Retirement Planning and Employee Benefits

Pension Plans

- a qualified retirement plan that pays a benefit to a plan participant for their entire life during retirement -usually determined by a formula **See Chart**

457 Plans 457(f) "Ineligible" Plans

-"Top-Hat Plans" -ONLY HC or Management can participate -Ineligible means: -failed to meet one or more requirements of eligible plan -amount contributed to 457(f): -subject to substantial risk of forfeiture -Taxation: -occur when there is no risk of forfeiture -can be taxed before any distribution to participant -Disadvantages: 1.if participant terminates employment before stated payment period, they may forfeit all plan funds 2. even if no distribution occurs, may be taxed once the funds vest

Establishing a Qualified Plan Prohibited Transactions - penalties

-15% excise tax on amount involved for each year in the taxable period -However, PPA 2006 says: -no excise tax if transaction is corrected within 14 days **If transaction is NOT corrected within the taxable period, an additional tax of 100% of the amount involved is imposed**

Individual Retirement Arrangements (IRA) Comparing Roth IRA's to Traditional IRA's

-2 important distinctions: 1. can make contributions to a Roth AFTER age of 70 1/2 2. RMD rules do NOT apply to Roth IRA's during life

Actual Deferral Percentage Test (ADP) Test 1

-ADP for the group of HC employees cannot be more than the ADP of all other employees multipled by 1.25 (THE 1.25 REQUIREMENT)

Deferred Compensation Plans Income Tax Issues - IRC SECTION 83 IMPORTANT

-AKA: property transferred in connection with performance of service -when employer transfers property to employee for service or performance, the employee will be taxed on the: -difference btwn FMV and the amount paid for the property -generally taxed as ORDINARY INCOME to the employee -usually apply to grants of stock or employee stock options

Defined Benefit Plans

-ALL Defined Benefit plans are pension plans **See Chart**

401(k) Plans Vesting

-ALL employee elective deferral contributions and their earnings are always 100% vested -Employer matching contributions and their earnings must vest under a schedule at least as generous as either the 3 year cliff or 2-to-6 year graduated vesting schedules

Nondiscrimination Testing

-ALL qualified plans are required to meed certain nondiscrimination tests but qualified plans with CODA provisions MUST meet two additional tests: 1. Actual Deferral Percentage Test (ADP) 2. Actual Contribution Percentage Test (ACP) -because of the burdensome nature of complying with these rule, IRC provides a SAFE HARBOR PROVISION that eliminates need for testing -So, employers have 3 options with respect to 401(k) testing: 1. perform ADP/ACP tests and take corrective action if plan fails 2. institute a qualified automatic enrollment feature (new safe harbor option enacted in 2006) 3. comply with the old safe harbork

Distributions

-All COD type plans provide that participants may take distributions for hardships (in addition to normal dist) -Distributions may occur after: -retirement, death, or separation of service and attainment of age 55 (without penalty) -termination of plan without establishment of another plan -certain acquisitions of company or company assets -attainment of age 59.5 by participant -certain hardships -Any of these distributions are taxable as ordinary income to the extent the participant does not have an adjusted basis in the 401(k) plan and may also be subject to a 10% penalty

Key Employee

-Any one or more of the following: -greater than 5% owner -greater than 1% owner w/ comp greater than $150,000 -an officer with comp exceeding $165,000 -Officer -an administrative exec in regular and continued service -No more than 50 employees must be treated as officers -If more than 50 officers, only first 50 ranked by comp will be considered officers under key employee definition

Profit Sharing (Stock Bonus) Contributions

-Because 401(k) plans consist of a CODA attached to a profit sharing plan or stock bonus plan, employers may also make a contribution to the profit sharing or stock bonus plan -employee elective deferrals do NOT count against the plan contribution limit of 25%,so employer CAN make a contribution -Limited to $51,000 per person (2013)

Advantages of Qualified Plans Tax of Plan Contributions Payroll Taxes

-Both Employers and Employees contributions are free of payroll taxes: -6.2% OASDI each -1.45% Medicare each -Total savings = 15.3% -Payroll tax exclusion does not apply to employee elective deferrals to retirement plans such as: -401(k), 403(b), SIMPLE's, SARSEP's, and 457 plans **tax deferred funds distributed from the qualified plan will NOT be subject to any payroll taxes**`

Defined Contribution Plans

-Can be either pension plans or profit sharing plans **See Chart**

Coverage Tests Average Benefits Test

-Consists of two tests: 1. Average Benefits Percentage Test, and 2. Non-discriminatory Classification Test 1. Average Benefits Percentage Test *(Avg Benefit % of NHC EE's) / (Avg Benefit % of HC EE's) -ratio must be at least 70% 2. Non-discriminatory Classification Test -the method in which employer selects employees to cover under a qualified plan must meet both requirements: 1. classification must be reasonable and established, based on facts and circumstances of business, and 2. classification must be nondiscriminatory: -Safe Harbor Test, or -Facts and Circumstances Test

DB Pension Plans vs. DC Pension Plans Investment Risk

-DB PLANS: plan sponsor bears investment risk -DC PLANS: individual participant generally maintains their own account and bears investment risk

Money Purchase Pension Plans (DC) Impact of the Economic Growth and Tax Relied Reconciliation Act of 2001 (EGTRRA 2001)

-EGTRRA 2001 increased the contribution limit for profit sharing plans to 25% (from 15%) -put DC pension plans and PS plans on equal contribution levels -since PS plans do not require mandatory funding... **This law ended the creation of new money purchase pension plans**

Qualification Requirements of Qualified Plans Coverage Highly Compensated Employees

-Eligible employees are segregated in two categories: 1. Highly Compensated (HC) 2. Non Highly Compensated -Definition of Highly Compensated: -more than 5% owner at any time during plan year, or -compensation exceeding $115,000 for prior plan year -Definition of 5% owner: -owning MORE than 5% of a company's stock or capital -rules consider shares owned by relatives as owner shares -Exception -when a company has too many HC employees, they can elect to select only the top 20% of all paid employees as ranked by compensation -all 20% must be over HC limit -a greater than 5% owner is ALWAYS HC

Advantages of Qualified Plans Tax of Plan Contributions Income Tax

-Employer -receive a current deduction for contributions made to plans -contributions are limited to a maximum of 25% of the total compensation paid to its employees -Employee -will NOT be currently taxed on the related plan contribution -employees are taxed later when the funds are distributed -this is an exception to the "normal" matching principal: -employer gets deduction when employee has income

Qualified Nonelective Contributions (QNEC)

-Employer can make qualified nonelective contributions to all eligible NHC employees CODA accounts -will increase the ADP of the NHC employees -QNEC's are considered elective deferrals made by the employee for purposes of discrimination testing. -therefore it is 100% vested when contributed

Money Purchase Pension Plans (DC) Contribution Limit

-Employer cannot deduct more than 25% of their total covered compensation paid -DC plan contributions are limited to the lesser of: 1. 100 percent of the participants compensation 2. $51,000 (2013)

Qualification Requirements of Qualified Plans Coverage

-Employer is required to consider all eligible employees for participation in the plan -employes covered under collective bargaining agreements (unions) are excludable from the plan -an employee is "covered" once they receive a benefit from the plan -Nondiscriminatory Classification -not all employees must be covered by the plan for it to maintain "qualified status" -however, selection of nonexcludable (covered) employees must be reasonable and established based on facts and circumstances of the business

Deferred Compensation Plans General

-Employers establish to provide benefits to select group of EE's without the limitations and rules of qualified plans -often discriminate in favor of key employees -usually involves deferral of income to executive -employer does NOT receive income tax deduction until the EE receives pmt and is recognizable as income

Vesting Options

-Employers may always elect to provide the employee with vested benefit faster than the standard schedule -If chosen, the employers vesting schedule must be comparatively better than one of the approved schedules

Vesting

-How long an employee must remain to be allowed to retain the plan assets accumulated on their behalf -applies only to employer contributions -employee contributions are automatically vested -Employer contributions vest using either: 1. Cliff, or 2. Graduated Vesting Schedule **remember, deferred eligibility (>2 years) requires immediate vesting **

"Other Tax Advantaged Plans" General

-IRC provides these plans that provide favorable tax treatment but are NOT qualified plans. -usually easier and less costly to administer 1. SIMPLE's -savings incentive match plans for employees -for small employers (100 or less) -less administrative costs and fewer setup procedures -no annual filing requirements 2. 403(b) Plans -tax sheltered annuities or tax deferred annuities -available to certain nonprofit organizations and employees of publlic educational systems 3. 457 Plans -allow certain employees of state and local governments to defer compensation free from current income taxation -these contributions are separate from other retirements plans for purposes of contribution limits

Stock Bonus Plans and Employer Stock Ownership Plans General

-If a company wants to establish a profit sharing plan but doesnt have enough cash to contribute, they can establish Stock Bonus Plans or ESOPS 1. Stock Bonus Plans -established and maintained by an employer to provide benefits -contributions to and distributions from these plans are in the form of employer stock 2. Employer Stock Ownership Plans (ESOPS) -a qualified plan investing primarily in "qualifying employer securities" -typically shares of stock in the corporation creating the plan

Safe Harbor 401(k) Plans

-If the employer does not want to comply with the ADP test, ACP test, or the Top Heavy Testing, they can choose to meet the safe harbor test -Election must be made 60days prior to beginning of plan year to convert a 401(k) plan to Safe Harbor status -Plan must provide a minimum contribution that MUST be immediately 100% vested -Permissible contributions: 1.3% minimum nonelective contribution -all employees receive contribution of 3% of salary 2. matching contribution -requires employer to match 100% of first 3% of employee elective deferrals, AND -50% of employee elective deferrals greater than 3% and less than 5% ****see chart****

Advantages of Qualified Plans ERISA protection

-In 1974 Congress enacted the Employment Retirement Income and Security Act (ERISA) -in order to provide protection for employees retirement plan -Anti Alienation Protection -provides protection from creditors and plan sponsors -once funds are distributed, they are no longer protected -However qualified retirement assets are not protected if: -Qualified Domestic Relations Order (QDRO) -court order related to divorce, child support, etc -Federal Tax Levy -Criminal Act involving the same qualified plan -Individual Retirement Accounts (IRA's, Roth SEP, etc) -these are not protected under Anti-Alienation act -Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA 2005) -provides IRA's similar creditor protection

Defined Benefit 50/40 Test

-In addition to meeting 1 of the 3 coverage tests, a DB plan must satisfy 50/40 coverage test -requires the DB plan to benefit the lesser of: -50 nonexcudable/eligible employees, or -40% of all nonexcludable/eligible employees on EACH DAY of the plan year

Deferred Compensation Plans Secular Trust

-Irrevocable Trusts -designed to hold fund assets for purpose of paying benefits under a non qualified deferred compensation plan -eliminates substantial risk of forfeiture, -SO employee is at risk of immediate taxation, -BUT eliminates risk of not being paid in the future

Money Purchase Pension Plans (DC) Younger/Older

-Like ALL DC plans, benefits younger participants more because of the increased number of contributions and compounding periods

Hardship Distributions

-MUST be limited to the MAXIMUM DISTRIBTUABLE AMOUNT -Maximum Distributable Amount -Employees total elective deferrals as of date of distribution reduced by the amount of previous distributions of elective contributions -Does NOT include earnings, QNEC's, or QMC's -Taxed as ordinary income and may be subject to 10% penalty

Establishing a Qualified Plan Terminating a Qualified Plan DB specific requirements

-MUST terminate under one of the following statuses: 1. Standard Termination -voluntary -employer has sufficient assets to pay all benefits at time 2. Distress Termination -voluntary -employer is in financial difficulty and unable to continue with plan 3. Involuntary Termination -initiated by PBGC -unable to pay benefits from the plan

