CFP - Retirement Planning and Employee Benefits

Company A has been capitalized by MJBJ Vulture Capital, a venture capital company. Company A's cash flows are expected to fluctuate significantly from year to year, due to phenomenal growth. They expect to go public within three years. Which of the following would be the best qualified plan for them to consider adopting? A. A profit sharing plan. B. A new comparability plan. C. A 401(k) plan with a match. D. A stock bonus plan.

The answer is D. A stock bonus plan will allow equity participation without the use of cash flows and the public offering will eventually provide liquidity.

Annuity Method of Retirement Calculation

4-Step Process 1. Determine annual funding needs in today's dollars 2. Inflate annual funding needs to beginning of retirement 3. Determine the total funding needs at retirement age 4. Determine the required annual savings

All of the following plans may integrate with Social Security EXCEPT: A. ESOP B. Profit Sharing Plan C. Defined Benefit D. Target Benefit

Ch 8. Solution: The correct answer is A.

All of the following statements concerning cash balance pension plans are correct EXCEPT: A. The cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand, and as a cost saving measure. B. The cash balance plan is a defined benefit plan. C. The cash balance plan has no guaranteed annual earnings to participants. D. The cash balance plan is subject to minimum funding requirements.

Ch. 3 Solution: The correct answer is C. A basic component of a cash balance plan is the guaranteed minimum investment return.

Tracy, age 46, is a self-employed financial planner and has Schedule C income from self-employment of $56,000. He has failed to save for retirement until now. Therefore, he would like to make the maximum contribution to his profit sharing plan. How much can he contribute to his profit sharing plan account? A. $9,464 B. $10,409 C. $11,200 D. $14,000

Ch. 8 Solution: The correct answer is B. $56,000 Schedule C net income -3,956 (less ½ self-employment taxes at 15.3% × 0.9235) $52,044 Net self-employment income × 0.20 (0.25/1.25) $10,409 Keogh profit sharing contribution amount

Persons that are deemed to be a "disqualified person" include: I. Plan sponsor. II. Plan Fiduciary. III. Officers of plan sponsor. IV. Family members of owners. A. I and II only. B. I and III only. C. I, II and IV only. D. I, II, III and IV.

Ch. 8 Solution: The correct answer is D. All are deemed disqualified person by law.

Qualified retirement plans that permit the employer unlimited investment in sponsor company stock are: I. 401(k) plans. II. Stock bonus plans. III. Profit sharing plans. IV. ESOPs. A. III only. B. IV only. C. III and IV only. D. I, II, III and IV.

Ch. 8 Solution: The correct answer is D. All of the listed plans permit 100% stock in the plans. The 401(k) plan is organized as a profit sharing or stock bonus plan.

In July of last year (2022) Paul turned 72. He retired years ago and was a participant in his former employer's profit sharing plan. His profit sharing plan had an account balance $600,000 on December 31 of last year, and $450,000 on December 31 of the year prior. According to the Uniform Lifetime Table the factors for ages 72, and 73 are 27.4 and 26.5 respectively. What is the amount of Paul's first required minimum distribution that he must take by the deadline? A. $21,898 B. $22,641 C. $16,981 D. $16,423

Solution: The correct answer is A. $600,000/27.4 = $21,898 is his RMD. Paul turned age 72 last year and he will be required to take his first distribution for the 2022 tax year. The RMD for the first year may be delayed until April 1 of the next year but is still based on the year the taxpayer turns 72. If they delay the first RMD until April 1 of the next year, they will then be required to take two RMDs, the RMD for age 72 that was delayed and the RMD for age 73. SECURE Act 2.0 revised distributions for those reaching 72 after 12/31/22.

Which of the following vesting schedules may a top-heavy qualified profit sharing plan use? A. 1 to 5 year graduated B. 5-year cliff C. 3 to 7 year graduated D. 4 to 8 year graduated

Solution: The correct answer is A. As a result of the PPA 2006, qualified profit sharing plans must use a vesting schedule that provides participants with vested benefits at least as rapidly as either a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule. This requirement applies without regard to whether the profit sharing plan is a top-heavy plan. Options B, C, and D all vest less rapidly than the required schedule.

