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61 Cards in this Set
- Front
- Back
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What is the difference between a nonleveraged ESOP and a leveraged ESOP
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A nonleveraged ESOP is not designed to borrow money and carries the normal attributes of a stock bonus plan. A leveraged ESOP, LESOP, is a qualified plan that is specially designed to borrow money and permits ER to obtain favorable debt financing through the deduction of both principal and interest for its contributions to the ESOP
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What are the requirements of an ESOP for EEs nearing retirement age.
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The EEs who are 55 and over and who have participated in the plan at least 10 years must be allowed to diversify the investments in their separate accounts during a qualified election period. The qualified election period is the six plan year period beginning with the individual first becomes a qualified participant.
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What happens if the elective deferrals of the HCEs exceed the level permitted by the ADP) (actual deferral percentage) tests?
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The plan must distribute the excess contributions to the HCEs by the end of the following plan year to maintain the qualified status of the plan. This distribution is subject to a 10% excise tax if the ER does not distribute the excess contributions within 2 1/1 months after the end of the plan year.
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What is the tax treatment of ER provided life insurance coverage to in a Keogh plan?
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The employer deducts those premiums as a plan contribution. The EEs are subsequently charged with the value of the pure life insurance element as additional compensation using IRS table 2001. However, the pure life insurance element of premiums paids for a self-employed owner IS NOT deductible by the employer.
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When should a traditional profit sharing plan be used?
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1)when ERs profits or cash flow fluctuate from year to year; 2) ER wants EE incentive; 3) EEs are young; 4) EEs are willing to accept some investment risk
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What safe harbor rules provide an alternative methods of meeting nondiscrimination testing requirements
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ER can avoid ADP and ACP testing id
A 100% match up to 3% of deferrals plus 50% match for contributions between 3-5% of comp or 100% match up to 4% (so if EEs don't contribute, ER does have to pay OR B Nonelective contributions of 3% or more of all eligible that are 100% vested |
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What are the two types of ER contribution provisions under a profit sharing plan
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Discretionary or formula
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In order for profit-sharing plan remain qualified, what does IRS require of contributions?
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That they are made on substantial and recurring. Normal contribution limits apply
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What is a major adv of profit sharing plans (including one with a 401K feature?
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Inservice distributions for financial hardship. residence, medical expense, higher education, foreclosure
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When is the use of a new comparability plan recommended?
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When there is more than one owner, with each own owner of a substantially different age.
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When is it most appropriate to have an ESOP?
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to provide a tax adv means for EEs to acquire stock, to create a market for stock, to provide a vehicle for company to borrow money for business needs, when ER wants to broaden its ownership to help prevent a hostile takeover.
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What is the unique advantage of ESOPs over every other type of qualified plan?
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ESOPs may borrow money in the name of the plan without violating the prohibited transaction rules.
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What is CODA (cash or deferred arrangement)
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AKA traditional 401K plan
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What are the two general nondiscrimination tests?
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actual deferral percentage (ADP) and actual contribution percentage tests.
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How is the actual deferral percentage test (ADP) satisfied?
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ADP (ACTUAL DEFERRAL PERCENTAGE (primarily for 401ks
NCHCE - DP Max HCE-DP 0-2% 2X 2-8% +2% 8% 1.25X |
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What happens if ADP test fails?
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ER must make a corrective distribution OR an additional matching or nonelective contribution may be made for the nonHCEs
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How is the actual contribution percentage test (ACP) satisfied?
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ACP test applies to ER matching and EE after tax (voluntary roth 401k) contributions. It has the same percentages as the ADP test but is based on actual contributions/compensation as a percentage
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What is the safe harbor rule for plans with automatic enrollment provisions?
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Qualified % of EE deferral cannot exceed 10% and must be equal to 3% first year and 6 % by 6th year
OR nonelective ER contribution of 3% OR 100% match to 1% and 50% match between 1-6% 100% QACA vested after 2 yrs of service |
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What is a SIMPLE 401K plan?
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SIMPLE plans used by ER with 100 or less EEs who earned min of $5K during preceding year, and who DO NOT maintain QP, or SEP, SARSEP or 403b. However sec 457 ok. Exempt from ADP and top heavy rules.
