AAEC 4104: Retirement Planning Exam 2 Review Guide I. Chapter 2: Retirement Accumulations and Distributions a.

Factors Affecting Retirement Planning--generally know how each of the following would influence the amount one would need to save for retirement: i. Retirement Income Sources, Remaining Work Life Expectancy (RWLE), Retirement Life Expectancy (RLE), Investment Returns, Inflation, Wage Replacement Ratio ii. Retirement Income Sources (Sometimes called the Three-legged stool. Money can come from your employer qualified and nonqualified, from you IRA, personal savings, reverse mortgage, or from the government SS and Medicare) iii. Remaining Work Life Expectancy (RWLE) (This is the amount of years you have left til you retire. During these years you will build your retirement income. 93% of people retire between ages 62-65. Working means you would need to save less each year but if you have a shorter RWLE you need to save more each year) iv. Retirement Life Expectancy (RLE) (This is the amount of time you will live in retirement beginning of retirement til death. This is the time period we are trying to prepare for) v. Savings (Important concepts related to savings include the savings amount, the savings rate, and the timing of the savings.) -Should start to save early (power of tvm/compounding), here are some recommended savings rates: 25-35: 10-13% 35-45: 13-20% 45-55: 20-40% vi. Investment Returns Basically asks: How/what should I invest in? Its important to get the individuals risk tolerance both objective (basic things needed to invest) and subjective (how the client feels about investing). The persons age is also important because we will base the risk level off of it (early person more compounding periods, can assume more risk; older person closer to retirement, should be more conservative and tone down the risk level) vii. Inflation (the silent killer. Inflation can easily erode away our savings loss of purchasing power. Ex. 100,000 turns out to only 20,000 after 50 years). To adjust inflation use IARR : (1+R)/(1+I) - 1 viii. Wage Replacement Ratio (WRR) Is an estimate of the percent of annual income needed during retirement compared to income earned prior to retirement (what percent of what you currently make do you plan to spend per year in retirement). 1. How to calculate WRR - Calculated as follows: WRR = Annual Income Needs in Retirement/Annual Income Earned before retirement ix. Retirement Income Needs--Be able to recognize adjustments which increase or decrease retirement income needs (Exhibit 2.15) Adjustments that would decrease income needs: No longer pay social security taxes No longer need to save No longer pay house mortgage 1

AAEC 4104: Retirement Planning Exam 2 Review Guide No longer pat work related expenses Auto insurance may be reduced Possible lifestyle adjustments Adjustments which may increase income needs Increasing cost of health care Lifestyle changes Increase in travel Second home Clubs and activities Expenditures on family/gifts/grandchildren Increased property taxes b. General definition of longevity risk Basically a risk of you outliving your money. Can also occur in life insurance or annuity companies when their payouts are higher than expected c. Capital Needs Analysis i. Be able to perform capital needs analysis (with calculator or TVM formulas) using the annuity method -Annuity (least Conservative method) retiree meets assumptions and dies broke 1-2) Calculate the WRR and figure out total needs in todays dollars 3) Subtract any additional retirement income (ex. Social security) 4) Find the future value needed of todays dollars by using the inflation rate 5) Figure out the final amount needed by using the PVAD with an inflation adjusted rate of return

II. III. IV. V. VI.

VII. Chapter 3: Qualified Plan Overview a. Be able to identify Advantages of Qualified Plans (Exhibit 3.4, slides) Advantages to the Employer Contributions are currently tax deductible and contributions to the plan are not subject to payroll taxes Advantages to the Employee Availability of pretax contributions, Tax deferral of earnings, ERISA protection, Lump-sum distribution options i. ERISA protectiongeneral protection from creditors/bankruptcy ERISA provides protection from creditors, bankruptcy and plan sponsors; ERISA can be seized to pay federal tax liens; Also, assets are not protected from QDRO (court order related to divorce, property settlement, or child support) b. Qualification Requirements i. Eligibility 1. Standard eligibilityone year service (1,000 hrs/yr) and age 21 2. 2 year election, -if elected the employee will be 100% vesting after the two year period. This is most useful for companies with high employee turnover rates 3. Educational institutionthey can elect to make participant wait until the age 26, but then he/she is 100% vested at that point ii. Coveragereceive any benefit/contribution to plan 1. Know how to calculate 3 Coverage Tests (4 tests for DB Plans) First know what a HC employee is - $110k in 2011, >5% owner 2

AAEC 4104: Retirement Planning Exam 2 Review Guide a. General Safe Harbor (Easiest test in order to pass, more than 70% of the NHC employees need to be included in the plan) b. Ratio Percentage (if the % of NHC to HC employees covered is greater than 70%, then pass) c. Average Benefits (will tell you if nondiscriminatory class. test met) (AB% of NHC/ AB% of HC > 70 then pass) d. 50 Employees/40% eligible test (DB plans only) This additional test is for Defined Benefit Plans onlyeither must benefit at least 50 (nonexcludable) employees or 40% of all (nonexcludable) employees) iii. Vesting 1. Employee Contributionsalways are 100% vested 2. Employer Contributions a. DC plans2 to 6 yr graded, or 3 yr cliff; unless 2-yr, 100% election b. DB plans3 to 7 yr graded, or 5 yr cliff; unless 2-yr, 100% election iv. Top-Heavy Plans (>60% accrued benefits or >60% balances in DC to key employees) 1. Being top heavy influence generally requires vesting to be accelerated and funding to non-key employees to increase c. Plan Limitations on Benefits and Contributions i. Covered Compensation $245k in 2011--max. salary that can be used in plan funding formulas in qualified plans (both DB and DC plans) ii. DB Plansmax. annual benefit at retirement up to 100% of avg. 3 highest yrs salary (but not more than $195k) iii. DC Plansmax. total contribution (employer, employee, forfeitures) in plan year up to 100% salary (but not more than $49k; $54.5k if catch-up contributions > age 50) iv. Employer Contributions Limit 1. DC PlansEmployers can only deduct up to 25% of total covered compensation or payroll of all participants 2. DB Plans25% rule does not apply, generally deduct whatever contribute

VIII. Chapter 4: Qualified Pension Plans a. Pension Plan Requirements i. Mandatory Annual Funding 1. DB Pension Plans--annual funding required,100% funding of all plans by 2015 2. DC Pension Plansfund plan annually w/ amount or % per plan documents ii. In-Service Withdrawalsare these generally permitted for DB and DC plans? (in service withdrawals are not permitted in pension plans. DB plans never allowed, but DC profit sharing plans they are) iii. Investment in employer securities: 10% DB plan, 100% DC plans (but allow diversify) iv. General differences b/w DB Pension and DC Pension Plans related to: 1. Actuarieswhen needed? How different assumptions change plan costs? (DBPP and CBPP need actuaries annually higher costs. They will help determine the amount of target normal cost) (MPPP no actuary is needed at all, whereas a TBPP needs an actuary for set up) 2. Investment risk--who maintains? (In a DB plan the employer assumes all the risk) (In a DC plan the employee assumes the risk) 3

AAEC 4104: Retirement Planning Exam 2 Review Guide

b.

c.

d.

e.