An individual has determined utilizing the annuity method of capital needs analysis that he needs $1,045,656 at the beginning of his retirement to meet his retirement life expectancy goals. If this individual would like to be more conservative in his retirement planning forecast and maintain this capital balance throughout his retirement life expectancy of 32 years, given an expected earnings rate of 6%, and an inflation rate of 3% during the period, how much more would he need to have at the beginning of his retirement? A. $162,032 B. $406,067 C. $417,246 D. $674,023

Solution: The correct answer is A. N = 32 I = 6% FV = $1,045,656 PMT = $0 PV = $162,032 (Answer)

A distress termination of a qualified retirement plan occurs when: The PBGC initiates a termination because the plan was determined to be unable to pay benefits from the plan. An employer is in financial difficulty and is unable to continue with the plan financially. Generally, this occurs when the company has filed for bankruptcy, either Chapter 7 liquidation or Chapter 11 reorganization. The employer has sufficient assets to pay all benefits vested at the time, but is distressed about it. When the PBGC notifies the employer that it wishes to change the plan due to the increasing unfunded risk. A. 2 only B. 1 and 2 C. 1, 2, and 3 D. 1, 2, and 4

Solution: The correct answer is A. Statement 2 is the definition of a distress termination. Statement 3 is standard termination. Statement 1 describes an involuntary termination. Statement 4 is simply false.

Jim, age 32, earns $65,000 per year. When he retires at age 62 he believes his wage replacement ratio will be 80% and Social Security will pay him $12,000 in today's dollars. How much must Jim save at the end of each year and make the last payment at 62, if he can earn 10% on his investments, inflation is 3% and he expects to live until age 100? A. $8,513 B. $6,513 C. $3,476 D. $10,543

Solution: The correct answer is A. Step #1 N = 30 (62-32) I = 3 PV = (65,000 × .80) - 12,000 = 40,000 PMT = 0 FV = ? = 97,090.50 Step #2 - BEGIN MODE N = 38 (100 - 62) I = (1.10) / (1.03) - 1 × 100 = 6.7961 PV = ? = 1,400,288.69 PMT = 97,090.50 FV = 0 Step #3 - END MODE N = 30 (62-32) I = 10 PV = 0 PMT = ? = 8,512.70 FV = 1,400,288.69

Tracy, age 46, is a self-employed financial planner and has Schedule C income from self-employment of $56,000. He has failed to save for retirement until now. Therefore, he would like to make the maximum contribution to his profit sharing plan. How much can he contribute to his profit sharing plan account? A. $9,464 B. $10,409 C. $11,200 D. $14,000

Solution: The correct answer is B. $56,000 Schedule C net income -3,956 (less ½ self-employment taxes at 15.3% × 0.9235) $52,044 Net self-employment income × 0.20 (0.25/1.25) $10,409 Keogh profit sharing contribution amount

The following statements concerning retirement plan service requirements for qualified plans are correct EXCEPT: A. The term "year of service" refers to an employee who has worked at least 1,000 hours during the initial 12-month period after being employed. B. According to the Internal Revenue Code, if an employee hired on October 5, 20X1 has worked at least 1,000 hours or more by October 4, 20X2, he has acquired a year of service the day after he worked his 1,000th hour. C. An employer has the option of increasing the one-year of service requirement to 2 years of service. D. Once an employee attains the service requirement of the plan, the employer cannot make the employee wait more than an additional six months to enter the plan.