Minimum Distributions Effect of the Participants Death on Minimum Distributions After Beginning RMD's

-Minimum Distributions are still required even after a participant dies -an important distinction is made depending on whether participant died before or after beginning minimum distributions: 1.DEATH AFTER BEGINNING MINIMUM DISTRIBUTIONS: -calculation of future distributions uses the designated beneficiary's life expectancy factor -if more than 1 beneficiary, the one with the shortest life expectancy (usually oldest) is used -the plan may also be divided into separate account for each beneficiary to utilize their own life table -if a trust is named beneficiary, the beneficiaries of the trust are treated as designated beneficiaries provided: -trust is valid under state law -trust is irrevocable, or will become so upon participants death -trust beneficiaries are identifiable from the trust instrument -appropriate documentation is provided to plan administrator

Profit Sharing Plans Funding

-NO mandatory funding -contributions are generally discretionary, but funding must be SUBSTANTIAL AND RECURRING -generally limit employer contributions to 25% of covered comp -ESTABLISHMENT: must be established by year end but can be funded as late as October 15th of the following year **if companies fiscal year is different than calendar year, plan must be established by the last day of the fiscal year and funded 9.5 months later**

Simplified Employee Pensions (SEP's) Vesting and Withdrawals

-NO vesting for employer contributions -since contributions are made to IRA accounts -employees can withdrawal funds in any amount from SEP-IRA

Fringe Benefits Athletic Facilities Furnished by Employer

-NOT included in gross income if: 1. operated by employer 2. located on premises owned or leased by employer 3. substantially all of the use of the facility is by employes, spouses, or children

Automatic Enrollment Safe Harbor 401(k) Plans Requirements

-Plan MUST meet certain requirements with respect to: 1. Automatic Deferral 2. Matching or Nonelective Contributions, and 3. Notice to Employees -Qualified Automatic Enrollment feature must provide that the employee (unless electing otherwise) is treated as making an election to make an elective deferral equal to a stated percentage of compensation not in excess of 10% and at LEAST equal to: -3% of compensation for first year -4% for second year -5% for third year -6% for fourth year and thereafter -the stated percentage must apply uniformly to ALL eligible employees

Re-characterization

-Plan sponsor can recharacterize the excess deferrals (pretax) as after tax employee contributions -may cause a problem for ACP testing -MUST be completed within 2.5 months after the end of the plan year -otherwise 10% excise tax is imposed on the amount that should have been distributed

DB Pension Plans vs. DC Pension Plans Pension Benefit Guaranty Corporation Insurance

-Plan sponsors pay premiums for insurance coverage designed to pay the "promised pension" if the plan is underfunded or unfunded -Covered plans are required to pay a flat-rate, per participant premium -PBCG pays only a limited retirement benefit in the event a plan is underfunded or unfunded **See chart for Amounts** -PBCG does NOT insure DC Plans or Profit Sharing Plans -PBCG does NOT insure plans with less than 25 participants

DB Pension Plans vs. DC Pension Plans

-Primary differences between the two plans include: 1. the use of an actuary -annually or at inception 2. assumption of investment risk -employer or employee 3. allocation of plan forfeitures -reduce plan costs or distribute to ee's 4. coverage under Pension Benefit Guaranty Corp (PBGC) 5. use of social security integration -offset or excess 6. calculation of accrued benefit or account balance 7. ability to grant credit for prior service for funding 8. use of commingled vs. separate funds

Plan Loans

-Qualified plans are permitted (NOT required) to provide loans from the plan to participants -MUST be made available to all participants and beneficiaries equally -MUST be limited in amount -MUST be paid back within a certain time period -MUST bear a reasonable inters rate -MUST be adequately secured -MUST have proper accounting maintained by administrator

Minimum Distributions Effect of Multiple Qualified Plans or IRA's

-RMD's apply to EACH qualified plan in which the taxpayer has a balance -However, taxpayers ARE permitted to combine the value of all their IRA's in determining the RMD

Individual Retirement Arrangements (IRA) Roth IRA's Contributions

-SAME contribution limit as a Traditional IRA -However, individuals may only contribute if the fall within the appropriate income levels -Phaseout Numbers: SINGLE: $112,000 - $127,000 MFJ: $178,000 - $188,000 MFS: $0 - $10,000 **these are all 2013 numbers**

DB Pension Plans vs. DC Pension Plans Use of Social Security Integration

-Social Security Integration (or Permitted Disparity) allows a higher contribution or allocation of benefits to employees whose compensation exceeds the Social Security wage base -Allows all qualified plans to consider the SS benefits that will be provided to the plan participants in the calculation of the participant's accrual of benefit or contribution amount -2 methods: 1. Offset method (DB PLANS) 2. Excess method (DB PLANS / DC PLANS)

Automatic Enrollment Safe Harbor 401(k) Plans General

-Some 401(k) plans have an "automatic enrollment" or "negative election" feature -These plans provide that elective contributions made by the employee are made at specific rates unless the employee elects otherwise -Pension Protection Act of 2006 -these plans are eligible for a new nondiscrimination safe harbor and are treated as meeting the ADP and ACP test -are NOT subject to the top heavy rules -effective after 2007

Cash Balance Pension Plans (DB) General Info

-a defined benefit pension plan that shares many characteristics of a defined contribution plan BUT provides specific defined retirement benefits. -consists of an individual account with guaranteed earnings attributable to the account balance ***HOWEVER, the account the employee sees is merely a hypothetical account with hypothetical allocations and earnings***

Money Purchase Pension Plans (DC) General

-a defined contribution pension plan -provides a contribution each yr equal to a fixed % of employees comp -employer promises to make a specified contribution to the plan for each year, but is NOT required to guarantee a specific retirement benefit

401(k) Plans Employee Contributions Roth Contributions (Roth Accounts)

-a plan may allow an employee who makes elective deferrals to designate some or all of the contributions as Roth contributions -same dollar limits that apply to employee pretax deferrals also applies to Roth contribution total -employee could contribute up to $17,500 (2013) to a Roth 401(k) or another pretax account BUT NOT TO BOTH

Profit Sharing Plans

-a retirement plan which plan participants usually become responsible for the management of the plans assets and sometimes for personal contributions **See chart**

Distributions prior to 59 1/2 Section 72(t) Distributions

-a series of substantially EQUAL periodic payments -must NOT change, or will be considered a full distribution -made at least annually for life of participant(s) -must begin after participant has separated from service -payments MUST be made in 1 of the following 3 ways 1. Required Minimum Distribution -made similarly to minimum distribution rules -recalculated annually 2. Fixed Amortization Method -payment calculated over participants life expectancy (if single) -or joint life expectancy (if married) -creates a series of installment payments that remain the same 3. Fixed Annuitization Method -distributions of the account over a number of years -determined by dividing account balance by an annuity factor -uses reasonable interest rate and a mortality table -payment does NOT change **NOT subject to early withdrawal penalties if the above rules are met**

457 Plans Eligible Entities

-a state -a political subdivision of state -any agency or instrumentality of a State/political subdivision of State -any other organization other than governmental unit (exempt from tax) -tax-exempt organizations include: -trade associations -religious organizations -private hospitals -rural electric cooperatives -farmers cooperatives -private schools and foundations -labor unions -charitable organizations

Profit Sharing Plans Permitted Disparity (Social Security Integration)

-a technique or method of allocating plan contributions to employee accounts so that a higher contribution will be made for those employees whose compensation exceeds the SS wage base -PS Plans ONLY allow the EXCESS METHOD -2 PS contribution rates are established: 1. Base Contribution Percentage -applied on income up to integration level (usually SS wage base) 2. Excess Contribution Percentage -applied to income ABOVE integration level UP TO COVERED COMPENSATION LIMIT - $255,000 (2013) -limited to LESSER of twice the base rate or a difference of 5.7% **Excess rate is generally 5.7% higher than the base rate**

Establishing a Qualified Plan Pension Benefit Guaranty Corporation (PBGC)

-acts to guarantee pension benefits -does NOT cover DC plans -does NOT cover DB plans with less than 25 employees -charges plan sponsor (2013) -$42 per plan participant per year -$9 per $1,000 of plan under-funding for the year

25 Percent Test

-actually consists of a 25% and a 50% test, depending on type of life insurance used in the pension plan -TERM or UNIVERSAL LIFE INSURANCE: total premiums paid for the plan cannot exceed 25% of employer's contributions to the participants account -WHOLE LIFE INSURANCE: total premiums paid for the plan cannot exceed 50% of employers contributions to the participants account.

DB Pension Plans vs. DC Pension Plans Actuary

-actuarial costs increase the administrative cost of the plans -allow for some limited discrimination in benefit -DB PLANS: require use of annual actuarial services to determine proper funding of the plan -DC PLANS: -Target Benefit Pension Plans: -use actuarial assumptions at inception of plan -does NOT require annual actuarial work -Money Purchase Pension Plans: -do NOT use actuarial services -annual contribution is predefined in plan docs

Adjusted Basis

-adjusted basis in distributions received from a qualified plan if either have occurred: 1.made after-tax contributions to qualified plan 2.was taxed on premiums of life insurance held in a qualified plan

401(k) Plans Employee Contributions Employee After Tax Contributions-Thrift Plans

-allow employees to make after tax contributions -generally used by individuals who want to save more that the elective deferral limit or more than the amount allowed under the ADP/ACP testing

Employee Stock Ownership Plans (ESOP's) Practical Uses

-allows owners of closely held businesses to sell all or part of their interest in the corp and defer recognition of capital gains **this NONRECOGNITION OF GAIN treatment must follow these rules: 1. ESOP must own at least 30% of the corps stock immediately after the sale 2. seller(s) must reinvest proceeds from the sale into qualified securities within 12 months of sale and hold for 3 years 3. corporation must have no class of stock outstanding that is tradable on established securities market 4. seller(s), relatives of the seller(s), and 25% shareholders in the corporation are excluded from receiving allocations of stock by the ESOP 5. ESOP may not sell stock acquired through the rollover transaction for 3 years 6. stock sold to the ESOP must be common or convertible preferred stock and must have been owned by the seller for at least 3 years prior to sale

Salary Reduction Simplified Employee Pensions (SARSEP's) SARSEP ADP Test

-amount deferred annually by each HC employee cannot be more than 125% of the ADP of all NHC employees eligible to participate ADP = (elective employee deferral) / (employees compensation)

Adjusted Basis Annuity Payments

-amounts distributed as an annuity are taxable in the year which the payments are received -each annuity payment is considered a "partially tax free" return of adjusted basis AND "partially" ordinary income -uses Inclusion/Exclusion Ratio (see below) -once entire cost basis of the annuity is recovered, all future monthly payments are fully taxed -Distributions that are not lump-sum and are not part of annuity are taxed pro rata to the account balance in comparison to the pre taxed portion COST BASIS IN ANNUITY ----------------------- = EXCLUSION RATIO TOTAL EXPECTED BENEFIT

Employer Stock Options and Stock Plans Nonqualified Stock Options (NQSO's)

-an option that does not meet requirements of ISO's -basically it is a bonus program - additional compensation -are NOT subject to holding period requirements -do NOT receive favorable capital gains treatment TAXATION: -the grant of an NQSO does not create a taxable effect -exercise of the option results in W-2 income for the appreciation of the FMV of the stock over the exercise price -income and payroll tax withholding applies -employer has an income tax deduction for same amount -the amount paid for the stock at exercise PLUS the appreciation over the exercise price (bargain element) = BASIS -at date of sale, gain or loss is considered capital gain or loss based on the holding period

Individual Retirement Arrangements (IRA) Roth IRA's Nonqualified Distributions

-any amount distributed that is NOT qualified -treated as made in the following order: 1. FROM REGULAR CONTRIBUTIONS 2. FROM CONVERSION CONTRIBUTIONS ON FIFO BASIS 3. FROM EARNINGS