3. Plan Forfeitureswhat are they; how can they be used? (DB plan forfeitures will be used to reduce the plans costs) (DC plan forfeitures can either be used to reduce the plans costs or be allocated amongst the participants) 4. PBGCgeneral purpose (to protect the assets of the plan for the employees. DB plans pay a premium for this type of insurance; $54k max PBGC guarantee; not used in DC plans 5. Accrued Benefit (DB) vs. Account Balance (DC) (Accrued Benefit DB roughly the PV of the benefits you should receive at retirement Ex. You will get 1.5% x Your Salary x Years of service when you retire) (Account Balance DC measured by the account balance easy, its the dollar amount in your account minus any unvested amount) 6. Credit for prior servicewhat is this; used for both DB and DC plans? The employer can choose to give credit for years of service before the plan was implemented once elected for one individual it must be provided for all. Only available for DBs Social Security Integration--what is this basically? (Basically this is a method of allocating plan contributions to employees that provides higher contributions to those employees whose compensation is in excess of the Social Security wage base for the year) Permitted with pensions? Defined Benefit Plans can utilize the excess method or the offset method while defined contribution plans are only permitted to use the excess method 7. Commingled (DB) vs. Separate Accounts (DC) Defined Benefit Pension Plans (DB plan) i. Know general difference b/w flat amount (ex. Fully invested earns you 500/month in retirement) lowest work incentive), flat % (the benefit received is based on a percent of the employees final salary) higher work incentive, and unit credit (Benefit received is based on years of service and compensation ex. 1%Xy.o.sXavg. 5 highest salaries) highest work incentive ii. Generally favors older participants--receive larger % overall contribution to plan Cash Balance Pension Plans (DB plan) i. Guarantees both annual contribution rate and annual earnings ii. Generally favors younger participants--more potential years in plan, compounding Money Purchase Pension Plans (DC plan) i. Guarantees contribution (% of compensation each year) but not earnings ii. Generally favors younger participants--more potential years in plan, compounding Target Benefit Pension Plans (DC plan) i. Guarantees contribution based on schedule determined by actuary when plan set up ii. Earnings are not guaranteed similar to Money Purchase Pension Plans iii. Generally favors older participants-- receive larger % overall contribution to plan

IX. Chapter 5: Profit Sharing Plans (all defined contribution plans) a. Contributions and Deductions i. When must contributions must be made? (Must be made by the due date of the companys tax return) Are they mandatory? No, not required ii. Total contributions (employer, employee, forfeitures) for each employee in 2011: $49k or $54k catch up if >50 (but never more than employee earned income) 4

AAEC 4104: Retirement Planning Exam 2 Review Guide iii. Employer Deduction limited up to 25% of total employer covered compensation iv. General diff. b/w allocation methods-Standard (stated percentage x each employee salary), Social Security Integration (take percentage times salary (up to 106,800), then times the remaining difference by the stated percentage (probably .157))), Age-Based (first calculate the PV of 1 dollar from now til the employee retires; Next multiply that percentage by the employees compensation; Next, get the percentage of the employees compensation to the total; Take that percent and multiply it by the predetermined Dollar contribution) New Comparability Plans--generally what it is; why are these far less common? -Retirement plans that provide higher benefits for certain classes of employees. Far less common due to IRS scrutiny, more expensive b. Cash or Deferred Arrangements (CODA)- also known as 401(k) plan i. Basics about a CODA or 401k plans 1. CODA= option to receive cash or defer taxation of compensation to future How are elective deferrals and earnings on those deferrals taxed? They are sheltered until withdrawn 2. 401k= CODA attached to Profit Sharing (most frequent) or Stock Bonus Plan Major advantages of 401k plans to employers? Can government establish? Mainly funded by employee deferral contributions and have minimal expenses (government cannot establish one of these) ii. Contributions to CODA or 401(k) 1. Employee contributions (aka Elective Deferrals) may be made in--traditional 401k, Roth 401k (if offered in plan), after-tax contributions (Thrift plan) a. Know $16.5k 2011 deferral limit ($5.5k catch-up if 50 or older) b. Roth 401(k)--irrevocable, included in gross income (but not taxed when withdraw) c. Individual 401(k) plan--basic understanding what they are, why used? Low-cost, easy to administer for owner-only business 2. Employer contributions--employer matching (be able to calculate example), employer profit sharing, or employer contrib. used to resolve ADP/ACP tests iii. Nondiscrimination tests for CODAs/401ks--in addition to meeting coverage tests and being subject to top heavy rules (Ch 3), also meet both ADP and ACP tests (unless meet one of two safe harbor tests): 1. Actual Deferral Percentage (ADP) test--test to make sure average deferral % of NHC not too much below average deferral % of HC a. What happens if fail test? Must correct. How? i. Corrective distributions--return contrib. to HC ii. Recharacterization--change to after-tax contrib. iii. Qualified Non-Elective contributions--employer makes to increase deferral % of NHC (100% vested) iv. Qualified Matching--additional match to NHC who elected to defer during plan year (100% vested) 2. Actual Contribution Percentage (ACP) test-- test to make sure average other contribution (employee after-tax + employer matching) % of NHC not too much below that % of HC a. Use same corrective procedures as ADP if fail test

