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283 Cards in this Set
- Front
- Back
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EMPLOYEE BENEFITS PLANS
Section 79 of Group Term Life |
1) provide general death benefit excludable from income
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EMPLOYEE BENEFITS PLANS
Group term: Expensive? Easy to administer? |
- most inexpensive form of group insurance
- easiest and least expensive to administer |
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EMPLOYEE BENEFITS PLANS
Group term - insurability |
evidence of insurability is not required
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EMPLOYEE BENEFITS PLANS
Group term - what if employee leaves? |
terminated employee may convert the group term policy to an individual cash value policy without evidence of insurability |
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EMPLOYEE BENEFITS PLANS
Group Permanent - Three different types of group permanent insurance |
1) group paid up
2) group ordinary 3) group universal life (UL) |
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EMPLOYEE BENEFITS PLANS
Plans can be established as one of two types (2): |
1) Contributory Plan - employee pays some of the cost
2) Noncontributory plan - employer pays entire cost |
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EMPLOYEE BENEFITS PLANS
Group Term Tax Implications (on premiums)Less than $50k coverage |
- Premiums deductible by employer
- Premiums NOT taxable to employee |
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EMPLOYEE BENEFITS PLANS
Group Term Tax Implications (on premiums)More than $50k coverage |
-Premiums deductible by employee
-Premiums taxable to employer |
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EMPLOYEE BENEFITS PLANS
Group Permanent Tax Implications (on premiums) -Any face amount |
-Premiums deductible by employer (if employee has vested rights to insurance)
-Premiums taxable to employee |
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EMPLOYEE BENEFITS PLANS
Group disability insurance - Income Tax Implications (premiums and benefits) |
-Premiums deductible to employer
-Premiums paid by employer are NOT taxable to employee
-Benefits received by employee ARE TAXABLE if paid by employer |
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EMPLOYEE BENEFITS |
Written plan under which employees can choose between two or more benefits consisting of two mandatory components
- Not able to be established by sole proprietors and partners |
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EMPLOYEE BENEFITS
What are the two mandatory components of a Cafeteria Plan? |
1) Cash - taxable as compensation
2) One or more qualified benefits |
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What are the qualified benefits employees can choose from in a Cafeteria Plan? (2)
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1) Medical expense benefit via individual or group (NONTAXABLE)
2) Cost of group term in excess of $50k (TAXABLE) |
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What is a Flexible Spending Account (FSA)?
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Type of cafeteria plan funded through salary reduction which allows them to fund certain benefits with PRE TAX dollars
-KEY PHRASE: Use it or Loose it! Employer gets the forfeiture |
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EMPLOYEE BENEFITS |
25% flat rate withholding tax on taxable fringe benefits
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What is a VEBA (Voluntary Employee Beneficiary Association)? |
Multiple-employer trust that can be used to prefund employee benefits - deposits to trust are immediately tax deductible |
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DEFFERED COMP Transferability? |
Only the employee can exercise during his life. Can be transferred at death
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DEFFERED COMP
Nonqualified Stock Options (NSO)
Transferability? |
Option is transferrable to family members |
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EMPLOYEE STOCK OPTIONS Vesting Schedule
Straight Vesting: |
Same percentage of option become exercisable each year |
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EMPLOYEE STOCK OPTIONS
Vesting Schedule Cliff Vesting: |
all at once
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EMPLOYEE STOCK OPTIONS
Vesting Schedule Step Vesting: |
varies year to year
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EMPLOYEE STOCK OPTIONS
Vesting Schedule Performance vesting: |
vested in the year the company acheives a particular goal
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EMPLOYEE STOCK OPTIONS
Vesting Schedule Early vesting (accelerated exercise): |
allowed to immedeatly exercise options when granted. For each option exercise they recieve a share of "restricted" stock subject to a holding period
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EMPLOYEE STOCK OPTIONS
Expiration on options |
-Generally employees have 10 years (or less) to exercise
-Terminated employees may have 30 to 90 days |
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DEFERRED COMP
ISO Taxation |
Income recognized when the shares are sold, not when the option is granted or exercised
May trigger AMT since bargain element is considered to be an adjustment for purposes of AMT |
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EMPLOYEE STOCK OPTIONS
Incentive Stock Options (ISO) Tax Implications - Upon Exercise |
No income for calculating regular tax
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EMPLOYEE STOCK OPTIONS
Incentive Stock Options (ISO) Tax Implications - Upon QUALIFYING Sale |
Regular tax - LTCG difference between FMV at time of sale and exercise price
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EMPLOYEE STOCK OPTIONS
Incentive Stock Options (ISO) What are holding period requirements for a QUALIFYING SALE? |
Shares must be held at least 1 year after the option is exercised
At least 2 years after the option grant |
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EMPLOYEE STOCK OPTIONS
Incentive Stock Options (ISO) Tax Implications What is penalty if holding requirements are not satisfied? |
Then a portion of the employee's profit is taxed as compensation and the employer is allowed a deduction for that compensation
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EMPLOYEE STOCK OPTIONS
Non-Qualified Stock Opt (NSO) Tax Implications - Upon Grant |
no income tax is due
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EMPLOYEE STOCK OPTIONS
Non-Qualified Stock Opt (NSO) Tax Implications - Upon exercise |
employee realizes income equal to difference between grant (exercise) price and FMV at time of exercise
THIS DIFFERENCE IS CALLED THE BARGAIN ELEMENT |
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EMPLOYEE STOCK OPTIONS
Non-Qualified Stock Opt (NSO) At time of exercise what is company required to do? |
Company must withhold federal and state tax
FMV at time of exercise becomes the new cost basis |
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EMPLOYEE STOCK OPTIONS
Non-Qualified Stock Opt (NSO) Tax Implications - Upon Sale |
only additional tax if selling price exceeds the share basis
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Tax Implications - What is an 83(b) election? |
employee makes an election to include in income the FMV of the stock, less any amount paid for the stock at the time the stock is issued
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DEFERRED COMP |
-allows a company to sell stock to employees at a discount to market price
- cannot be given on discriminatory basis and ONLY employee can purchase - Purchase can be as low as 85% of FMV - Require shareholder approval |
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DEFERRED COMP
ESPP Tax implications for GRANT, PURCHASE and SALE: |
Grant - no inc tax
Purchase - no inc tax Sale - Can be income or LTCG depending on holding period requirements (as for ISOs) |
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STOCK OPTIONS:
Which plans can discriminate and which cannot discriminate? ESPP, ISO, NSO? |
ESPP - nondiscriminatory
ISO / NSO - discriminatory |
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Phantom stock - Basic provisions
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-Employee is awarded units analogous to shares using a formula (based on comp)
- Not real stock but method of tracking (no dilution of shares) -no recognized income to employee -cannot specify date on which to exercise stock -upon exercise (usually given cash not stock) taxed as ordinary income |
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EMPLOYEE STOCK PLANS
Stock appreciation right (SAR) - Basic provision |
Like Phantom stock except:
-offered together with stock option -gives employee right to appreciation in the stock after the grant date -employee has right to decide when to exercise SAR -taxed as ordinary income at exercise |
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DEFERRED COMP
Restricted Stock - Basic Provision |
-granted to employee at not cost or at a bargain price with restrictions
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EMPLOYEE STOCK PLANS
