 403(b) or governmental 457(b), or into an IRA. Why perform a Rollover? -Defer recognition of income taxes if former employer won't permit funds to remain within former plan. -Avoids taxes if a lump-sum distribution would otherwise be required. -Increase variety of investment choices and access lower expense investment choices. Rollovers may be accomplished in one of two ways, direct rollovers and indirect rollovers (combination of both is possible).

With respect to allocating profit sharing contributions what is the age-based allocation?

An Age-Based profit sharing plan uses both age and compensation as the basis for allocating contributions to each employee's account. These plans dramatically shift contribution amounts towards older participants. Passes nondiscrimination based on benefits, not contributions.

The law permits a variety of distribution options from Qualified Plans such as:

Annuities (single life, joint life, joint and survivor, etc.) Lump-sum Rollovers In-service withdrawals (including hardship) Non-repaid loans Repaid Loans = Not Distributions Non-repaid Loans = Distributions

What are the qualified plan requirements?

Are there any special Qualified Plan requirements? -Not allowed: 2 year /100% eligibility option. -Employee deferrals are 100% immediately vested. -Employer matching contributions not required, but are common. -Vesting of employer match: usual 2-to-6 graduated or 3-year cliff. -Profit sharing plan with a CODA must meet two special nondiscrimination tests: ACP test and ADP Test.

What are the disadvantages of the Standard Allocation method for allocating profit sharing contributions?

At retirement the total income replacement (plan assets plus Social Security) will be lower for the owner(s) and executives than for rank-and-file employees. If the plan is established when the owner is older, he/she will struggle to accumulate enough plan assets to replace his/her pre-retirement income.

What are catch up contributions?

Authorized by IRC section 414(v); not specifically a 401(k) plan feature. It allows participants age 50 and over to make additional salary deferrals of up to $6,500 in 2020. Are not subject to the 401(k) deferral limit of $19,500 in 2020. It is also not subject to 415(c) limit of $57,000 in 2020. For plan participants age 50 or older add up all salary deferrals during the plan year and the total may not exceed 100% of compensation. CODA deferrals in excess of $19,500 in 2020 are Catch-ups. If plan limits CODA deferrals but allows Catch-ups, deferrals exceeding plan limits are considered Catch-ups.

With respect to a safe harbor 401(k) plan what is the automatic enrollment feature?

Automatic Contribution Arrangements were created to encourage employee participation in 401(k) workplace plans. A Negative Election arrangement is when the employee is deemed to have elected a specific annual deferral unless the employee positively elects out. Deferrals as a percentage of employee compensation automatically rise each year unless employee elects out of the increase. If an automatic contribution arrangement has certain features, the overall 401(k) will be exempted from annual ADP / ACP testing.

What are cash or deferred arrangements?

Cash or Deferred Arrangements, also referred to as CODAs, are the most prevalent type of qualified plan being established today. They are predominantly funded by employee wage deferral contributions and are authorized by Section 401(k) of the IRC, hence the common name. They are also attached to profit sharing plans or stock bonus plans. -Colloquially: "401(k) plan with employer profit sharing added." -More Accurately: "Profit sharing plan with 401(k) CODA added." Cash or Deferred Arrangements permit employees to defer compensation into a qualified savings plan. The deferral is limited to lessor of 100% of compensation or $19,500 for 2020. Employers may (but are not required to) offer a deferral match. Employers may place even lower deferral limits into their plan.

How do contributions work for ESOPs?

Contributions to the ESOP are either employer Stock or Cash. ESOP would use cash to purchase employer stock or would use cash to pay off bank debt from previous loans used to purchase large quantity of employer stock (Leveraged ESOP). Regardless, the employer receives tax deduction for the value of the stock or the cash at the date of the ESOP contribution. It is subject each year to 25% of employer covered compensation limit. Leveraged ESOP interest payment provides additional deductible and stock dividends are paid to ESOP and are also deductible Stock (contributed or purchased) is allocated to employee accounts By: -Standard / Percentage of Compensation -Age-Based Not allowed: -Social Security Integration is not allowed

Give a brief layout of distribution options for qualified plans?

Distribution options can differ depending on the type of qualified plan, such as Pension Plans or Profit Sharing Plans. Options can be restricted by employer plan provisions. The plan is not required to offer all legally allowed choices and the plan document terms are controlling. When working with clients, you need to request the distribution options for each qualified plan from Human Resources (especially for pension plans). Also refer to the plan's Summary Plan Description.

How are distributions generally taxed from qualified retirement plans?

