QBank 4

Which of the following statements is CORRECT in describing requirements that must be met for a plan to be considered a Section 457 plan? To avoid adverse income tax effects, the agreement must be executed during the same month as the participant's services are provided. Eligible participants include employees of agencies, instrumentalities, and subdivisions of a state as well as Section 501 tax-exempt organizations. The deferral limit for employees younger than age 50 is the lesser of $22,500 in 2023, or 100% of compensation. A) II and III B) I and III C) II only D) I and II

A) All of these organizations may establish a Section 457 plan. Deferrals are limited to the lesser of $22,500 in 2023, or 100% of compensation. Statement I is incorrect because the agreement must be executed before the first day of the month in which the services will be performed. The result will be a loss of the tax deferral for that month if the agreement is made during the month.

Which of the following are characteristics of a Section 403(b) plan (TSA)? An employee, age 52, has a maximum contribution of $22,500 for 2023. Qualifying lump-sum distributions from a TSA are eligible for NUA tax treatment. Rollovers to IRAs are permitted. A) III only B) I and II C) II and III D) I and III

A) For 2023, the regular elective deferral limit for employee elective deferral contributions to a Section 403(b) plan is $22,500. Employees over age 50 would be allowed to defer an additional $7,500 (2023) as a catch-up contribution. An employee who has worked for an eligible plan sponsor for at least 15 years and has not maximized deferrals to the Section 403(b) plan in past years is also eligible for an additional $3,000 catch-up contribution. The eligible plan sponsors are health, educational, and church employers. With this, rollovers are allowable, and NUA tax treatment is not permitted for Section 403(b) plans because a not-for-profit employer does not have employer stock to distribute.

George, age 62, has worked for the Green Rivers Irrigation District for the last 16 years. He began participating in the 457 plan lately. This year, he will be eligible for the final three-year catch-up. What is his maximum deferral for 2023? A) $45,000 B) $52,500 C) $7,500 D) $22,500

A) George's 2023 maximum is twice the regular deferral limit for the year, $45,000. He cannot take advantage of the age 50 catch-up in his final three-year period if he chooses to double his annual amount.

What makes the SIMPLE IRA so attractive to business owners? There is no ADP testing. There is the ability to defer up to $15,500 (2023) without regard to employee participation. The plan requires top-heavy testing. The employer isn't required to make any contributions to the plan on behalf of employees. A) I and II B) III and IV C) I, II, III, and IV D) I, II, and III

A) Statements I and II are correct. SIMPLE IRAs are attractive to business owners due to the ability to defer up to $15,500 (2023) without regard to employee participation. There is no ADP testing and there is no top-heavy testing. The trade-off for these benefits is that the employer is required to make a fully vested contribution by either (1) matching elective deferrals dollar for dollar up to 3% (a "3% match"), or (2) contributing 2% of compensation to all eligible employees, regardless of elective salary deferral (limited to the current compensation cap of $330,000). If the 3% match is chosen for a SIMPLE IRA, the current compensation cap of $330,000 is disregarded. For example, if the owner made $400,000 and deferred 3%, then the contribution would be $27,500. The owner would defer $15,500 and the match would add another $12,000.

For tax-exempt employers who do not want to implement a Section 457 plan and desire a plan funded strictly by employee elective deferrals, a good alternative would be A) a Section 403(b) plan. B) a SEP plan. C) a SARSEP plan. D) a SIMPLE.

A) The Section 403(b) plan, like the Section 457 plan, can be used as an employee deferred contribution plan. Certain tax-exempt employers can implement Section 403(b) plans. A SEP plan is funded by employer contributions. A new SARSEP can no longer be established. A SIMPLE requires mandatory employer contributions.

For purposes of determining active participation status in testing for the deductibility of IRA contributions for a single individual, participation in which of the following is NOT considered? A) A SEP plan B) A governmental Section 457 plan C) An ESOP D) A Section 403(b) plan

B) A Section 457 deferred compensation plan (typically implemented by state and/or local governments) is not considered in determining active participation status for the deductibility of IRA contributions.

Shock Limited just established a simplified employee pension (SEP) plan for the benefit of its employees. The company has more than 500 employees, 15% of whom are highly compensated. This year, Shock contributed 6% of each eligible employee's salary to the SEP plan. Several of the employees of the company are unfamiliar with the provisions of SEP plans and have come to you requesting information. Which of the following statements regarding the basic provisions of SEP plans is CORRECT? Employees can roll money that is distributed from a SEP plan into a different IRA within 60 days without withholding or penalty as long as it is not a required minimum distribution. Contributions must be made for any employee, age 21 or over, who has performed services for the company in three of the past five years and has earned at least $750 during 2023. Employer contributions are 100% vested immediately. A SEP plan may exclude members of unions if the unions have their own retirement plan. A) I, II, and III B) I, II, III, and IV C) II, III, and IV D) I, III, and IV

B) All of the statements are correct.