Junior stock - Basic Provisions |
Restricted stock that can be converted into common stock of the company but only if performance goals are reached
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DEFERRED COMP
Rabbi Trust |
-Irrevocable trust set up by employer to set funds aside prior to retirement to pay retirement benefits
-Trust and benefits cannot be changed even in hostile takeover
-Not protected from bankruptcy |
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NONQUALIFIED DEFERRED COMPENSATION
Pure deferred compensation plan: |
-Pure deferred compensation plan -employee agrees to defer a specified portion of compensation in exchange the employer pledges to pay a benefit in the future equal to the amount deferred and a predetermined rate of interest -rabbi trust often used to fund pure def comp plan |
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DEFERRED COMP
Supplemental Executive Retirement Plan (SERP) |
-employee (executive) does NOT give up current dollars for later benefits
-instead company pledges to provide the benefit often above and beyond companies qualified retirement plan calculations |
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DEFERRED COMP
Employee Funded Grantor Secular Trust |
- A funded plan that consists of an irrevocable trust
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EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS
Buy-Sell Agreements |
-make sure an estate can sell a business interest for a reasonable price
-contains wording that binds the owner of a business to sell their share of it at a specified price to a pre-set buyer (usually partners in the business) |
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EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS
Cross-Purchase agreement |
-Each owner purchases an insurance policy on the other owners
-Policy owner is also bene -upon death of an owner his estate will sell and other owners will buy the business interest -insurance proceeds are used to fund the agreement |
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EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS
Entity Agreement (also called Stock-Redemption Agreement) |
-The business (not owners like Cross-Purchase) buys the insurance on the owners
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EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS
Business overhead disability plan |
-used to cover ongoing operating costs of a business while owner is disabled
-premiums are deductible and benefits are taxable |
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EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS
Executive/owner benefits (Executive-Bonus Life Ins) |
Allows an employer to provide life insurance protection for a selected employee on a tax-deductible basis
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EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS
Split-dollar |
-allows an employer to provide life insurance for a selected employee
-The death benefit is split as follows: (a) corporation recieves return of premium (cash surr value) (b) beneficiary receives the net amount of risk -employer and employee share premium |
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EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS
Key employee insurance |
-Insurance on a key employee (business owns and is bene of)
-Premiums NOT deductible to business -Death bene are tax free -Primary purpose is to: 1) protect business against loss of income 2) provide funds for locating and traning replacement |
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Implications of the Demographic Projections |
1. Increased poverty 2. Increased health care costs 3. Increased need for long-term care |
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RETIREMENT PLANNING Sensitivity Analysis |
Make changes in assumptions towards the undesirable side of the risk, and then see what the impact is on the overall plan |
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RETIREMENT PLANNING
Capital Utilization |
Assets are used with serial payments based on life expectancy
Steps: Use "Beg" mode Inflation-adjusted returns |
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RETIREMENT PLANNING
Inflation Adjusted Return |
[((1+ror)/(1+i))-1] x 100
ror = rate of return i = inflation rate |
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RETIREMENT PLANNING
Capital Preservation Approach |
maintaining a certain amount of principal through retirement |
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RETIREMENT PLANNING Level Payment Approach |
Achieving a lump-sum amount through level payments adjusted for inflation |
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RETIREMENT PLANNING Serial Payment Approach |
Payments made each year increase with inflation to achieve a desired lump sum |
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SOCIAL SECURITY
Income subject to Social Security Tax |
- wages, salaries, bonuses and commissions - value of employer provided meals and lodging - sick days during first six months - employer-paid premiums for group term life exceeding $50,000 - employee salary red. to work spon. ret. plans - amount deferred under NQDC - vacation & severance pay - NQ stock option bargain element |
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SOCIAL SECURITY
Income exempt from Social Security Tax |
- sick days after first six months - employer-paid premiums for group term under $50,000 - employer payments for medical or hospital expenses - employer contributions to qual. ret. plans - amounts deferred under NQDC - FSA contibutions |
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SOCIAL SECURITY Components of 15.3% FICA Tax |
OASDI Tax: 12.4% of comp up to taxable wage base ($117,000 in 2014 Medical Hospital Insurance: 2.9% of all comp 12.4% + 2.9% = 15.3% |
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SOCIAL SECURITY Insured Status |
a specific period of employment covered by Social Security and by meeting attained age and family status requirements |
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SOCIAL SECURITY Quarters of Coverage |
earned for each $1,200 that an employee or self-employed individual earns a.k.a. credits or coverage credits |
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SOCIAL SECURITY Fully Insured |
All S.S. benefits available if one of the two tests are met: 1. 10 years of employment covered by S.S. (40 quarters) 2. If born before 1929, the number of years between 1951 and the year they turn 62, equals quarters of coverage required |
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SOCIAL SECURITY Currently Insured |
At least six quarters of coverage in the 13-quarter period preceding the event for which eligibility is sought |
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SOCIAL SECURITY Provisional Income |
AGI + tax-exempt interest income + 1/2 of OASDI Benefits |
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SOCIAL SECURITY Taxation of S.S. Benefits |
50% 85%
Single, HOH, widower $25,000 $34,000 MF & living seperately $25,000 $34,000 MFS & living together $0 MFJ $32,000 $44,000 |
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SOCIAL SECURITY Social Security Act (year?) |
1935 |
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Qualified Plan |
A retirement plan that meets the stringest requirements of the Internal Revenue Code & ERISA:
- min. participation - non-discriminatory - top heavy testing - in USA - min. vesting standards - fiduciary requirement |
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Non-Qualified Plans |
Exempt from qualified plan rules
May discriminate |
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DB PLANS Annual Benefit |
Cannot exceed the lesser of: - $210,000; or - 100% annual compensation |
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DB PLANS Compensation |
the individual's total earnings wages, salaries, fees for service, and any item included in income Must satisfy IRC Sec. 414(s) & 415(c)(3) |
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DB PLANS Final Average Pay |
the highest three or five years of compensation prior to a participant's retirement no less than three years can be used |
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DB PLANS Normal Retirement Age |
used as a target age in plan funding required to be defined typically 65 law requires no later than 65, or the fifth anniversary of a participant's date of initial participation |
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DB PLANS Early Retirement |
If taken before 62, then IRC Sec. 415(b)(2)(A) dollar limit on benefits may be adjusted downward |
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DB PLANS Late Retirement |
If retires after 62, then IRC Sec. 415(b)(2)(A) dollar limit on benefits must be adjusted upward |
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DB PLANS Plan Benefit Formula |
determines the level of retirement income provided at normal retirement no fixed guidelines usually either years of service or length of service |
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DB PLANS Unit Benefit Formula |
