Retirement Planning and Employee Benefits Session 1 of 3

1
Retirement Planning and Employee BenefitsSession
1 of 3

• Course Preview
• Retirement Needs Analysis
• Qualified Retirement Plans

2
Retirement Planning

• Timely and Important
• Concerns a wide range of clients
• Requires expertise in many areas

3
Objectives of This Section

• Understand the importance of setting goals
• Know how to calculate income needs at retirement
• Calculate future values and future income needs
• Identify the most effective plan based on needs
• Describe how to monitor the plan

4
Setting Retirement Goal

• What lifestyle will the client choose?
• Basic expenses
• Medical issues
• Travel
• Relocating
• Leaving a legacy

5
How Much Will I Need?

• Wage Replacement Ratio
• 70 - 80 of pre-retirement income
• Budgeting
• Estimating the actual money needed in retirement
  using current dollars

6
The Tates

• Both currently age 35
• Will retire at age 65
• Life Expectancy Age 95
• Current retirement savings - 50,000
• Projected Social Security Benefit at age 65
  -18,000

7
The Tates

• Assume current living expenses total 52,234
• Estimated retirement expenses will be 41,787
• Add in additional annual 4,000 for travel
• Total after tax need will be 45,787
• If their effective tax rate is 14, divide
  45,787 by 0.86 (1 minus the tax rate (1-0.14
  .86) to arrive at their gross income need,
  53,241
• Essentially this breaks down
• 7,454 paid in taxes
• 45,787 for the Tates to spend in retirement

8
Factoring Social Security

• The Tates will require the equivalent of 53,241
  of income at retirement
• Projected Social Security Benefits - 18,000
• Reduces Income Need to 35,241
• Social Security can also be ignored
• Social Security Benefits are inflation adjusted

9
Adjusting Income Need for Inflation

• Value of Retirement Need in Current Dollars -
  35,241
• Assume inflation rate 3
• Years to start of retirement 30
• Calculate future dollar value of this need
• PV (35,241)
• N- 30
• I .03
• FV 85,539
• For the first year of retirement, the Tates will
  need 85,539 plus their first year adjusted
  benefit from Social Security

10
Lump Sum Need at Retirement

• Capital Utilization Method
• All capital will be used up with nothing left at
  the end
• Capital Preservation Method
• A lump sum will be left at the end of retirement
• Draw Down Method
• Taking income of 3 - 4 per year
• Commercial Annuity Method
• Buy a stream of income from an insurance company

11
Lump Sum Need at Retirement

• What amount of savings will be needed at
  retirement?
• Calculated from the beginning to end of
  retirement
• The annual payment (retirement income) must be
  increased each year by inflation. (Serial
  Payment)
• Calculation of a Serial Payment involves merging
  the inflation assumption (3) with rate of return
  (8).
• 1 Rate of Return/1 the Inflation Rate Minus 1 x
  100

1.08
- 1 X 100 4.8544
1.03
12
Capital Utilization Method

• PV Solving for
• FV Zero
• N 30
• I 4.8544
• PMT - 85,539 (Beg)
• Solution - 1,401,959
• Note the use of Begin mode for the payment.

QA in 2 slides
13
How Much to Save?

• Goal at retirement - 1,401,959
• Years to retirement 30
• Current Savings 50,000
• Calculation
• PV (50,000)
• FV 1,401,959
• N 30
• I 8
• PMT Solving For

QA next slide
14
Annual Savings Needed

• Based on the calculation, the Tates will need to
  save 7,935 per year to reach their goal.

Q A
15
Using Tax Advantaged Savings

• Employer Based Retirement Plans
• Qualified Plans
• SEP-IRA, SIMPLE, 403(b), 457
• Personally Owned Retirement Options
• IRA
• Roth-IRA

16
Monitor the Plan

• Re-visit the plan, at least annually
• Investment returns
• Savings levels
• Changes in income
• Tax law changes
• Lifestyle changes
• Medical issues

17
Other Issues

• Medical Insurance
• Annuity Payouts
• Investment Considerations
• Insurance Issues

18
Medical Insurance

• Prior to age 65
• Health insurance from an employer group plan or
  individually purchased insurance
• After Age 65
• Medicare Part A No Cost Facilities
• Medicare Part B Monthly Cost Professionals
• Medicare Part C Fills in the gaps
• Medcare Part D Prescription Drug Coverage