Distributions from qualified retirement plans are generally subject to ordinary income tax because the plans usually contain both contributions and earnings that have never been subjected to income tax. Contributions to the plan were effectively wages that would have been taxed at ordinary income tax rates had they been paid directly to the participant.

How does each distribution option work for profit sharing distributions?

Divorce is covered later in the chapter

With respect to profit sharing plans explain the vesting of contributions?

Employee contributions are always 100% immediately vested and mainly applies to 401(k) and Thrift plans. Employer contributions generally vest using either a 2 to 6 year graduated schedule or a 3 year cliff schedule. Employers are free to choose a faster vesting schedule. -Example: 1 to 4 year graduated or 1 year cliff Faster employer contribution vesting in special situations. 2 year cliff is required if plan eligibility requires 2 years of service. 401(k) "safe harbor" plans require 100% immediate vesting.

What is the Put Option for ESOP plans?

Employees can require the employer to repurchase stock at its fair market value as of the distribution date. The repurchase must occur within a time period of no less than 60 days after distribution, or no less than 60 days during the following plan year. The put option reduces the employee's risk of being unable to sell the stock, or not being able to sell at a fair value. It increases the employer's cash flow risk, because plan sponsor must stand ready to use this cash to repurchase possibly large amounts of stock.

How does a company allocate profit sharing contributions?

Employer decides each year on the (approximate) amount of money to be divided among all eligible employee profit sharing accounts. Amount shouldn't exceed 25% of total employee compensation. The amount is discretionary and could also be $0. The employer must use a definite and predefined formula when allocating these contributions and the formula must be contained in the plan document. Allocation of employer contributions among accounts may not discriminate in contributions or in benefits and the formula can discriminate in one or the other, but not both.

Give the lay of the land on distributions from 401ks?

Employer profit sharing contributions have liberal distribution options and generally in service withdrawals after 2 years of participation. Employee after-tax contributions face no in-service restrictions. Distributions from 401(k) accounts face in-service restrictions. Generally not allowed until age 59 ½ / separation of service / retirement; hardship in-service distributions are allowed. Distribution for immediate and extreme financial need entail medical or funeral expenses and purchase of principal residence. No other sources of funds are available. Employer's plan document can create additional restrictions.

What is the formula used to allocate employer contributions

Formula used to allocate employer contributions must be definite and predefined in the plan documents. Allocation of employer contributions among participant accounts may not discriminate in contributions or in benefits (but both are not required). IRC and regulations specify complex tests used to demonstrate nondiscrimination. -Standard Allocation: Fixed percentage of each employee's compensation. -Age-based and Benefits-based allocations are allowed. -Social Security integration (permitted disparity) is allowed.

What are the trustees of the ESOP?

Holds ESOP assets in trust for the benefit of the plan participants. The trustee is always held to standard of fiduciary and must operate with the care, skill, prudence, and diligence of a prudent man. They must act in best interest of plan beneficiaries, plan participants, and their beneficiaries. Otherwise, resign and appoint neutral trustee. Often the ESOP trustee is also an officer, director and/or stockholder of the sponsoring company; this can create conflicts of interest. Often the conflict isn't so great that the trustee must resign from ESOP. Trustee can navigate conflicts by obtaining advice from an independent party.

What is the net unrealized appreciation stance with regards to normal distributions distributions for qualified plans?

In year of distribution of employer stock the value of securities at date(s) of Employer Contribution(s) is immediately taxable at ordinary income rates. NUA of securities will be taxed at long term capital gains rate but the tax is deferred until securities are sold. At date of sale of employer stock, he/she will recognize deferred NUA long-term capital gain. Any subsequent gain after date of distribution will be either short- or long-term capital gain based on holding period since date of distribution. Special treatment for inheritances with NUA does not receive a step-to fair market value adjusted taxable basis in the hands of the beneficiary (heir).

With respect to allocating profit sharing contributions what is the permitted disparity allocation?

Just another expression for Social Security Integration. Provides additional employer allocations to employees whose earnings are greater than the plan Integration Level. Profit sharing plans can only use the Excess Method of calculation. All employees receive a Base Contribution and the percentage of compensation up to the integration level. It also must be at least 3% of compensation for top-heavy plans. Higher paid employees also receive an Excess Contribution. Calculated on all compensation above the integration level, but not higher than the covered compensation limit of $285,000 (2020). Not considered discriminatory towards highly paid employees and the employer doesn't make 5.7% OAS payroll contribution* for wages above Social Security wage base ($137,700 in 2020). * 6.2% Social Security payroll tax = 5.7% OAS + 0.5% DI.