Recognizes the participant's years of service to the company and the participant's level of compensation |
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DB PLANS Flat Benefit Formula |
Promises each participant an annual flat dollar amount for each year of service |
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DB PLANS Flat Percentage Formula |
pays a flat percentage of income at retirement Either - Final Average Pay - Career Average Pay |
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DB PLANS Floor Offset Plan |
two plans maintained by the same employer: a DB plan and a DC plan DB provides a guaranteed benefit level DC offsets or reduces DB plan's pension benefit |
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DB PLANS Cash Balance Plan |
Another type of DB plan Guarantees investment performance of a hypothetical account Usually designed so participant receives a pay credit for each year of service and the right to future interest on the pay credits |
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DB PLANS Pension Equity Plan |
Benefits described as a % of final average pay Based on points received for each year of service |
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DB PLANS
50/40 Test |
minimum participation requirement - IRC Sec. 401(a)(26)
Must provide "meaningful" benefits to at least the lesser of: - 50 employees; or - the greater of - - 40% of all employees; or - - 2 employees |
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DB PLANS
Discrimination Tests |
Must meet ONE of the following:
- Safe harbor coverage test - Ratio percentage test - Average benefits test |
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DB PLANS Safe Harbor Coverage Test |
Plan must benefit 70% or more of the non-excludible, non-highly compensated employees (NHCE)
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DB PLANS Ratio Percentage Test |
% of NHCEs who benefit by participating in the retirement plan must be equal at least to 70% of the HCEs who benefit by participating int he plan |
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DB PLANS Average Benefit Test |
1. the plan must benefit a nondiscriminatory classification of employees, and 2. the plan must provide an average benefit % for NHCEs that is at least 70% of the average benefit % of the HCEs |
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DB PLANS Highly Compensated Employee |
Any employee who: - was a more than 5% owner at any time during the current or preceding year - In 2014, a person whose comp. was > $115k in the previous year (2013) --Employer has the option to limit HCE to the top-paid 20% employees based upon precedeing year's compensation |
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DB PLANS Permitted Disparity |
enables a defined benefit plan to provide a higher benefit for employees with compensation above a certain level without violating the prohibition against discrimination in favor of HCEs May use excess or offset method |
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DB PLANS Vesting Schedules |
Vesting maximums are: - five-year cliff - three-to-seven-year graded |
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DB PLANS Vesting for Top Heavy DB Plans |
-Three-year cliff - Two-to-six-year graded |
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DB PLANS Key Employee |
An officer of the employer receiving annual compensation from that employer > $170,000 - More than 5% owner - More than 1% owner with income > $150,000 |
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DB PLANS Variables that affect final retirement benefit |
- Plan's formula for contributions - Participant's compensation - Years of service - Forfeitures - Investment Earnings |
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401(k) PLANS
Cash-or-Deferred Arrangements (CODA) |
Permitted with PSPs including stock bonus plans and ESOPs
Allows employees to defer some of their compensation into retirement plan, pretax
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401(k) PLANS Profit Sharing 401(k) features |
The ability of employees to make voluntary contributions Individual accounts for participants Matching contributions Plan loans and hardship withdrawals |
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401(k) PLANS Eligible Entities |
- Sole proprietors - Partners - Corporations - Tax-exempt organizations - Indian tribal governments |
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401(k) PLANS Eligible Employees |
1. One year of service and over 1,000 hours of work 2. 21 years or older |
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401(k) PLANS 401(k) Contributions |
Sources of contributions: - Discretionary Employer Contributions - Employee Deferrals - Matching Contributions |
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401(k) PLANS Qualified Matching Contributions (QMACs) |
- Discretionary employer matching contributions that must be 100% vested at all times, and treated as if they had been made by the employee - Used to pass ADP testing - Only made to non-highly compensated employees (NHCEs) |
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401(k) PLANS Qualified Nonelective Employer Contributions (QNECs) |
- Discretionary employer nonelective contributions that must be 100% vested at all times, and treated as if they had been made by the employee - Used to pass ADP testing - Only made to NHCEs |
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401(k) PLANS Saver's Credit for 401(k) |
- Tax credit available to lower income earners up to $2,000 Up to: - Joint of $60,000 - HOH of $45,000 - Single of $30,000 |
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401(k) PLANS Nondiscrimination Regulations |
Help ensure that the highly paid, highly placed individuals who design, fund and administer these tax-advantaged plans do not take advantage of them |
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401(k) PLANS Highly Compensated Employees (HCEs) |
- > 5% owner at any time this year or last year - compensation > threshold ($115k in 2013) |
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401(k) PLANS Minimum Coverage Rules |
401(k) plans must satisfy either: - The ratio percentage test - Average benefits percentage test |
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401(k) PLANS Aggregation Rules |
Combing two or more features of a single tax-deferred retirement plan or combinging two or more plans for the purpose of demonstrating that the plan or plans satisfy certain retuiremetns of the IRC |
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401(k) PLANS Permissive Aggregation |
When an employer decides to aggregate or combine two or more plans to demonstrate that both plans satisfy the IRC's coverage and nondiscrimination requirements |
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401(k) PLANS Actual Deferral Percentage Test (ADP Test) |
Compares the deferral rates of nonhighly compensated participants (NHCEs) with those of their highly compensated colleagues (HCEs) |
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401(k) PLANS Resolving ADP Failed Testing |
ADP failed test can be resolved with: 1. Corrective distributions 2. Recharacterization 3. Qualified matching contributions 4. Qualified nonelective contributions |
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401(k) PLANS Actual Deferral Ratio |
Total of elective deferrals, QNECs, and QMACs treated as elective contributions by the plan administrator and expressed as a percentage |
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401(k) PLANS Actual Contribution Percentage Test (ACP Test) |
Compares the percentage of employer matching contributions and nondeductible employee contributions made by or on behalf of NHCEs with percentage of matching contributions and nondeductible employee contributions made by HCEs |
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401(k) PLANS Vesting for Top Heavy Plans |
- 3-year cliff; or - 2-to-6-year graded |
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401(k) PLANS Basic Matching Formula |
To each NHCE - 100% match on first 3% of comp., and 50% match on 3% to 5% of comp.; or - 100% match on first 4% of comp. |
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403(b) PLANS AND PLAN ISSUES 403(b) Plans |
- tax-sheltered annuities (TSA) - allows employees of 501(c)(3) non-profits to have tax-sheltered savings through TSAs |
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403(b) PLANS AND PLAN ISSUES Qualified Employer |
Three types of employers that qualify for 403(b): 1.) Public educational systems 2.) Certain tax-exempt organizations 3.) Certain employers of ministers |
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403(b) PLANS AND PLAN ISSUES Eligible Employees |
- Anyone who performs services directly or indirectly as an employee - Self-employed do not qualify |
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403(b) PLANS AND PLAN ISSUES Nondiscrimination Requirement |
Satisfied if all employees who are willing to have a salary reduction of at least $200.01 per year are allowed to participate |
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403(b) PLANS AND PLAN ISSUES ACP Test for 403(b) plans |