AAEC 4104: Retirement Planning Exam 2 Review Guide 3. Also 2 general Safe harbor options to comply with ADP, ACP, or top-heavy rulesjust know that deal with employer making some min. contrib./yr, or automatically enrolling participants to defer % of salary iv. Hardship Distributions--Generally what are these; taxed as ordinary inc (possible 10% penalty); major examples--medical, funeral, purchase of home, education X. Chapter 6: Stock Bonus Plans and Employee Stock Ownership Plans (ESOPs) a. Stock Bonus Plans i. What essentially is a stock bonus plan and ways different from profit sharing plans A

stock bonus plan is a defined contribution plan established/maintained by an employer to provide benefits similar to those of a profit sharing plan. Contributins to the plans are in the form of company stock, not cash, and are not depended on the profitability of the company. Thus, a stock bonus plan does not require the corporation to use currently needed cash flow. Subject to the same basic qualified plan requirements as profit sharing plans. Contributions are discretionary, but must be substantial and recurring.
ii. Special requirements--right to demand employer securities, put option, voting rights, when distributions must begin and be fully paid (different than RMD rules) right to demand employer securities (when taking distributions), put option (allows the terminating employee the choice to receive the cash equivalent of the employers stock if the stock is not readily tradeable on an established market), voting rights (pass through the plan, all the way to the participant: except for nonmaterial matters of closely-held corporations), when distributions must begin and be fully paid (different than RMD rules) (Distributions must begin within 1 year of normal retirement, death or disability, or within 5 years for other termination and distributions must be fully paid within 5 years of commencement of distributions). iii. Be able to recognize Major advantages to Employer, Major advantages to Employee Employer - Contributions made by the employer are tax deductible (up to 25% of total covered compensation). Flexible funding for the corporation because contributions are not required to be fixed in amount as there is no annual mandatory contribution requirement. Incentive for workers because they have a vested interest in the company. Good for cash limited (start-up companies) because it will not disrupt the cash flow of the company. Employee - They have a vested interest in the company. Deferral of compensation and earnings. They have the put option with regards to shares. In service withdrawals can be allowed iv. Recognize that Eligibility (same as other qualified plans including age of 21 and one year of service. Company could require a two year eligibility period but employee will be 100% vested after that point in time),, Allocation (standard - based on a percentage of each employees compensation therefore the stock must be valued each year to determine the correct amount),, age-weighted (age plays a factor in determining the amount),, SS integration - (better for employees whose earnings are above the social security base of 106,800)), vesting requirements - requirements (same as other DC plans 2 6 graduated or 3 year cliff), deductible contribution limit same as profit sharing plans (same as other profit sharing plans 25% of covered compensation limited up to $245,000) 6

AAEC 4104: Retirement Planning Exam 2 Review Guide v. Distributions 100% lump sum distribution--how is original value employer contributions, NUA, appreciation after lump-sum dist. made taxed? (Know how to calculate example) If there is a lump-sum distribution, the employee is subject to ordinary income tax in the year of the distribution based on the fmv of the employer stock at the time of the original contribution. The NUA of the stock (appreciation of stock while held in plan) is not taxed at the time of the lump sum but rather is taxes as a long-term capital gain when the stock is ultimately sold. Example: Joe receives $2000 of stock in his Stock Bonus Plan (no tax implications yet). When he retires the stock is worth $10,000. Joe receives a lump sum distribution. The original $2000 will be taxes as ordinary income. The $8000 capital gain (NUA) is not taxed until Joe sells the stock and will be taxed at the LT capital gains rate (unless the stock was sold <1 year of distribution). b. ESOPs What essentially is an ESOP and major ways different from Stock Bonus Plans An ESOP is a special form of a stock bonus plan that, in addition to providing ownership (stock) of a company, also provides the employee with substantial tax benefits. The ESOP is controlled through a trust and the sponsor company receives tax deductions for contributions of stock from the corporation. i. ii. What are the two general forms of ESOPs? Are they both controlled using a trust? Basic, Leveraged ESOP (LESOP)--both controlled through trust. A key characteristic to the ESOP is that the trust may borrow money from a bank or other lender to purchase the employer stock. The corporation generally repays the loan through tax deductible contributions to the ESOP. Both interest and Principal repayments for the loan are income tax deductible. 1. Basichow do these generally work?

2. Leveraged ESOP How are LESOPs generally set up and contributions made? Are 100% of contributions or loan repayments tax-deductible? (process) Bank loans funds to ESOP Trust (with companys guarantee) to purchase shares from the stockholders ESOP buys stock from the existing 7

AAEC 4104: Retirement Planning Exam 2 Review Guide stockholder(s) who generally also guarantee the loan. (Stock also usually used as collateral for loan) Company contributes annually (tax deductible) to the ESOP Trust, and the ESOP Trust repays the bank both principal and interest. Employees receive distributions of the company stock when they retire or terminate employment with the company. iii. Be able to recognize Major Advantages and Disadvantages of ESOPs and Leveraged ESOPS (Exhibit 6.6, also shown in slides) Employer Advantages Creates a market; helps retain employees; improves employee loyalty; diversified portfolio without recognition of capital gain; can improve current cash flow of the company. Employer Disadvantages Dilutes ownership; administrative costs; may strain cash flow to meet payout requirements of departing employees; periodic appraisals costs can be expensive Employee Advantages ownership; better attitude towards company; NUA treatment; put option Employee Disadvantages bears risk of insolvency and diversification; value of stock fluctuates and based on the appraiser; stock not liquid iv. Why are ESOPs great for retiring or departing owners of closely held companies? Because it creates a ready market How is retiring owner taxed on the sale of securities to ESOP in year of sale if meet certain requirements (sells > 30% securities (owned for 3 years) to ESOP, reinvest proceeds w/n 1 yr in new domestic securities (which hold onto for 3 years)? Owner sells/rolls over shares to ESOP. owner then reinvests proceeds within 1 year of new domestic securities. ESOP must hold sold shares for 3 yearsno taxes on owner until securities are sold (now there is a carryover of the original basis) v. Can an LESOP deduct more than 25% of covered compensation? Contributions are deductible (limit up to 25% of covered payroll for S Corp. For a C corp they get the 25% and 100% of interest. vi. Allocation methodsstandard, age-based (but no SS integration allowed) vii. Distributions--similar to Stock Bonus Plans (i.e. NUA, distrib. before age 59 1/2) 1. Similar to Stock Bonus Plans (i.e. NUA rules, distributions before age 59 1/2), but ESOPs subject to RMD rules (Chapter 7) Why, in general, is setting up an ESOP in a S-Corp a great planning strategy? Background S Corporations are a pass through entity, with only one class of stock and no more than 100 individual shareholders Great Planning Strategy Profits of S-Corp flow through to the ESOP but the ESOP doesnt have to pay federal income taxes on these profits. XI. Chapter 7: Distributions from Qualified Plans (QP) a. Pension Plans i. Generally Allow in-service withdrawals? Are Permitted (if participant is over 62) ii. Normal Retirement--usually paid as annuity, must generally offer QJSA & QPSA (or QOSA if plan participant waived QJSA); How are distributions generally taxed? Regardless of the option chosen, it will probably be taxed as ordinary income. b. Are income taxes deferred? The Income taxes will be deferred until withdrawn . 8