Pension Plan Characteristics Limited Investment in Life Insurance

-any qualified plan may purchase life insurance, as long as it is not the primary focus of the plan -premiums paid by the employer are taxable to the employee at time of payment -to maintain qualified status, a qualified plan including life insurance must pass either: 1) 25 Percent Test, or 2) 100 to 1 Ratio Test

Pension Plan Characteristics Disallowance of In Service Withdrawals

-any withdrawal from the plan while the employee is a participant in the plan -excludes plan loans -Pension Protection Act of 2006: DB pension plans can provide in service distributions to participants 62 years or older

Offset Method DB PLANS

-applies a benefit formula to all earnings and then reduces the benefit on earnings below the covered compensation limit -the reduction in benefits is limited to lesser of: 1. 0.75% per year of service up to 35 years 2. 50% of the overall benefit funding % per year of service

Fringe Benefits No-Additional Cost Services

-applies to ANY service provided by an employer that does not cause the employer to incur an additional cost or lose revenue -Examples: -airline, bus, and hotel accommodations or phone services **Nondiscrimination requirements apply**

Establishing a Qualified Plan Qualified Trust

-assets of the qualified plan must be placed in a qualified trust OR a custodial account

403(b) Plans or Tax Sheltered Annuities (TSA's) Facts

-available to certain qualified nonprofit organizations or employees of public education systems 403(b) PLANS: -retirement plan for certain employees of public schools, certain ministers, and employees of various tax-exempt organizations -is a tax sheltered retirement plan -NOT a qualified plan -established by the employer -employee has an individual account -2 Types: 1. Salary Reduction Plan (only accepts employee deferrals 2. Employer Funded Plan (accepts EE AND ER contributions)

Establishing a Qualified Plan Notifying Eligible Employees

-before IRS can issue a determination letter on qualified status of plan, the employer MUST distribute (and provide proof to IRS) information regarding the plan to both eligible and ineligible employees SUMMARY PLAN DESCRIPTION -summarizes the details of the qualified plan -employer MUST provide to employees, participants, and beneficiaries receiving benefits SUMMARY OF MATERIAL MODIFICATIONS -notices of plan amendments or changes -MUST provide to employees SUMMARY ANNUAL REPORT -MUST provide to employees each year

Actual Contribution Percentage (ACP)

-calculates a contribution percentage for both HC ad NHC employees -determines if the NHC are subject to discrimination -tests the sum of the employee after tax contributions and employer matching contributions -If plan sponsor fails, the same corrective measures may be used as the ADP test ***calculated exactly the same way as the ADP test***

Simplified Employee Pensions (SEP's) Establishment

-can be established and funded as late as the due date of the federal income tax return including extensions for the respective entity: 1. SOLE PROPRIETOR (SCHEDULE C) due date of return: April 15th final extension: October 15th 2. PARTNERSHIP (FORM 1065) due date of return: April 15th final extension September 15th 3. CORPORATION (FORM 1120) due date of return March 15th final extension September 15th 4. S-CORPORATION (FORM 1120S) due date of return March 15th final extension September 15th -To establish, employer must complete 3 basic steps: 1. formal written agreement to provide benefits to all eligible ee's 2. all eligible ee's must be given notice about the SEP 3. A SEP-IRA (the receptacle account) must be set up for each ee

Profit Sharing Plans Forfietures

-can be use either to: 1.reduce plan contributions, or 2. reallocate to the remaining participants accounts -must NOT be discriminatory favoring HC Employees -CANNOT be reallocated to participants accounts that have already reached their annual additions limit for the year

Individual Retirement Arrangements (IRA) Conversions

-can convert a Traditional IRA to a ROTH, with the expectation that distributions are completely tax free -MUST include value of conversion amount in taxable income at the time of the conversion **For 2010 and forward, an IRA may be converted regardless of AGI**

Profit Sharing Plans Other Allocation Methods

-can fund the plan with the annual additions limit - $51,000 (2013) -the use of a "Cash or Deferred Arrangement" (CODA) may enable an owner to reach the maximum contribution limit with a lower total employer contribution.

403(b) Plans or Tax Sheltered Annuities (TSA's) ERISA Applicability

-common for a 403(b) plan to be part of an overall pension or retirement plan -this portion is known as the "supplemental retirement plan" **SO, this plan is subject to ERISA requirements NOT SUBJECT TO ERISA RULES IF THE FOLLOWING ARE TRUE: 1. employee participation is voluntary 2. no employer contributions 3. employee has solely enforceable rights under the plan 4. employer has limited involvement in plan, and 5. plan is sponsored by a government or religious institution **if the plan only provides for salary reduction agreements, it is not maintained by the employer and is NOT subject to ERISA requirements**

Coverage Tests Ratio Percentage Test (People Test)

-compares the percentage of covered NHC employees to the percentage of covered HC employees -A plan satisfies the test if at least 70% of NHC/nonexcludable/eligible employees are covered -if this requirement is met, move on!

Deferred Compensation Plans Income Tax Issues - Constructive Receipt IMPORTANT

-concept that establishes when income is includable by taxpayer -taxpayer exercises "dominion and control" over the assets even if it is not physically received -BUT, deferred compensation plans are structured so that employees will AVOID constructive receipt and can defer tax

Deferred Compensation Plans Income Tax Issues - Substantial Risk of Forfeiture IMPORTANT

-concept that relates when income is subject to income tax -exists when rights of property are conditioned upon the future performance of substantial service, or related to a purpose of the transfer and possibility of forfeiture is substantial -as long as there are substantial risks of forfeiture, taxpayer does NOT have to include income as taxable income

457 Plans No Integration with Other Salary Deferral Plans

-contributions are NOT aggregated with contributions to other tax-deferred retirement plans ****huge benefit****

Individual Retirement Arrangements (IRA) Roth IRA's

-contributions are NOT deductible, but -qualified distributions consist solely of NON-taxable income -may be funded AFTER owner turns 70 1/2 -NOT subject to RMD rules during owners life -can be funded EITHER by cash OR converting a Traditional IRA to a ROTH account *****SEE CHART*****

Simplified Employee Pensions (SEP's) Contributions

-contributions are discretionary (similar to profit sharing plans) -in years that a contribution is made, one must be made to ALL employees eligible during the yr -must be made to ee's IRA accounts based on a written formula that does NOT discriminate in favor of HC employees -contributions may be integrated with Social Security (permitted disparity) -for self employed individuals, the 25% limit converts to 20% of net self employment income (like Keogh calculation)

Profit Sharing Plans New Comparability Plans

-contributions are made based on employees respective classification in the company as defined by the plan sponsor -to meet nondiscriminatory rules, MUST comply with cross testing rules: -dictate testing of DC plans on the expected benefits to be received at retirement ***these plans are more expensive to administer***

Money Purchase Pension Plans (DC) Separate Accounts

-contributions are made to a separate account on behalf of each participant

Savings Incentive Match Plans for Employees (SIMPLE's) Taxation of Contributions (both)

-contributions are tax deductible for the employer -amount includes the employee elective deferral AND the employer match (or nonelective contributions) WITHDRAWALS AND DISTRIBUTIONS: -distributions are taxable as ordinary income in year they are taken (different than Traditional IRA) -a distribution or a transfer made from a SIMPLE in first 2 years must be made to another SIMPLE to avoid taxation and penalty -if distribution is subject to early withdrawal penalty, penalty increases from 10% to 25% -AFTER first 2 years: -the 10% penalty applies unless it is a "penalty-excluded reason" -can be rolled into (tax free) almost any other retirement plan

Individual Retirement Arrangements (IRA) Active Participant Status

-deductiblity of Traditional IRA contributions may be reduced if the taxpayer is an ACTIVE participant in a retirement plan during the same year ACTIVE PARTICIPANT -an employee who has benefited under any of the following: 1. Qualified Plan 2. Annuity Plan 3. Tax Sheltered Annuity (403b) 4. Certain Government Plans 5. Simplified Employee Pensions (SEP) 6. Simple Retirement Accounts (SIMPLE)

Individual Retirement Arrangements (IRA) Calculation of IRA Deduction - Subject to Phaseout

-deduction limit ($5,500) is reduced based on a proportion equal to the (amount by which the individuals AGI exceeds the lower limit of the phaseout range) / ($10,000) or ($20,000 if joint return)

Deferred Compensation Plans Income Tax Issues - Payroll Tax IMPORTANT

-deferred compensation is considered to be earned income at 1. the time it is earned, or 2. the time a substantial risk of forfeitures expires -therefore: it is subject to payroll tax even though employee may not receive payment until future -when the income is later paid to the EE, it will be subject to income tax -the payments will NOT be considered "earned income" when received, and therefore will not be subject to payroll taxes

Stock Bonus Plans Requirements

-defined contribution profit sharing plans that allow employers to contribute stock on behalf of employees -subject to all eligibility coverage and vesting requirements -if CODA provision is attached, they must comply w/ ADP/ACP testing REQUIREMENTS: -participants must have pass through voting rights on employer stock held by the plan -participants must have the right to demand employer securities on plan distributions -participants must have right to demand that employers repurchase their securities if they are not publicly traded (put option) -Distributions must begin within 1 year of normal retirement age, death, or disability, or within 5 years -Distributions must be fully paid within 5 years of commencement of distributions

Top Heavy Plans Background / General

-designed to ensure that qualified plans that significantly benefit key employees must provide some minimum level of benefits for the rank-and-file employees ***once a plan is considered top heavy, it MUST: 1) use top heavy vesting schedules 2) provide minimum funding to non key employees

Calculating the Required Minimum Distribution

-determined each year by dividing the account balance (as of close of business on Dec 31 of the yr preceding the distribution year) by the distribution period (determined according to participants age as of Dec 31 of distribution year in Uniform Life Table) UNIFORM LIFETIME TABLE: -used when calculating RMD -exception: -when participants sole beneficiary is their spouse, and -spouse is more than 10 years younger than participant, then -they will use the Joint Life Expectancy Table for RMD ****this table results in longer life expectancy and decreases RMD****

Individual Retirement Arrangements (IRA) IRA Annuity vs. IRA Account

-different because it's an annuity contract issued by an insurance company TRANSFERABILITY: -is NOT transferable by the owner -benefits must NOT be forfeitable -proceeds must be received by the owner or beneficiary -cannot be pledged as collateral nor cannot take loans from PREMIUMS: -may not exceed $5,500 (2013) DISTRIBUTIONS: -SAME as Traditional IRA's

Individual Retirement Arrangements (IRA) Roth IRA's Qualified Distributions

-distribution from a ROTH IRA is NOT included in gross income if it is "qualified" (these are also NOT subject to 10% penalty) -to be considered qualified, must satisfy both tests: 1. DISTRIBUTION MUST BE MADE AFTER A 5-TAXABLE YR PERIOD -begins Jan 1st of the yr which the first contribution is made 2. DISTRIBUTION SATISFIES ONE OF THE FOLLOWING (4): -made on or after turning 59 1/2 -made to beneficiary/estate of the owner on or after owners death -attributable to owner being disabled, or -first time home purchase **the "5-taxable yr period" is NOT redetermined when an owner dies. so this beneficiary would only have to wait until the end of the original 5 year period**

Cash Balance Pension Plans (DB) Quasi-Separate Accounts

-does NOT have separate accounts for each participant, even though each participant receives a statement detailing a separate account in their name -consists of a commingled account that has a value equal to the actuarial equivalent of the present value of expected future benefits that will be paid to the participants

Establishing a Qualified Plan Terminating a Qualified Plan DC specific requirements

-easy compared to DB plans -employer just needs to pass a corporate resolution -at that point, any promised contributions must be distributed

