Module 3 Quiz (Retirement)

Which of the following are basic provisions of an IRC Section 401(k) plan? I. Employee elective deferrals are exempt from income tax withholding and FICA and FUTA taxes. II. An employer's deduction for a vested contribution to a Section 401(k) plan cannot exceed 25% of covered payroll, which is not reduced by the employees' elective deferrals. III. A Section 401(k) plan cannot require as a condition of participation that an employee complete a period of service longer than one year. IV. Employee elective deferrals may be made from salary or bonuses. A) II and IV B) I and IV C) II, III, and IV D) I and III

A) II and IV

Shawn, age 32, needs $10,000 for the purchase of a primary residence. She has no other source of funds at her disposal. Her Section 401(k) plan allows participant loans. The current value of Shawn's deferral account is $14,000, of which $9,500 is her aggregate vested balance. What is the maximum loan Shawn can take from the Section 401(k) plan? A) $14,000 B) $10,000 C) $9,500 D) $7,000

C) $9,500

Which of the following statements regarding the characteristics or use of a profit-sharing plan is CORRECT? A) Profit-sharing plans are best suited for companies that experience fluctuating cash flow. B) A company with a great number of older employees will find the implementation of a traditional profit-sharing plan to be the most beneficial for the older employee-participants. C) Profit-sharing plans require a fixed, mandatory, annual contribution by the employer to the plan. D) The maximum tax-deductible employer contribution to a profit-sharing plan is 15% of covered payroll.

A) Profit-sharing plans are best suited for companies that experience fluctuating cash flow.

What is the maximum elective deferral a participant can make to a Section 401(k) plan in 2020, assuming no catch-up provisions apply? A) $57,000. B) $6,000 C) $13,500 D) $19,500

D) $19,500

In addition to meeting the financial needs and resources tests for hardship withdrawals, money may only be withdrawn from profit-sharing plan accounts for the following reasons: I. Purchase of a primary residence II. Payment of unreimbursed medical expenses III. Payment necessary to prevent foreclosure on the participant's primary residence IV. Payment of higher education expenses for the participant, spouse, or dependent children A) I, II, III, and IV B) I, II, and III C) I and II D) III and IV

A) I, II, III, and IV

Ryan wants to take a distribution from his SIMPLE 401(k) account balance from his previous employer and deposit it in an IRA at his local banking institution. Which of the following statements regarding his transfer is CORRECT? I. The distribution from the SIMPLE 401(k) plan is not subject to the mandatory 20% income tax withholding requirement. II. A direct transfer from Ryan's SIMPLE 401(k) to an IRA is not subject to the mandatory 20% income tax withholding requirement. A) II only B) I only C) Both I and II D) Neither I nor II

A) II only

The Acme Corporation has six owners, ranging in age from 30 to 60 years old, and 25 rank-and-file employees. The owners want to adopt a qualified retirement plan that will allow them to maximize the contributions to the owners' accounts and minimize the contributions to the accounts of the rank-and-file employees. Which of the following plans would best meet the owners' needs? A) New comparability plan B) Age-based profit-sharing plan C) Self-employed Keogh plan D) Section 401(k) plan

A) New comparability plan

Under a profit-sharing plan: A) up to 25% of the plan's assets can be invested in the employer's stock. B) the company has flexibility regarding annual funding. C) the employer bears investment risk. D) the company must make annual contributions.

B) the company has flexibility regarding annual funding.

Which of the following statements regarding profit-sharing plans is NOT correct? A) Profit-sharing plans are types of qualified defined contribution plans. B) Profit-sharing plans are best suited for companies that have fluctuating cash flows. C) A company that adopts a profit-sharing plan must make contributions each year. D) The maximum tax-deductible employer contribution to a profit-sharing plan is 25% of total (aggregate) eligible employee covered compensation.

C) A company that adopts a profit-sharing plan must make contributions each year.