AAEC 4104: Retirement Planning Exam 2 Review Guide c. What distribution options may a profit-sharing plan have? i. At retirement or termination--lump sum, annuitize (if plan permits), rollover lump sum, annuitize (if plan permits), rollover (generally same rules as pension plans) ii. QJSA and QPSA not required unless what? Unless 1) Plans do not pay participant in the form of a life annuity and 2) Plans pay remaining benefit to spouse at the participants death iii. In-service withdrawals permitted at any age (with taxes, penalties)? Loans allowed? Yes they are generally allowed (no age limits) d. How are distributions from Qualified Plans taxed? Typically as ordinary income, except for? Direct and Indirect rollovers to IRAs and other QPs; Roth type accounts tax free; Stock Bonus and ESOPS NUA, ST/LT gains; Thrift Plans taxed only on earnings but not the basis; QDRO. Non-periodic payments mandatory withholding 20% except for hardship, loans, direct rollovers. Is a tax refund available? Yes, tax refund available after the filing e. Rollovers i. What are advantages of rolling over from QP to another QP or IRA? Maintain the tax-deferred growth; More control over investments and plan assets. But lose NUA, 10-yr forward avg, pre-1974 capital gains if roll over to IRA. (Also, will lose the ERISA protection) ii. Direct Rollovers--what generally are they? When a plan is directly rolled over from trustee to trustee. Must they be offered and accepted by QP? Must be offered by a plan but another plan does not have to accept the rollover. 20% withholding? The orgininal plan custodian is not required to withhold 20 percent of the distribution for federal income taxes if direct rollover. Can directly rollover now to Roth IRA? It is allowed but the participant will have to pay ordinary income tax on the amount rolled over (or else he/she would never be taxed on it) iii. Indirect Rollovers--what generally are they? A plan assets is first distributed to the participant with a subsequent transfer to another account. 20% withholding? The original trustee will withhold 20%. Must reinvest full amount (including 20% w/h) within 60 days. A check will be issued to the participant for 80% of the value. Therefore, it is up to the participant to get the remaining 20% because the rolled over account will need 100% of the full balance. f. Lump-Sum Distributions (LSDs) i. Be able to recognize 4 general requirements100% distribution; w/n 1 yr; death, disability, separation from service, at least 59 ; participated in plan at least 5 years ii. Net Unrealized Appreciation (NUA)LSD employer securities; know how to calculate example , how are subsequent gains/losses taxed? When generally not take advantage of NUA? Dont want to take advantage when the NUA is relatively small compared to the cost basis. Or when concerned with holding one single stock/lack of diversification. Would make more sense to rollover a smaller NUA. g. Plan Loanscan never be more than $50k; if not repay loan generally taxed as ordinary inc.+ possibly 10% penalty. h. Distributions prior to age 59 subject to 10% early withdrawal penalty. Also, be able to identify major exceptionsdeath, disability, medical expenses >7.5% AGI, QDRO, 72t distributions, separation from service after reaching age 55. i. Generally, what are Substantially Equal Periodic 72(t) Distributions? a 72t is a series of substantially equal periodic payments (think: can terminate employment earlier and still 9

AAEC 4104: Retirement Planning Exam 2 Review Guide receive payments) Subject to 10% penalty? These payments will not be subjected to the 10% early withdrawal penality Required Minimum Distributions (RMDs) i. When, in general, must RMDs begin? By April 1 of year following year participant turns 70 . (unless still employed, then RMD required ____ of year after terminate - If still employed, the worker has the option to delay distributions until April 1st after terminated employment UNLESS they are more than 5% owner (then they need to start making distributions on time) 1. All other RMDs after the first year must occur by December 31 of the year. 2. Note: Individuals can always withdraw more than RMD. ii. If RMDs not made on time, what % excise tax will apply to the undistributed RMD? 50% iii. RMDs apply to Qual. plans, IRAs, other tax-advantaged plans--but not Roth IRAs. iv. In general, are RMDs still required after a participant dies? Yes

j.

XII. Chapter 8 Qualified Plan (QP) Installment, Establishment, Administration, Termination a. Qualified Plan Selectionbe familiar with major pros/cons, purposes of different QPs, so that can select and justify selection of retirement plan given a situation Defined Benefit (Pensions) Biggest requirement is steady cash flows. Becoming increasingly rare so probably wont be suggested. Profit Sharing Plans Profit Sharing, Stock Bonus, ESOP, 401k, Roth 401k, Thrift Plan, AgeBased profit Sharing, New Comparability, etc. 1. Establishing a QPmust be in writing, contributions may be made up to tax return due date, Individually designed (more expensiveERISA attorney) vs. Master or Prototype (master and prototype plans are plans that have already been approved by the IRS and are available for employer selection) Master Single trust or account used by all adopting employers Prototype Each employer establishes their own separate trust or account, employees must be notified, QPsplaced in qualified trust or custodial account, Plan sponsors (fiduciary) may hire out to asset mgmt firm (become fiduciary) Keogh Plansin general, what is a Keogh Plan? A Keogh Plan is a qualified plan designed for self-employed individuals or unincorporated businesses. ForfeituresDB plans (must reduce employer funding costs), DC plans (reduce employer funding costs, or allocate to remaining participants) Prohibited transactionsin general, what are they? These are transactions between a qualified plan and a disqualified person that are prohibited by law (such as a plan fiduciary, service providers, plan sponsor, owners, family members of owners, officers and directors) Can financial planner or advisor be compensated as a fiduciary for giving participants investment advice? Yes, as long as its fee does not vary depending on the investment choices the participants make or if the recommendations are based on a model certified by an independent third party. Who pays penalties? The disqualified person (15 % of amount involved per year, 100% if not corrected within the taxable year) ERISAprotects employee benefits, fiduciary responsibility on plan management

b.

c. d.

e.

10

AAEC 4104: Retirement Planning Exam 2 Review Guide f. Department of Laborenforces rules governing plan managers, investments, reporting and disclosure of plan info, workers benefits g. Form 5500information return generally filed with Dept of Labor annually h. Plan termination--Employees become 100% vested (all contributions) with termination XIII. Chapter 9: Individual Retirement Accounts (IRAs) and Simplified Employee Pensions (SEPs) a. Qualified Plans (QPs)--more admin./reporting, ERISA protection, Loans permitted, 10-yr avg, pre-74 cap gain treatment, NUA--while these not present in IRAs, SEPs, SIMPLE IRAs b. General differences b/w Types of IRAs i. Traditional--1. Deductible (Distrib. taxable), 2. Non-Deductible (Distrib. not taxable) ii. RothNondeductible contributions, Qualified distributions tax-free iii. SEP IRAsIRAs provided by employers, greater funding limits than other IRAs c. IRAs Contributions i. Limits generally lesser of $5k ($6k if 50 or older) or earned income (exception Spousal IRA), may be subject to AGI limitations ii. Age > 70 1/2 can no longer make traditional IRA contrib. Apply to Roth IRAs? Does not apply to Roth IRAs iii. Timing of IRA contributionsby due date of individuals tax return (usually 4/15) iv. Nondeductible contributionstax-deferred growth, adjusted basis (know how to calculate how distributions are taxed) d. Distributions from Traditional IRAs i. Generally taxed as ordinary income (unless non-deductible contributions made) ii. RMDssame as for Qualified Plans (Chapter 7) iii. Distributions subject to 10% penalty if prior to age 59 1. Be able to identify general differences in exceptions to 10% penalty for QP vs. IRA (Exhibit 9.9, power point slides)

e. Roth IRAs i. Similarities and differences b/w Traditional vs. Roth IRAs ii. Traditional--1. Deductible (Distrib. taxable), 2. Non-Deductible (Distrib. not taxable) iii. RothNondeductible contributions, Qualified distributions tax-free 11