19
Annuity Payouts

• Annual payments made for a period of time or life
  are called Annuity Payments. They may come from
  pension plans or commercial annuities.
• Single Life Annuity Payment paid to one person
• Joint and Survivor Annuity Payment- paid to two
  people with 50, 75 and 100 survivor options
• Term Certain Payment Payments for a defined
  number of years

QA in 2 slides
20
Investment Considerations

• Accumulation Phase
• Importance is to achieve the desired level of
  growth
• Use of stocks, bond, cash and other investment
  categories to achieve this goal
• Volatility is not a great concern as long as
  goals are achieved
• Distribution Phase
• Volatility is much more important
• Time frame is still long but portfolio
  fluctuations can significantly affect value due
  to withdrawals

QA next slide
21
Insurance Issues

• Insurance coverages must be maintained to protect
  against the unforeseen.
• Health Insurance
• Life Insurance
• Disability Income Insurance
• Property Insurance
• Liability Insurance
• Professional Insurance

Q A
22
Qualified Plans

• Enjoy substantial income tax benefits
• Plans covered by ERISA
• Employer contributions are pre-tax
• Employer avoids FICA on contributions
• Assets held in trust grow tax deferred
• In certain cases, withdrawals may receive special
  tax treatment
• Unique Benefits
• Anti-Alienation Protection from Creditors
• Possibly avoid a 10 penalty on withdrawals after
  age 55

23
Tax Advantaged Plans

• These are not considered Qualified Plans but
  offer some of the same tax advantages
• SEP-IRA Plans
• SIMPLE-IRA Plans
• 403(b) Tax Sheltered Annuity Plans
• 457 Deferred Compensation Plans
• Individual Retirement Accounts or Arrangements
• Not covered under ERISA
• (Except for certain 403(b) Plans)

24
Types of Qualified Plans

• Profit Sharing Plan
• Money Purchase Plan
• Target Benefit Plan
• Defined Benefit Plan
• Cash Balance Plan
• Are all subject to ERISA
• All may enjoy special tax treatment for lump sum
  withdrawals made after age 59 ½
• All have Anti-Alienation protection

25
Categorizing Qualified Plans

• Defined Contribution Plans
• Profit Sharing Plan
• Money Purchase Plan
• Target Benefit Plan
• Defined Benefit Plans
• Defined Benefit Plan
• Cash Balance Plan
• These Plans are Predominantly Employer Funded

26
Defined Contribution Plans(Circle Plans)

• Employer contribution is capped at 25 of
  Covered Compensation
• Each Employee is limited to Annual Additions
  the lesser of 100 of the employees compensation
  or 50,000
• The benefit received at retirement is equal to
  the balance in the employees account
• Investment risk lies with the employee
• May be more beneficial for younger employees

27
Defined Benefit Plans(Square Plans)

• A plan formula determines the employees benefit
  at retirement
• The plan is funded by the employer (except for
  some government contributory plans)
• The plan formula often is based on years of
  service, age at retirement and average
  compensation
• Investment risk lies with the employer
• Plans offers a guaranteed benefit to the
  participant

28
Sample Question 1

• Which plans are generally considered more
  advantageous for younger employees?
• I. Profit Sharing and Defined Benefit Plan
• II. Money Purchase and Target Benefit Plan
• III. Profit Sharing and Money Purchase Plan
• IV. Defined Benefit and Cash Balance Plan

A. I and III B. II and IV C. I, II and III D. II
and III
29
Sample Question 1

• Which plans are generally considered more
  advantageous for younger employees?
• I. Profit Sharing and Defined Benefit Plan
• II. Money Purchase and Target Benefit Plan
• III. Profit Sharing and Money Purchase Plan
• IV. Defined Benefit and Cash Balance Plan

A. I and III B. II and IV C. I, II and III D. II
and III
Feedback Defined Contribution plans are
considered more advantageous for younger
employees as they have many years for assets to
grow.
QA in 2 slides
30
Pension Plans

• Four of the five qualified plans are Pension
  Plans
• Money Purchase
• Target Benefit
• Defined Benefit
• Cash Balance
• The employer must either make a contribution for
  the defined contribution plans or provide a
  guaranteed benefit for the defined benefit plans

QA next slide
31
Pension Plans

• Mandatory Benefit or Contribution
• No In-Service Withdrawals
• Employer stock limited to 10 of plan assets
• Default payout option will be
• If Married
• QJSA Qualified Joint Survivor Annuity
• QPSA Qualified Plan Survivor Annuity
• If Single
• Life Annuity