Give a layout of disability distributions for pension plans:

Leading to separation from service. If retirement eligible age, refer to those options: -The plan may offer generous early retirement annuity payout. Otherwise, refer to non-retirement termination options.

Give an in depth analysis on the ACP Test?

Like ADP test procedure, but each employee ratio is now calculated by adding employee's after-tax contributions + employer matching contributions. Then divide by employee's compensation. Determine Actual Contribution Percentage (ACP) as averages for group of all HCs and NHCs. Compare NHC and HC ACPs using same schedule as for ADP test. If ACP test fails, use same corrective procedures just described.

Give the relationship between and S Corp and implementing an ESOP:

Many closely held companies are organized as S-corporations, which are pass-through entities for tax purposes (S-corp doesn't pay income taxes), having no more than 100 individual shareholders, and only one class of stock. Until the passage of the Small Business Job Protection Act in 1996, it wasn't possible for S-corporations to establish ESOPs. This limited ability of closely held S-corp owners to dispose of stock ESOPs holding S-corp stock have some special characteristics. They can prevent plan participants from demanding stock instead of cash. Act as the "single owner" of all stock shares in place of plan participants. As a tax-exempt trust, ESOP doesn't pay taxes on S-corp distributed earnings. Participants in the plan eventually pay these taxes at time of distributions. Non-recognition of income tax on S-corp's pass-through earnings led to abuses. Congress added "Prohibited Allocations of Securities in an S corporation" to IRC. No allocations of S-corp stock within an ESOP to a "disqualified person" in a "non-allocation" year. -Disqualified Person: Person who owns (with family members) 20% or more of stock OR a person without family ownership who owns 10% or more of the stock. -Non-Allocation Year: ESOP owns S corporation stock and disqualified persons own at least 50% of S corporation stock. -Net Effect: The owners of a closely held S-corp are prohibited from benefiting under an ESOP arrangement when there is a significant concentration of ownership.

With respect to profit sharing plans what does it mean to be substantial and recurring?

Only employers can sponsor Profit Sharing plans and contributions are discretionary but must be "substantial and recurring." No requirement of company profit for contribution to be made and the company has option to skip contributions in unprofitable years. Contributions in cash or employer stock by end of tax year can be stock Bonus plans and ESOP's are 100% stock. Contributions are tax deductible by employer. Total of all employer plan contributions, shouldn't exceed 25% of total employee compensation for the year. This does not generally limit a company's employee account contribution to be no more than 25% of that employee's compensation!

How do plan loans work for qualified plans (pension or profit sharing)

Plan loans are permissible by any qualified plan (pension or profit sharing) but usually only offered by CODA / 401(k) type plans. Plan loans are offered as one method to increase plan participation and greater participation helps CODA plans pass ADP and ACP testing. General rules governing plan loans: -Available to all plan participants on an equal basis -Limited in amount -Must be repaid within specified time period -Charge a reasonable interest rate on outstanding balance -Must be adequately secured

Give a lay of the land of plan loans for qualified plans:

Plan loans aren't considered distributions, provided they are repaid within the allotted time period. Therefore, plan loans are generally not taxable. Any loan balance not repaid within allotted time period will be treated as a taxable plan distribution. It may also be subject to a 10% penalty tax. When loan balances remain upon the termination of employment for an employee, the plan document will specify one of two treatments. It will be either deemed distribution or loan offset. A deemed distribution is a non-rollover eligible, taxable distribution. A loan offset is rollover eligible and can avoid tax if repaid into receiving plan or IRA by due date for federal tax return, effective 2017.

What are employee After-tax contributions?

Profit sharing plans may also allow Thrift Plan contributions that are independent of CODA / 401(k) deferral limits (always after-tax dollars). Only contribution limits are provided by 415(c) of $57,000 in 2020.

Give a layout of divorce distributions for pension plans:

QDROs will be covered in more detail later in this lesson.

With respect to Roth accounts what are they and what are roth iras

Roth Accounts allowed starting in 2006. Employee must specifically designate salary deferral to Roth account. The $19,500 (2020) limit applies to the sum of Roth + traditional deferrals and employer match can't go into Roth account. Roth Accounts have some differences from Roth IRAs. For example, there are no modified AGI restrictions on contributions. There are much higher contribution limits: $19,500 vs $6,000 (2020). Pro-rata distributions of Roth account contributions and earnings. Participant lifetime RMD rules apply to Roth Accounts.

With respect to stock bonus plans how do the distributions work?

