Chartered Life Underwriter (CLU) Retirement Planning and Employee Benefits Syllabus

Define a "highly compensated employee" (HCE) for nondiscrimination testing.

An employee who is a more-than-5% owner (in the current or prior year) OR who earned compensation above the indexed threshold in the prior year ($155,000 for 2024, used in 2024 testing this is the prior-year amount).

What are the ADP and ACP tests, and which plans must satisfy them?

The Actual Deferral Percentage (ADP) test limits HCE elective deferrals relative to non-HCEs; the Actual Contribution Percentage (ACP) test does the same for employer matching/after-tax contributions. Traditional 401(k) plans must pass them (safe-harbor 401(k)s are exempt).

What is the maximum compensation that can be counted for plan contribution/benefit purposes in 2024 (the 401(a)(17) limit)?

$345,000 of compensation in 2024.

Compare the basic tax treatment of a traditional IRA versus a Roth IRA.

Traditional IRA: contributions may be tax-deductible, growth is tax-deferred, and qualified distributions are taxed as ordinary income. Roth IRA: contributions are after-tax (never deductible), growth is tax-free, and qualified distributions are tax-free.

What is the 2024 IRA contribution limit and catch-up amount?

$7,000 total across all IRAs, plus a $1,000 catch-up for individuals age 50 or older ($8,000 total).

What makes a Roth IRA distribution "qualified" (tax-free)?

The account must satisfy the 5-year holding period AND the distribution must be due to one of: attainment of age 59½, death, disability, or a first-time home purchase (up to $10,000 lifetime).

How does Roth IRA eligibility differ from traditional IRA eligibility regarding income and RMDs?

Roth IRA contributions phase out above certain MAGI limits (income limits apply); traditional IRA contributions have no income cap (only deductibility phases out). Roth IRAs have no required minimum distributions during the owner's lifetime; traditional IRAs do.

What is a SEP (Simplified Employee Pension) plan and its 2024 contribution limit?

A SEP is an employer-funded plan using SEP-IRAs; only the employer contributes. The 2024 limit is the lesser of 25% of compensation or $69,000 per employee.

Describe the SIMPLE IRA plan and its 2024 employee deferral limit.

A SIMPLE IRA is for employers with 100 or fewer employees; employees defer salary and the employer must either match up to 3% of pay or make a 2% nonelective contribution. The 2024 employee deferral limit is $16,000 plus a $3,500 catch-up at age 50+.

What is the special early-withdrawal penalty rule unique to SIMPLE IRAs?

Distributions taken within the first 2 years of participation are subject to a 25% early withdrawal penalty (instead of the usual 10%) if no exception applies.

What type of employers may sponsor a 403(b) plan, and what investments are allowed?

403(b) plans are for public schools, 501(c)(3) tax-exempt organizations, and certain ministers. Contributions go into annuity contracts or mutual funds held in custodial accounts (tax-sheltered annuities).

What is the special 403(b) "15-year rule" catch-up provision?

Employees with 15+ years of service with the same qualifying employer may contribute up to an additional $3,000 per year (lifetime max $15,000), separate from the age-50 catch-up.

How does a governmental 457(b) plan differ from a 401(k) regarding early distributions?

457(b) plans are not subject to the 10% early withdrawal penalty; distributions are allowed at separation from service at any age without that penalty (though they remain taxable as ordinary income).

What is the unique "double limit" feature of a 457(b) plan compared to a 401(k)?

A 457(b) limit is separate from 401(k)/403(b) limits, so an employee with both a 457(b) and a 401(k)/403(b) can defer the maximum to each. 457(b) also offers a special final-3-years catch-up that can double the normal limit.

What is the required beginning date (RBD) for required minimum distributions from traditional retirement plans under current law (SECURE 2.0)?

RMDs must begin by April 1 of the year after the year the owner turns 73 (rising to 75 in 2033). For most years thereafter, the RMD is due by December 31.

How is an annual required minimum distribution (RMD) calculated?