Q A
32
Eligibility Rules

• Maximum Eligibility Rules
• Age 21
• One Year of Service
• 1,000 hours within 12 month period
• No maximum age allowed
• A qualified plan may impose a two years of
  service eligibility rule but vesting must be
  immediate. (Not allowed for 401(k) plans)

33
Excluding Certain Employees

• Under Age 21
• Less than one year of service
• Non-Resident Aliens
• Members of Union with collective bargaining

34
No Discrimination

• Qualified plans may not discriminate
• ERISA 1974 establishes many rules designed to
  protect the rank and file within Qualified
  Plans
• Tests for discrimination are performed annually
  and are based on the comparison of highly
  compensated employees and non-highly compensated
  employees
• If discrimination tests fail, ERISA requires that
  the circumstances be corrected

35
Highly Compensated Employees

• An employee is considered highly compensated in a
  plan year if he or she
• Owned more than 5 of the company in the current
  or past year
• Received compensation more than 115,000
  (indexed) in the prior year
• An employer may choose to replace the second
  option by declaring the top twenty percent of
  employees ranked by compensation will be declared
  highly compensated. (Note that more than 5
  ownership still applies)

36
Re-Hired Employees

• Are considered HCEs if
• They were HCEs when they terminated service
• Or
• They were HCEs at any time after attaining age 55

37
Sample Question 2

• John, age 45, earns 125,000 with no ownership
• Kathy, age 34, earns 79,544, owns 10 of company
• Mariel, age 51, earns 98,000, with no ownership
• Which of these three are considered HCEs?
• 1. Kathy and Mariel
• 2. Kathy Only
• 3. John and Mariel
• 4. John and Kathy
• 5. None are HCE

38
Sample Question 2

• John, age 45, earns 125,000 with no ownership
• Kathy, age 34, earns 79,544, owns 10 of company
• Mariel, age 51, earns 98,000, with no ownership
• Which of these three are considered HCEs?
• 1. Kathy and Mariel
• 2. Kathy Only
• 3. John and Mariel
• 4. John and Kathy
• 5. None are HCE

Feedback John is highly compensated because his
income has exceeded 115,000. Kathy is highly
compensated because she owns more than 5 of the
company.
39
Coverage Tests

• Employers may cover only certain groups of
  employees if there is a valid business rationale
  for covering some but not all employees
• Salary versus Commission
• Office versus Field
• Different Geographic Locations
• Job Classification
• Groups cannot be discriminatory Must pass
  certain tests based on HCE and Non-HCEs

40
Coverage Tests (continued)

• For a plan to pass muster, it must pass any one
  of the following three tests
• The Safe Harbor Test plan must cover at least
  70 of the non-highly compensated employees
• The Ratio Percentage Test - plan must cover a
  percentage of non-highly compensated employees
  equal to at least 70 of the percentage of highly
  compensated employees covered
• The Average Benefits Test the percentage of
  benefits received by non-highly compensated
  employees must equal at least 70 of the
  percentage of benefits received by highly
  compensated employees

41
Safe Harbor Coverage Test

• Ackimation Corporation has two locations, an
  office in Denver, CO with 26 employees (8 are
  HCEs) and a production facility in El Paso, TX
  with 12 employees (6 are HCEs). All employees
  are eligible.
• Ackimation would like to install a plan in Denver
  where the labor market is competitive, but not in
  El Paso where labor is plentiful.
• The proposed plan would cover a total of 18
  non-highly compensated employees. This
  represents 75 of the total of the 24 non-highly
  compensated employees.
• It passes the Safe Harbor Test

42
Changing the Numbers

• The Ratio Percentage Test
• Denver 26 Employees (8 HCEs)
• El Paso 30 Employees (6 HCEs)

QA next slide
43
Ratio Percentage Test

• Changing the numbers---
• Denver 26 Employees (8 HCEs)
• El Paso 30 Employees (6 HCEs)
• Now..it would not pass the Safe Harbor Test
• Only 43 of Non-HCEs are covered by the plan
• (182442 NHCEs) 18/4243

QA next slide
44
Changing the Numbers

• Denver 26 Employees (8 HCEs)
• El Paso 30 Employees (6 HCEs)
• Now..it would not pass the Safe Harbor Test
• Only 43 of Non-HCEs are covered by the plan
• (182442 NHCEs) 18/4243
• It does pass the Ratio Percentage Test
• Percentage of Non-HCEs covered 43
  75
• Percentage of HCEs covered 57