Solution: The correct answer is B. Option B is incorrect because the employee would NOT acquire a year of service the day after he worked his 1,000th hour, but after twelve months AND 1,000 hours

Andrea died this year (2023) at the age 77, leaving behind a qualified plan worth $200,000. Andrea began taking minimum distributions from the account after attaining age 70½ and correctly reported the minimum distributions on her federal income tax returns. Before her death, Andrea named her granddaughter, Reese age 22, as the designated beneficiary of the account. Now that Andrea has died, Reese has come to you for advice with respect to the account. Which of the following is correct? A. Reese must distribute the entire account balance within five years of Andrea's death. B. Reese must distribute the entire account balance within ten years of Andrea's death. C. In the year following Andrea's death, Reese must begin taking distributions over Andrea's remaining single-life expectancy. D. Reese can roll the account over to her own name, treat the account as her own and name a new beneficiary.

Solution: The correct answer is B. SECURE Act 2019 changed distribution rules for beneficiaries of account owners that died after 12/31/19. Whether the account owner died before RBD (Required Begin Date) or after, the distribution rules are now the same. All Designated Beneficiaries must withdraw the account balance within 10 years of the owner's death. Eligible Designated Beneficiaries may distribute over their life expectancy in the year following owner's death. Eligible Designated Beneficiaries are: •Surviving spouse for the employee or IRA owner •Child of employee or IRA owner who has not reached majority •At age of majority becomes a designated beneficiary •Chronically ill individual •Any other individual who is not more than ten years younger than the employee or IRA owner Non-Designated Beneficiaries (no listed Beneficiary) rules are pending clarification from the IRS but we believe must be distributed within 5 years of the account owner's death. The new rules were not clear if the difference for before or after RBD were still applicable. Reese is more than 10 years younger than Andrea, which makes her a Designated Beneficiary.

Which of the following statements concerning the use of life insurance as an incidental benefit provided by a qualified retirement plan is (are) correct? 1. The premiums paid for the life insurance policy within the qualified plan are taxable to the participant at the time of payment. 2. Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer's aggregate contributions to the participant's account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer's aggregate contributions to the participant's account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income, or the policy distributed to the participant, at or before retirement. A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2

Solution: The correct answer is B. Statement 1 is incorrect. The economic value of pure life insurance coverage is taxed annually to the participant. Statement 2 is correct because the 25 percent test is actually a misnomer, for it is really two tests: a 25 percent test and a 50 percent test, depending on which type of life insurance protection is involved.

The early distribution penalty of 10 percent does not apply to qualified plan distributions: I. Made after attainment of the age of 55 and separation from service. II. Made for the purpose of paying qualified higher education costs. III. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions. A.I only. B. I and III only. C. II and III only. D. I, II and III.

Solution: The correct answer is B. Statement II is an exception for distributions from IRAs, not qualified plans. Statements I and III are exceptions to the 10% penalty for qualified plan distributions.

Packlite company has a defined benefit plan with 200 nonexcludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the requirements set forth in the IRC? A. 40 B. 50 C.80 D. 100

Solution: The correct answer is B. The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. Here 40% would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees.

Larry, age 55, is employed by BB Trucking Company as a tire repair specialist. He earns $62,000 per year. He received an allocation of $32,000 to his employer-provided profit sharing plan for the year. If BB Trucking does not match employee deferrals, what is the maximum amount Larry can defer to his 401(k) plan for the 2023 plan year? A. $22,500 B. $30,000 C. $66,000 D. $73,500

Solution: The correct answer is B. The maximum deferral to a 401(k) plan for a participant who is over 50 years old in 2023 is $30,000 ($22,500 plus catch-up of $7,500). The deferral is also included in the maximum defined contribution limit of $66,000 ($73,500 if 50 and over with catch-up). Since Larry has received an allocation from the profit sharing plan of $32,000, he is able to defer $22,500 plus the $7,500 catch up deferral for participants who are 50 years and older to maximize his defined contribution plan limit for the year. Note that Larry does not attain the section 415 maximum at $73,500, but does have total contributions of $62,000.

