CFFP_4 Mod
With a safe harbor 401(k) plan, the employer must provide a (LO 4-3) 50% match of the first 3% of compensation, and a 100% match on the next 2% of compensation; or a 100% match on the first 6% of compensation. 75% match of the first 3% of compensation, and a 50% match on the next 2% of compensation; or a 100% match on the first 6% of compensation. 100% match of the first 3% of compensation, and a 50% match on the next 2% of compensation; or a 100% match on the first 4% of compensation.
100% match of the first 3% of compensation, and a 50% match on the next 2% of compensation; or a 100% match on the first 4% of compensation. With a safe harbor 401(k) plan, the employer must provide a 100% match of the first 3% of compensation, and a 50% match on the next 2% of compensation; or a 100% match on the first 4% of compensation.
If the ADP for nonhighly compensated employees is 9%, then the maximum deferral percentage for highly compensated employees is (LO 4-2) 11%. 11.25%. 18%.
11.25%. Starting at 9% (and higher), the allowable spread between NHCEs and HCEs is 1.25 (125%).
If a 401(k) profit sharing plan is top heavy, and the employer is contributing 5% for HCEs, then the employer must contribute at least (LO 4-2) 2% for the NHCEs. 3% for the NHCEs. 5% for the NHCEs.
3% for the NHCEs. If a defined contribution plan, which includes profit sharing plans, is top heavy then a minimum contribution of 3% must be made for the NHCEs. The only exception would be if a lower amount (such as 2%) were being contributed for the HCEs, then an equal amount (in this case also 2%) would need to be contributed on behalf of the NHCEs.
Which one of the following statements is correct regarding a safe harbor 401(k) plan? (LO 4-3) A major advantage of a safe harbor 401(k) plan is that the employer does not need to do either the ADP or ACP testing, but the employer is still subject to the top-heavy rules. A safe harbor 401(k) plan is deemed to have met both the ADP and ACP tests, and in addition it is not subject to the top-heavy rules. A safe harbor 401(k) plan is not subject to the top-heavy rules, but must meet either the ADP or ACP test.
A safe harbor 401(k) plan is deemed to have met both the ADP and ACP tests, and in addition it is not subject to the top-heavy rules. A safe harbor 401(k) plan is deemed to have met both the ADP and ACP tests, and in addition it is not subject to the top-heavy rules.
Which one of the following is a correct statement about a solo 401(k) plan? (LO 4-4) A solo 401(k) enables the unincorporated business to contribute up to 20% into the plan for the owner, and the owner can also personally defer up to $12,500 (plus an additional $3,000 if age 50 or older). A solo 401(k) enables the sole proprietor to contribute up to 25% into the plan as the business contribution, and the owner can also personally defer up to $18,000 (plus an additional $6,000 if age 50 or older). A solo 401(k) enables the unincorporated business to contribute up to 20% into the plan for the owner, and the owner can also personally defer up to $18,000 (plus an additional $6,000 if age 50 or older).
A solo 401(k) enables the unincorporated business to contribute up to 20% into the plan for the owner, and the owner can also personally defer up to $18,000 (plus an additional $6,000 if age 50 or older). A solo 401(k) enables the unincorporated business to contribute up to 20% into the plan for the owner, and the owner can also personally defer up to $18,000 (plus an additional $6,000 if age 50 or older). This is a big advantage of solo 401(k)s, the ability to have both the business and owner contribute to the plan.
Which one of the following statements incorrectly describes components of defined contribution plans in 2015? (LO 4-1) The overall annual employee limit, including both employee and employer contributions, is $53,000 or 100% of compensation, whichever is less. The maximum age 50 catch-up deferral amount for 2015 is $6,000. Compensation that may be considered in the calculations is limited to $265,000 this year. All profit sharing plans are also 401(k) plans.
All profit sharing plans are also 401(k) plans. Profit sharing plans are traditionally funded by the employer. Section 401(k) of the IRC allows for profit sharing plans to offer pretax employee deferrals, but it is not mandatory. There are still profit sharing plans that are entirely funded by the employer, and that do not offer 401(k) provisions.
Which one of the following is a correct statement regarding a Roth 401(k) plan? (LO 4-4) An employee can contribute $18,000 each to a 401(k) plan and to a Roth 401(k) plan. An employee has to aggregate and the maximum employee deferral between both plans is $18,000. As with a Roth IRA, a Roth 401(k) is not subject to the required beginning date for distributions.
An employee has to aggregate and the maximum employee deferral between both plans is $18,000. One has to aggregate and the maximum employee deferral between both plans is $18,000.