Special Taxation for Lump Sum Distributions Pre 1974 Capital Gains Treatment

-eligible if born before Jan 1, 1936 -can treat a PORTION of a lump-sum distribution as capital gains Months of pre-1974 participation LTCG Portion = ----------------------------------------- x Taxable Dist Total months of participation

Special Taxation for Lump Sum Distributions 10 Year Forward Averaging

-eligible if born before Jan 1, 1936 -income tax due is calculated by dividing the taxable portion of the lump sun distribution by 10. -then apply the 1986 individual income tax rates -then multiply by 10 to determine total income tax due **tax must be paid in the year of the distribution** ***benefit of avoiding higher tax bracket (todays)***

Deferred Compensation Plans Income Tax Issues - Economic Benefit Doctrine IMPORTANT

-employee will be taxed on the funds if they are unrestricted and nonforfeitable -deferred comp plans may use a trust to hold the funds for employee prior to retirement or termination -in this case, for the funds to be subject to income tax they simply have to be unrestricted or nonforfeitable, which may occur once the employee becomes partially or fully vested -SOLUTION: -use of rabbi trust

457 Plans Facts

-employees of state and local governments and nongovernmental tax-exempt entities -employee elective deferrals do NOT count against deferrals into a 401(k) or 403(b) plans ***because it is a deferred compensation plan not a retirement plan*** -NOT qualified plans, so not subject to eligibility standards -considered a "nonqualified deferred compensation plan" -3 types: 1. eligible governmental plans 2. eligible tax-exempt plans, and 3. ineligible plans

Deferred Compensation Plans Income Tax Issues - ER Income Tax Deduction IMPORTANT

-employer is entitled to receive an income tax deduction for contributions ONLY when the employee is required to include the payments as taxable income ***Matching Principle***

401(k) Plans Employee Contributions Matching Contributions

-employer matching contributions must vest at least as rapidly as either a: 1. 3 year cliff, or 2. 2-to-6 year graduated vesting schedule

Establishing a Qualified Plan Plan Freeze

-employer no longer wants to contribute to the plan but does not want to terminate fully DC PLANS: -employer no longer makes contributions DB PLANS -participants no longer accrue benefits -plan sponsor MUST still maintain previously accrued benefits

Deferred Compensation Plans Funding With Insurance

-employers are responsible for paying income tax on earnings on assets held in the plan -SO, employers often use insurance products -WHY? -because the increase in cash surrender value is not taxed if payments are not made to the policy

Deferred Compensation Plans Income Tax Issues IMPORTANT

-for deferral of income tax to be realized, must comply w/: 1. CONSTRUCTIVE RECEIPT 2. SUBSTANTIAL RISK OF FORFEITURE 3. ECONOMIC BENEFIT DOCTRINE 4. IRC SECTION 83: PROPERTY TRANSFERRED IN CONNECTION WITH PERFORMANCE OF SERVICE 5. PAYROLL TAX 6. EMPLOYER INCOME TAX DEDUCTION

Fringe Benefits Definition

-form of compensation where a benefit, other than taxable wages, is provided to the employee for performance of services -serves as a way to increase total compensation without raising taxable income -ex: paid vacation, sick leave, health insurance, life insurance, pension plans, profit sharing plans, holidays, parking, etc.

Adjusted Basis Lump Sum Distributions

-full distribution upon termination of employment -to be considered "lump-sum" must meet ALL 4 requirements: 1. distribution must be entire accrued benefit (pension) or full account balance (defined contribution) 2. must be on account of either participants death, attainment of age 59.5, separation from service, or disability 3. must have participated in plan for at least 5 taxable years (waived if on account of death) 4. must file FORM 4972 to income tax return within 1 year of receiving distribution ****lump-sum distributions receive special tax treatment (10 year forward averaging, Pre 1974 capital gains treatment, or NUA treatment)****

Individual Retirement Arrangements (IRA) Roth IRA's 10 Percent Early Withdrawal Penalty

-generally applies to any portion of a distribution from a Roth that is includable in gross income -also applies to nonqualified distributions, even if not included in gross income -penalty may be avoided is it falls within one of the following exceptions: (see table pg 144)

Stock Bonus Plans Distributions

-generally made in the form of employer stock, but the plan may allow employees choice to receive cash equivalent **if cash is chosen, the deferral of income tax on the stocks appreciated value until the stock is sold is lost (NUA benefit) -taxed on whether the distribution is a lump-sum or an installment: LUMP-SUM: employee is subject to to ordinary income tax in year of distribution based on the securities FMV at time of contribution NET UNREALIZED APPRECIATION (NUA): not taxed at time of distribution but rather treats the stock as deferred long-term capital gains until it is sold INSTALLMENT: employee may only defer recognition of the appreciation on the stock purchased with after-tax employee contributions...everything else will be subject to ordinary income tax rates

Distribution Options Qualified Pre-retirement Survivor Annuity (QPSA)

-generally must also be provided to married participants of pension plans and ps plans -pays a benefit to the surviving spouse if the participant dies before attaining normal retirement age -nonparticipant spouse can also waive the option ****full value of distribution is subject to ordinary income tax AND estate tax****

Distribution Options Qualified Joint and Survivor Annuity (QSJA)

-generally must be provided to married participants of pension plans and profit sharing plans -pays a benefit to individual and spouse for life -at death of first spouse, surviving spouse's payments can range from 50-100% of the benefit -nonparticipant spouse can waive their right to a QSJA, but must be made 90 days before annuity start date

Cash or Deferred Arrangements (CODA) AKA: 401(k) Plans

-generally referred to as a 401(k) plan -a feature that attaches to certain types of qualified plans to create a contributory component -permitted with profit sharing plans and stock bonus plans **allows employees to defer a portion of their salary on a pretax basis to the qualified plan, reducing their current income tax liability** **these employee elective deferral contributions are TAX DEFERRED - meaning the earnings are not subject to income taxation until the employee takes a distribution from the plan**

Taxation of Distributions

-generally subject to Ordinary Income Tax -usually contains both contributions an earnings that have never been subject to income tax -generally, plan custodian withholds 20% from distributions, excluding hardship distributions and loans -ONLY applies to qualified plans and NOT IRA's ROLLOVERS: -into another qualified plan or IRA 1. Direct Rollover -plan trustee distributes acct balance directly to trustee or recipient account -custodian NOT required to withhold 20% 2. Indirect Rollover -distribution to participant with subsequent transfer to another account -custodian issues check for full account balance LESS 20% withholding -Participant MUST reinvest FULL amount (including the 20% withholding) to new plan within 60 days of original distribution

Individual Retirement Arrangements (IRA) Distributions from Traditional IRA's

-generally taxed as ordinary income EXCEPTION: -distributions consisting of a combination of tax-deferred earnings AND return of adjusted basis resulting from either nondeductible IRA contributions or rollovers of contributions from qualified plan balances that included after-tax contributions THEREFORE: -these will consist of a combination of return of Adjusted Basis and ordinary income: **Ratio of AB = (AB before withdrawal) / (FMV of acct at withdrawal)

Employer Stock Options and Stock Plans Stock Appreciation Rights (SAR)

-grant the holder cash in an amount equal to the excess of FMV over the exercise price -a way to achieve a "cashless exercise" -payments received are included in gross income -used to provide cash to the executive for exercise of the ISO or NQSO -usually the number of ISO's or NQSO's is reduced by any exercised SAR's

Individual Retirement Arrangements (IRA) Transfers Incident to Divorce

-if an individual is required to transfer some or all of the assets of his Traditional IRA to a spouse or former spouse, there are two commonly used methods: 1. instruct the custodian to change the name on the account, or 2. direct the trustee of his IRA to transfer the funds directly to the trustee of the other spouse's IRA

Fringe Benefits Nondiscrimination

-if benefit is deemed discriminatory, the exclusion may be lost, resulting in the value to be added to an employees income

Individual Retirement Arrangements (IRA) Prohibited Transactions

-if individual OR beneficiary of an IRA engages in any of the following, the account will cease to be an IRA as of the first day of the current taxable year: 1. selling, exchanging, or leasing of any property to an IRA 2. lending money to an IRA 3. receiving unreasonable compensation for managing IRA 4. pledging IRA as security for loan 5. borrowing money from an IRA, or 6. buying property for personal use with IRA funds **if a "deemed distribution" is made due to a prohibited transaction, the entire balance in the IRA is treated as having been distributed, and the taxpayer is subject to ordinary income tax on the entire balance and is also subject to 10% early withdrawal penalty**

Establishing a Qualified Plan Administration Operating the Plan - Excess Annual Addition

-if more money is contributed to the plan than is allowed under the limits, the excess is called the EXCESS ANNUAL ADDITION -can be corrected if caused by a reasonable error -3 options in correcting the excess contributions: 1. allocate excess to other plan participants 2. hold excess in separate account and allocate in future years 3. make corrective distributions

Minimum Distributions Exception

-if participant is still employed by the plan sponsor of the qualified plan upon attainment of 70 1/2, they do not have to begin taking RMD's until April 1 of the year AFTER they terminate employment **not available for participant who owns more than 5% of the ownership of the plan sponsor in the year they reach 70 1/2**

Establishing a Qualified Plan Administration Carryover of Excess Contributions

-if the employer contributes more to the plan than is permitted by taxable deductions, the excess can be carried over and deducted in future years -can be combined with contributions for those future years -amount carried over may be subject to an excise tax of 10% -excise tax does NOT apply to any contribution made for a self-employed individual to meet the minimum funding requirements in a DB plan

Top Heavy Vesting

-if the qualified defined benefit retirement plan is top heavy, the plan must accelerate vesting to either: 1. 2 to 6 year graduated schedule, or 2. 3 year cliff vesting schedule

Employer Stock Options and Stock Plans Employee Stock Purchase Plans (ESPP)

-intended to benefit a large portion of employees -cannot be discriminatory -gives employees an incentive to buy employer stock by allowing them to purchase at a discounted price -they receive favorable tax treatment for any gains after certain holding period requirements are met -employees can purchase employer stock for a price equal to no less than 85% of a date-determined stock price EMPLOYEE DOLLAR LIMIT: -limited to purchasing $25,000 per year QUALIFYING DISPOSITION: -2 years from date of grant, and -1 year from date of exercise -employees gain on the sale of stock to the extent of the gain on the discount of date of stock purchase = ordinary income -any gain in excess of the ordinary income portion = LTCG DISQUALIFYING DISPOSITION: -if holding periods are NOT met, then -gain attributable to the discount will be W-2 income rather than ordinary income

100 to 1 Ratio Test

-limits the amount of the death benefit of life insurance coverage purchased to 100 times the monthly accrued retirement benefit provided under the same retirement plans DB formula

Establishing a Qualified Plan Investing Plan Assets

-managed by plan sponsor (or firm hired by plan sponsor) or by plan participants -plan sponsors are generally the fiduciary of qualified plans -plan MUST provide participants with at least 3 alternatives in which to invest within the retirement plan -the alternatives must meet all of the following: 1.be diversified 2.have different risk and return characteristics 3.each alternative, when combined with other alternatives, must minimize the overall risk of a participants portfolio

457 Plans Employer Contributions

-matching contributions OR nonelective dederrals -contribution limit of $17,500 includes BOTH EE and ER contributions ****huge difference from 401(k) and 403(b) Plans**** -matching contributions are RARE

Deferred Compensation Plans Rabbi Trust

-may be seized and used for paying creditors in event of company liquidation -treated as being unfunded due to substantial risk of forfeiture

Deferred Compensation Plans Deferred Executive Compensation

-may be used to defer an executives compensation to future yr -usually create income tax benefits for ER and EE: 1. Employee Tax Benefit: -defers compensation to a time he expects to be in a lower bracket -so he pays less in income tax on the compensation 2. Employer Tax Benefit: -IRC limit for public companies deduction for comp paid to any one of the top 5 executives = 1MM, so -if EE elects to defer income, employer could deduct the total compensation