When employer matching contributions are part of a 403(b) plan, then the employer must carry out ACP test |
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403(b) PLANS AND PLAN ISSUES Incidental Benefit |
- Life insurance can only be provided as an incidental benefit and not a primary benefit - The cost of whole life must be less than 50% of the total employer contribution allocated to the participant's account |
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403(b) PLANS AND PLAN ISSUES Long Service Catch-Up Provision |
TSA participants with at least 15 years of service at a qualified organization (HER) Lesser of: - $3,000 - $15,000 - "increase for long service" previously used - $5,000 x # of years of service (minus previous years total elective deferrals) |
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403(b) PLANS AND PLAN ISSUES Qualified Organization |
"HER" Health Education Religion |
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403(b) PLANS AND PLAN ISSUES Section 415 Annual Additions Limit |
Annual additions to an employee's account may not be more than: - $52,000; or - 100% of employee's compensation |
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403(b) PLANS AND PLAN ISSUES Types of Plans |
Master Plan Prototype Plan Volume submitter Plan Custom-designed Plan |
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403(b) PLANS AND PLAN ISSUES Master Plan |
A retirement plan sponsored by a financial institution that an employer can adopt simply by executing an adoption agreement Consists of basic plan document, adoption agreement, and trust or custodial account document |
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403(b) PLANS AND PLAN ISSUES Prototype Plan |
A plan that is made available by a sponsor for adoption by employers and has a seperate funding medium for each adopting employer Offered by banks, insurance, credit unions, mutual funds, trade or professional organizations and certain individuals |
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403(b) PLANS AND PLAN ISSUES Volume Submitter Plan |
A specimen plan of a VS practioner or a plan of a client of the VS practioner that is substantially simialr to the VS practioner's approved specimen plan Must be submitted for IRS approval |
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403(b) PLANS AND PLAN ISSUES Advance Determination Letter |
An IRS response letter to a plan document submission If accepted, it will be considered qualified |
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403(b) PLANS AND PLAN ISSUES
Statutory Exclusions |
- Age
- Length of service
- Union Membership |
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403(b) PLANS AND PLAN ISSUES Non Statutory Exclusions |
- Job description classification - form of compensation - classification by geographic location or by employment in a specific division of a company |
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403(b) PLANS AND PLAN ISSUES Safe Harbor Normal Retirement Age |
- Age 50 for qualified public safety employee - Age 62 for plans other than qualified public safety employees |
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403(b) PLANS AND PLAN ISSUES 457(b) Plans |
1. ) Nongovernmental or private 457(b) plans (unfunded) 2.) governmental or public 457(b) plans (funded) |
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403(b) PLANS AND PLAN ISSUES Eligible 457(b) Plan |
A written plan established and maintained by an eligible employer (state or local gov't) that complies with retirement plan rules |
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RETIREMENT PLAN DISTRIBUTIONS Pension In-Service Distributions |
A pension plan must prohibit in-service withdrawals prior to age 62 to retain status as a qualified plan |
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RETIREMENT PLAN DISTRIBUTIONS PSP Hardship Withdrawals Plan Requirements |
1. term hardship must be defined in the plan 2. uniform and nondiscriminatory rules must be followed in determing whether a hardship exists and the amount of the distribution necessary to alleviate the hardship; and 3. the amount of the hardship distribution cannot exceed the participant's vested interest under the plan |
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RETIREMENT PLAN DISTRIBUTIONS 401(k) and 403(b) Hardship Withdrawals Participant Requirements |
Only from elective deferrals, and only when a plan document specifically allows such withdrawals Plan Participant must demonstrate: 1. "an immediate and heavy financial need", and 2. lack of other "reasonably available" resources |
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RETIREMENT PLAN DISTRIBUTIONS Hardship Distribution Amounts |
- subject to the 10% early withdrawal penalty for distributions made before age 59.5 - are not eligible for rollover - are not subject to mandatory withholding - exceptions to 10% early penalty may apply |
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RETIREMENT PLAN DISTRIBUTIONS Loans Requirements |
1. Term of loan is no longer than five years (except for home loans - 15 years)
2. Loans are available to all participants and beneficiaries, but not available to highly compensated employees in greater proportions (as a % of account balance) than to NHCE 3. Repayments at least quarterly 4. Loan is accomplished by legal agreement 5. Cannot excced 50% or $50,000 6. Plan has a written loan policy |
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RETIREMENT PLAN DISTRIBUTIONS
Qualified Domestic Relations Orders (QDRO) |
a legal judgement mandating the distribution, segregation or attachment of one person's property for the benefit of another. |
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RETIREMENT PLAN DISTRIBUTIONS Alternative Payee |
QDRO identified nonparticipant of a plan |
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RETIREMENT PLAN DISTRIBUTIONS QDRO Applies to: |
- Qualified plans, 403(b) plans, and Section 457 arrangements - Does not apply to IRAs or hybrid IRA plans |
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RETIREMENT PLAN DISTRIBUTIONS Ten-Year Forward Averaging |
Ten-year forward averaging is only available from qualified plans. |
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RETIREMENT PLAN DISTRIBUTIONS Spousal Beneficiaries |
Only spousal beneficiaries can recalculate RMDs every year. Nonspouse beneficiaries go to the life expectancy table only once, and then reduce that number by one each year (called “fixed term”). |
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RETIREMENT PLAN DISTRIBUTIONS Loans to Plan Sponsors |
Loans to plan sponsors are a prohibited transaction. Results in a 15% prohibited transaction penalty, and may also result in disqualification of the plan. |
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RETIREMENT PLAN DISTRIBUTIONS
Default Distribution on Death |
Used when no beneficiary is named Five-year rule before required distributions Distribution of life expectancy of deceased owner if RDs taken |
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RETIREMENT PLAN DISTRIBUTIONS IRA Only Premature Distributions |
1. Education expense 2. First-time homebuyer up to $10,000 3. Payment of medical insurance premiums after seperation from employment |
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RETIREMENT PLAN DISTRIBUTIONS Substantially Equal Periodic Payments |
At least five years or until the participant reaches age 59.5 (whichever is the later) Distribution amount may not be altered once established |
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RETIREMENT PLAN DISTRIBUTIONS Substantially Equal Periodic Payment Methods |
1. Required minimum distribution method 2. Fixed amortization method 3. Fixed annuitization method |
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RETIREMENT PLAN DISTRIBUTIONS One-Time Switch |
The IRS permits taxpayers to make a one-time switch from using either the fixed amortization method or the fixed annuitization method to the RMD method. |
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RETIREMENT PLAN DISTRIBUTIONS Mandatory Withholding |
Qualified plans, 403(b) plans and gov't 457 plans are required to withhold 20% of any distribution that is eligble for a direct rollover if the participant elects a non-direct rollover. |
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RETIREMENT PLAN DISTRIBUTIONS Ten year forward averaging |
Uses a tax-bracket as if the distribution is paid out over 10 years, not 1 year - the participant is born prior to January 1, 1936 - forward-averaging treatment si elected for all lump-sum distributions - the employee has been a participant of the plan for at least five years before the year in which the distirbution occurs |
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RETIREMENT PLAN DISTRIBUTIONS Net Unrealized Appreciation (NUA) |
The appreciation in value of the stock while held in the qualified plan. |
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RETIREMENT PLAN DISTRIBUTIONS Property Distribution |
Property other than cash can be rolloed over into an IRA or other plan. An individual may sell the property received as a distribution from a retirement plan and roll over the net proceeds from teh sale into an IRA or another plan.