Which of the following statements regarding Section 401(k) plans is CORRECT? I. Employer contributions and their accrued earnings are always immediately 100% vested in the plan. II. A Section 401(k) plan is a qualified profit-sharing or stock bonus plan. III. The maximum pretax elective deferral for a participant age 35 is $19,500 in 2020. IV. Elective deferrals in a cash or deferred arrangement (CODA) are not subject to FICA and FUTA taxes. A) I, II, III, and IV B) III only C) II and III D) I and IV

C) II and III

Bernie is a participant in his employer's noncontributory employee stock ownership plan (ESOP). Two years ago, his employer contributed stock with a fair market value of $30,000 into Bernie's account. Bernie retired one year later and took distribution of the stock when its fair market value was $40,000. Two years after his retirement, Bernie sold the stock for $50,000. What is the appropriate tax treatment available to Bernie upon sale of the stock? A) $20,000 ordinary income B) $10,000 long-term capital gain C) $50,000 ordinary income D) $20,000 long-term capital gain

D) $20,000 long-term capital gain

Northwest Instruments Corp. made matching contributions to its SIMPLE 401(k) in the last three years. Assume all eligible employees earn at least the maximum includible compensation limit and all defer the maximum amount allowed. Due to extensive capital expenses anticipated this year, the company is considering how to reduce expenses. It will not be able to continue to make the 3% matching contribution and has called you to discuss their options. Which of the following could you recommend? A) Employer contributions under a SIMPLE plan are discretionary, and Northwest Instruments Corp. could provide notice that they will not provide any contribution this year. B) Because they have satisfied the 3% matching contribution for three years, Northwest Instruments Corp. could reduce the matching contribution to 1%. C) With SIMPLE 401(k) plans, employers who begin using the 3% matching contribution do not have any option available to modify the company's contribution. D) By providing adequate notice, Northwest Instruments Corp. could move to the 2% non-elective contribution this year, although the savings would be minimal.

D) By providing adequate notice, Northwest Instruments Corp. could move to the 2% non-elective contribution this year, although the savings would be minimal.

ABC Corporation is a closely held company that wants to establish a qualified retirement plan for its employees. Also, the company wants to improve the marketability of its stock and give the employees an ownership stake in the company. Which of the following plans would help ABC meet all of these objectives? A) Keogh (self-employed) plan B) Target benefit pension plan C) SIMPLE 401(k) D) Employee stock ownership plan (ESOP)

D) Employee stock ownership plan (ESOP)

A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary or bonuses simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following is a rule that applies to Section 401(k) plan elective deferrals? I. Section 401(k) plan elective deferrals are immediately 100% vested and cannot be forfeited. II. In-service withdrawals are to be made only if an individual has attained age 62. III. An extra nondiscrimination test called the actual deferral percentage test applies to elective deferral amounts. A) III only B) I and II C) I only D) I and III

D) I and III

Which of the following plans may be eligible for a 10-year forward averaging for tax purposes if a qualifying lump-sum distribution is made? I. Traditional profit-sharing plan II. Simplified employee pension (SEP) plan III. Individual retirement account (IRA) IV. Section 403(b) tax-deferred annuity A) I, II, III, and IV B) II and III C) I and IV D) I only

D) I only

An employee stock ownership plan (ESOP) is a defined contribution plan that may provide the employer with which of the following advantages? I. Increased corporate cash flow II. The ability to borrow money to purchase corporate stock III. A market for employer stock IV. Financial resources to expand the business A) I, II, and III B) I and II C) III and IV D) I, II, III, and IV

D) I, II, III, and IV

Grant, age 51, made an initial contribution of $10,000 to a Roth 401(k) in 2013. He made subsequent contributions of $6,000 annually for the next four years. In 2020, Grant took a $50,000 distribution from his Roth 401(k) to purchase a boat. Which of the following statements regarding this distribution is CORRECT? A) It is taxable because it was within 10 taxable years from the date of initial contribution. B) It is income tax free because it was made after five taxable years, and Grant is over age 50. C) It is income tax free because it was made after five taxable years from the date of initial contribution. D) It is partially taxable because Grant was not age 59½, disabled, the distribution was not made to a beneficiary or Grant's estate after his death, or used for a first-time home purchase.

D) It is partially taxable because Grant was not age 59½, disabled, the distribution was not made to a beneficiary or Grant's estate after his death, or used for a first-time home purchase.

A client's employer has recently implemented a traditional Section 401(k) plan as part of its profit-sharing plan. Which of the following is CORRECT regarding the client's participation in the plan? A) The client is always immediately vested in all employer-matching contributions and their accrued benefits. B) The client will not pay Social Security (FICA) taxes on amounts paid into the plan. C) The client will not pay current federal income taxes on amounts distributed from the plan. D) The client is immediately vested in all elective deferrals and their accrued earnings.

D) The client is immediately vested in all elective deferrals and their accrued earnings.

