midterm review

Stevie has a qualified plan with an account balance of $2,000,000. In which of the following circumstances would a third party be able to alienate the assets within Stevie's qualified plan? 1. A QDRO in favor of a former spouse 2. A federal tax levy 3. Creditors in a personal bankruptcy

1 and 2

Which of the following are costs of a stock bonus plan? 1. Periodic appraisal costs 2. Periodic actuarial costs

1 only.

Which of the following is true regarding negative elections? 1. A negative election is a device where the employee is deemed to have elected a specific deferral unless the employee specifically elects out of such election in writing. 2. Negative elections are no longer approved by the IRS. 3. Negative elections are only available for employees who enter the plan when it is first established and are not available for new employees.

1 only.

Organic Inc. sponsors a qualified plan that requires employees to complete one year of service and be 21 years old before entering the plan. The plan also excludes all commissioned sales people and all other allowable exclusions allowed under the code. Which of the following employees could be excluded? 1. Jessie, age 32, who has been a secretary for the company for 11 months. 2. Andy, age 20, who works in accounting and has been with the company for 23 months. 3. Barbie, a commissioned sales clerk, who works in the Atlanta office. Barbie is 25 years old and has been with the company for four years. 4. Woody, age 29, who works in the factory. Woody has been with the company for nine years and is covered under a collective bargaining agreement.

1, 2, 3, and 4.

Which of the following is (are) required for an investment advisor to be deemed a fiduciary under ERISA's "renders investment advice" definition? 1. The investment advisor renders advice pursuant to an agreement. 2. The investment advisor is paid for the advice provided. 3. The investment advisor has influence approaching control over the plan's investment decisions. 4. The investment advisor affirmatively elects to be a fiduciary.

1, 2, and 3.

Which of the following pension plans would allocate a higher percentage of the plans' current costs to a certain class or group of eligible employees? 1. Defined benefit pension plan. 2. Target benefit pension plan. 3. Money purchase pension plan with permitted disparity.

1, 2, and 3.

Which of the following people would be considered a highly compensated employee for 2023? 1. Tiana, a 1% owner whose salary last year was $160,000. 2. Ariel, a 6% owner whose salary was $42,000 last year. 3. Belle, an officer, who earned $105,000 last year and is the 29th highest paid employee of 96 employees. 4. Jasmine, who earned $152,000 last year and is in the top 20% of paid employees.

1, 2, and 4.

Which of the following are true as to leveraged ESOPs? 1. The corporation makes tax deductible contributions to the trust in the form of both principal and interest for the loan. 2. The trust purchases shares of corporate stock from the principal shareholder, but these shares are not pledged as security for the bank loan. 3. The corporation and the principal shareholder (seller) guarantee the loan and the corporation's assets are pledged as collateral for the loan. 4. Prior to the allocation of the actual shares to the participant's account within the trust, the pledged shares are held in a separate holding account and are referred to as unallocated.

1, 3, and 4.

ESOP distributions can be made in installments: 1. No longer than 5 years under any scenario. 2. No longer than 5 years unless the account balance exceeds $1,330,000 for 2023, in which case an additional year is allowed for each $265,000 over $1,330,000 but not more than 5 additional years. 3. In substantially equal payments.

2 and 3.

Patrick and Kevin own Irisha Corporation and plan to retire. They would like to leave their assets to their children; therefore, they transfer 70 percent of the stock to a trust for the benefit of their 10 children pro rata. Patrick and Kevin then plan to sell the remaining Irisha shares to a qualified ESOP plan. Which of the following is correct? 1. The stock transfer to the ESOP is not a 50 percent transfer and therefore will not qualify for nonrecognition of capital gains. 2. Any transfer to an ESOP of less than 50 percent ownership may be subject to a minority discount on valuation.

2 only

One of the disadvantages of an ESOP is that the stock is an undiversified investment portfolio. Which of the following is correct?1. An employee, age 55 or older, who has completed 10 years of participation in an ESOP may require that 100% of the account balance be diversified.2. An employee who receives corporate stock as a distribution from an ESOP may enjoy net unrealized appreciation treatment at the time of distribution.

2 only.

Which of the following are false as to ESOPs? 1. An ESOP is controlled through a trust. 2. ESOPs provide corporate owners with a way to transfer ownership interests to their employees. 3. The trust of an ESOP is prohibited from borrowing money from a bank to purchase the employer stock.

3 only.

Which of the following vesting schedules may a top-heavy qualified cash balance plan use?

35% after 1 year, 70% after 2 years, and 100% after 3 years.