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RETIREMENT PLAN DISTRIBUTIONS Minimum Distribution Requirements |
Employees, other than 5% owners, may delay distributions from their accounts until retirement. IRA and IRA hybrid plans require distributions begin by 4/1 year after 70.5. |
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RETIREMENT PLAN DISTRIBUTIONS RMD Joint and Survivor Table |
Used when a spouse is more than 10 years younger than account owner |
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RETIREMENT PLAN DISTRIBUTIONS Qualified Pension Plan distribution options |
Required: Automatic survivor annuity benefits to married participants Optional: Lump sum Life annuity Term Certain payments |
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RETIREMENT PLAN DISTRIBUTIONS Simplified Method if under age 75 |
Not lifetime annuity: Nontaxable portion of payment = Investment in contract / total number of payments due |
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RETIREMENT PLAN DISTRIBUTIONS Simplified Method if over age 75 |
Nontaxable portion of payment =
Investment in contract / Anticipated returns |
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RETIREMENT PLAN DISTRIBUTIONS
Four Steps in Distribution selection |
1. Review plan distribtion options
2. Project income and expenses in retirement 3. Calculate plan beenfits and tax implications 4. Recommend distribution options |
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RETIREMENT PLAN DISTRIBUTIONS Qualified Preretirement Survivor Annuity (QPSA) |
If a participant dies before retirement, the plan must pay benefits to a surviving spouse in the fomr of a qualified preretirement survivor annuity. May be not less than the annuity resuliting in joint and 50% to survivor annuity |
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RETIREMENT PLAN DISTRIBUTIONS Qualified Joint and Survivor Annuity (QJSA) |
If death occurs in retirement, spouse is paid out a minimum of 50% of benefit for their life. |
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RETIREMENT PLAN DISTRIBUTIONS Qualified Optional Survivor Annuity (QOSA) |
An annuity for the life of the participant with a survivor annuity for the life of the surviving spouse equal to a required percentage of the joint annuity payable during hte joint lives of the participant and spouse 75% and 75% minimums |
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DEFERRED COMP Section 409A |
IRC Section 409A deals with nonqualified deferred compensation plans. Does not include: qualified plans, 403(b) plans, 457(b) plans, incentive stock options (ISOs), nonqualified stock options (NQSOs), employees stock purchase plans (ESPPs) and stock appreciation rights (SARs) Does apply to 457(f) plans |
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DEFERRED COMP Covered Employee |
one of the top five employees defined under Section 162(m) or any corporate officer subject to Section 16(a) of the Securities Exchange Act of 1934 |
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DEFERRED COMP
Covered Employee Rules |
Covered Employees cannot access money when:
1. Plan sponsor or another controlled group member is in bankruptcy
2. A qualified DB plan of the sponsor is at risk
3. An involuntary or distress termination of a DB plan has occurred within 6 months |
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DEFERRED COMP Excess Benefit |
a plan that provides a select number of employees contributions or benefits based on the plan formula in place that exceed limitations on contributions and benefits imposed by IRC Section 415 |
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DEFERRED COMP Top Hat Plan |
- A supplemental plan, that makes a commitment to provide a specific benefit, but does not forgot current compensation to fund this benefit - Always unfunded - Subject to ERISA reporting and disclosure requirements |
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DEFERRED COMP Financial Health Trigger |
- A provision that mandates payment of the participant's account if a named financial condition is evidenced in the company's financial statement - not allowed in rabbi trusts |
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DEFERRED COMP Claw Back Feature |
- Requirement of benefits having to be repaid to employer upon separation of service |
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DEFERRED COMP Endorsement Method |
- Used for split-dollar life insurance - When policy is transferred to the employee it will be treated as a Section 83 transfer and taxed |
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DEFERRED COMP Equity Split Dollar |
- Use for split-dollar life insurance - When cash value equals premiums paid by employer, the remaining value is owned by employee - Employee taxed on their portion each year |
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DEFERRED COMP Collateral Assignment Method |
- Employee owns policy and the employer's premium payments are classified as loans to the employee - Deemed as additional taxable compensation in the year premiums are paid |
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DEFERRED COMP Death-benefit only plan (DBO plan) |
- Provides benefits to beneficiaries of an employee - A type of ERISA welfare plan often misclassified as a NQDC plan |
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DEFERRED COMP Welfare Plan |
- An employer-sponsored plan that provides, among other things, death, disability, sickness, accident or unemployment benefits for its participants |
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DEFERRED COMP Economic Benefit Doctrine |
- When the employee's benefit has become substantially vested or essentially equivalent to the receipt of cash, current income taxation will result. |
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DEFERRED COMP Income in respect of a decedent (IRD) |
- Deferred comp taxed as ordinary income to a deceased participant's beneficiary |
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DEFERRED COMP FICA rules |
1. FICA tax applies to salary deferral NQDC upon vesting 2. Funded plans are taxable upon vesting 3. Unfunded plans are taxed on FICA upon vesting, and income tax later |
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DEFERRED COMP Informal Funding |
- Allows for an employer to set aside money for deferred comp and still allow for tax deferral.
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DEFERRED COMP Escrow Accounts |
- If deferred compensation is placed in escrow for the benefit of the employee, it will immediately be taxable to the employee if the employee's right to the amount set aside are nonforfeitable
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DEFERRED COMP Assignment of Income Doctrine |
-the individual who earns income cannot avoid tax by assigning the income to another individual. However, a transfer of the entire property interest to another individual will shift the income tax responsibility to that individual. |
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DEFERRED COMP Equity-Based Comp Plans |
- Plans that tie together executive performance and company stock values Includes: - Stock Options - Restricted Stock Plans |
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DEFERRED COMP
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- A right granted by a corporation, or a parent or subsidiary of the corporation, to an employee that allows the employee to purchase stock of the corporate in a tax-favored manner - Not able to be granted to 10% owners, unless exercise price is 110% of market value |
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DEFERRED COMP Bargain Element |
- the difference between the purchase price for an ISO and the current fair market value of the stock |
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DEFERRED COMP Nonqualified Stock Options (NSOs) |
- a right granted by a corporation, its parent, or one of its subsidiaries to one or more of its employees on a discriminatory basis to acquire shares of the corporations stock |
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DEFERRED COMP Golden Parachutes |
- An agreement between an executive and his or her company requiring the company to pay certain benefits in the event of a change in control of the company |
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DEFERRED COMP Tin Parachutes |
- Middle-management versions of Golden Parachutes |
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DEFERRED COMP Covered Employee Deductions |
- Corporations are restricted to $1,000,000 deduction for compensation paid to certain "covered employees" |
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DEFERRED COMP Unfunded Non-Qualified Excess Benefit |
Provides additional retirement benefits for highly compensated employees |
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DEFERRED COMP Funded Non-Qualified Deferred Compensation |
- Earnings are taxable to employer - The benefits are protected from the claims of the employer's creditors and subject to taxation unless there is a substantial risk of forfeiture - To avoid immediate taxation, plan must be nontransferable and subject to substantial risk of forfeiture |
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DEFERRED COMP Constructive Receipt Doctrine |
- taxes income when it is made available, even though income is not actually received - Applies to formally funded plans, not unfunded plans |
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DEFERRED COMP IRC Section 409A |
Voids a taxpayer's right to defer income after services have been performed |
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DEFERRED COMP Income in Respect of a Decendent |
Deferred comp that is taxable as ordinary income to the deceased participant's beneficiary |
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EMPLOYEE BENEFITS Title I of ERISA |
- Gives DOL primary jurisdiction over reporting, disclosure, and fiduciary responsibilities. - Gives IRS primary jurisdiction over participation, vesting and funding. |