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How much of compensation can EE defer to a SIMPLE 401K or SIMPLE IRA and what is the ER contribution?
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EEs are limited to $12K with $2.5 catchup (less than traditional 401k)
ER matches to 3% or 2% nonelective for all eligible. |
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What is a Roth 401K plan
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elective deferrals are permitted on an AFTER TAX basis. Max contribution same as traditional ($17.5 with $5.5 catchup) If ER has a 401K and Roth 401K, they must be separately tracked Max contribution is $17.5 plus $5.5 catch for over 50.
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What is a major adv and disadv of the Roth 401K
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Distributions of contributions are tax free Distribution of earnings are tax free if IF 1) after 5 yr hldg (January 1) and 2) ADD.
RMDs required Disadv Required RMDs No first time home buyer exception. Contributions phased out at $188K MFJ, $112K S, $10K MFS |
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What is a savings thrift plan?
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Qualified DC plan. A pure thrift plan features only after tax contributions.. Generally has been replaced with 401K plans
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When should a savings/thrift plan be used?
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ER wants to supplement the company's defined benefit pension plan; EEs are young and are will to assume risk
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What is a Keogh
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AKA HR10, a qualified plan for self-employed usually sole proprietorships, LLCs LLPs and partnerships. The three most common types of Keoghs are profit sharing, money purchase and target benefit plans (all DC plans).
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What is the max contribution for a Keogh plan?
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Use sch C income X .1859 and pick answer closest to it.
About 20 % adjusted for SE |
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Can life insurance be used in a Keogh plan
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Yes but for the self employed individual (not employees) the pure protection value of the premium is not deductible
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What are the xteristics of a profit sharing plan
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Defer taxes. No mandatory funding requirements. contributions can be discretionary but must be substantial and recurring. ER contribution must be vested at 3 yr cliff or 2-6 graded. Inservice distribution for med and hom. Considered a DC plan.
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When is a ps plan appropriate
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When ER financial ability to contribute varies year to year; as an alternative to a qualified pension plan, when ER want to increase contributions when ER profits increase, EEs are young and can accept investment risk, as a supplement to existing db plan
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What is a stock bonus plan (ESOP)
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benefits are generally distributed in the form of ER stock, not cash. It may permit EEs contributions but usually does not, dividends an be reinvested or distributed to participants. If elective deferrals permited, ER MUST permit EEs to divest ER securities . Participants are given voting rights.
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How is NUA - net unrealized appreciation treat in a stock bonus plan.
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participant can defer NUA if there was a lump sum distribution. Upon distribution participant recognized ordinary income on value of stock at contribution to plan. NUA is taxed as capital gains at sell.
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What are disadv of ESOP
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Because ESOP is a qualified plan, must apply coverage, vesting, funding, reporting requirements. ER stock is very speculative, CANNOT use SS integration
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What are the tax bnefits provided to a SH for selling stock to an ESOP
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No recognition of gain if ESOP owns 30% of stock and S/H held stock for at least 3 years before sale.. Allows S/H to create a diversified retirement portfolio,
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What are adv and disadv of a savings thrift plan.
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Not subject to ADP testing of 401K but subject to ACP test. Admn costs more expensive than a money purchase or traditional profit sharing w/o EE contributions
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What is the max elective deferral contributions for 2013 for 401k (CODA) cash or deferral arrangements
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$17.5K with catchup for over 50 of $5.5K
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When can 401K accounts based on elective deferrals be distributed
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ADD. Preretirement distrubitions are subject to a 10% early withdrawal penalty. RMDs are not required if still work at 401K sponsor
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What is the income tax credit for elective deferral contributions
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a nonrefundable income tax credit is available for 401K, 403b, section 457, SIMPLE, SARSEP, IRA and Roth IRA if income is less than $29,500 OR $59k mfj. of $2k
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What are examples of age weighted plans
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age weighted money purchase plan, age based profit sharing plan, new comparability plan
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When are age weighted plans appropriate
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Older EEs, alternative to DB needed for older EEs, switch from DB, a closely hed business or PC with large number of key EEs older than 50
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What are adv and disadv of age weighted plans
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tax deferred savings, eligible for 10-year forward averaging, Disadvsubject to minimum funding standards, mandatory minimum contributions each year AGE WEIGHT PROFIT SHARING PLAN IS NOT subjec to minimum funding but requires recurring and substantial contributions.