Stock bonus plans generally lack in-service distribution options but IRC permits plans to offer them after 2 years of participation and distribution allowances in cases of financial hardship are more common. After employee separation from service in any "plan year." Distributions must begin no later than the end of the next plan year in cases of normal retirement, death, or disability. They must begin no later than the end of the 5th plan year for other modes of employment termination and must be completed within five years of commencement. Participant can demand distribution of employer securities rather than cash. If the plan permits a lump sum distribution, this will enable Net Unrealized Appreciation or NUA treatment.

Give a general rule of thumb for roth account distributions:

Roth accounts are a type of 401(k) account that can receive designated salary deferrals, but for which there was no deferral of income taxes. Contributions are after-tax and earnings grow tax-deferred. Qualified Distributions: Funds withdrawn from Roth accounts will be entirely tax-free if the distribution meets IRS qualifications, including the 5-Year Rule and the Distribution Rule.

How does the taxation of distributions of stock purchase plans work?

Taxation of distributions depends on the form of distribution: -Partial distributions over more than 1 year: Ordinary income tax treatment. -Lump sum distribution (within 1 tax year): Net Unrealized Appreciation treatment. -Distributions before age 59 ½ may be subject to 10% penalty tax. -Rollover treatment is possible if stock is accepted by receiving plan.

What are the advantages of the standard allocation method for allocating profit sharing contributions?

The advantages of the standard allocation method are that it is easy for employees to understand, it is likely to be accepted as fair by all employees even though more highly compensated employees receive more dollars, and it is easy to implement because math is straightforward.

What is the sum of all contributions limits with respect to 401k and 415c?

The sum of all contributions (ignoring catch-ups) must not exceed the 415(c) limit, which is $57,000 in 2020. The sum of all contributions including catch-ups must not exceed 100% of employee's compensation.

What is the default benefit for pension plan distribution options?

The default benefit for a pension plan is a Single Life Only annuity. This type of annuity is payable only for the remainder of the participant's life. Default benefit becomes a Qualified Joint and Survivor Annuity (QJSA) if the participant is married. -This provides an annuity benefit over both lives -Monthly payout will always be less than for Single Life annuity -Survivor option chosen determines how payout changes after the first death -100% survivor - no change in monthly benefit -50% (or higher) survivor - payout is indicated percentage of the benefit Most plans also offer a Qualified Optional Survivor Annuity (QOSA) -QOSA offers 40% or 75% survivor option if QJSA didn't offer them -After 2007, plans with non-annuity benefit options must offer QOSA

How does repayment work for loans in qualified plans?

The loan must be repaid through payroll deductions and are completed within 5 years. The payments are made with after-tax dollars into a pre-tax account. Therefore, it is important to note that the dollars being repaid are taxed twice! The exception is that if the loan is used for the purchase of a principal residence, for which the loan could last up to 30 years but 10 years is a more typical repayment period. Further repayment requirements are that payments must be made regularly and at least quarterly using substantially level amortization over the period of the loan, and the plan document requirements ultimately control the loan.

What is 10 year forward averaging with respect to qualified plans:

The participant must have been born prior to January 2, 1936. At age 84 in 2020, very few such people have yet to distribute. Calculation procedure: -Start with the lump-sum (LS) distribution amount -Divide by 10 (i.e., LS/10) -Calculate tax on (LS/10) using 1986 ordinary income rates, and -Multiply previous step's tax by 10 All tax is paid in year of distribution and avoids higher marginal tax brackets.

What are the special requirements for stock bonus plans?

The participants in Stock Bonus Plans have special rights such as pass-through voting rights of stock held in their account. The right to demand employer securities when taking distributions, even if the stock isn't publicly traded. If the employee doesn't want to own distributed stock that isn't publicly traded, the plan must offer a "put option" to the employee. The employer must repurchase the stock at fair market value and a special valuation will be required to ascertain that value. Other diversification and distribution rules are covered on subsequent slides.

Give a layout of Retirement-Eligible Separation of Service for pension plan distributions:

The plan defines a normal and early retirement: -Normal: Unreduced lifetime annuity options available. Age 65 is typical. -Early: Lifetime annuity payout reduced per plan document. -If Married: Plan must offer survivor annuity options. -Lump sum distribution option allowed by some plans. If this applies, rollover to IRA or another qualified plan is also available. -Leave assets in plan (early retirement): -Plan option to delay annuity until normal retirement age. -If < $1,000 asset PV - forced distribution. -If $1,000 to $5,000 asset PV - at plan's option.

What are the steps to a direct rollover?