Hardship withdrawals are only allowed from Section 401(k) plans if specifically stated in the plan document and typically for expenses such as: I. vacation costs. II. medical expenses. III. college tuition costs. IV. insurance premiums. A) I and II B) II and III C) I and III D) II, III, and IV

B) II and III

Which of the following plans is a cross-tested plan? I. New comparability plan II. Employee stock ownership plan (ESOP) III. Age-based profit-sharing plan IV. Stock bonus plan A) III and IV B) I only C) I and III D) I, II, III, and IV

C) I and III

In 2020, what is the maximum amount an employee under the age of 50 may contribute to a traditional Section 401(k) plan as an elective deferral? A) $19,500 B) $13,500 C) $26,000 D) The lesser of 100% of compensation or $57,000 annually

A) $19,500

A Section 401(k) plan does not have to satisfy the ADP and ACP tests if it meets one of the safe harbor provisions. All of the following statements about the safe harbor provisions are correct except: A) mandatory employer contributions under the safe harbor provisions may be subject to a three-year cliff vesting requirement. B) an employer may satisfy the safe harbor provisions by making certain matching contributions for non-highly compensated employees who participate in the plan. C) an employer may satisfy the safe harbor provisions by making non-elective contributions for all eligible employees. D) a plan that satisfies the safe harbor provisions is not subject to the top-heavy rules.

A) mandatory employer contributions under the safe harbor provisions may be subject to a three-year cliff vesting requirement.

Valerie earns $290,000 annually from XYZ Corporation. The company profit-sharing plan provides for a contribution of 25% of participant compensation. What is the amount of the company's contribution for Valerie for 2020? A) $71,250 B) $57,000 C) $230,000 D) $100,000

B) $57,000

How is an age-weighted profit-sharing plan similar to a traditional defined benefit pension plan? A) Retirement benefits are determined by the participant's final account balance. B) Contribution allocations to older participants may be maximized, while allocations to younger participants may be minimized. C) Employer contributions are flexible from one year to another and, if resources are not available, the employer may choose not to contribute to the plan. D) Minimum vesting schedules are more liberal than in other types of plans.

B) Contribution allocations to older participants may be maximized, while allocations to younger participants may be minimized.

Which of the following qualified plans can an S corporation implement? I. Profit-sharing plan II. Stock bonus plan III. Money purchase pension plan IV. Employee stock ownership plan (ESOP) A) I and II B) I, II, III, and IV C) II, III, and IV D) I, II, and III

B) I, II, III, and IV

Which of the following statements regarding the safe harbor rules for Section 401(k) plans is CORRECT? I. The employer can avoid ACP and ADP testing if it matches 100% up to 4% of compensation for nonhighly compensated employees. II. The employer can avoid ACP and ADP testing if it makes contributions of 3% or more of compensation for all employees who are eligible to participate in the plan, whether or not the employee chooses to participate. III. To meet the safe harbor requirements, the matching and non-elective contributions must be immediately 100% vested. IV. The employer must provide notice to each eligible employee about rights and obligations under the plan. A) II and III B) I, II, III, and IV C) IV only. D) III and IV

B) I, II, III, and IV

Jack, age 51, is the owner of an architectural firm with 23 employees, most of whom are younger than 40. The company's cash flow varies from year to year, depending on their contracts. Jack wants to implement a qualified plan that is easy for employees to understand and that is administratively cost-effective. He also wants a plan with an incentive feature by which an employee's account balance increases with company profits. Which of the following plans would be most appropriate for Jack's firm? A) Section 403(b) plan B) Traditional profit-sharing plan C) Defined benefit pension plan D) Money purchase pension plan

B) Traditional profit-sharing plan

Which of the following retirement plans would be appropriate for a general partnership with stable cash flows? A) Age-weighted profit-sharing plan B) Stock bonus plan C) Employee stock ownership plan (ESOP) D) Section 403(b) plan (TSA)

A) Age-weighted profit-sharing plan

Ellen participates in a SIMPLE 401(k) maintained by her employer. If she has completed two years of service, to what extent is she vested in the employer contributions to her account? A) 40% B) 20% C) 100% D) 0%

C) 100%

Which of the following legal requirements apply to employee stock ownership plans (ESOPs)? I. ESOPs must permit participants who have reached age 55 and have at least 10 years of service the opportunity to diversify their accounts. II. ESOPs cannot be integrated with Social Security. III. An employer's deduction for ESOP contributions and amounts made to repay interest on an ESOP's debt cannot exceed 25% of the participants' payroll. IV. The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP. A) II, III, and IV only B) II and III C) I and II D) I, II, and III E) I, II, and IV

E) I, II, and IV