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What is a target benefit plan
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A DC pension plan which contributions are made for each participant to fund the participant's target benefit at retirement. Must provide for a qualified joint and survivor annuity as an automatic benefit. Must apply rule for DB plans to the target formula. Cross tested
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What are adv and disadv of target benefit plan for ER
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PBGC not required, EE bears risk, minimizes cost for lower paid EEs
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What is a new comparability plan
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A DC plan that is either a money purchase pension plan or a discretionary profit sharing plan. It has a contribution formula that results in oe group or class of EE receiving a given contribution level and another group receiving a different level
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When should a new comparability plan be used
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where owners ared different ages. Classifications of EE can be based on SY, Age, title, division, comp, class of EE or any combination
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What happens when a new comparability plan is aggregated with a 401K
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all features of plan are aggregated and must pass nondiscrimination tests
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What type of entities would use a Keogh
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Sole proprietorships, partnerships, S corporations (contributions are based on W2 earnings since corporations do not have self employed owners)
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What is the formula used to determine the deduction for a keogh for an owner
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.1859 get you close to answer
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What are disadv of Keogh plan
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can be expensive unless use prototype plan, ERs must comply with nondiscriminatory plan coverage requirements; insurance in qualified plan for self-employed is treated less favorably than for regular EEs,
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How is the contribution different for self employed
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The effective percentage limits for contributions to qualified plans are lower for self employed because of the definition of compensation=Sch C type income
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When is a QPSA, qualified preretirement survivor annuity and a QJSA, qualified joint and survivor annuity required?
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Required by all qualified plans.
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What are the Section 72T exceptions
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IM 2HEADED
Applies to all qualified plans, section 403b and IRAs--no w/d penalty to distributions after 59 1/2, made to the bene or estate; attributable to owner;s disability, that are part of an annuity of equal paments over the life expectance, for medical expenses exceeding percentage, also (but not for IRAs) 55 no job, a QDRO for IRAs only=$10K home loan and health insurance if unemployed |
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What are annual additions as defined by Sec 415
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ER contributions plus EE deferrals plus ER matches and reallocated forfeitures CANNOT exceed the lesser of $51K or 100% of compensation.
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Justin earns $200K/year. He has elective deferrals of $15K invested in his Keogh plan. His company matches up to 3% of his salary. Due to EE turnover, $2K of forfeitures is added to his account. What is the maximum ER contribution the company can make to a DC plan on Justin's behalf in 2013
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$28K. Max annual addition=$51K. Annual addition=ER contributions, EE deferrals, reallocaated forfeitures
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If a person has multiple ERs, how are contributions and deferrals treated?
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ER contributions are not limited--no coordination
EE deferrals must be aggregated. Does not include section 457 nor if you are an ER in one business and an EE in another |
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What are the safe harbor Sec 401K plan rules (alternative methods of meeting nondiscrimination testing requirements) rules for QACA, qualified automatic contribution arrangements
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No ADP or ACP test required if ER must make nonelective contribution (at least 3%) or 5% matching contribution for NHCE, 100% vested
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How are nonqualified distributions from Roth 401K treated
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As distribut8on of both contributions and a distribution of taxable accumulated earnings
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What is the ma that can be contributed into a 41K traditional or roth
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$17.5K with a $5.5K catchup
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How are the distributions different btwn Roth 401K and traditional 401K
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Just like the Roth IRA, a 5 year 5 year holding period beginning January 1 is required. If holding period is not met,j only ER matching contributions can be withdrawn to aovid taxes. In a traditional 401K only usual requirements must be met for qualified distributions
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What event can a non penalized w/d be taken in a 401K that is not available for other plans
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hardship
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How is NUA, net unrealized appreciation treated in a stock bonus plan
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When participant gets stock, recognizes OI on value of stock at time of ER CONTRIBUTION. At time of sale NUA is recognized as CG
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How is a lump sum distribution to decedents beneficiary from a profit sharing plan treated
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IRD It is treated as income with respect to decedent--ie. no step up in basis. OI tax must be paid on lump sum distribution
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