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EMPLOYEE BENEFITS Title II of ERISA |
- Provides minimum standards for participation, vesting and funding. - Age 21, one year of service - Vest 100% within 7 years, or cliff in 5 years |
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EMPLOYEE BENEFITS Title III of ERISA |
- Administrative governmental procedures |
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EMPLOYEE BENEFITS Title IV of ERISA |
- Created PBGC and the procedure for establishing and collecting insurance premiums |
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EMPLOYEE BENEFITS Benefits that Protect the Employee's Earnings |
Health Insurance Accidental death and dismemberment insurance (AD&D) Travel insurance or travel accident insurance Dependent care assistance plans Cafeteria plans Adoption assistance plans Group legal plans Executive perks Noncash fringe benefits or perks |
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EMPLOYEE BENEFITS Benefits that Replace the Employee's Earnings |
Group long-term disability Group short-term disability Social Security Worker's Compensation Unemployment Insurance Supplemental unemployment benefit plans (SUB plans) Qualified Retirement Plans Severance Pay plans Group Term Life Insurance Split-dollar plans Death-benefit-only plans (DBO) |
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EMPLOYEE BENEFITS Benefits that Provide Capital as Part of the Employee's Earnings |
Incentive Stock Options (ISOs) Nonqualified Stock Options Stock Appreciation Rights (SARs) Phantom Stock plans Junior Stock plans Restricted Stock plans |
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EMPLOYEE BENEFITS Group Term Life advantages |
1. No medical exam 2. Tax-free nature of the first $50,000 of coverage |
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EMPLOYEE BENEFITS Accidental death and dismemberment |
Provides a lump sum benefit for loss of life or body parts due to an accident
business travel coverage - covers specified class of employees only while traveling for business voluntary accident insurance - covers accidents at any time related to any activity, personal or business |
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EMPLOYEE BENEFITS Group Policies with Permanent Benefits Requirements for special tax treatment |
1. The amount of DB considered pat of the group term plan must be specified in writing by the employer or policy 2. The amount of DB designated as group term must comply with a formula in the regulations |
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EMPLOYEE BENEFITS Group Paid-Up Insurance |
Consists of increasing units of whole life and decreasing units of group term. Only available to employees exhibiting employment stability |
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EMPLOYEE BENEFITS Group Ordinary Insurance |
Offers employees the opportunity to participate in whole life insurance funded by employee and employer contributions Not common |
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EMPLOYEE BENEFITS Group Universal Life Policy |
GULP Offers the benefits of an individual universal life policy but is underwritten on a group basis |
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EMPLOYEE BENEFITS Group Survivor Income |
No Lump Sum, but paid out as an annuity for a certain period Lack of choice in beneficiaries (spouse or children only) Only paid out if an eligible survivor Not considered life insurance due to unusual beneficiary structure |
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EMPLOYEE BENEFITS Dependents' Group Life |
Group life available for spouse or children up to age 26 Limited to $2,000 since coverage in greater amounts is taxable |
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EMPLOYEE BENEFITS
Supplemental Group Term Life |
Additional coverage provided to a class of employees in a non-discriminatory basis
Often requires proof of insurability |
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EMPLOYEE BENEFITS Group Carve Out |
Enhanced benefits available to a group of executives, in which group term coverage is removed and personalized coverage is provided Not subject to discrimination requirements Split-Dollar life is one method |
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EMPLOYEE BENEFITS Exceptions to >$50k Group Term taxation |
1. Individuals who are disabled or retired, under certain conditions 2. Individuals who have designated the employer or a charitable organization as a beneficiary |
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EMPLOYEE BENEFITS
Retired Lives Reserves |
A plan that prefunds the cost of postretirement group life insurance coverage Either an insurance company separate account or a trust account |
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EMPLOYEE BENEFITS Small Business Health Care Tax Credit |
No more than 25 full-time equivalent employees (two part-time employees = 1 full-time employee) Pay average of less than $50,000 Business must cover at least 50% of the cost of single health care coverage for each employee (not family) 35% of the cost available against the employer's regular tax and AMT liability |
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EMPLOYEE BENEFITS Self-funded state regulation exemption |
1. The plans do not have to include benefits mandated by specific states 2. Does not have to carry any insurance protection, and saves about 2% on state premium tax 3. Combined savings may approach 5% compared to fully insured plan |
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EMPLOYEE BENEFITS Specific vs. Aggregate Stop Loss Coverage for self-funded plans |
Specific - pertains to an individual participant and limits the plan's liability for any individual's health care costs Aggregate - pertains to an entire group and normally is not calculated until the end of the plan year |
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EMPLOYEE BENEFITS Minimum premium plans |
Limits an employer's potential liability on a monthly basis Carrier's reimburses the plan during the year when benefit payments have exceed a predetermined level |
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EMPLOYEE BENEFITS Voluntary Employee Beneficiary Associations (VEBAs) |
A trust funded by an employer for nonretirement benefits and take an immediate tax deduction Sponsored by a single employer or group of 10 or more employers Trusts that comply with IRC Sec. 501(c)(9) (nondiscrimination) and 505(b)(7) are exempt from income tax on earnings, while welfare benefit trust earnings are fully taxable to employers Can not offer retirement, commuter or misc. fringe benefits |
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EMPLOYEE BENEFITS Self-Insured Nondiscriminatory Testing |
- at least 70% of all employees; - 80% of eligible employees, if at least 70% of employees are eligible; or - a class of employees that is considered nondiscriminatory |
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EMPLOYEE BENEFITS Deductiblity of Premiums |
Premiums paid by the employer for health or disability insurance are deductible business expenses for the employer as long as the benefits are payable to the employee |
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EMPLOYEE BENEFITS Deductiblity of Premiums in S Corps. |
Health and accident insurance premiums paid on behalf of a greater than 2% S Corp shareholder-employee are deductible by the S corporation as fringe benefits |
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EMPLOYEE BENEFITS HSA Distributions |
Ordinary income tax applies to distributions for other than qualified medical expenses, plus a 20% additional tax |
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EMPLOYEE BENEFITS LTC Premiums |
LTC insurance premiums are considered a qualified medical expense under an HSA Deductible for individuals above the 10% medical expense threshold with limitations based upon age |
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EMPLOYEE BENEFITS LTC Qualified Requirements |
- must be guaranteed renewable - cannot provide a cash surrender value or be used as collateral for a loan - cannot duplicate benefits provided under Medicare, with limited exceptions; and - any premium refunds or dividends must either reduce premiums or increase future benefits |
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EMPLOYEE BENEFITS Qualified LTC includes: |
- necessary diagnostic - preventive - therapeutic - curing - treating - mitigating - rehabilitative services - maintenance or personal care services for a Chronically ill individual |
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EMPLOYEE BENEFITS Chronically Ill Individual |
- Unable to perform at least two activities of daily living (ADLs) without substantial assistance for at least 90 days, - Requiring substantial supervision due to cognitive impairment ADLs include: eating, toileting, transferring, bathing, dressing and continence |
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EMPLOYEE BENEFITS COBRA |
Consolidated Omnibus Budget Reconciliation Act of 1985 - Employers providing group or self-funded health coverage are required to offer terminated employees the right to buy continued health coverage - Identical coverage from when employed |
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EMPLOYEE BENEFITS |
- Gov't and church employers - Small companies with less than 20 full-time employees (2 part-time = 1 full-time) |
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EMPLOYEE BENEFITS COBRA Notice |
- 44 days (30 days + 14 days after administrator was notified of qualifying event) - up to $110/day for each day that COBRA notice is late awarded to participant |
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EMPLOYEE BENEFITS Major HIPAA Provisions |
- Defines "preexisting conditions" - eliminatted by ACA - Preexisting conditions cannot apply to pregnancy - Limitation or exclusionary period (<12 months) - Portability - Guarantee Issue - IRA Withdrawal provision - Life insurance proceeds - Long-term care - Long-term care premium deduction |