401(k) Plans Participation

-most popular form of election is salary reduction agreement -employee agrees to reduce compensation in exchange for the elective deferral contribution into the plan

Fringe Benefits Educational Assistance Programs

-must be a separately written document providing employees with educational assistance -gross income exclusion is limited to $5250 -Includes: 1. expenses incurred for education including books, or 2. employers provision of education to an employee -does NOT include: 1. employers payment for tools/supplies other than books 2. employers payment for meals, lodging, or transportation, 3. employers payment for education involving sports, games, or hobbies **nondiscrimination requirements apply**

Establishing a Qualified Plan Adopting a Written Plan

-must be detailed in a written plan adopted by the company -MUST be adopted by the last day of year (2011 for example) to take an income tax deduction for contributions on year (2011 for example) MASTER or PROTOTYPE PLANS -majority follow this standard form -these are pre-approved by IRS and simplify process for employers INDIVIDUALLY DESIGNED PLANS -if a company has specific needs -to be qualified, must be permanent and for exclusive benefit of employees and their beneficiaries -determination letters are used when plan is adopted, amended, or terminated -issued by the IRS to plan sponsor -can approve and/or disqualify plan -file Form 5300

Individual Retirement Arrangements (IRA) Timing Contributions

-must be made my the due date of the individual federal income tax return WITHOUT considering extensions (APRIL 15) -must be made in cash, with an exception for rollover contributions **no other type of asset may be contributed to an IRA**

Savings Incentive Match Plans for Employees (SIMPLE's) SIMPLE 401(k) Contributions

-must generally satisfy same requirements of 401(k) and SIMPLE IRA EMPLOYEE CONTRIBUTIONS -salary reduction contributions/ deferrals = $12,000 (2013) -catch up contributions = $2,500 **employer can choose to permit catch up contributions** EMPLOYER CONTRIBUTIONS -MUST make either: 1. Dollar-for-Dollar Match up to 3%, or 2. Nonelective contribution of 2% to each eligible employee -ADP and ACP tests and Top Heavy Rules DO NOT APPLY!

Profit Sharing Plans Allocations / Funding

-must provide a definite predetermined formula for allocating plan contributions to employee accounts -standard method is allocating based on percentage of each employees compensation -benefits HC employees more than NHC employees

Top Heavy Funding Minimum Level of Funding for DB Plans

-must provide non-key employees compensation equal to 2% per the employees years of service multiplied by employees average annual compensation

Deferred Compensation Plans Phantom Stock Plans

-no stock actually changes hands -employer grants fictional shares to employee -the stock is initially valued at time of grant -at retirement or termination, the stock is then valued -employer receives difference of stock value in cash

Top Heavy Funding Minimum Level of Funding for DC Plans

-non-key employees must be provided contribution no less than 3% of their compensation **Exception to the rule when ALL employees receive less than 3%**

Individual Retirement Arrangements (IRA) Savers Credit

-nonrefundable credit -used to encourage low-income taxpayers to establish and maintain savings for retirement -amount of credit is equal to the applicable percentage times the amount of qualified retirement savings contributions (up to $1,000 for single and $2,000 for MFJ)

Employer Stock Options and Stock Plans Restricted Stock Plans

-pays executives with shares of the employers stock -executive is restricted from selling or transferring the stock -employer usually has ability to repurchase the stock during a set number of years TAXATION: -at receipt of the stock, the employee will not recognize any taxable income since there is a substantial risk of forfeiture -HOWEVER, when the substantial risk of forfeiture is eliminated, the employee will realize W-2 Income: -equal to FMV of stock at THAT date -employer has a tax deductible expense for equal amount -the amount recognized by the employee becomes their adjusted basis in the stock

Pension Plan Characteristics Limited Investment in Employer Securities

-pension plan assets may be invested in employer securities, BUT the total value of the employer invested securities must not exceed 10% of the total pension plan assets -Pension Protection Act of 2006: DC pension plans must be offered a choice of at least 3 investment options other than employer securities

Employee Stock Ownership Plans (ESOP's) Diversification

-permitted to hold 100% of the corporate stock in the trust -under IRC, qualified participants may force diversification of their holdings ONLY if they are 55 years of age and have 10 years participation in the ESOP -must be offered diversification election within 90 days after close of each plan year -can elect to diversify up to 25% of the account balance -in final election year, cumulative diversifiable percentage is increased to 50%

Qualification Requirements of Qualified Plans Special Eligibility Rules (an Exception)

-plan may require that an employee complete two years of service to be eligible -If this option is chosen, plan participants are immediately vested in their accrued benefit/ account balance after two years of service **NOT available for 401(k) plans**

Coverage Tests General Safe Harbor Coverage Test

-plan must benefit 70% or more of the eligible employees/NHC employees/nonexcludable employees -if this requirement is met, move on!

Cash Balance Pension Plans (DB) Contributions and Earnings

-plan sponsor develops a formula to fund the hypothetical allocation at the plans establishment -contributions may be integrated with Social Security to produce a higher benefit percentage to those who earn a salary above the SS wage base -plan sponsor is responsible for the investment performance -the benefit will be payable to participant at retirement regardless of the plans true earnings, whether greater or less than the benefit provided by the formula

401(k) Plans Employee Contributions Non Elective Deferrals

-plan sponsors may elect to contribute to ALL eligible employees, whether they elect to defer or not

Taxation of Distributions After Tax Contributions

-plan that consists of employee after tax contributions -these may be rolled over into another qualified plan that accepts after-tax dollars OR into a Traditional IRA -rollover from one qualified plan to another can ONLY be accomplished through a DIRECT ROLLOVER **After Tax Dollars are NOT permitted to be rolled over from an IRA to a qualified plan**

Simplified Employee Pensions (SEP's) General

-practical retirement plan alternative -can be used by small business owners and sole proprietors -easier to establish -little to no filing requirements -use IRA's as the receptacle for contributions, so no trust accounting needed -contributions limited to lesser of 25% of comp or $51,000 (2013)

Establishing a Qualified Plan Prohibited Transactions - Actions

-prohibited transactions generally include actions by a disqualified person that could have adverse consequences to the plan: 1. transfer of plan income or assets for benefit of a disqualified person 2. self-dealing by a fiduciary 3. receipt of consideration by a fiduciary for his own account when working with a party dealing with the plan (attorney, accountant) 4. selling, exchanging, leasing, buying, and/or lending between a disqualified person and the plan

Excess Method DB PLANS and DC PLANS

-provides an increased percentage benefit to participants whose earnings exceed an average of the SS wage bases over the 35-year period prior to the individuals SS retirement age. -average is called "covered compensation limit" -increased percentage only applies to income that exceeds the covered compensation limit, limited to lesser of: 1. 0.75% per year of service 2. benefit percentage for earnings below covered comp limt per year of service -only applies up to 35 years, ***so the max increase in benefits = (0.75% x 35) = 26.25%***

Vesting Graduated Vesting Schedule

-provides employee full rights to a certain percentage of plans assets after a certain number of years, then an additional percentage after additional years of service **see schedule**

Vesting Cliff Vesting Schedule

-provides employee full rights to the plans assets immediately upon the passage of certain number of years, usually 3 years **see schedule**

Deferred Compensation Plans Wage Replacement Ratio

-purpose of the Deferred Compensation plan is to increase the executives wage replacement ratio -since employees who earn more than the covered compensation limit (255,000 for 2013) cannot attain a significant wage component replacement ratio from qualified plans, the Deferred Compensation plan allows for alternative

Failing ADP or ACP Tests

-puts the plan at risk for disqualification -corrective action must be taken and there are several options: 1. Corrective Distributions 2. Re-characterization 3. Qualified Nonelective Contributions (QNEC) 4. Qualified Matching Contributions (QMC)

Fringe Benefits Qualified Employee Discounts

-relates to property or services offered to an employers customers in the ordinary course of business -limited to lesser of: 1. 20% of the price at which the service is offered, or 2. the employers gross profit % multiplied by the price the employer charges non-employee customers (for merchandise) **Nondiscrimination requirements apply*

Salary Reduction Simplified Employee Pensions (SARSEP's) General

-replaced by SIMPLE plans -not permitted to be established after 1996 -allowed employees to defer portion of salary into a SEP-IRA -very similar to 401(k) plans -but easier to establish and minimal reporting/testing requirements

Savings Incentive Match Plans for Employees (SIMPLE's)

-retirement plans for small employers -NOT required meet all of the nondiscrimination rules applicable to qualified retirement plans ESTABLISHMENT: -companies who employee 100 or fewer employees who earned at least $5,000 of compensation from the employer -other plans NOT allowed** -may not establish if contributes to a DC plan for its employees, or -if employees accrue a benefit from a DB plan, or -if employer contributes to a SEP or 403(b) plan ELIGIBILITY: -earned at least $5,000 in compensation from employer in any of last 2 years -expected to earn $5,000 in current year VESTING: -all contributions are fully and immediately vested

Employer Stock Options and Stock Plans Incentive Stock Options (ISO's)

-right to purchase employers common stock at a stated exercise price -if IRC Section 422 requirements are met, no taxable income recognized by employee *IRC Section 422 -exercise price is equal to FMV of stock when granted -At the date of exercise, employee will NOT be subject to ordinary income tax on the difference between the FMV and the exercise price - "BARGAIN ELEMENT" -When the employee sells the stock after the option has been exercised, the difference between the sales price of the stock and the original exercise price is considered LTCG (assuming holding period requirements are met) HOLDING REQUIREMENTS: -a qualified sale requires: 1. waiting until 2 years from date stock was granted, and 2. 1 year from the date the stock was exercised

Minimum Distributions Effect of the Participants Death on Minimum Distributions Death Before RMD's

-rules depend on the designated beneficiary: SPOUSE: -can receive distributions over the participants remaining single-life expectancy, recalculated each year -distributions must begin in the year which the participant would have attained age 70 1/2 -BUT, if spouse is sole beneficiary, they can roll the plan balance over and wait until they attain 70 1/2 -OR, they can elect to distribute the entire account balance within 5 years of the owners death NON-SPOUSE: -option 1: first distribution period is the remaining single, nonrecalculated life expectancy of the designated beneficiary -option 2: elect to distribute the entire account balance within 5 years after the year of the owner's death NO BENEFICIARY: -must be named by December 31 of the yr following death -if not, the account must be fully distributed before the end of the 5th yr following death

Salary Reduction Simplified Employee Pensions (SARSEP's) Elective Deferral Limt

-same as 401(k) - $17,500 -deferral limit applies to the aggregate elective deferrals the employee makes for the year to a SARSEP AND any of the following: 1. 401(k) 2. 403(b) 3. SIMPLE IRA **NO DOUBLE DIPPING** -if the employer makes nonelective contributions to the SARSEP, the combined employee and employer contributions cannot exceed the lesser of: 1. 25% of employees compensation, or 2. $51,000 (2013)

Establishing a Qualified Plan Administration Operating the Plan - Deductions for Self-Employed

-self employed individuals may adopt almost any qualified plan (except ESOP or stock bonus plans) -plan is referred to as a Keogh Plan -simply a qualified plan for self-employed person -reduces contributions that can be made on behalf of the individual CALCULATION OF KEOGH PLANS: -special comp needed to calculate max contribution and tax deduction -self employed individuals do not have W-2's -SO, IRC uses "earned income" to denote amount of comp earned -earned income is net earnings less 1/2 self-employment tax less the deduction for contributions to the qualified plan **see index card for formula**

Fringe Benefits Dependent Care Assistance

-services must be provided for one of the following persons: 1. dependent children under 13 2. dependent children who are physically or mentally incapable of caring for themselves, or 3. employees spouse if they are physically/mentally incapable -services must allow an employee to work -employee may exclude the lesser of : 1. $5,000 annually, or 2. earned income of the employee or her spouse **Nondiscrimination requirements apply**