QA next slide
45
Defined Benefit Plans

• One Additional Test for Defined Benefit Plans
• Defined Benefit
• Cash Balance
• 50/40 Test On every day of the plan year, the
  plan must cover the lesser of
• 50 Employees
• 40 of Eligible Employees

Q A
46
Integration with Social Security

• Provides additional contribution or benefit for
  income above the integration level
• Integration must be written into plan document
• Two methods to integrate
• Excess Integration Defined Contribution plans
  or Defined Benefit plans
• Offset Integration Defined Benefit plans only

47
Integrating a DC Plan

• Integration Level
• Usually the Social Security Wage Base (can be
  smaller but must not be discriminatory).
  Currently 110,100.
• Base Rate
• The normal contribution to the DC plan. For this
  example, assume 8.
• Excess Rate
• The higher contribution (Base Rate plus Maximum
  Permitted Disparity) made in the DC plan to
  income above the integration level. In this
  example, 13.7 will be contributed to the plan
  for income above the integration level of
  110,100.

48
Maximum Permitted Disparity

• The Excess Rate is the Base Rate plus the Maximum
  Permitted Disparity (hereafter known as the
  Disparity)
• The Disparity is equal to the lesser of
• The base rate or 5.7
• If base rate is 10, then excess rate is 15.7
• If base rate is 4, then excess rate is 8
• If base rate is 5, then excess rate is 10
• If base rate is 8, then excess rate is 13.7

49
Where did 5.7 come from?

• Of the 7.65 for FICA contributed by the
  employer
• 1.45 is for Medicare
• 5.7 is for retirement
• 0.5 is for disability, death benefit and other
  benefits
• Since the employer is no longer making FICA
  contributions for retirement on income above the
  Social Security Wage Base, the plan contribution
  is replacing that contribution.
• Integration simply uses extra contributions to
  the qualified plan to replace retirement benefits
  not enjoyed on income above the wage base.

50
Example

• Wendells employer, Prime Advisory Group, offers
  a profit sharing plan
• The company plans on contributing an amount equal
  to 7 of compensation for all eligible employees
  this year
• For all income below the integration level,
  employees will receive a contribution to the
  profit sharing account equal to 7 of their
  compensation
• Any participant income above 110,100 will
  receive 12.7 instead of 7

QA in 2 slides
51
Wendells Profit Sharing Contribution

• Wendell has compensation for the year equal to
  172,531.
• If the plan is integrated, he will receive a
  profit sharing contribution equal to
• 7 of 110,100 7,707.00
• 12.7 of 62,431 7,928.74
• Total received 15,635.73
• If the plan was not integrated, Wendell would
  have received only 12,077.17 (7 of 172,531)

QA next slide
52
Defined Benefit Integration

• A Defined Benefit plan pays Wendell a monthly
  benefit for life.
• The monthly benefit will be increased using a
  procedure similar to the Defined Contribution
  plan
• His monthly benefit will be increased based on
  how much his average earnings exceed the
  historical Social Security Wage Base.

Q A
53
Funding Levels for DC Plans

• The employer may not contribute more than 25 of
  Covered Compensation
• Covered Compensation takes into account the limit
  on compensation of 250,000 (Indexed)
• Example
• If Covered Compensation for a company is
  1,000,000
• the employer may not contribute more than
  250,000
• 1,000,000 X .25 250,000

54
Funding Level for DB Plans

• The employer may not fund for a benefit greater
  than
• 100 of Compensation
• or
• 200,000 (whichever is less)

55
Participant Limit in DC Plans

• Annual Additions
• Employer Contributions
• Employee Contributions
• Forfeitures
• For each employee, Annual Additions in any year
  may not exceed the lesser of
• 100 of Compensation
• or
• 50,000 (Indexed)

56
Key Employees

• Three ways for an employee to be a Key
  Employee
• 1. Owns more than 5 of the company
• 2. Owns more than 1 with compensation in
  excess of 150,000
• 3. An officer with compensation greater than
  165,000 (indexed)
• Note
• No more than 50 employees can be treated as
  officers

57
Top Heavy Plans

• Defined Contribution Plan
• More than 60 of the plan assets are attributable
  to
• the Key Employees
• Action
• Use a faster Top Heavy vesting schedule
• Non-key Employees receive additional 3
• Defined Benefit Plan
• More than 60 of benefits in the plan are
  attributable to
• the Key Employees
• Action
• Use a faster Top Heavy vesting schedule
• Increase retirement benefits for non-key
  employees by 2 per year to a maximum of 20