AAEC 4104: Retirement Planning Exam 2 Review Guide iv. Contribution Limits--$5k (or $6k if 50 or older), know that a phase-out limit exists v. Roth IRA conversionsno AGI limit starting 2010, taxpayers may elect to defer payment of taxes over 2 year period (in 2010, 2011) vi. Qualified Roth IRA Distributions are income-tax free and not subject to 10% penalty 1. Not subject to RMD rules f. IRA/Roth IRA invest. options-- life ins, collectibles, other coins not permitted (although US Gold, Silver, Platinum coins permitted) g. Simplified Employee Pensions (SEPs) i. What is it basically? How is it generally different than QP? Practical retirement plan alternative to a QP that can be used by small businesses and sole proprietors. Easier to establish and have no filing requirements. No trust accounting for the plan sponsor (because SEPs use IRAs as the receptacle)l ii. Has less restrictive coverage requirements than in QP and more liberal participation requirements iii. ContributionsEmployer funded only; Discretionary but must be made to all eligible employees; contributions generally limited to lesser of 25% employees covered compensation or $49k; can integrate with Social Security iv. Vestingemployees 100% vested at all times, withdrawals taxed similar to traditional IRAs (ordinary income, possible 10% penalty) XIV. Chapter 10 SIMPLE, 403(b), and 457 Plans a. SIMPLEs i. What are they basically and major advantages over other qualified plans? 1. SIMPLEs- (Savings Incentive Match Plans for Employees) for small employers (100 employers or less) . Easy to establish and maintain. Possess similar tax advantages as QPs. Attractive to Employers bc they are not required to meet nondiscrimination rules and they dont have annual filing requirements. Allows employer to make elective defferal cont. similar to 401 (k). ii. Establishing 1. Small employers (< 100 total employees w/ earnings > $5k previous year) a. 2 Year Grace Period--can exceed 100 employee limit for 2 years 2. Relatively easy to establish (IRS form) Must be a calendar year plan 3. Employer cannot also maintain a qualified plan, SEP, or 403b 4. The participant is 100% vested in all contributions to the SIMPLE iii. Eligibility--employer cannot have more than 100 employees, and all eligible employees must benefit. 1. What is an eligible employee? >$5k earnings any 2 preceding years, and expect to earn >$5k in current year iv. SIMPLE IRAs 1. Employee Elective Deferrals--$11,500 (2011), plus $2,500 (2011) as catch-up 2. Employer Contributions--mandatory Matching or Non-elective Contributions a. Employer Matching Contributions-- 100% match up to 3% salary (may be as low as 1% if used infrequently) b. Non-elective Contributions--2% of compensation 3. Contributions to SIMPLEs--Tax deductible, tax-free growth (similar to 401k) subject to payroll taxes to Employee, not ER 4. Withdrawals and Distributionsgenerally ordinary income to recipient 12

AAEC 4104: Retirement Planning Exam 2 Review Guide a. May rollover to non-QP or QP, but only rollover from a SIMPLE IRA b. May be subject to early withdrawal penalties, same IRA early withdrawal exceptions (but 25% rather than 10% penalty) v. SIMPLE 401(k) Plans 1. Similar to SIMPLE IRAs, but major differences: a. SIMPLE 401(k)s permits loans b. Non-elective contributions and matching similar to SIMPLE IRA (but no option to reduce matching in some years down to 1%) c. SIMPLE 401(k) annual filing requirement and admin. Costs d. Loans are permitted in SIMPLE 401(k) b. 403b Plans i. What are they basically? Retirement plans for Public Schools and educational organizations and tax-exempt orgs. Who can generally establish? ERISA and additional requirements does not apply to what organizations? Governmental 403(b) abd Church Related 403(b). 1. ERISA applies when the plan meets the following tests: a. Nondiscrimination test b. Matching cont. must satisfy ACP Test c. Plan must offer the preretirement Joint and survivor annuity and Qualified Joint and survivor ii. Eligibility--May require employees to meet the general eligibility requirements of: 1. Age 21 and one year of service, or 2. Age 26 and one year of service (educational institutions) iii. Contributions may be made through: 1. Employee elective deferrals: Tax deductible, Limited to $16,500 per year for 2011, plus $5,500 for 2011 for catch-up (50 and over) 2. Non-elective contributions: Tax deductible by Employer 3. After-tax contributions 4. 15-Year Catch-Up Contributions--work at least 15 years, additional $3,000/yr contributions, but no more than $15,000 total cont. over years 5. SO.. MAX deferral Contribution COULD be $25,000 a. 16,500 ER deferral b. 5,500 Age 50 and over catch-up c. 3000 15- year catch up iv. Vesting--participant is 100% vested in all contributions to a 403(b) plan v. Investing--employee assumes risk; can only in mutual funds or annuity contracts vi. Roth 403b--similar to Roth 401ks (but not subject to AGI limitations) 1. Good for HC employees bc they can participate 2. 16.5k cont limit, 22k incl. catch up 3. cont. made on after-tax basis 4. dist not taxable if qualifying vii. Limit on Total Contributions (from employee and employer)--same as 401k 100% of compenstion up to $49k 54.5k with catch up viii. Loans--only allowed in ERISA 403b plans- subject to same limits and rules as loans from 401(k) plans ix. Distributions--generally only be made after age 59, Death, Separation from Service Disability, Hardshipfrom CH5 13