403(b) Plans or Tax Sheltered Annuities (TSA's) Contributions

-similar to 401(k), SARSEP's, and 457's -all employee contributions are 100% vested PERMISSIBLE (BUT NOT REQUIRED) CONTRIBUTIONS: -employee elective deferrals -nonelective contributions -after-tax contributions, and -any combination of the above MAX CONTRIBUTION: $17,500 (2013)

Qualified Matching Contributions (QMC)

-similar to the QNEC, where plan sponsor makes contribution to employees to increase the ADP of NHC -HOWEVER: QMC is only made to those employees who chose to participate/elected to defer during the plan yr -Also 100% vested when contributed

Target Benefit Pension Plans

-special type of money purchase pension plan -CONTRIBUTION: based on benefit that will be paid at retirement -ER' promises contribution based on original actuarial assumptions -ACTUARY: required at plan establishment but NOT annually **a form of money purchase pension plans, therefore EGTRRA 2001 has eliminated its usefulness** **Employers are using age-weighted profit sharing plans instead**

Employee Stock Ownership Plans (ESOP's) Key Characteristics

-special type of stock bonus plan that rewards with both ownership in the corporation and provides substantial tax advantages -controlled through a trust -sponsor company receives tax deductions for contributions of stock from the corp that is later distributed to separate accounts for participating employees **trust may borrow money from bank or lender to purchase the stock. corporation usually repays the loan through tax deductible contributions to the ESOP. -interest and principal repayments for loan are deductible **must follow all other rules that apply to qualified plans (vesting, participation, eligibility, coverage, etc)

Qualification Requirements of Qualified Plans Eligibility

-standard eligibility requirements -completing period of service beyond the later of: -reaching the age of 21, or -completion of one year of service (12mo w/min 1000hrs) -plan entrance date -employer may require entering at next entrance date after eligibility is met, not to exceed 6 month waiting period -So, most plans establish two plan entrance dates annually

Fringe Benefits Taxation

-taxable as wages UNLESS, -a specific provision of the IRC excludes it, OR -the employee pays fair value for the benefit

Special Taxation for Lump Sum Distributions Net Unrealized Appreciation (NUA) General

-taxpayers who receive a lump-sum distribution of employer securities may benefit using special tax treatment on the distribution -allows (the more favorable) capital gains treatment instead of ordinary income tax on the NUA portion of the distribution -also allows deferral of recognition of the gain on NUA portion until the employer securities are sold -INHERITED SECURITIES with NUA from QUALIFIED PLAN DIST: -inherited stock will receive adjustment of basis to FMV at death date less any unrecognized NUA -tax will be paid when the assets are sold by heirs

Corrective Distributions

-the easiest and cheapest solution -reduces the elective deferrals of the HC employees by returning the funds to the HC's -any earnings on these contributions must also be returned -MUST be completed within 2.5 months after the end of the plan year -otherwise 10% excise tax is imposed on the amount that should have been distributed

Actual Deferral Percentage Test (ADP) Test 2

-the excess of the ADP for the group of HC employees cannot be greater than 2% points more than all other employees -the ADP for the group of HC employees is not more than the ADP of all other employees multiplied by 2 (THE 200% / 2% TEST)

Cash Balance Pension Plans (DB) Younger/Older

-the formula is based on the number of years the participant is employed by the plan sponsor -younger participants have more years of contributions and earnings so this plan is more beneficial for younger participants.

Deferred Compensation Plans Unfunded Promise to Pay

-this arrangement meets the standards of substantial risk of forfeiture THEREFORE WILL MEET OBJECTIVE OF TAX DEFERRAL -However, employee is at risk of not being paid

Cash Balance Pension Plans (DB) Funding Formulas

-to determine the retirement benefit provided, the plans funding and allocation formula must be established. -the most common formulas used are: 1. Flat Amount Formula 2. Flat Percentage Formula 3. Unit Credit Formula **See Chart**

Establishing a Qualified Plan Prohibited Transactions

-transactions between the plan and a disqualified person that are prohibited by law -A disqualified person is any of the following: 1. A fiduciary of the plan 2. A person providing services to the plan 3. An employer, any of whose employees are covered 4. An employee organization, any of whose members are covered 5. Any direct or indirect owner of 50% or more of any of the following: -combine voting power of all classes of stock entitled to vote, or -total value of shares of all stock of a corp described in (3) or (4) -capital/ profit interest of a partnership described in (3) or (4) -beneficial interest of a trust that is described in (3) or (4) 6. Family member of an individual in (1), (2), (3), or (5)

Profit Sharing Plans Age Based Profit Sharing Plans

-use both age and compensation as the basis for allocating contributions to employees accounts -chosen when the key employees are older than most employees and company wants to tilt contribution towards the older employees

Employer Stock Options and Stock Plans Stock Options

-usually granted to select employees for purchase of stock of the employer at a future date -OPTION PRICE: -usually equal to the FMV at the date of issuance -is a form of deferred compensation if stock price increases -options granted at FMV are not subject to rule of IRC 409A -options granted at discount to FMV, are subject to tax rules of IRC 409A 2 TYPES: 1. Incentive Stock Options (ISO's) 2. Nonqualified Stock Options (NQSO's)

Repayment of Loans

-usually repaid through payroll deductions and must generally be repaid within 5 years -5 year rule does not apply to purchases of residence -loans are also required to be repaid in a specific manner over the repayment period -substantially level amortization is required over term -Failure to repay within plans term will result in the loan being treated as a distribution as of the date of the loan -Impact when employee is terminated: -most plans require that loans be repaid upon termination of employment, but not required under law -plans may require that the loan balance reduce the amount of a direct rollover distribution

Fringe Benefits Adoption Assistance

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Fringe Benefits Awards and Prizes

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Fringe Benefits De Minimis Fringe Benefits

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Fringe Benefits Qualified Moving Expense Reimbursement

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Fringe Benefits Qualified Transportation and Parking

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Fringe Benefits Qualified Tuition Reduction Plans

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Fringe Benefits Working Condition Fringe Benefits

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457 Plans ERISA Applicability

1. "public 457(b) plans -sponsore by governmental employers -required to be funded through a trust holding all assets and income -employer not required to make available to all employees -can select which employees may participate 2. "private 457(b) plans" -tax-exempt employers -ERISA limits participation to a select group of HC EE's or mgmt -this is because funds are NOT placed in a trust -vulnerable to employers creditors

403(b) Plans or Tax Sheltered Annuities (TSA's) Catch Up Contributions (different than most)

1. Age 50 Catch Up Provision (New Rule) -can be made if age 50 by end of year, and -max amount of elective deferrals have been made to EE's account have been made for the year **if both conditions are met, catch up contributions equal lesser of: -$5,500 (2013), or -includable compensation minus other elective deferrals for the yr 2.15 year Rule Exception (Original Rule) -applies to employees 50 and over who have worked w/ same employer for at least 15 years -limit to elective deferrals is then increased by lesser of: A. $3,000 B. $15,000 reduced by increases to general limit in previous yrs C. $5,000 times number of years of service, subtracted from total elective deferrals made by employer for earlier years **to qualify for 15 year catch up, business must be a Health, Education, or Religious Organization (HER) **(1) and (2) can be used simultaneously in certain circumstances**

Trade-offs of Qualified Plans

1. Cost -Operational -Contributions 2. Compliance -Vesting, Funding, Eligibility, Nondiscrimination testing, IRS reporting, and employee disclosure

Advantages of Qualified Plans (Employer)

1. Current Income Tax Deductions 2. Payroll Tax Savings

Pension Plan Types

1. Defined Benefit Pension Plan (DB) 2. Cash Balance Pension Plan (DB) 3. Money Purchase Pension Plan (DC) 4. Target Benefit Pension Plan (DC)

Deferred Compensation Plans Examples of types

1. Golden Handshakes -severance package, designed to encourage early retirement 2. Golden Parachutes -substantial payments made to executives being terminated due to changes in corporate ownership 3. Golden Handcuffs -designed to keep an employee with the company

Advantages of Qualified Plans (Employee)

1. Income Tax Deferrals 2. Payroll Tax Savings 3. Federally Provide Creditor Asset Protection

Types of Profit Sharing Plans

1. Profit Sharing Plans 2. Stock Bonus Plans 3. Employee Stock Ownership Plans 4. 401(k) Plans 5. Thrift Plans 6. Age-Based Profit Sharing Plans 7. New Comparability Plans

Deferred Compensation Plans Types of Nonqualified Deferred Comp Plans

1. Salary Reduction Plans -employees elect to reduce their current salary and defer it until future years 2. Salary Continuation Plans -provide benefits after retirement on an ongoing basis **commonly used by professional athletes with their signing bonuses

Top Heavy Plans 2 Definitions

1. When the PV of the total accrued benefits of key employees in the defined benefit plan exceeds 60% of the PV of total accrued benefits for all employees 2. When the aggregate of the account balances of key employees in the plan exceeds 60% of all accounts of all employees **Think > 60% = TOP HEAVY**

Cash Balance Pension Plans (DB) Requirements for Cash Balance Conversions

1. a participants accrued benefit must be equal to or greater than that of any "similarly situated", younger participant. -similarly situated - identical in period of service, compensation, position, date of hire, work history, etc. - EXCEPT for age 2. the interest rate used to determine the interest credit on the account balance must NOT be greater than a market rate of return 3. plan must provide 100% vesting after three years of service ***popular choice for employers to get rid of old expensive DB plans***

Employer Stock Options and Stock Plans Incentive Stock Options (ISO's) - REQUIREMENTS

1. can only be granted to an EE of the corp issuing the ISO 2. ISO plan must be approved by the stockholders of the corp 3. must be granted within 10 years of the ISO plan date 4. exercise of ISO is limited to a 10 year period (5 yr for more than 10% owners) 5. at the date of ISO grant, exercise price must be greater than OR equal to the FMV of the stock 6. ISO cannot be transferred EXCEPT at death 7. owner of more than 10% of a corp cannot be given an ISO unless the exercise price is 110% of FMV at date of grant AND option term must be less than 5 years 8. aggregate FMV of ISO grants cannot exceed $100,000 per year per executive 9. to qualify, executive must not dispose the stock within two years of the grant of the ISO or within one year of exercise 10. executive must ben an employee of the corp continuously from date of grant until at least 3 months prior to exercise

Deferred Compensation Plans Advantages to Employer

1. cash outflows are deferred until the future 2. employer will save on payroll taxes 3. employer can discriminate and provide benefits exclusively

Distributions prior to 59 1/2 4 Additional Ways to Avoid 10% Penalty

1. government provides an (E)xception -if distributions are dividends paid within 90 days of plan year end from an ESOP 2. distributions made to pay certain unpaid income (T)axes due to a tax levy on the plan 3. certain (M)edical expenses paid during the year -greater than 7.5% of participants adjusted gross income 4. distributions pursuant to a (Q)DRO **think Eat The Mighty Quail**

Net Unrealized Appreciation (NUA) Issues

1. must qualifiy for lump sum distribution treatment 2. NUA portion must be relatively high relative to cost basis portion. otherwise you may be paying too much immediate ordinary income tax for the benefit of future LTCG treatment 3. whether the stock is to be held by the recipient...if so, investment risks of holding a large concentration of a single security must be considered 4. cash flow considerations -determine the impact of holding the securities vs selling

How is the ADP Calculated? (steps)

1. separate eligible employees into HC and NHC groups 2. calculate Actual Elective Deferral Ratio (ADR) for eligible employees -(ELECTIVE DEFERRAL CONTRIBUTION) / (EE's COMPENSATION) -calculate for EACH eligible employee 3. Once ADR is determined, the amount of ADP is calculated by averaging the ADR's for the employees within each group (HC or NHC) 4. Plug the ADP for the NHC into the "ADP Schedule" and calculate the max ADP allowed for the HC 5. Compare the "desired/required" ADP to your actual ADP. -If the HC are higher, employer FAILED the ADP test