QA in 2 slides
58
Vesting
A period of time that must elapse before plan
participants own employer contributions made to
their accounts
1 0 0 0 0
2 0 20 0 0
3 20 40 0 100
4 40 60 0
5 60 80 100
6 80 100
7 100
Year of Service Graded Top Heavy Cliff
Vesting Top Heavy

• All DC plans must use the shorter Top Heavy
  schedules regardless of whether the plan is top
  heavy or not

QA next slide
59
Loans

• Qualified plans can allow participant loans
• Loans may be for any purpose
• Loans must be available to all employees
• Loans may not exceed the lesser of 50,000 or 50
  of the plan balance (or up to 10,000 if balance
  lt10,000)
• Loan payments must be made at least quarterly and
  be sufficient to repay the loan within five years
  (longer if the loan is used to purchase a primary
  residence)
• The plan must charge a reasonable interest rate

Q A
60
Defined Contribution Plans

• Money Purchase Plan
• Profit Sharing Plan
• Target Benefit Plan

61
Money Purchase Plan

• Funded by employer money
• Mandatory Contributions
• Non-discriminatory Formula
• Subject to vesting schedule
• The retirement benefit is equal to the value of
  the accounts at retirement
• The default payout is an annuity

62
Money Purchase Plan

• Advantages
• Fairly simple for participants to understand
• Simple administration and design
• Provides tax deductible contributions for
  employer
• Assets in trust grow income tax deferred
• Employer contributions up to 25 of Covered
  Compensation
• Benefits are portable
• Employee may receive up to Annual Additions limit
• Lesser of 100 of compensation or 50,000

63
Money Purchase Plans

• Disadvantages
• Older employees may not be able to accumulate
  enough for retirement
• Employers may not want to be locked into an
  annual contribution
• No predictable retirement benefit
• Income in excess of 250,000 will not be counted

64
Profit Sharing Plans

• Funded by employer money
• Contributions must be Substantial and Recurring
• Non-discriminatory Formula
• Subject to vesting schedule
• The retirement benefit is equal to the value of
  the accounts at retirement
• There may not be a default payout (not a
  pension plan)

65
Profit Sharing Plans

• Advantages
• Employer does not have to make contributions each
  year
• Employer may contribute up to 25 of Covered
  Compensation
• Employees may receive annual additions up to 100
  of compensation or 50,000
• Contributions are tax deductible and grow tax
  deferred
• Simple to understand and inexpensive to run
• Benefits are portable

66
Profit Sharing Plans

• Disadvantages
• Older employees may not accumulate enough
• Employer may not make contributions each year
• Income in excess of 250,000 is not counted
• Employees bear investment risk
• No predictable retirement benefit

67
Employer Contribution Arrangements for Profit
Sharing Plans

• Discretionary
• Employer decides each year subject to the
  Substantial and Recurring rule
• Profits are not necessary
• Formula
• Employer may contribute some portion or
  percentage of compensation
• Stock Bonus Plan
• In either arrangement, the employer can
  contribute stock instead of cash

68
Allocation Strategies

• Fixed Amount
• Everyone receives 5,000
• Fixed Percentage
• Everyone receives 7 of their compensation
• Age Weighted
• Older participants receive more
• New Comparability (Cross Tested)
• Special Groups receive more

69
Profit Sharing Plans

• Withdrawals
• Plan assets are available to participants at
  separation from service or at retirement age
• The plan can allow for in-service distributions
  after money has been in the plan for at least two
  years
• Plan may allow for Hardship Withdrawals
• In Service Distributions are taxable unless
  rolled over
• Distributions made prior to age 59 ½ may be
  subject to a 10 penalty

70
Profit Sharing Plans

• Tax Implications
• Employer contributions are limited to 25
• Contributions are deductible and grow tax
  deferred
• Employer does not pay FICA on contributions
• Withdrawals are taxable
• Lump Sum Distributions made after 59 ½ may
  receive special tax treatment
• Plan can allow for deemed IRA accounts

71
Thrift Plan

• After-tax contributions are made by employees
  through payroll deductions
• Employer may contribute matching contributions
• Assets grow tax deferred in the trust
• Note Thrift plans have mostly been replaced by
  401(k) plans. However, some 401(k) plans contain
  thrift or after-tax components

72
401(k) Plan

• Allows Profit Sharing plan participants to
  contribute
• Cash or Deferred Arrangement - CODA
• 17,000 Maximum for 2012
• Catch Up Election - 5,500 if age 50 or older
• Used after normal maximum is reached
• Used after any testing limits applied
• Annual testing (ADP Test) may limit contributions
  by Highly Compensated Employees

73
401(k) Plans

• Advantages
• Voluntary
• Payroll Deducted
• Tax Advantaged
• Contributions are pre-tax
• Plan may offer Roth(k) option
• Mix of both
• Account grows tax deferred
• Employee pays FICA on elective Deferrals
• Employer may offer matching contributions
• Portable

74
401(k) Plan

• Disadvantages
• No guaranteed retirement benefit
• Employee assumes investment risk
• Employer is subject to testing which may limit
  contributions by HCEs.