Which of the following qualified plans require mandatory funding? Defined benefit pension plans 401(k) plans with an employer match organized as a profit sharing plan Cash balance pension plans Money purchase pension plans A. 1 and 3 B. 1, 2, and 3 C. 1, 3, and 4 D. 1, 2, 3, and 4

Solution: The correct answer is C. 401(k) plans do not require mandatory funding. The other three require mandatory funding.

Which of the following plans require mandatory funding? I. Defined Benefit Plan II. Cash Balance Pension Plan III. ESOP IV. Target Benefit A. I and II only. B. I , II and III only. C. I, II and IV only. D. I, II, III and IV only.

Solution: The correct answer is C. An ESOP does not have mandatory funding requirements.

Robbie is the owner of SS Automotive and he would like to establish a qualified pension plan. Robbie would like most of the plan's current contributions to be allocated to his account. He does not want to permit loans and he does not want SS Automotive to bear the investment risk of the plan's assets. Robbie is 32 and earns $700,000 per year. His employees are 25, 29, and 48 and they each earn $25,000 per year. Which of the following qualified pension plans would you recommend that Robbie establish? A. Target benefit pension plan B. Cash balance pension plan C. Money purchase pension plan D. Defined benefit pension plan using permitted disparity

Solution: The correct answer is C. Because Robbie does not want SS Automotive to bear the investment risk of the plan assets, the money purchase pension plan or the target benefit plan would be the available options to fulfill his requirements. The target benefit plan would not fulfill Robbie's desires because as a percentage of compensation, older employees receive a greater contribution in a target benefit plan and one of the employees is older than Robbie. In such a case, the older employee would receive a greater (as a percentage of compensation) contribution to the plan.

Going Higher Construction sponsors a 401(k) profit sharing plan. In the current year, Going Higher Construction contributed 25% of each employees' compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC was 3.5%. If Bob, age 57, earns $100,000 and is a 6% owner, what is the maximum amount that he may defer into the 401(k) plan for this year? A. $3,500 B. $5,500 C. $13,000 D. $30,000

Solution: The correct answer is C. Bob is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 5.5% (3.5% + 2%) and because he is over 50, he can defer the additional $7,500 (2023) as a catch-up contribution. Bob can defer $5,500 (5.5% × $100,000) and $7,500 (the catch-up) for a total of $13,000.

Which of the following statements concerning choosing the most appropriate type of vesting schedule for a qualified plan --restrictive vs. generous--is (are) correct? 1. Two advantages of choosing a restrictive vesting schedule are (1) to reduce costs attributable to employee turnover and (2) to help retain employees. 2. Three advantages of choosing a liberal vesting schedule in which there is immediate and full vesting are (1) to foster employee morale (2) keep the plan competitive in attracting employees, and (3) to meet the designs of the small employer who desires few encumbrances to participation for the "employee family." A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2

Solution: The correct answer is C. Both Statements 1 and 2 are correct.

Which of the following statements concerning choosing the most appropriate type of vesting schedule for a qualified plan --restrictive vs. generous--is (are) correct? I. Two advantages of choosing a restrictive vesting schedule are (1) to reduce costs attributable to employee turnover and (2) to help retain employees. II. Three advantages of choosing a liberal vesting schedule in which there is immediate and full vesting are (1) to foster employee morale (2) keep the plan competitive in attracting employees, and (3) to meet the designs of the small employer who desires few encumbrances to participation for the "employee family." A. I only. B. II only. C. Both I and II. D. Neither I nor II.

Solution: The correct answer is C. Both statements are correct.