Qualified Plan Selection Important Considerations

1.BUSINESS OBJECTIVES -benefit owners, all employees, select employees, etc. 2.EMPLOYEE CENSUS -identifies age, compensation, number of years, etc of each EE -helps identify which employees will benefit w/ various plans -review of turnover also helps determine appropriate vesting 3.CASH FLOW CONSIDERATIONS 4.ADMINISTRATIVE COSTS 5.OWNER'S BUSINESS AND PERSONAL OBJECTIVES -small business owners typically want to reduce current taxes -also want to save for their own financial future 6.PLAN SELECTION APPLICATION

Savings Incentive Match Plans for Employees (SIMPLE's) Types

1.SIMPLE IRA: -uses an IRA as funding vehicle -employees contribute through a salary deferral -REQUIRE employer match OR provide nonelective contributions to all employees who are eligible -all contributions MUST be made to a SIMPLE IRA 2.SIMPLE 401(k) -uses a 401(k) as funding vehicle -plan loans are permitted (unlike SIMPLE IRA) -must be maintained by an eligible employer -must satisfy contribution requirements, eligibility requirements, and vesting requirements -NOT subject to nondiscrimination requirements or top-heavy restrictions -GREATER administrative requirements (compared to SIMPLE IRA)

Individual Retirement Arrangements (IRA) Contribution Limits (both Trad and ROTH)

ANNUAL CONTRIBUTION LIMIT -individuals under 50 -lesser of, $5,500 or earned income CATCH UP CONTRIBUTIONS -attain age 50 before end of year -$1,000 catch up limit ATTAINMENT OF AGE 70 1/2 -Traditional IRA's CANNOT contribute after 70 1/2 -ROTH IRA's w/ sufficient earned income CAN contribute after 70 1/2 EXCESS CONTRIBUTIONS -subject to a 6% excise tax each year the excess contributions remain

Distribution Options Profit Sharing Plans

At termination, participant can take distributions as: 1. Ordinary Taxable Income 2. Annuitize Value of Account (if plan permits) 3. Roll assets into IRA or other qualified plan -NOT required to offer survivor benefits (unlike pension plans)

Employee Stock Ownership Plans (ESOP's) Contributions

CONTRIBUTIONS: -employer contributions are deductible by ER -subject to 25% limit of covered compensation **both are just like any other profit sharing plan** -if employers stock is obtained by loan (leveraged ESOP), then the ER is allowed to deduct all interest paid on the loan over and above the 25% deduction. The interest deduction is unlimited

Simplified Employee Pensions (SEP's) Eligibility and Coverage

COVERAGE: -attainment of age 21 or older -performance of services for 3 of last 5 years, and -received compensation of at least $550 (2012) during the year -based on this definition, even part-time employees must be covered -may be used if a company has a high turnover rate, to exclude employees who do not remain with the company

Establishing a Qualified Plan Administration Operating the Plan

COVERING ELIGIBLE EMPLOYEES: -requires annual coverage testing to ensure the rank-and-file employees (NHC) are sufficiently covered MAKING APPROPRIATE CONT's; MIN FUNDING REQUIREMENT -applies to pension plans -must satisfy min requirements as determined by actuary for the yr CONTRIBUTIONS IN GENERAL -company can make deductible contributions for tax yr up to the date of their tax return (plus extensions) -employer generally applies contributions in the year they are paid -BUT, they may apply the payment to the previous yr if 4 requirements are met: 1. contributions are made by due date of tax return for previous yr 2. plan was established by the end of previous yr 3. plan treats contributions as though it had received them on last day of previous yr 4. company specifies in writing that contributions apply to previous year OR company takes a deduction for the previous yr -self-employed individuals can only make contributions for themselves if they had positive net earnings -catch up contributions are NOT subject to annual DC limit

401(k) Plans Employee Contributions

Contributions can be made as any of the following: 1. Employee Elective Deferrals (either traditional or Roth) 2. Employee After Tax Contributions 3. Employer Matching Contributions 4. Employer Profit Sharing Contributions 5. Employer Contributions used to solve an ADP/ACP problem

DB Pension Plans vs. DC Pension Plans Calculation of Benefit - Accrued Benefit ***Important***

DB PLANS: an employee who terminates participation from the plan before full retirement age will be entitled to a benefit payable from the plan equal to the retirement benefit earned to date -is the actuarial equivalent that would be paid if they had waited until retirement DC PLANS: participant has an accrued benefit equal to the account balance of the plan consisting of any combination of employer and employee contributions plus the earnings on the respective contributions reduced by any nonvested amounts

DB Pension Plans vs. DC Pension Plans Calculation of Benefit - Account Balance ***Important***

DB PLANS: does not apply DC PLANS: the participants account balance is the sum of the employer contributions and the employee contributions plus/ minus any investment earnings/losses

DB Pension Plans vs. DC Pension Plans Credit for Prior Service

DB PLANS: employers can elect to give employees credit for their service -must be nondiscriminatory DC PLANS: do not qualify

DB Pension Plans vs. DC Pension Plans Allocation of Forfeitures

DB PLANS: forfeited funds can ONLY be used to reduce future plan costs for the employer DC PLANS: plan sponsor can choose to utilize forfeitures in two ways: 1. Reduce future plan costs 2. Allocate to remaining participants in nondiscriminatory manner

DB Pension Plans vs. DC Pension Plans Commingled vs Separate Accounts

DB PLANS: use commingled investment accounts but send individual statements to participants DC PLANS: use separate investment accounts

Pension Plan Characteristics Mandatory Funding

DEFINED BENEFIT: ensures the employer only deducts (shelters) the amount necessary to fund the future benefit DEFINED CONTRIBUTION: requires the plan sponsor to fund the plan annually with an amount as defined in the plan document

Employer Stock Options and Stock Plans Incentive Stock Options (ISO's) Disqualifying Disposition and Cashless Exercise

DISQUALIFYING DISPOSITION: -the stock is disposed of before either 2 years from date of grant or 1 year from date of exercise -favorable tax treatment is LOST -any gain on sale of stock attributable to difference of exercise price and FMV on date of exercise is taxed as ordinary income -any gain in excess of the difference between the exercise price and the FMV at the date of exercise will be either STCG or LTCG, depending on holding period CASHLESS EXERCISE: -a 3rd party lender lends the executive the cash needed to exercise the option -the 3rd party is immediately repaid with the proceeds of the sale of stock **automatically triggers (at least a partially) disqualifying disposition since the holding period requirements are not met

403(b) Plans or Tax Sheltered Annuities (TSA's) Minimum Distribution Requirements and Taxation

DISTRIBUTION REQUIREMENTS: -same as IRA's and qualified plans -required by April 1st of year they turn 70 1/2 TAXATION: -distributions are taxed as ordinary income -however, employee-participants return of adjusted basis is not taxed

Employee Stock Ownership Plans (ESOP's) Distributions

DISTRIBUTIONS: -subject to minimum distribution requirements -HOWEVER, plan participants can elect to to receive substantial equal periodic payments not less than once/year after they quit -cannot exceed 5 years -UNLESS balance is greater than $1,015,000 (2012) -THEN the period can be extended 1 year for every 200K -UP to 10 years **any distribution that is NOT a lump-sum will NOT be eligible for NUA treatment and will be taxed as ordinary income**

457 Plans Distributions and Rollovers

DISTRIBUTIONS: -included as ordinary income in the year they are made -59 1/2 rule does NOT apply and NO 10% penalty for Public 457's ****huge difference**** -Private 457's face same rules (59 1/2 and 10% penalty) -withdrawals MUST begin by 70 1/2 ROLLOVERS: -same rules as for qualified plans -Public 457's: -can roll into a new employers 403(b), 401(k), or 457(b) if accepted -otherwise, can roll into an IRA -Private 457's -can roll ONLY into another tax-exempt organizations 457 plan -CANT be rolled into an IRA or any other employer sponsored plan

Distribution Options Pension Plans

EARLY RETIREMENT: -defined as before normal retirement age -3 distribution options: 1. lump-sum 2. roll assets into an IRA or other qualified plan 3. leave funds in pension plan -if plans vested balance is less than 5K, plan may distribute balance to participant (forced payout) -regulations require forced payouts between 1-5K be directly rolled into an IRA if no timely election is made NORMAL RETIREMENT: -plan will distribute benefits through an annuity -typically through single life annuity for single persons -qualified joint and survivor annuity for married indiv ROLLOVER: -can roll into an IRA or other qualified plan -as long as participant is no required to take RMD -may lose favorable tax treatment if rolled over (NUA, 10 yr forward averaging, or pre 74 capital gains) ****qualified pension distributions are subject to ordinary income tax****

Distributions prior to 59 1/2 Early Withdrawal Penalty

EARLY WITHDRAWAL PENALTY: -generally subject to a 10% penalty **see flashcard for exceptions**

Individual Retirement Arrangements (IRA) Earned Income

EARNED INCOME - individual IRA -any type of compensation where some level of service is performed -alimony received by the taxpayer EARNED INCOME - spousal IRA -individuals who do not have any earned income can still est an IRA if their spouse has sufficient earned income -generally referred to as a "SPOUSAL IRA" -necessary earned income is equal to the total amount to be contributed to both IRA's

Profit Sharing Plans Vesting

EITHER: 1. Standard 3-year Cliff, or 2. 2-to-6 year graduated vesting UNLESS: -the plan requires a 2 year eligibility/waiting period THEN: -all contributions must be 100% Vested after the waiting period has expired

403(b) Plans or Tax Sheltered Annuities (TSA's) Eligiblity

ELIGIBLE EMPLOYEES: 1.tax-exempt organizations -2.involved in day-to-day operations of public school 3.cooperative hospital service organizations 4.ministers who meet the following criteria: -employed by section 501(c)(3) organizations, or -self employed, or -not employed by section 501(c)(3), but function as ministers in day-to-day operations with their employer EDUCATIONAL INSTITUTIONS: -if immediate vesting, may require: 1. max waiting per of 2 years and attainment of age 21, or 2. max waiting per of 1 year and attainment of age 26 -Exception: -if NO immediate vesting, max waiting per is 1 year and age of 21

Savings Incentive Match Plans for Employees (SIMPLE's) SIMPLE IRA Contributions

EMPLOYEE ELECTIVE DEFERRAL: -only contributions allowed: 1. employee elective deferrals, and 2. required employer matching contributions (nonelective contr) -employees max contributions = $12,000 (2013) -catch up contributions = $2,500 EMPLOYER CONTRIBUTIONS: -either matching contributions OR nonelective contributions to ALL eligible employees 1. Employer Matching Contributions -dollar-for dollar up to 3% of EE compensation -can elect to reduce the 3% requirement if ALL requirements are met A. limit is reduced to min of 1% B. not reduced for more than 2 years out of 5 yr period C. employees are notified of reduced limit 2. Nonelective Employer Contributions -MUST be made if they dont want to make matching contributions -must be 2% of each eligible employees compensation (up to limit)

Establishing a Qualified Plan Administration Operating the Plan - Taking Deductions

EMPLOYER DEDUCTION: -can deduct contributions made to qualified plan, include his own -subject to certain limitations -deduction CANNOT exceed 25% of compensation paid -deductions for contributions to a Defined Benefit Plan: -based on actuarial computations -if employer maintains BOTH a DC and DB plan: -funding limit is combined -max deductible amount is greater of: 1. 25% of aggregate covered compensation, or 2. required min funding standard of DB plan ****employee elective deferrals do NOT count against the plan limit****