75
Aggregating Salary Deferrals

• Each individual must aggregate salary deferrals
  from all employers
• 401(k)
• 403(b)
• SIMPLE-IRA
• SIMPLE 401(k)
• SAR-SEP
• Maximum is 17,000 (plus 5,500 if age 50 or
  older)
• Note Section 457 plans do not aggregate

QA in 2 slides
76
Roth 401(k)

• Roth(k) option may be added to a plan
• Contributions are after-tax
• Growth is tax deferred
• Contributions will not be taxed when withdrawn
• Required Minimum Distributions at age 70 ½
• Untaxed gain may be withdrawn income tax free
• After five years of Roth participation in the
  plan
• And due to
• Death
• Disability
• Age 59 ½ or older

QA next slide
77
Unique Roth(k) Distribution Rules

• Withdrawals from 401(K) are pro-rata (Traditional
  vs Roth)
• Transfers from Roth(k) to Roth(k) are permitted
• If withdrawn, only untaxed gain can be rolled
  over
• Defaulted loans will be fully taxable
• Roth(k) may be rolled over to Roth IRA

Q A
78
In Plan Roth Conversions

• Plans may offer In-Plan Roth Conversion after
  age 59 ½ on contributions, earnings and employer
  match
• Rollovers may convert prior to age 59 ½
• Converted assets are taxed but exempt from 10
  tax
• Conversion amount is subject to individual 5 year
  clock based on conversion year
• Earnings are subject to 5 year clock based on
  first Roth(k) contribution to the plan
• No re-characterization
• No income restrictions

79
Automatic Enrollment

• Designed to increase participation in 401(k)
  plans
• After 30-90 days, payroll deductions for 401(k)
  are started at 3 of pay
• Employee is notified and may say, No at any
  time
• If no action taken, contributions begin and are
  directed to default fund.
• Contributions may be increased each annually to
  6
• Adding employer match of 100 on 1 and 50 up to
  6 plus immediate vesting eliminates ADP and Top
  Heavy testing.
• Note The Pension Protection Act of 2006 (PPA 06)
  specifically approved this strategy and further
  acknowledged the use of Target Based funds based
  on age as the default investment option.

80
401(k) Plans

• Employer Contributions
• May be made in several forms
• Matching Contributions
• Non-Elective Contributions
• Profit Sharing Contributions
• May be based on several formulas
• Discretionary
• Matching
• Note Employer contributions can be vested but
  only up to a Top Heavy Schedule

81
Sample Question 3

• Chip Murray works for Quality Tools, Inc. He is
  48 and earns 35,000. Chips wife is a successful
  consultant with substantially higher income.
  Because the company offers a 100 match up to 10
  of pay, Chip contributes the maximum to his
  401(k). Quality Tools, Inc. also plans on making
  a 10 Profit Sharing contribution.
• How much will Chip receive in total annual
  additions?
• A. 17,000
• B. 24,000
• C. 33,500
• D. 37,500

82
Sample Question 3

• Chip Murray works for Quality Tools, Inc. He is
  48 and earns 35,000. Chips wife is a successful
  consultant with substantially higher income.
  Because the company offers a 100 match up to 10
  of pay, Chip contributes the maximum to his
  401(k). Quality Tools, Inc. also plans on making
  a 10 Profit Sharing contribution.
• How much will Chip receive in total annual
  additions?
• A. 16,500
• B. 24,000
• C. 33,000
• D. 37,000

Solution Chips Elective Deferrals Quality Tools
Match Profit Sharing Contribution Total
17,000 3,500 3,500 24,000
83
401(k) Plan Distributions

• Elective Deferrals cannot be withdrawn until
• Death or Disability
• Age 59 ½
• Termination from Service
• Retirement
• Plan Termination
• Distributions can be rolled over to IRA or new
  employer plan
• Distributions taken directly will be taxable
• 10 Penalty for taxable distributions taken prior
  to age 59 ½