Which of the following vesting schedules may a top-heavy profit sharing plan not use?

4-year cliff.

JJ is a Marine, who served our country for the last 25 years. He has $250,000 in his U.S. Government Thrift Savings Plan. Which of the following plans is JJ's Thrift Plan most similar to?

401(k) plan.

Which of the following statements is true?

A cash balance pension plan does not have individual separate accounts for each participant

Which of the following statements regarding defined benefit plans is true?

A defined benefit plan can use forfeitures to reduce future plan costs.

The following definition applies to which of the following terms: "the corporation makes tax deductible contributions to a trust in the form of both principal and interest for the loan."

A leveraged ESOP.

Which of the following statements is false?

A sensitivity analysis helps the advisor determine the single most effective factor in a retirement plan.

Which of the following statements regarding EGTRRA 2001 is false?

After the enactment of EGTRRA 2001, money purchase pension plans adoptions have increased.

Nex sponsors a DB(k) plan that provides benefits for all employees. Nex adopted the plan four years ago. Kleen, who is age 55 and earns $100,000, has been employed for the last ten years with Nex. Which of the following statements is correct regarding Kleen's benefits under Nex's DB(k) plan?

All benefits provided under the DB(k) plan will be 100 percent vested for Kleen.

Which of the following statements are true regarding put options: 1. They are also referred to as "repurchase options" under ESOPs. 2. If the employer securities are not readily tradeable on an established market, the participant has the right to require that the employer repurchase the employer securities under a fair market valuation formula. 3. The put option is widely considered to be a substantial benefit to an employee-participant of an ESOP. 4. Rank-and-file employees at a closely held corporation are protected with the put option because the employee may force the corporation to "buy back" the stock at the fair market value when there otherwise would be no market for the stock.

All of the above.

Andi, the 100 percent owner of Andi's Day Care, a C-corporation, would like to establish a profit-sharing plan. Andi's Day Care's tax year ends July 31 to coincide with the school year. What is the latest day Andi can establish and contribute to the plan?

Andi must establish the plan and make the contribution by May 15 of the following year assuming she filed the appropriate extensions.

Which of the following statements regarding target benefit pension plans is true?

Assuming equal salaries, a target benefit pension plan would allocate a higher percentage of its current contributions to an older employee.

Which of the following are requirements for a qualified stock bonus plan? 1. Participants must have pass through voting rights for stock held by the plan. 2. Participants must have the right to demand employer securities at a distribution, even if the plan sponsor is a closely-held corporation.

Both 1 and 2.

Which of the following statements is true regarding CODAs?

CODAs are employee self-reliant plans.

Cathy and her twin sister Carley, both age 25, each believe they have the superior savings plan. Cathy saved $5,000 at the end of each year for ten years then let her money grow for 30 years. Carley on the other hand waited 10 years then began saving $5,000 at the end of each year for 30 years. They both earned 9% on their investment and are 65 years old today and ready to retire. Which of the following statements is correct?

Cathy's strategy is better because she has a greater account balance at age 65

Qualified plans have many benefits to the employee and the employer. However they must satisfy many tests and comply with many limits to maintain their qualified status. Which of the following is correct regarding coverage tests?

Coverage testing can include leased employees as part of the calculation.

Which of the following actuarial assumptions is not used by the actuary who determines the mandatory funding range for a defined benefit plan?

Divorce rate.

Bailey is 56 years old and obtained ten years of participation in the Blackwater ESOP in Year 1. Assume she elects to diversify 20% of her 200 shares during the 90-day period following Year 1. Which of the following is correct?

During the 90-day period following Year 6, Bailey could diversify up to 250 shares, on a cumulative basis with prior diversification amounts, assuming a cumulative total of 500 shares had been contributed to her account as of the end of Year 6.

Which of the following is not an example of a qualified retirement plan?

ESPP

All of the following are advantages of a 401(k) plan except:

Employers can sponsor 401(k) safe harbor plans without committing to annual contributions and without creating a deferred liability.

Which of the following is not a common defined benefit plan funding formula?

Excludible amount formula.

Which of the following is not a characteristic of pension plans?

In-service withdrawals for employees under the age of 59½.

Meb, the owner of Meb's Hardware, is considering establishing a stock bonus plan. She recently talked with her advisor, Don T. Know. Don T. Know never studied when he took his certificate program, therefore he gave Meb incorrect information about stock bonus plans. Which of the following statements given to Meb was correct?

Meb can require the employees to be age 21 and employed for two years before becoming eligible for the stock bonus plan.