Which one of the following is correct regarding a SIMPLE 401(k) plan? (LO 4-5) The maximum employee deferral (not including catch-up contributions) to a SIMPLE 401(k) plan is $15,000. An employer may elect to make nonelective contributions of 2% of compensation for each employee that makes a salary deferral into a SIMPLE 401(k) plan. The maximum employee deferral to a SIMPLE (whether 401(k) or IRA) in 2015 is $12,500; $2,500 is the catch-up amount for a total of $15000.
An employer may elect to make nonelective contributions of 2% of compensation for each employee that makes a salary deferral into a SIMPLE 401(k) plan. The maximum employee deferral to a SIMPLE (whether 401(k) or IRA) in 2015 is $12,500; $3,000 is the catch-up amount for a total of $15,500. An employer may elect to make nonelective contributions of 2% of compensation for each employee who is eligible to participate in a SIMPLE 401(k) plan. The employer may make this contribution in lieu of a matching contribution. However, an employer that chooses to make nonelective contributions must make contributions on behalf of all plan participants, including participants who fail to make elective contributions (i.e., salary reduction contributions).
Which of the following employer contributions must be 100% vested at all times? (LO 4-2) Employer qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) must be 100% vested at all times. Any employer-matching contribution taken into account in determining whether the requirements for a qualified automatic enrollment feature are satisfied must be 100% vested at all times. Discretionary matching and nonelective employer profit sharing contributions must be 100% vested at all times.
Employer qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) must be 100% vested at all times. QMACs and QNECs enable a 401(k) plan to pass discrimination testing, and must be 100% vested.
If a company allows hardship withdrawals, which of the following statements is correct regarding hardship withdrawals from a 401(k) plan? (LO 4-7) Hardship withdrawals can be made from elective deferral amounts only, not from employer contributions or earnings. The maximum amount distributable in connection with a hardship distribution includes elective deferral amounts, earnings, QNECs, or QMACs credited to the employee's account after July 31, 1989. Hardship distributions are eligible rollover distributions, and are therefore subject to the automatic 20% income tax withholding rules. Participants may not elect out of withholding on hardship distributions.
Hardship withdrawals can be made from elective deferral amounts only, not from employer contributions or earnings. Hardship withdrawals are only available from elective deferral amounts.
Which one of the following is a correct statement regarding 401(k) plan loan provisions? (LO 4-7) Employers are required to offer employees the ability to take out loans and/or take a hardship withdrawal from their profit sharing 401(k) plan. If an employee with an outstanding loan leaves the company prior to the loan being repaid, the loan must be repaid within five years of termination of employment. If a participant has a vested benefit of $15,000, the participant could be eligible to borrow $10,000.
If a participant has a vested benefit of $15,000, the participant could be eligible to borrow $10,000. Normally loans cannot exceed 50% of the participant's vested benefit. Also, $50,000 is the maximum amount that can be borrowed. However, plans can allow loans up to $10,000 without regard to the 50% restriction.
Which one of the following is not correct about qualified plan limits for profit sharing 401(k) plans? (LO 4-1) The retirement benefit is not certain; investment risk is borne by the participant. Includible compensation is limited to the lesser of 100% of compensation or $210,000 in 2015. The employer contribution limit is 25% of compensation. The maximum allowable employee deferral amount is $18,000, not counting any catch-ups, in 2015.
Includible compensation is limited to the lesser of 100% of compensation or $210,000 in 2015. The maximum amount of includible compensation is $265,000, not $210,000.
Which of the following represents action in accordance with Department of Labor regulations that an employer can take to prevent being potentially liable for employee losses in the company 401(k) plan? (LO 4-6) Participants must be permitted to choose from a broad range of investment alternatives with different risk and return characteristics. At least three pooled or core funds must be made available. Employers may choose from investments approved by the Department of ERISA that are considered appropriate risk and return by the investment panel in the Department of ERISA. Participants can exercise control over the assets in their accounts. Among other things, control implies that participants are able to obtain enough information to make informed investment decisions.
Participants must be permitted to choose from a broad range of investment alternatives with different risk and return characteristics. At least three pooled or core funds must be made available. One of the DOL requirements is that participants must be permitted to choose from a broad range of investment alternatives with different risk and return characteristics. At least three pooled or core funds must be made available.
The Pension Protection Act of 2006 (PPA) requires 401(k) plans that are maintained by publicly traded companies to comply with which of the following new investment and diversification rules? (LO 4-6) Participants must be permitted to direct at least 66% of after-tax plan contributions and 401(k) elective plan deferrals invested in employer securities be reinvested in suitable alternative investments. Participants who have at least three years of service (based on the vesting schedule imposed by the plan) must be permitted to direct 66% of their account balances attributable to employer contributions made in plan years after 2006 that are invested in employer securities (i.e., certain contributions other than after-tax plan contributions and elective plan deferrals) be reinvested in suitable alternative investments. Plan administrators of 401(k) plans subject to ERISA Section 204(j) must provide participants with a notice describing their rights under this law (and IRC Section 401(a)(35)) and the importance of diversifying assets held in their plans, and the notice must direct participants and beneficiaries to the Department of ERISA website at www.erisa.gov/ebsa/investing.html for sources of information on individual investing and diversification. Plan administrators of 401(k) plans subject to ERISA Section 204(j) must provide participants with a notice describing their rights under this law (and IRC Section 401(a)(35)) and the importance of diversifying assets held in their plans, and the information furnished to participants about their ERISA Section 204(j) diversification rights must include an explanation of the importance of a well-balanced and diversified investment portfolio.