Marcus has been employed by GCD Enterprises for 15 years, and currently earns $60,000 per year. Marcus saves $15,000 per year. He plans to pay off his home at retirement and live debt free. He currently spends $12,000 per year on his mortgage. What do you expect Marcus' wage replacement ratio to be based on the above information? A. 28.41% B. 33.02% C. 47.35% D. 55.00%

Solution: The correct answer is C. Calculate the Wage Replacement Ratio: Salary $60,000 100.00% Payroll Taxes ($4,590) 7.65% Savings ($15,000) 25.00% Mortgage Paid-Off ($12,000) 20.00% Costs in Retirement $28,410 47.35%

Kyle is 54 and would like to retire in 11 years. He would like to live the "high" life and would like to generate 90% of his current income. He currently makes $150,000 and expects $24,000 (in today's dollars) in Social Security. Kyle is relatively conservative. He expects to make 8% on his investments, that inflation will be 4% and that he will live until 104. How much does Kyle need at retirement? A. $3,631,802 B. $3,423,275 C. $3,554,911 D. $3,480,448

Solution: The correct answer is C. Salary = 111,000 (150,000* 90%) - 24,000 = 111,000 N = 11 years to retirement I = 4% inflation PV = 111,000 in salary Solve for FV Answer = 170,879.4003 beg mode PMT = 170,879.40 N = 39 (104 - 65) I = 3.8462 Inflation adjusted rate of return = (1.08/1.04) - 1 * 100 Solve for PVAnswer = 3,554,911.3548 Answer a is the wrong payment (150,000 -24,000* 90%) = 113,400 Answer b is ordinary annuity (g end) Answer d uses 4% for interest (g beg)

Carolyn Smart wanted to volunteer full-time and decided to retire from Lotsa Cash Corporation at the age 57, after 15 years of service. She requested a total distribution of her account in the Lotsa Cash Corporation's profit sharing plan and received a check, made payable to her. Her account balance was $60,000 on her final day of employment. Which of the following statements describe the consequences of this distribution? I. Eligible for 10 year forward averaging. II. Subject to 10% penalty. III. Eligible for Rollover. IV. Subject to mandatory 20% withholding. V. Exempt from the 10% early withdrawal penalty. A. I, II and III only B. II, III and IV only C. III, IV and V only D. III and IV only E. I, IV and V

Solution: The correct answer is C. She must be born by 1/1/1936 in order to use 10 year forward averaging. She is not subject to the 10% penalty due to separation of service after age 55. She is eligible for a rollover. She is subject to the 20% withhold since the check went to her (indirect rollover) She is exempt from the 10% penalty, due to separation of services after age 55.

A company's defined benefit pension plan utilizes a funding formula that considers years of service and average compensation to determine the pension benefit payable to the plan participants. If Kim is a participant in this defined benefit pension plan and she has 30 years of service with the company and average compensation of $75,000, what is the maximum pension benefit that can be payable to Kim at her retirement? A. $22,500 B. $66,000 C. $75,000 D. $265,000

Solution: The correct answer is C. The maximum amount payable from a defined benefit pension plan is the lesser of $265,000 (2023) or 100% of the average of the employee's three highest consecutive years of compensation. Because the average of Kim's compensation is $75,000, she would be limited to receiving a pension benefit at her retirement of $75,000.

XYZ has a noncontributory qualified profit sharing plan with 310 employees in total, 180 who are nonexcludable (40 HC and 140 NHC). The plan covers 72 NHC and 29 HC. The NHC receive an average of 4.5% benefit and the HC receive 6.5%. Which of the following statements is (are) correct? 1. The XYZ company plan meets the ratio percentage test. 2. The XYZ company plan fails the average benefits test. 3. The plan must and does meet the ADP test. A. 1 only B. 2 only C. Both 1 and 2 D. 1, 2, and 3

Solution: The correct answer is C. The plan does not have to meet the ADP test because it is a noncontributory plan. The plan meets the ratio percentage test and fails the average benefits test. Safe Harbor = 72 ÷ 140 = 51% = Fail Ratio % = (72 ÷ 140) ÷ (29 ÷ 40) = 70.9% = Pass Average Benefit = 4.5 ÷ 6.5 = 69.2% = Fail

XYZ has a noncontributory qualified profit sharing plan with 310 employees in total, 180 who are nonexcludable (40 HC and 140 NHC). The plan covers 72 NHC and 29 HC. The NHC receive an average of 4.5% benefit and the HC receive 6.5%. Which of the following statements is (are) correct? I. The XYZ company plan meets the ratio percentage test. II. The XYZ company plan fails the average benefits test. III. The plan must and does meet the ADP test. A. 1 only B. 2 only C. Both 1 and 2 D. 1, 2, and 3