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EMPLOYEE BENEFITS Family and Medical Leave Act (FMLA) |
Requires all employers of at least 50 employees in the current or previous year within a 75-mile radius of the workplace to provide eligible employees with up to 12 weeks' leave for: - adoption or birth of a child or placement of a foster child - serious illness of employee's spouse, parent or dependent child - serious illness of the employee |
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EMPLOYEE BENEFITS Affordable Care Act provisions |
- Grandfathered plan - Essential health benefits and minimum essential coverage - Affordable coverage |
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EMPLOYEE BENEFITS ACA Affordable Coverage |
Coverage considered affordable if employee contributions are less than 9.5% of an amount equal to 130 hours multiplied by: 1. The employee's hourly rate of pay first day of coverage; 2. The employee's lowest hourly rate of pay during the month |
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EMPLOYEE BENEFITS Categories of Noncash Fringe Benefits |
1. No-additional-cost services 2. Qualified employee discounts (<20%) 3. De minimis fringe benefits 4. Working condition fringe beneifts* 5. Transportation fringe benefits with cash option* 6. Athletic facilities* 7. Meals and lodging* * - may discriminate |
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EMPLOYEE BENEFITS Principles of Workers' Compensation |
- Negligence is no longer a factor in determining liability - Indemnity is partial but final - Periodic payments - Cost of program is made a cost of production - Insurance is required |
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EMPLOYEE BENEFITS Workers' Compensation Benefits |
1. Medical expenses 2. Total temporary disability 3. Partial temporary disability 4. Total permanent disability 5. Partial permanent disability 6. Survivors' death benefits 7. Rehabilitation benefits Benefits are tax-exempt to participant |
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EMPLOYEE BENEFITS Unemployment Insurance |
- Funded by the employer - Employees must meet certain eligibility requirements 1. covered employment 2. minimum income earned 3. continued attachment 4. unemployment must be involuntary Subject to income tax |
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QUALIFIED PLANS Pension Plans |
Defined Benefit Plan (DB) Cash Balance Plan (DB) Money Purchase Plan (DC) Target Benefit Plan (DC) |
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QUALIFIED PLANS Profit Sharing Plans |
Profit Sharing Thrift Plan Stock Bonus ESOP (LESOP) Age-Weighted Cross Tested 401(k) Plan Simple 401(k) Plan |
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NON-QUALIFIED PLANS Tax-Advantaged Plan |
Traditional IRA Roth IRA Simple IRA SEP (SARSEP) 403(b) (TSA) |
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NON-QUALIFIED PLANS Other NQ Plans |
Section 457 ISO ESPP NQSO Deferred Comp. |
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QUALIFIED PLANS Top-Heavy |
-The aggregate account balances for key employees exceed 60% of the present value of cumulative accrued benefits |
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QUALIFIED PLAN Top Heavy Plan Requirements |
Accelerated Vesting - 3-year cliff or 6-year graded Min. Contributions and Benefits to be paid to Non-Key Employees - DC Plan -- Plan must provide contribution of at least 3% of compensation per year, or if less, the percentage contributed by key employees - DB Plan -- Must provide min. benefit of 2% of employee's highest 5-year average comp. for each year of service while plan is top heavy, to a max of 20% |
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QUALIFIED PLAN Minimum Funding Requirement |
- Employer must contribute at least a min. amount to fund the plan benefit - If act. value exceeds min. required to fund, contribution is decreased. - 10% penalty tax if underfunded |
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IRA Divorced Spouse Contribution |
A divorced non-working spouse may use alimony to fund a contribution. |
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DEFINED BENEFIT Required Contribution |
The required contribution is the amount needed each year to fund the lump-sum equivalent of the participants' normal retirement benefits |
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IRA SEP IRA Eligibility |
Any employee 21 or older, earning $7.50/hour (or $550/year), who works as little as two hours per week and who has done so for three of the last five years |
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IRA SIMPLE IRA Withdrawals |
Withdrawals during first two years of participation are subject to a 25% penalty tax |
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OTHER PLAN ISSUES Parent Subsidiary Group |
Exists if the parents own at least 80% of the stock in another corporations Includes company in coverage test |
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OTHER PLAN ISSUES Life Insurance in a DC Plan |
The cost of whole life insurance must be less than 50% of the total employer contribution allocated to a participant's account |
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EMPLOYEE GROUP BENEFITS Group Survivor Income Coverage |
The employee does NOT have a choice in selecting the policy's beneficiary |
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EMPLOYEE GROUP BENEFITS Retired Lives Reserves Tax implications |
A current employee is NOT taxed on the employer's contributions if he or she has no present interest in the fund |
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EMPLOYEE GROUP BENEFITS Fully Insured Tax implications |
Death benefits from accidental death coverage are taxable to the employee's beneficiary if the contract does NOT meet the definition of life insurance |
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Participant Eligibilty |
Allowed to commence participation once satisfies service requirements no later than which two of the following events: 1. the first day of the plan year beginning after the date on which the employee satisfies such requirements 2. the date six months after the date on which the employee satisfies such requirements |
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DEFINED CONTRIBUTION Legal Requirements for Profit Sharing Plans |
1. Forfeitures must be used to reduce employer contributions or be reallocated to the remaining participants' accounts 2. Employer deductions for plan contributions are limited to 25% of the participants' total comp. 3. Allocations to a participants' account cannot exceed the lesser of 100% of compensation or $52,000 annually in 2014 |
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DEFINED CONTRIBUTION Legal Requirements for ESOPs |
1. ESOPs must permit participants who have reached age 55 and have at least 10 years of service the opportunity to diversify their accounts 2. ESOPs cannot be SS integrated 3. The mandatory 20% income tax w/h requirement does not apply to distributions of employer stock from an ESOP |
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DEFINED CONTRIBUTION Legal Requirements for Money Purchase Plan |
1. The plan must provide a definite and nondiscretionary employer contribution formula 2. Forfeitures can be reallocated to the remaining participants' accounts in a nondiscriminatory manner or be used to reduce employer contributions 3. A separate employer contribution account must be maintained for each participant |
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DEFINED CONTRIBUTION Basic Provisions of a IRC Sec. 401(k) Plan |
1. An employer's deduction for a contribution to a Section 401(k) plan cannot exceed 25% of covered payroll, and the deduction is not reduce by the employees' elective deferrals 2. A Section 401(k) plan cannot require as a condition of participation that an employee complete a period of service longer than one year. 3. Employee elective deferrals may be made from salary or bonuses. |
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401(K)s Legal Requirements of a SARSEP |
1. An existing (pre-1997) SARSEP may be maintained by a sole proprietorship, partnership or corporation under the provisions of prior law. 2. A new SARSEP may not be established after 1996. |
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DEFINED CONTRIBUTION Keogh Plans |
1. Benefits provided by a defined benefit Keogh plan cannot exceed the lesser of $210k or 100% of a participant's average compensation for his high three years. 2. Keogh plans are qualified plans established by any unincorporated business entity. 3. Keogh plans are permitted to make loans to common-law employee participants and owner-employees. |
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TSA Provisions |
1. At the TSA owner's death, the amount received by the beneficiary is included in the gross estate of the decedent. 2. The catch-up eligibility increases the total amount of the employee's maximum available deferral 3. If an employee contributes $6,000 to a 401(k) plan this year, he or she is limited to contributing a maximum of $11,500 to his or her salary reduction TSA, assuming the employee is not eligible for catch-up contributions. 4. Salary reduction contributions made to a TSA are subject to Social Security tax (FICA). |
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Top Heavy Rules |
1. An employer's min. top-heavy contribution to a money purchase pension plan is the lesser of 3% of compensation per year for non-key employees or the highest cont. %made for a key employee if the highest cont. % is less than 3% of comp. 2. For purposes of applying the 60% top-heavy test, benefits include any dist. made due to separation of service during the last year and any in-service distributions made during the last 5 years |
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Exempting a loan from prohibited transaction |
1. A reasonable rate of interest 2. Adequate security |
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Unrelated Business Taxable Income (UBTI) |