AAEC 4104: Retirement Planning Exam 2 Review Guide 1. Generally taxed as ordinary income (unless after-tax contributions or Roth 403b), and potential 10% penalty 2. Subject to RMD rules (even for Roth 403b) 3. Dist. From nonelective contributions are not restricted x. Rollovers from 403(b) Plans 1. Can be made to QP, Trad. IRA, Roth IRA, another 403b 2. Indirect rollovers subject to same rules as QPs. 20% mandatory withgholding 100% dist. Must be deposited into new account w/n 60 days c. 457 Plans i. What are they basically? Non-Qualified Defferal Compensation Plan - Generally Taxexempt and governmental entities form. ii. Contributions (or elective deferrals) 1. Not combined with other plans--so can defer max $16,500 (2011) in 457 and max $16,500 (2011) for 403(b) or 401(k) 2. 3 Year Catch-up provision (457b)--additional $16,500 contribution/yr (in 3 years prior to normal retirement age) if previous unused deferrals. iii. 3 Types 1. 457(b) Governmental Entities--$5,500 catch up (50 or older), assets protected in a trust 2. 457(b) Tax-Exempt Entities--no catch up and assets not protected in trust 3. 457(f) Ineligible Entitities-- no catch up and assets not protected in trust; unlimited deferrals, but subject to "substantial risk of forfeiture" XV. Chapter 11 Social Security a. How is it funded? FICA--7.65% (6.2% SS up $106,800, 1.45% Medicare on all salary), Selfemployed: 12.4% up to 106,800, 2.9% Medicare --> but deduction 1/2 S/E taxes paid i. Know how to calculate S/E taxes and how much deduct example (In-Class Assign) b. Social Security Retirement Benefits i. Status 1. Fully Insured = 40 quarters (1 quarter ~ $1k/earnings), max. 4 quarters/year 2. Currently Insured=6 quarters (out of last 13);survivorship benefits ii. Normal Retirement Age (full benefits PIA available)--ages 65 up to 67 (you and I) iii. Know how to calculate a participant's PIA and monthly benefit given: AIME, bend points (but know 90%, 32%, 15%), COLA adjustments (In-Class Assign) 1. 90% of the first $749/ 32% of the AIME over $749 - $4,517/ 15% of the AIME that exceeds $4,517 ---- Max PIA = $2,346 2. COLA (Cost of living adjusted) adj for inflation 3. What happens to benefit if... retire early and not working ( MAX - 20% 1st 3 years early, 25% 4 years early, 30% 5 years early) or....retire later (8% increase/year after full retirement age) a. 1/180 for each month of early retirement up to 36 months early b. an additional 1/240 for each additional month over 36months (3yrs) c. SO maximum reduction is 30% if began retirement at 62 and full retirement was 67 4. Do benefits increase or decrease, in general, for early retirees still working? a. In crease the benefit by 3-8% for each year delayed until age 70. iv. Taxation of Social Security benefitswhat is max. % of SS benefits are taxable? What is the min. % of benefits that are taxable? 1. 85% Max of the SS benefits may be taxable. 14

AAEC 4104: Retirement Planning Exam 2 Review Guide v. Limitations Test 1. Retirement Earning Limitations Test- SS is reduced for early-retirees who have earning from continued employment. This does NOT include pension income, investment income, Cap gains, Rental income 2. $1 reduction for every $2 of earnings above 14,160 3. In the year retiree reaches normal retirement age- $1 reduction for every $3 above $37,680. ONLY applies to earning in the months before attaining normal retirement age. 4. After normal retirement age, $0 reduction c. Disability Benefits i. Benefits payable to workers with: Severe physical or mental impairments which prevents them from performing substantial work 1. Fully insured with >20 quarters coverage (in last 40), can be fewer if under 31 age d. General Beneficiaries of SS Retirement and Disability Benefits (Family Benefits) i. Worker, spouse ( >62, caring for child <16, caring for disabled child), children (<18, 18+student, disabled), dependent parents (age 62+), divorced spouse (>62, generally 10+ years of marriage) ii. Unmarried Child under 18, under 19 in high-school, age 18 or older and disabled before 22 e. Survivor Benefitswhat are they basically? Benefits payable to family members of deceased individuals who were entitled to benefits i. Who benefits? Same as SS Retirement and Disability Benefits, except spouse as widow (or widower) can start receiving benefits when 60+ or 50+ and disabled ii. Survivors generally receive 75-100% of SS benefits, but max. family limit generally 150-180% of PIA f. Medicare Benefits i. What basically is it? Federal health plan for people 65 and older, disabled indiv. Individ with permanent kidney failure. Who generally is covered? ii. 3 Parts 1. Medicare Part A (Hospital/skilled nursing Insurance). Are deductibles or coinsurance generally required? Yes and coinsurance is based on benefit period. a. Inpatient Hospital care (i.e. room, recovery, nursing)90 max. days coverage each benefit period (plus 60 unrenewable reserve days) b. Skilled Nursing (or home healthcare approved by physician)100 max. days coverage each benefit period (0- 20 days no deductible, 21- 100 days ~$140/day deductible) 2. Medicare Part B (Medical Insurance) a. Optional, but if choose, then monthly premium (~$115/mo), ~$160 yearly deductible, generally pays 80% of approved charges b. Covers items like doctor costs, ambulance, tests, outpatient services c. Private ins. co. sell Medicare supplemental policies (i.e. Medigap, Medicare SELECT)help cover deductibles, coinsurance, other gaps 3. Medicare Part D (Prescription Drug) a. Coverage to buy prescription drugs (generic, brand) at better prices b. Optional, but if choose, then low monthly premium (~$25) iii. Supplemental Security Income--payments to those with low income and few assets 15

AAEC 4104: Retirement Planning Exam 2 Review Guide XVI. Chapter 12 Deferred Compensation and Nonqualified Plans a. Why are deferred compensation plans offered? How are they typically used? i. Provide benefits to a select group of employees without limitations, restrictions, rules of QPS ii. To discriminate the provision of benefits to key employees iii. QPs cannot provide sufficient retirement resources for key executives who earn > the CC limit 245k iv. DO NOT have tax advantages of QPs, b. What is the main benefit to an executive deferring compensation in a NQDC plan? Main benefit to the employer? i. To increase Executives WRR or to defer the Exectutives compensation/ retain key employees ii. Employer 1. Avoid payroll taxes 2. Can discriminate in favor key employees 3. $1 mil deductable compensation over the years iii. Executive 1. Reduce taxable income 2. Avoids payroll taxes (except 1.45% medicare) on appreciation c. What basically is constructive receipt? Establishes when income is included in a taxayers taxable income d. How does this relate to NQDC plans? When an executive defers income there is no a constructive receipt ( meaning its an unsecured promise to pay) e. Generally describe substantial risk of forfeiture. How does this relate to NQDC plans? Occurs when the rights in trasfered property are conditioned, directly or indirectl, upon some future occurance. MEANING>>> No income tax consequences i. Risk is on the Employee f. What in general is a salary-reduction plan? i. The executive or indiv. Defers receipt of salary to the future. EX pro athlete. Must elect to defer compensation before earning. g. Nonqualified deferred compensation plan (NQDC)basically what is this? i. What basically is a phantom stock plan and when might they typically be used? ii. What basically are Supplemental Retirement Plans (SERPs)? iii. Major Differences b/w Unfunded Promise to Pay, Rabbit Trust, Secular Trust 1. Secular Trust irrevocable usually no substantial risk of forfeiture ( unless on vesting schedule) . taxable when funded 2. Rabbi trust- irrevocable Are available to creditors under bankruptcy, Substantial risk of forfeiture exists not taxable

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AAEC 4104: Retirement Planning Exam 2 Review Guide

Funded with assets? Employer has access? General Creditors have access? When is income taxable to executive? When is the payment deductible to employer?