Plan administrators of 401(k) plans subject to ERISA Section 204(j) must provide participants with a notice describing their rights under this law (and IRC Section 401(a)(35)) and the importance of diversifying assets held in their plans, and the information furnished to participants about their ERISA Section 204(j) diversification rights must include an explanation of the importance of a well-balanced and diversified investment portfolio. Plan administrators of 401(k) plans subject to ERISA Section 204(j) must provide participants with a notice describing their rights under this law (and IRC Section 401(a)(35)) and the importance of diversifying assets held in their plans, and the information furnished to participants about their ERISA Section 204(j) diversification rights must include an explanation of the importance of a well-balanced and diversified investment portfolio.
Which one of the following fund options could be offered under qualified default investment alternatives for 401(k) plans? (LO 4-6) Target retirement funds are an appropriate qualified default investment for 401(k) plans, but life-cycle funds are not. Life-cycle funds are an appropriate qualified default investment for 401(k) plans, but balanced funds are not. Professionally managed funds could be offered under qualified default investment alternatives for 401(k) plans, but fiduciaries must consider investment fees and expenses when choosing a qualified investment alternative.
Professionally managed funds could be offered under qualified default investment alternatives for 401(k) plans, but fiduciaries must consider investment fees and expenses when choosing a qualified investment alternative. Professionally managed funds could be offered under qualified default investment alternatives for 401(k) plans, but fiduciaries must consider investment fees and expenses when choosing a qualified investment alternative.
Which one of the following statements is correct regarding a safe harbor 401(k) plan? (LO 4-3) Safe harbor 401(k) plan employer contributions are subject to accelerated vesting. Safe harbor 401(k) employer contributions must be immediately 100% vested, there is no vesting schedule allowed. Safe harbor 401(k) employee contributions must be immediately 100% vested, but employer contributions may be subject to a two-year gradual or cliff vesting schedule.
Safe harbor 401(k) employer contributions must be immediately 100% vested, there is no vesting schedule allowed. Safe harbor 401(k) employer contributions must be immediately 100% vested; there is no vesting schedule allowed.
Which one of the following is correct about a SIMPLE 401(k)? (LO 4-5) With a SIMPLE 401(k) plan the employer must make either a 100% match on the first 3% of compensation, or a 2% nonelective contribution for all participants. If an employer makes a matching contribution of 3% of compensation to either a SIMPLE IRA or SIMPLE 401(k) plan, the annual compensation limit ($265,000 in 2015) does not apply. With adequate notice, an employer can reduce the matching contribution in a SIMPLE 401(k) to 1%. The reduction cannot be made more than two years out of the five-year period that ends with (and includes) the year for which the election is effective.
With a SIMPLE 401(k) plan the employer must make either a 100% match on the first 3% of compensation, or a 2% nonelective contribution for all participants. With a SIMPLE 401(k) plan the employer must make either a 100% match on the first 3% of compensation, or a 2% nonelective contribution for all participants.
Which one of the following statements is correct regarding automatic contribution arrangements? (LO 4-3) Qualified automatic contribution arrangements were established in order to make contributing to a 401(k) plan mandatory. With the automatic contribution arrangements a certain amount will be contributed on behalf of the employee automatically, the idea being that if contributions get started then hopefully the employee won't miss the amount and will continue to save. Participants who leave before their salary deferrals are fully vested help to reduce the administrative cost for the employer and participants that stay.
With the automatic contribution arrangements a certain amount will be contributed on behalf of the employee automatically, the idea being that if contributions get started then hopefully the employee won't miss the amount and will continue to save. Contributions are not mandatory; one can always change the contribution amount or opt out. The difference is in the approach. Traditionally, employees have had to "opt in" to a plan, and proactively determine and make a contribution. With the automatic contribution arrangements a certain amount will be contributed on behalf of the employee automatically, the idea being that if contributions get started then hopefully the employee won't miss the amount and will continue to save.