1. Employer securities purchased with borrowed funds by ESOPs are not subject to UBTI.
2. For purposes of UBTI rules, a trade or business generally includes any active (as opposed to passive) business activity carried on for the production of income. 3. The UBTI rules apply to both active and passive investors who own a partnership in an investment enterprise. 4. Dividends, interest and similar types of income derived from investments in a business are not subject to the UBTI rules. |
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Responsibilities of a Qualified Plan Trustee |
1. Investing the plan's assets according to ERISA's fiduciary requirements 2. Monitoring and reviewing the performance of qualified plan assets |
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Penalties applied to Prohibited Transactions |
1. The transaction must be corrected and the plan placed in a financial position no worse than if the transaction had never occurred. 2. Transactions that continue uncorrected into subsequent years are subject to additional penalties. |
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DEFINED BENEFIT Legal Requirements for PBGC Coverage |
1. PBGC-guaranteed benefits exclude medical insurance benefits, benefits in excess of PBGC limit, and lump-sum benefit payments. 2. The amendment of a defined benefit pension plan into a money purchase pension plan will result in termination of the defined benefit plan. |
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Group Term Nondiscriminatory |
1. At least 85% of participants are not key employees
2. The plan must benefit a nondiscriminatory class of employees 3. If benefits are part of a cafeteria plan, then the plan must comply with the nondiscrimination rules of IRC Sec. 125 |
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SOCIAL SECURITY Quarters of Coverage |
$1,200 = 1 Quarter of coverage Currently insured = 13 Quarters Fully insured = 40 Quaters |
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SOCIAL SECURITY Working while collecting SS under FRA |
62 to FRA-1 Penalized $1 for every $2 earned over $15,480 (2014)FRA-1 to FRA Penalized $1 for ever $3 earned over $15,480 (2014) |
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SOCIAL SECURITY Workers not covered by SS |
- Federal employees hired prior to 1984 - Railroad employees covered under the Railroad Retirement System - Business owners received only distributive income (dividends) for services performed - Children under age 18 employed by a parent in an unincorporated business - State and local government groups covered by a retirement system where employer has elected to excluded SS coverage - Employees of religious organizations opting out for religious reasons |
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DEFINED CONTRIBUTION PS 401(k) Plan Limits |
1. Includible compensation is limited to lesser of 100% of compensation or $260,000 in 2014. 2. The employer contribution limit is 25% of compensation |
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Section 457 Catch-Up Provision |
The final three-year catch up provision allows participants to make contributions up to twice the maximum deferral allowed for a 457 plan. The additional deferral amount is available only from prior unused deferrals and is to make up for those years when deferrals were less than the maximum allowed. The other catch-up is for those who have attained age 50, and can increase their deferrals by $5,500 in all but the last three years before retirement if they use the final-three year catch-up |
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DEFINED CONTRIBUTION PLANS Money Purchase Plan |
Employer is required to contribute a fixed percentage of each participant's compensation
Individual accounts with the ability to invest as you choose Lesser of 100% of compensation or $52,000 (considering up to $260,000) |
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EMPLOYEE BENEFITS IRC Section 125 Cafeteria Plan Characteristics |
- Offers one or more nontaxable benefit and a cash benefit taxable to the employee - Generally, retirement or deferred compensation benefits may not be included - The plan may include 401(k) (salary reduction) contributions, 401(m) (after-tax) contributions and employer matching contributions - The plan CANNOT provide reimbursements for educational expenses, commuter expenses and LTC insurance premiums - The plan may provide dental expense reimbursements and child care expense reimbursements |
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Parent-Subsidiary Group |
Exists if the parent owns at least 80% of the voting stock in another corporation |
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Service period for 100% vesting plan |
A plan that offers immediate 100% vesting can have a service requirement of 2 years before participation |
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EMPLOYEE BENEFITS Taxable payments from a Health Insurance Policy |
- Discriminatory payments - Reimbursements for amounts deducted in a prior year - Payments in excess of the actual medical expenses |
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Stock Bonus Plan |
- Taxation of the capital gain on stock held in the plan may be deferred beyond the distribution date - Stock bonus plans allow for flexible employer contributions - Participants must be allowed to receive their distributions in shares of employer stock that is publicly traded - If not readily tradable on an established market, a participant must be provided a put option that will be available for at least 60 days after distribution |
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ISOs treated as NQSOs |
The value of ISOs exercised in any year can not exceed $100,000 based on the grant price. If exercised, the portion of ISOs that exceeds $100,000 based on the grant price will be treated as NQSOs |
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Table 2001 versus Table 1 |
Table 2001 is used for permanent insurance in a plan
Table 1 is used for group term |
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Roth 401(k) RMDs |
RMDs are required for a Roth while still in a 401(k). This can be avoided my rolling it over to a Roth IRA. |
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DEFERRED CONTRIBUTION PLANS Stock Bonus Plan |
PSP where employer contributions are made using stock, but other investments are available to diversify after three years of service Participant deferrals can be diversified immediately |
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Permitted Dispartiy |
Social Security integration - Must be reduced for early retirement - No longer permits "integrated excess" where some participants receive no contribution - Calculated on a per year of service basis over a max. of 35 years |
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Qualified Employer Discounts |
Not deductible by c corporation |