Unfunded Promise to Pay No Yes Yes, claim below gen creditors Actually or "constructively received When payment is made

Rabbi Trust Yes No Yes, claim below gen creditors Actually or "constructively received When payment is made

Secular Trust Yes No No Immediately as funded by employer (or vesting) Immediately as funded + "constructively received"

h. Employer Stock Options i. Basically what are stock options? What are the 3 types? ii. Incentive Stock Options (ISOs) 1. ISOs--better tax treatment (if sell stock after 2 years from grant and 1 year from exercise date), but more restrictive (only issue ISOs to employees, no more than <$100k/yr may be granted to each executive 2. Grant Date NO taxable income unless exercise price is less than fair market value at date of grant 3. Upon Exercise No W-2 or ordinary income recognized 4. Upon sale of stock LTCG treatment for stock appreciation from exercise price 5. Employer does not have a tax deduction relate to the ISO 6. ISO Disposition a. Know how to calculate tax consequences (W-2 Income, AMT adj., capital gains, employer deduct.) related to Grant, Exercise, Sale date 7. Disqualifying ISO Disposition (sell stock before 2 yrs from grant date, 1 year from exercise date) a. Know how to calculate tax consequences (W-2 Income, AMT adj., capital gains, employer deduct.) related to Grant, Exercise, Sale date i. Appreciation over exercise price = ordinary income no payroll taxes ii. Appreciation after exercise date = capital gain ( ST or LG) iii. Employer has tax deduction = executives W-2 Income 8. Cashless Exercisea disqualifying disposition / exercise ISO option without cash (3rd party lends cash to executive to exercise option, executive repays lender almost immediately through proceeds from sale of stock) a. Know how to calculate tax consequences (W-2 Income, AMT adj., capital gains, employer deduct.) related to Grant, Exercise, Sale date i. Has W-2 income for the excess value over the exercise price 17

AAEC 4104: Retirement Planning Exam 2 Review Guide iii. Nonqualified Stock Options (NQSOs)Ties an employee benefit to the performace of the company stock. not as many restrictions (i.e. no >$100k/yr per executive limit), but less favorable tax treatment 1. Know how to calculate tax consequences (W-2 Income, AMT adj., capital gains, employer deduct.) related to Grant, Exercise, Sale date a. Exercise DOES NOT recive favorable tax treatment b. NO statory holding period requirements ER may place them on stock c. Grant Date-No Taxable income unless EX price is less than FMV d. Upon exercise W-2 income for appreciation over the ex price e. Payroll tax and withholding are also required( NOT required for ISOs) income tax deduction for same amt f. Sale of stock capital gains with holding period beg. At ex date iv. Stock Appreciation Rightsbasically what are these? Rights that grant the holder cash = Excess of FMV of stock above the ex price>> Essentially cashless exercise w/o right to purchase stock 1. Know how to calculate tax consequences (W-2 Income, AMT adj., capital gains, employer deduct.) related to Grant, Exercise, Sale date a. No taxation on grant date ( unless IRC Sec. 83(b)) b. EE- W-2 income for excess value over the ex price (income and payroll taxes) c. ER Tax deduction for W-2 amt Restricted Stock Planswhat basically are they? Plan which pays executives with shares of employer stock / Stock has restrictions preventing them from selling or transferring Why are they used? Increases executive retention, aligns executive and shareholders interests, compensates w/o use of company cash flow i. Know how to calculate tax consequences (W-2 Income, AMT adj., capital gains, employer deduct.) related to Grant, Exercise, Sale date 1. At receipt of the restricted stock: No Taxable income/deduction unless IRC sec 83(b) 2. At the time restriction is lifted W-2 income for FMV of stock including income and payroll taxes. ER has tax deduction equal to W-2 3. Holding period begins at the date the restriction is lifted ii. IRC Section 83bwhat is this basically? Employee election to include value of stock in taxable income at the date of grant rather than at date of vesting or when restrictions are lifted. What is the benefit of making this election? Any subsequent gain in value over the grant date is Capital gain rather than W-2. If an employee does not vest and losses rights- no tax deduction is lost. ER holding period return begins the date the amt was included in gross income. MUST be filed no later than 30 days after stock is transferred. Employee Stock Purchase Plan (ESPP)allows employees to purchase employer stock (no more than $25k/year) at discounted price (no less than 85% FMV) 18

i.

j.

AAEC 4104: Retirement Planning Exam 2 Review Guide i. ESPP Qualifying Disposition (hold stock >2 years from grant date and >1 year from exercise date) 1. Ordinary Income = Gain from discount, No Payroll Taxes though, LTCG=Gain in excess of ordinary income ii. ESPP Disqualifying Disposition (dont hold for required holding period) 1. W-2 Income = Gain from discount (also employer deduction), Payroll Taxes, STCG/LTCG=Gain in excess of ordinary income XVII. Chapter 13 Employee Fringe Benefits a. What are the general tax consequences to employers and employees of fringe benefits? i. Taxable as wages to the employee (unless specifically excepted by the IRC provision or employee pays FMV for benefit) ii. Tax deduction generally for the employer deductable as compensation expense generally unless fringe benefit not taxable to the employee ( employer may still be able to deduct as ordinary and nessary bus. Expense) iii. Withholding for federal, state, payroll taxes may be required b. Mealsvalue of meal excluded from employees gross income if 1) for convenience of employer and 2) On employer premises c. Lodging-- value of lodging provided to employee excluded from employees gross income if i. 1) for convenience of employer ii. 2) On employer premises iii. 3) Employee required to accept lodging as condition for employment d. Athletic facilitiesvalue of on-premise facilities provided by employer not included in employees gross income if facility is: i. 1) operated by employer, ii. 2) located on employers premises, iii. 3) Substantially all of use of facility by employee, spouse, dependent children (may be discriminatory) e. Educational Assistanceup to $5,250 may be excluded from employees gross income (no exclusion if employee given choice of cash or educational assistance) f. Dependent Care Assistanceup to $5k MFJ/$2,500 Single may be excluded from employees gross income (but no more than earned income of employee or spouse) i. Qualifying personsdependent children <13, dependent children/spouse incapable of caring for themselves g. Qualified Employee Discountsmust be offered in ordinary course of business i. Exclusion Limit the Lesser of: Service (<20%), Merchandise/products (but no more than gross profit %) h. No-additional-cost services-- what are these basically and when will the value of this fringe benefit generally be excluded from the employee's taxable income? i. Services provided by the employer that do not cause employer to incur any substantial additional cost or loss of revenue ii. Must be offered to customers within the ordinary course of business. iii. Lost or forgone revenue would not be considered No-additional cost 19