Solution: The correct answer is C. The plan does not have to meet the ADP test because it is a noncontributory plan. The plan meets the ratio percentage test and fails the average benefits test. Safe Harbor = 72 ÷ 140 = 51% = Fail Ratio % = (72 ÷ 140) ÷ (29 ÷ 40) = 70.9% = Pass Average Benefit = 4.5 ÷ 6.5 = 69.2% = Fail

Christine has been the owner of Chris' Antique Dolls for the past 15 years. She decided to establish a retirement plan for her corporation. She wants to make all initial contributions to the plan using company stock and she may integrate with social security. Which of the following would be the best qualified plan for them to consider adopting? A. Defined benefit pension plan B. New comparability plan C. 401(k) plan with a match D. Profit sharing plan

Solution: The correct answer is D. A profit sharing plan will allow a stock contribution and integration with social security. A stock bonus plan would also be an appropriate, but it's not one of the choices.

Which of the following qualified plans would allocate a higher percentage of the plan's current contributions to a certain class or group of eligible employees? 1. A profit sharing plan that uses permitted disparity 2. An age-based profit sharing plan 3. A defined benefit pension plan 4. A target benefit pension plan A. 1 only B. 1 and 3 C. 2 and 4 D. 1, 2, 3, and 4

Solution: The correct answer is D. All of the listed plans would allocate a higher percentage of a plans current cost to a certain class of eligible employees.

Josh recently died on January 5, 2021 at the age of 63, leaving a qualified plan account with a balance of $1,000,000. Josh was married to Kay, age 53, who is the designated beneficiary of the qualified plan. Which of the following is correct? A. Kay must distribute the entire account balance within five years of Josh's death. B. Kay must begin taking distributions over Josh's remaining single-life expectancy. C. Any distribution from the plan to Kay will be subject to a 10 percent early withdrawal penalty until she is 59½. D. Kay can receive annual distributions over her remaining single-life expectancy.

Solution: The correct answer is D. Kay can receive distributions over her remaining single-life expectancy. Kay qualifies as an eligible designated beneficiary as she is 10 years younger, not more than 10 years younger. Answer A is incorrect. She is not required to distribute the entire account within 5 years. Answer B is incorrect. Kay can wait (not must) until Josh would have been 72 to begin taking distributions over her recalculated life expectancy. Answer C is incorrect. The distribution will not be subject to the early withdrawal penalty because the distributions were on account of death.

Tom, age 39, is an employee of Star, Inc., which has a profit sharing plan with a CODA feature. His total account balance is $412,000, $82,000 of which represents employee elective deferrals and earnings on those deferrals. The balance is profit sharing contributions made by the employer and earnings on those contributions. Tom is 100 percent vested. Which of the following statements is/are correct? 1. Tom may take a loan from the plan, but the maximum loan is $41,000 and the normal repayment period will be 5 years. 2. If Tom takes a distribution (plan permitting) to pay health care premiums (no coverage by employer) he will be subject to income tax, but not the 10% penalty. A. 1 only B. 2 only C. 1 and 2 D. Neither 1 nor 2

Solution: The correct answer is D. Statement 1 is incorrect because he can take a loan equal to one-half of his total account balance up to $50,000. Statement 2 is incorrect because the exemption from the 10% penalty only applies to IRAs and only to the unemployed.

Which of the following is true regarding QDROs? A. The court determines how the retirement plan will satisfy the QDRO (i.e., split accounts, separate interest). B. In order for a QDRO to be valid, the order must be filed on Form 2932-QDRO provided by ERISA. C. All QDRO distributions are charged a 10% early withdrawal penalty. D. A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient's IRA or qualified plan.

Solution: The correct answer is D. The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is required. Form 2932-QDRO is not a real form.