The plan trustee distributes the account balance directly to the trustee of the receiving account. Usually completed by a wire transfer (preferred) and sometimes done using an FBO check mailed to plan participant.

With respect to allocating profit sharing contributions and the "standard allocation" what does it mean to say equal percentages based on employee compensation?

The standard allocation of employer profit-sharing contributions is to give the same percentage of employee compensation, regardless of an employee's compensation. One exception to this rule applies to highly compensated employees whose contributions are limited by the 415(c) limit.

How do the distributions from ESOPs work?

The timing of distributions from ESOPs are related to its "plan year." The plan year often matches the calendar year and when a plan participant separates from service within one plan year, the timing of account distributions is measured in terms of subsequent plan years. Employee separation due to normal retirement, death or disability relates to distributions and must begin no later than the end of the next plan year. Employee separation due to other reasons relates to distributions that must begin no later than end of the 5th subsequent plan year. Distributions from ESOP accounts must generally be completed within five years of commencement. The normal mode of distribution is substantially equal payments over the typically 5 year time span. The participant can elect other distribution modes as permitted within the plan as well. The normal 5 year maximum for distribution payments can be stretched further for very large account balances. If the account is valued at more than $1,150,000 (2020), then the distribution period may be extended one year for each additional $230,000 (2020) of account value, up to no more than ten plan years. Participant can demand distribution of employer securities rather than cash. If the plan permits a lump sum distribution, this will enable Net Unrealized Appreciation (NUA) treatment and is the same as was discussed previously for Stock Bonus plans.

What is the taxation of QDRO's?

There is no taxation until a distribution occurs. For example, a QDRO recipient chooses to leave assets in the original plan. If the QDRO distribution is rollover eligible there will be no tax if recipient completes the transfer into an IRA or qualified plan. The distribution is taxable otherwise as ordinary income. If the QDRO distribution isn't rollover eligible, the distribution is taxable to recipient as ordinary income. Also, a distribution to a child or dependent is taxable to plan participant and the distribution is exempt from 72(t) early withdrawal penalty tax.

What is net unrealized appreciation with respect to stock bonus plans?

This is a special tax treatment available when stock is distributed from a qualified plan as part of a "lump sum" distribution. -Lump Sum: All account assets distributed within 1 tax year. Treatment available to both stock bonus plans as well as ESOPs. If stock is sold before distribution, NUA treatment option is lost unless at least 59 ½, in-service distributions can't get NUA. Plans must track the value of stock at time of each contribution. For non-publicly traded stock, this requires special valuations. At time of lump sum distribution, the Fair Market value of all stock must be determined. Contribution value of stock is immediately taxed as ordinary income. NUA is taxed at long term capital gains rate only when stock is sold. -NUA = Fair Market value - Employer Contribution value. If stock is not sold immediately after distribution the subsequent changes in stock value relative to fair market distribution value is taxed after sale using the typical capital gains approach. Stock held 1 year or less receives short term gain / loss treatment. Stock held more than 1 year receives long term gain / loss treatment. -Stock held till death: NUA does not receive step-up in basis.

What is the total contributions allowable in a profit sharing plan?

Total of all contributions and deferrals for any employee may not exceed the lesser of 100% of employee's compensation, or $57,000 (415(c) limit for 2020). Ongoing employee deferrals may limit year-end employer contributions and vice versa. -Forfeitures: Company contributions returned to plan when an employee leaves before reaching 100% vesting. Can be used to reduce future company plan contributions, or divided among remaining employee accounts. Forfeitures allocated to an employee account are included with new employer contributions for purposes of 415(c) limits.

How do the voting rights work for ESOPs?

When ESOP holds stock of publicly traded corporations, participants have voting rights as regular shareholders and participants earn dividends. When ESOP holds stock of privately held corporations, participants must be allowed to vote in major corporate decisions regarding mergers, acquisitions, consolidation, reclassification, liquidation, dissolution, recapitalization or a sale. Also, trustee of the ESOP votes in all other matters.

What is the difference between a direct and indirect rollover?

With a direct rollover, funds are transferred directly from one trustee to another trustee automatically. With an indirect rollover, a check is paid directly to the participant, less a 20% withholding. Within 60 days, the participant must transfer an amount equal to 100% (including the withholding) to avoid a taxable distribution.

Give a layout of early termination of service distributions for pension plans?

With early termination of service, the individual will receive a lump sum distribution. It will rollover to an IRA or another qualified plan. Permitted to leave funds in a pension plan: -If < $1,000 asset PV - forced distribution -If $1,000 to $5,000 asset PV - at plan's option