Jax is the owner of Ideal Mechanics, Inc. He would like to establish a qualified pension plan and 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 Ideal to bear the investment risk of the plan's assets. Jax is 47 years old and earns $300,000 per year. His employees are 25, 29, and 32 and they each earn $25,000 per year. Which of the following qualified pension plans would you recommend that Jax establish?

Money purchase pension plan.

Angela owns NOCTM, Inc. and sells 100 percent of the corporate stock (all outstanding stock) on January 1st of this year to an ESOP for $5,000,000. Her adjusted basis in the stock was $2,400,000. Which of the following is correct? 1. If Angela reinvests the $5,000,000 in qualified domestic securities within 18 months, she has a carryover basis of $2,400,000 in the qualified domestic security portfolio and no current capital gain. 2. Angela has a long-term capital gain of $2,600,000 reduced by the 20 percent small business credit; therefore, his gain is $2,080,000 if she does not reinvest in qualified domestic securities within 18 months.

Neither 1 nor 2.

Which phrase best completes the following sentence: "A repurchase option allows a terminating employee the choice to receive the cash equivalent of the employer's stock if the stock is _____."

Not readily tradeable on an established market.

Andrew is a small business owner and wants to install a qualified plan that has specific requirements. Which of the following plans meets the following list of requirements? 1. Qualified under IRC Section 401(a) 2. Permits at least 25 percent of employer securities to be invested in the plan 3. Can use forfeitures to reduce plan contributions 4. Does not require a joint and survivor annuity distribution option

Profit sharing plan.

Which of the following statements is true?

Profit-sharing plans allow annual employer contributions up to 25 percent of the employee's covered compensation.

Which of the following is not true regarding profit-sharing plans?

Profit-sharing plans are established and maintained by the individual employee.

SJ, Inc. covered the following employees under a qualified plan. 1. Joan, a 9% owner and employee with compensation of $30,000. 2. Lind, a commissioned salesperson with compensation of $260,000 last year (the highest paid employee). 3. Reilly, the chief operating officer, who had compensation of $152,000 last year but was not in the top 20% of paid employees. 4. Garner, the president, who was in the top 20% of paid employees with compensation of $250,000.Assuming the company made the 20% election when determining who is highly compensated, which of the following statements is correct?

Reilly is neither highly compensated nor a key employee.

Omar would like to determine his financial needs during retirement. All of the following are expenditures he might eliminate in his retirement needs calculation except:

The $1,500 mortgage payment he makes that is scheduled to end five years into retirement.

Which of the following statements is true regarding the anti-cutback rule, as it is referred to?

The anti-cutback rule prohibits the plan sponsor from amending the plan such that prior accrued benefits are reduced.

Sam is a participant in RFK, Inc.'s ESOP. Sam has been a participant in the plan for eight years, and her account balance in the plan is $1,000,000 and is completely funded with employer securities. The plan defines the normal retirement age as 65 years old. Sam is 64 years old this year and would like to retire. Her advisor mentioned that she should have a more diversified portfolio. What, if anything, can she do to diversify her portfolio?

The only way Sam can diversify her portfolio is to take a distribution of the employer stock from the ESOP and reinvest the value in a diversified portfolio.

Which of the following statements regarding the plan sponsor of a money purchase pension plan is correct?

The plan sponsor is required to make an annual contribution to the plan.

Of the following statements regarding target benefit pension plans, which is true?

The plan sponsor of a target benefit pension plan does not guarantee that the participant will receive an amount, expected to be the "target benefit" amount, at their retirement

Which of the following expenditures will most likely increase during retirement?

Travel.

Rex, age 47, an employee at Water Waste, is considering contributing to a 401(k) plan during 2023. Which of the following statements are true?

Water Waste must deposit Rex's elective deferral contribution to the plan as soon as reasonably possible.

Which of the following statements regarding leveraged ESOPs is correct?

When dealing with leveraged ESOPs, as a trust repays the bank loan, an appropriate allocation of shares are withdrawn from the holding account and allocated to the individual participant's account.

Prior to EGTRRA 2001, an employer could deduct contributions to a money purchase pension plan up to 25 percent of employer covered compensation.

all of the above

Which factors may affect an individual's retirement plan? 1. Work life expectancy 2. Retirement life expectancy 3. Savings rate 4. Investment returns 5. Inflation

all of the above

To qualify for nonrecognition of gain treatment, the following requirements apply:

all of the above The stock sold to the ESOP must be common or convertible preferred stock and must have been owned by the seller for at least 3 years prior to the sale.