AAEC 4104: Retirement Planning Exam 2 Review Guide iv. EX: PIRATE TICKETS i. Working condition fringe benefits-- what are these basically and when will the value of this fringe benefit generally be excluded from the employee's taxable income? i. Any property or service provided to employee that enables employee to perform his work and IF paid for by the employee would be deductable as a trade or business expense. EX. Company car. ii. Excluded from an employees gross income only the business part is excluded ( may be discriminatory) j. De minimis fringe benefitswhat are these basically and when will the value of this fringe benefit generally be excluded from the employee's taxable income? i. Any property or service provided to the employee bby the employer this is so small this it makes accounting for it unreasonable ii. Generally excludable from employee gross income k. Qualifying Moving Expense Reimbursement i. Qualifying movedistance b/w new job location and old home must be >50 miles greater than distance between old job location and old home (old commute). 1. Also, employee must be full-time (FT) in new location >39 weeks (w/n 1 year of move), or combined FT/self-employed > 78 weeks (w/n 2 years of move) ii. Deductible Moving Expenses (for qualified move) 1. Moving household goods (moving co.actual expenses, yourselfactual expenses or 19 cents/mile (2011) 2. Traveling and Lodging (travelingactual or 19 cents/mile, lodgingactual expenses) iii. Examples of nondeductible moving expensestemporary living expenses, meals, pre-housing hunting, costs to purchase new home or sell previous home l. Qualified Tuition Reduction Programs what are these basically and when will the value of this fringe benefit generally be excluded from the employee's taxable income? i. An employee may exclude from gross income any amt representing a qualified tuition reduction ii. Generally only for edu below graduate level iii. Employee,spouse,child may be eligible m. Adoption Assistance Programsmust be in writing, exclusion limited (~$12k per child), know that there generally is an AGI phase out (dont have to memorize) n. Discrimination i. Fringe benefits must generally be provided on a nondiscriminatory basis (otherwise must be included in employees taxable income) ii. Be able to recognize exceptions of benefits that can discriminate-- Athletic facilities, working condition fringe benefits, de minimis, qualified transportation & parking o. Valuation Rules Applying to Fringe Benefits i. General ruleValue=FMV of fringe benefits ii. Exception for special valuation of employer-provided vehicle (may choose): 20

AAEC 4104: Retirement Planning Exam 2 Review Guide 1. Cents per mile rule (Amt included Gross Income=51 cents/mi*personal mi.) a. To use this rule, must use vehicle regularly for business (includes commuting pool with 3 or more employees) 2. Commuting rule--Amt included Gross Income=$1.5*each one-way commute a. To use this rule, generally employer must have written policy that requires vehicle only to be used for commuting 3. Lease Value RuleAmt included Gross Income=Annual Lease Value*% personal use a. Lease Value i. Employer purchased vehicleuse Annual Lease Table ii. Employer leased vehiclevaluation primarily based on invoice, suggested retail, or nationally recognized retail iii. Know how to calculate value of employer provided vehicle to be included in annual gross income (if provided Annual Lease table) 1. Annual Lease Value x %personal use =Amt included in EE Gross income XVIII. Chapter 14 Employee Group Benefits a. Describe in general what the COBRA provisions requires employers to do. Requires employer to continue to provide benefits to covered employees and qualified beneficiaries such for; normal termination (18month), Qualified dependant reaches age no longer eligibile for plan (36 months) and death of employee (36months) Can employers require that employees pay COBRA insurance premiums? Yes If so, up to what amount? Premiums can never exceed 102% of plan costs. b. Describe cafeteria plans generally and how they are used to provide employer benefits. Can you discriminate using these plans? i. Written plan that allows employees to receive cash or defer receipt of the cash to purchase various tax-free fringe benefits ii. Qualified benefits include medical insurance, dependant care, adoption assistance, group term life insurance iii. NONDISCRESIONARY c. Describe flexible spending accounts (FSAs). When would one generally prefer using an FSA to cover dependent care expenses versus using the dependent care credit? i. A type of cafeteria plan where employeees can defer salary into a flexible spending account, defferd amts not subject to income or payroll taxes ii. Major disadvantage Unused funds each year are forfeited !!! iii. Uses- dependant care expenses d. Describe Health savings accounts (HSAs). Can only be set up with what type of deductible insurance plan? High deductable insurance plan How are these similar to IRAs? Earning are taxed deffered until distribution How are they generally different (i.e. withdrawals for medical expenses, age can begin using for retirement)?65 years old and , dist for medical expenses is completely tax free e. Describe, in general, the two types of business continuation plans. Which results in more life insurance policies needing to be purchased and unfair costs for younger owners? i. Salary continuation plans unfunded arrangement btw an employee and his employer Employer continues to pay employee after his retirement Discretionary basis 21

AAEC 4104: Retirement Planning Exam 2 Review Guide ii. f. Generally describe what split-dollar life insurance is and why it is used. Also, generally describe the two types of methods that can be used to provide split-dollar coverage. Can you discriminate? g. Group term life insurancebe able to calculate portion of employer premiums taxable as W-2 income to employee given example (i.e. above $50k, Uniform Table would be provided) h. Group Disabilitybe able to calculate portion of disability payments that would be included in taxable income given example (use % total premiums paid by employer) i. What basically is key personal life insurance? j. What basically is a VEBA? k. What basically is a salary continuation plan? l. General taxation of Employee Group Benefits i. Employer contributions for group benefits generally deductible 1. Except key personal life insurance, entity-purchase insurance ii. Employer contributions generally excluded from employee gross income 1. Except salary continuation, split-dollar endorsement iii. Employee contributions generally do not reduce employee gross income 1. Except medical insurance, flexible spending, health savings accounts iv. Final Benefits Received (i.e. payment for medical costs) generally excluded from employee gross income (although some is partly included, i.e. disability) 1. Except salary continuation plan

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