Establishing a Qualified Plan ERISA and Filing Requirements

ERISA (employee retirement income security act of 1974) -Key obligation it imposes: Fiduciary Responsibility PERIODIC PENSION BENEFIT STATEMENTS -administrator of a DC plan is required to provide a benefit statement: 1. Quarterly, to participant/beneficiary who can direct investments 2. Annually, any other participant/beneficiary w/ an acct in the plan 3. One time request during 12 mo period, other beneficiaries -MUST be written in a manner that can be understood by avg participant (DB and DC) DEPARTMENT OF LABOR -enforces rules of conduct of the plan managers, investment of plan assets, reporting and disclosures, enforcement of fiduciary provisions, and workers benefit rights

401(k) Plans Establishment

Entities permitted to establishing 401(k) plans: 1. Corporations 2. Partnerships 3. LLC's 4. Proprietorship 5. Tax Exempt Entities

Individual Retirement Arrangements (IRA) IRA Rollovers

FROM QUALIFIED PLANS: -when individual terminates employment, they may roll assets into IRA **this is typically referred to as a "conduit" IRA or "IRA Rollover" -the funds in the "conduit IRA" are allowed to be rolled back into another qualified plan in the future -PPA 2006, direct rollovers from qualified plans to Roth IRA's allowed after 2007 TO QUALIFIED PLANS: -permissible to roll an IRA into a qualified plan, 403(b), or 457 plan -However, these plans are not required to accept such rollovers

Minimum Distributions

GENERAL: -required to take minimum distributions at 70 1/2 -if not, a 50% tax is levied on the participant for failure to take RMD -penalty is on amount equal to RMD less any distribution that was taken APPLY TO: -assets in qualified plans, IRA, 403(b), SEP, SIMPLE, or 457 plans ***do NOT apply to Roth IRA's, BUT they do apply to Roth accounts in a 401(k) or 403(b) plan*** DISTRIBUTION: -first distribution must be taken by April 1 of the year following attainment of age 70 1/2 -each year after, RMD must be taken before Dec 31 of the tax year -if participant delays taking first RMD until April 1 after attainment of 70 1/2, he MUST ALSO take second RMD by Dec 31 of the same yr

403(b) Plans or Tax Sheltered Annuities (TSA's) Investment Choices, Loans, Distributions, and Rollovers

INVESTMENT CHOICES - LIMITED!! -ONLY allows insurance annuity contracts or mutual funds LOANS -are allowed and subject to same restrictions applicable to qualified plans DISTRIBUTIONS -only after one of the following events have occured: 1. 59 1/2 2. employee separated from service 3. employee dies 4. employee becomes disabled 5. employee endures severe hardship ROLLOVERS -can be rolled over (tax free) into a qualified plan, Trad IRA, or another 403(b) plan, or a Roth IRA (as of 2007)

Employer Stock Options and Stock Plans Gifting ISO's and NQSO's

ISO's: -lifetime transfers of UNEXERCISED options are not permitted -the stock must be transferred ONLY AFTER exercise and AFTER the holding period requirement is met NQSO's: -can be gifted if plan permits transfer of ownership -NO immediate income tax consequences on transfer -when the DONEE exercises the gift (the option), the employee will have W-2 income for the difference of the exercise price and the FMV -Donee's basis will be equal to the FMV at exercise

403(b) Plans or Tax Sheltered Annuities (TSA's) Employer Contributions

LIMIT ON ANNUAL ADDITIONS: -total contributions are comprised of elective deferrals, nonelective contributions, and after-tax contributions -MAX is lesser of 1. $51,000 (2013), or 2. 100% of covered employee comp for most recent yr of service

457 Plans Employee Contributions

LIMITS: -lesser of: 1. $17,00 (2013), or 2. up to 100% of includable compensation *** (2) must be less than the employee elective deferral limit*** CATCH UP CONTRIBUTIONS: 1. Age 50 Catch-Up for Governmental Plans (New Rule) -$5,500 additional contribution **NOT available to Private 457(b) Plans 2. Special Final 3-Year Catch Up (Original Rule) -applies to BOTH Public and Private 457 Plans -employee can contribute additional amount equal to elective deferral limit ($17,500) -MUST be 3 years prior to normal retirement age -employers are NOT required to offer this option -CANNOT be used simultaneously with (1)

401(k) Plans Eligibility

Look into further**

Fringe Benefits Meals and Lodging by Employer to Employee

MEALS: -employee may exclude from gross income the value of all meals provided to him, his spouse, or any of his dependents -must meet 2 requirements: 1. meals are furnished for convenience of employer, and 2. meals are furnished on employers business premises -IRS specifies what is NOT considered "for convenience of ER" 1. any meal provided to promote the morale or goodwill o the employee or to attract prospective employees 2. employer charges employee for meal and the employee has a choice of accepting the meal and paying for it LODGING: -IRC provides an exclusion from employees gross income for value of lodging is ALL qualifications are met: 1. lodging is furnished on employers business premises 2. lodging is furnished for the convenience of employer, and 3. employee is required to accept the lodging as a condition of employment **if the above are NOT met, the employee must include the value of the lodging in gross income

Deferred Compensation Plans Reasons Used

MOST OFTEN USED TO: 1. increase executives wage replacement ratio 2. defer the executive compensation 3. in lieu of qualified plans

Individual Retirement Arrangements (IRA) Deductibility of IRA Contributions

NO QUALIFIED OR OTHER RETIREMENT PLAN -contributions are fully deductible ACTIVE PARTICIPANT OF QUALIFIED/OTHER RETIREMENT PLANS A. Inividuals or MFJ-income test used to determine deductibility of IRA contributions 1. AGI greater than upper limit of phaseout -NO deduction permitted 2. AGI less than lower limit of phaseout -FULL deduction permitted 3. AGI between the limits -Ratably phased out B. MFS -phased out between AGI of $0 and $10,000 -between the ranges, calculate deductible amount using Calculation of IRA Deduction C. Solo Spouse Participant -partially phased out for married individuals w/ AGI beginning at $173K and completely phased out at $183K

Special Taxation for Lump Sum Distributions Net Unrealized Appreciation (NUA)

NUA FORMULA: -the portion of the distribution attributable to the cost of employer securities is taxed as ordinary income in the year of the distribution -this value is the participants adjusted basis in ER securities -at the date of sale of ER securities, participant must recognize the long term capital gain that was deferred since the date of distribution -gains are treated as STCG/LTCG depending on holding period

Stock Bonus Plans Unique Features

PORTFOLIO DIVERSIFICATION: -Pension Protection Act of 2006 requires plan participants to be allowed to diversify pretax deferrals, after tax contributions, and employer contributions that have bee invested in employer securities VOTING RIGHTS: -participants must has pass through voting rights on employer stock that is held by the plan on their behalf -this means the participant can vote the shares allocated to his acct

Actual Deferral Percentage Test (ADP) Prior Year Method vs. Current Year Method

PRIOR YEAR METHOD -calculates the maximum permissible deferral for HC employees -uses the NHC employees ADP from the previous year CURRENT YEAR METHOD -provides greater deferral percentage to the HC -provides more flexibility to plan sponsor in the even of ADP failures

Individual Retirement Arrangements (IRA) Investments

PROHIBITED: 1. Life Insurance 2. Collectibles -if either is purchased within an IRA, it is deemed as distributions and the value of the purchase is subject to tax and/or penalty EXCEPTION: -for collections; US minted coins, and investments in gold, silver, or platinum are permitted

Actual Deferral Percentage Test (ADP) General

PURPOSE: designed to test the elective deferrals of employees to ensure that NHC employees are not being financially discriminated against GOAL: either limit HC employees from deferring significantly more than NHC employees OR raise amount received by NHC employees TEST: IRC states the ADP for HC employees is limited by the ADP for all other employees and must meet one of two tests (See next cards)

Establishing a Qualified Plan Terminating a Qualified Plan

REASONS: -tax law changes -financial costs -not meeting needs WHAT HAPPENS: -all plan participants become fully vested in their benefits -plan cannot be established as a temporary plan WHY: -so that owners wont create plans that benefit key EE's and then terminate plan before NHC EE's receive benefits

Individual Retirement Arrangements (IRA) Distributions from Traditional IRA's RMD's

RMD rules require that distributions begin by April 1st of the year following the year the owner turns 70 1/2 -required distributions not taken are subject to a 50% excise tax ****same as qualified plans****

Minimum Distributions Effect of the Participants Death on Minimum Distributions After Beginning RMD's Spouse, Non-spouse, and No Beneficiary

SPOUSE: -can receive distributions over their remaining single-life expectancy -recalculated each year based on single life expectancy table -distributions MUST begin in the year following the participants death -Except if the surviving spouse is the sole beneficiary, in which they may rollover the plan balance to their own account and wait until they reach 70 1/2 to take min distributions utilizing their own L.E. Table NON-SPOUSE: -distribution is the remaining single, nonrecalculated life expectancy of the beneficiary -if they are much younger than the decedent, they can "stretch out" the distributions taken NO BENEFICIARY: -distributions must continue over the remaining distribution period of the deceased owner -the remaining distribution period is reduced by one each year

401(k) Plans Employee Contributions Employee Elective Deferrals

TAX IMPACT: funds deferred in a 401(k) are not currently subject to federal income tax (but payroll taxes are still paid) EXCEPTION: Roth 401(k) and Thrift Plan contributions are subject to all taxes CATCH UP CONTRIBUTIONS: -employees who are at least 50 years old during the plan year may increase their deferral limit by up to $5,500 (2013) ****See chart for 2013 contribution limit amounts****

Employee Stock Ownership Plans (ESOP's) Disadvantages

TO EMPLOYEE: -lack of diversification in the investment portfolio since ESOP's must primarily invest in stock of the company -must wait until age 55 and 10 years of service for employer to be required to offer some diversification options TO EMPLOYER: -dilute ownership in the corporation -repurchase option (put option) that is not readily tradable can create cash flow problems -costly plan administration -annual appraisals create significant recurring expenses -necessary to determine value of tax deduction for ER -determine price an ER/trust would pay for repurchase of ESOP distributed shares **SEE TABLE**

Employee Stock Ownership Plans (ESOP's) Advantages

TO EMPLOYEE: -provides a type of retirement vehicle and ownership in their employer -provides a vehicle to acquire a business when employees may have little or no cash to do so -may benefit from the NUA at time of stock distributions because of favorable capital gains and deferred recognition TO EMPLOYER: **shareholder is often the owner looking to retire. and the ability to sell shares to the plan, which is a ready and available buyer with no income tax consequence, is a HUGE benefit -corporation or trust can borrow money to provide contributions resulting in funds being provided immediately to the ESOP, while the employer repays the loan with tax deductible contributions -without ESOP there may not be a market for private held corporate stock

Stock Bonus Plans Advantages

TO EMPLOYEES: -ER's reduced cash outlay may encourage regular contributions -EE's may be rewarded at retirement by increased stock value -EE's are eligible for preferred Net Unrealized Appreciation (NUA) tax treatment on lump sum distributions of employer stock TO EMPLOYERS: -FMV of contributions of employer stock are tax deductible to the employer, which can result in decreased income tax costs for the corporation with virtually no cash outlay -employees share a vested interest with the success of the company

Stock Bonus Plans Disadvantages

TO EMPLOYEES: -risk associated with the non-diversified investment portfolio of employer stock TO EMPLOYERS: -ownership and control of the company is diminished or diluted -the required "repurchase option" (put option) could deplete the cash of the corporation **repurchase option** -allows a terminating EE the choice to receive the cash equivalent of the employers stock if the stock is not readily tradable in the market

Salary Reduction Simplified Employee Pensions (SARSEP's) Requirements

to establish, employer had to meet the following: 1. at least 50% of eligible employees must choose to defer portion of salary 2. employer had to have no more than 25 eligible employees 3. elective deferrals of HC ee's had to meet the SARSEP ADP test