RMD = prior year-end account balance divided by the applicable life expectancy factor from the IRS Uniform Lifetime Table (or Joint Life Table if the sole beneficiary is a spouse more than 10 years younger).

What is the penalty for failing to take a required minimum distribution under SECURE 2.0?

An excise tax of 25% of the shortfall (the amount not distributed), reduced to 10% if the failure is corrected within the applicable correction window.

What is the SECURE Act "10-year rule" for most non-spouse inherited retirement accounts?

Most non-eligible designated beneficiaries (e.g., adult children) must fully distribute an inherited IRA/plan within 10 years of the owner's death, rather than stretching distributions over their own life expectancy.

How is the 10% early distribution penalty applied, and name three common exceptions.

A 10% additional tax applies to taxable distributions before age 59½. Exceptions include: death, disability, qualifying medical expenses above the AGI threshold, substantially equal periodic payments (72(t)), first-home purchase (IRA, up to $10,000), and qualified higher-education expenses (IRA).

In group life insurance, how much employer-provided coverage is income-tax-free to the employee, and how is the excess taxed?

Under IRC Section 79, the first $50,000 of employer-paid group term life coverage is tax-free; the cost of coverage above $50,000 is imputed income (taxable) based on the IRS Table I uniform premium rates.

What is COBRA and the general maximum continuation period for terminated employees?

COBRA lets qualified beneficiaries continue group health coverage after a qualifying event by paying up to 102% of the premium. The maximum period is generally 18 months for termination/reduction of hours (up to 36 months for certain events like divorce or death).

How are employer-paid group health insurance premiums and benefits generally taxed to employees?

Employer-paid group health premiums are excluded from the employee's gross income, and benefits (reimbursement of medical expenses) are received income-tax-free.

Define an annuity and distinguish the accumulation phase from the annuitization (payout) phase.

An annuity is a contract that exchanges premium for a stream of payments. During the accumulation phase, the contract grows tax-deferred; during the annuitization/payout phase, the accumulated value is converted into periodic income payments.

Distinguish a fixed annuity from a variable annuity.

A fixed annuity guarantees a stated minimum interest rate and fixed payments; the insurer bears investment risk. A variable annuity's value and payouts fluctuate with subaccount investment performance, and the contract owner bears the investment risk.

Distinguish an immediate annuity from a deferred annuity.

An immediate (SPIA) annuity begins income payments within about one year of a single premium. A deferred annuity has an accumulation period before payments begin, allowing tax-deferred growth until annuitization or withdrawal.

How are withdrawals from a nonqualified deferred annuity taxed before annuitization, and what penalty may apply?

Withdrawals are taxed under LIFO (last-in, first-out): earnings come out first and are taxed as ordinary income. A 10% penalty applies to the taxable portion if taken before age 59½ (with exceptions). There is no capital-gains treatment.

What is the "exclusion ratio" for annuitized payments and how is it computed?

The exclusion ratio determines the tax-free portion of each annuity payment = investment in the contract ÷ expected total return. The result is the percentage of each payment returned tax-free as recovery of basis; the remainder is taxable as ordinary income.

Compare a "straight life" annuity payout with a "life with period certain" option.

A straight (pure) life annuity pays the largest income for the annuitant's life only, ceasing at death with nothing to heirs. Life with period certain pays for life but guarantees payments for a minimum period (e.g., 10 or 20 years); if the annuitant dies early, a beneficiary receives the remaining guaranteed payments (smaller payment amount).

What is a joint-and-survivor annuity and why is its payment lower than a single-life annuity?

A joint-and-survivor annuity pays income while either of two annuitants is alive (often continuing at 50%/66⅔%/100% to the survivor). Payments are lower because they cover two lives, lengthening the expected payout period.

What is a Section 1035 exchange in the context of annuities?

A tax-free exchange under IRC Section 1035 allows an owner to swap one annuity contract for another (or a life policy/endowment for an annuity) without recognizing gain, as long as it is a direct transfer between like-kind contracts; basis carries over.