The ratio percentage test and average benefits percentage test (LO 4-2) both look at key versus non-key employees to determine if a company passes the tests. both look at highly compensated employees (HCEs) versus nonhighly compensated employees (NHCEs) to determine if a company passes the tests. are similar, but the ratio percentage test looks at key versus non-key employees to determine if a company passes and the average benefits percentage test looks at highly compensated employees (HCEs) versus nonhighly compensated employees (NHCEs) to determine if a company passes the tests.
both look at highly compensated employees (HCEs) versus nonhighly compensated employees (NHCEs) to determine if a company passes the tests. The ratio percentage and average benefits tests use highly compensated employees (HCEs), not key employees.
Viva Industries has just learned that their profit sharing 401(k) plan has failed the ADP test. All of the following could bring the plan into compliance except (LO 4-2) discretionary contribution. corrective distribution. qualified matching contribution. qualified nonelective contribution.
discretionary contribution. A discretionary contribution is an employer contribution and would not affect the employee deferral calculation and would not help bring the plan into compliance. However, if a qualified matching or qualified nonelective contribution is made, then even though the employer is making the contribution it is counted as if the nonhighly compensated employees are making the contribution. This raises the ADP for the NHCEs, and can bring the plan into compliance. A corrective distribution, where money is returned to HCEs, can also bring the plan into compliance.
The maximum vesting schedule for defined contribution plans, which includes profit sharing plans, is (LO 4-2) either 2- to 6-year graded or 4-year cliff. either 2- to 6-year graded or 3-year cliff. either 3- to 7-year graded or 5-year cliff.
either 2- to 6-year graded or 3-year cliff. The maximum vesting schedule is either 2- to 6- year graded or 3-year cliff.
The ADP test looks at the (LO 4-2) amount of employer contributions. employee deferrals (actual deferral percentage). amount of employee after-tax contributions.
employee deferrals (actual deferral percentage). The ADP test looks at employee deferrals (actual deferral percentage).
Which one of the following would classify an employee as being highly compensated? (LO 4-2) 5% or less owner greater than 5% owner 10% or less owner greater than 10% owner
greater than 5% owner A greater than 5% owner is considered to be both a highly compensated employee and a key employee.
One of the criteria used to determine if an employee is a key employee is if they are a (LO 4-2) greater-than-1% owner with annual compensation greater than $150,000. greater-than-10% owner. an officer of the company with annual compensation greater than $165,000 (2015).
greater-than-1% owner with annual compensation greater than $150,000. One of the criteria used to determine if an employee is a key employee is if they are a greater-than-1% owner with annual compensation greater than $150,000. The other two criteria that make one a key employee would be a greater-than-5% owner, or an officer of the company with annual compensation greater than $170,000 (2015).
All of the following may be included under the IRS's definition of compensation as it applies to defined contribution plans except (LO 4-1) investment income. salaries. fees for professional services. salary reduction contributions.
investment income. Investment income is not considered compensation.
A defined contribution plan is considered top heavy if more than 60% of the account balances are attributed to (LO 4-2) key employees. highly compensated employees. employees that are more-than-10% owners.
key employees. A defined contribution plan is considered top heavy if more than 60% of the account balances are attributed to key employees.
Ace Industries has 10 highly compensated employees, and 9 of them participate in the plan. If 30 of the 40 nonhighly compensated employees participate, the plan (LO 4-2) passes. fails. The plan would need at least 36, or 90% of, nonhighly compensated employees to participate to pass. fails. To pass, the plan would need each nonhighly compensated employee to participate.
passes. If 90% of the HCEs participate (9/10), then at least 63% of the NHCEs must participate (70% of 90%, or .90 × .70 = .63). If 30 of the 40 NHCEs participate, that means 75% of the NHCEs are participating (30/40 = .75), which is more than the 63% requirement.
Which one of the following statements correctly describes the term "elective deferral"? (LO 4-1) the ratio of nonhighly compensated employees' benefits to highly compensated employees' average compensation the dollar amount of forfeitures being allocated to a 401(k) plan participant the dollar amount contributed by the employer into a 401(k) plan the dollar amount contributed by an employee into a 401(k) plan
the dollar amount contributed by an employee into a 401(k) plan "Elective deferral" is the dollar amount that the employee defers into the 401(k) plan.
All of the following affect the ultimate retirement benefit in a defined contribution plan except (LO 4-1) investment earnings on the plan's assets. the participants deferral amount. the participant's years in the plan. the plan's formula.
the plan's formula. Defined benefit plans, not defined contributions plans, have a plan formula that determines a participant's retirement benefit.
In 2015, if an employer so elects, they only have to count (LO 4-2) the top 20% of employees with compensation greater than $115,000 (in 2014) as highly compensated employees. the top 20% of employees with compensation greater than $170,000 (in 2015) as highly compensated employees. any employee who was a more-than-10% owner at any time during the current or preceding year.
the top 20% of employees with compensation greater than $115,000 (in 2014) as highly compensated employees. An employer can pass discrimination tests by only having to count the top 20%. $115,000 is the applicable amount for 2014, the lookback year for 2015.