Which of the following statements regarding both a SEP plan and a qualified profit-sharing plan is CORRECT? A) Annual employer contributions are mandatory. B) The employer's tax-deductible contributions are limited to 25% of aggregate covered compensation. C) The investment risk is borne by the employer. D) Immediate 100% vesting of all contributions is required.

B) SEP plans and qualified profit-sharing plans are both subject to 25% of the aggregate covered compensation limit on annual employer deductions. Neither plan requires an annual mandatory employer contributions, nor is investment risk borne by the employer. Immediate 100% vesting is required in SEP plans but not in profit-sharing plans.

Which of the following statements regarding plan requirements for SIMPLE IRAs is CORRECT? To establish a SIMPLE IRA, a business normally cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation). Assets in SIMPLE IRAs can be invested in life insurance. A) Neither I nor II B) I only C) Both I and II D) II only

B) Statement II is incorrect because SIMPLE IRAs, like SEP plans, are funded with individual retirement accounts, and these assets cannot be invested in life insurance or collectibles.

Which of the following statements is CORRECT in describing a Section 457 catch-up provision? A) The final three-year catch-up provision allows all participants of a Section 457 plan to contribute an additional $22,500 during the three years preceding retirement, regardless of previous contributions. The other catch-up is for those who have attained age 50. They can increase their deferrals by $7,500 (in 2023) in all but the last three years before retirement. B) The final three-year catch-up provision allows participants to make contributions up to twice the maximum deferral allowed for a 457 plan. The additional deferral amount is available only from prior unused deferrals, and is to make up for those years when deferrals were less than the maximum allowed. The other catch-up is for those who have attained age 50. They can increase their deferrals by $7,500 (in 2023) in all but the last three years before retirement if they use the final three-year catch-up. C) During the final three years before retirement, a participant in a Section 457 plan could contribute up to the lesser of 100% of compensation, or $66,000. The other catch-up is for those who have attained age 50. They can increas

B) The additional deferral amount is available only from prior unused deferrals and is to make up for those years when deferrals were less than the maximum allowed. The other catch-up is for those who have attained age 50. They can increase their deferrals by $7,500 (in 2023) in all but the last three years before retirement if they are using the final three-year catch-up.

Which of the following retirement plans, maintained by an employer, if any, would also permit the employer to establish a savings incentive match plan for employees (SIMPLE)? A) Simplified employee pension (SEP) B) Section 457 plan C) Section 403(b) plan D) Cash balance plan

B) To establish a SIMPLE, an employer cannot maintain another qualified or tax-advantaged plan. However, a Section 457 plan is a nonqualified deferred compensation plan and, therefore, does not constitute a prohibited plan for purposes of also establishing a SIMPLE.

Tom, a sole proprietor, is interested in implementing a retirement plan. He may have employees in the future. He also wants a plan that is easily understood, where the employees bear the investment risk, does not favor older participants, and allows elective deferrals. Which of the following plans is best suited to Tom's goals? A) SEP plan B) SIMPLE IRA C) Target benefit pension plan D) Age-weighted profit-sharing plan

B) Tom's goals describe attributes of a SIMPLE IRA. The SEP plan and the target benefit plan do not allow worker contributions. The age-weighted profit-sharing plan is not as easily understood. Also, the target benefit plan and the age-weighted profit-sharing plan favor older employees.

George has been participating in his employer's SIMPLE IRA for one year. He is 45 years old. If he withdraws $1,000 from this plan this year and the withdrawal is not covered by an exception to the penalty tax on premature withdrawals, he will owe a penalty tax of A) $0. B) $100. C) $250. D) $500.

C) George will incur a $250 penalty tax on the $1,000 withdrawal. Premature withdrawals made from a SIMPLE IRA within two years of initial participation are subject to a penalty tax of 25%.

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

C) Only lump-sum distributions from qualified plans may be eligible for 10-year forward averaging. SEP plans, IRAs, and tax-deferred annuities—also known as Section 403(b) plans—are not qualified plans and, therefore, are not eligible for 10-year forward averaging. Remember, to be eligible for 10-year forward averaging, a person must be born before Jan 2, 1936. Thus, only people working into their 80s can today qualify for 10-year forward averaging. Even then, they would have to take a lump-sum distribution to meet another rule to qualify for 10-year forward averaging.

Sharon Bender, age 52, has been a teacher in the Lammer County School District for 18 years. Recently, she inherited a large sum of money and wants to minimize her income tax. What is her maximum 403(b) deferral in 2023? A) $22,500 B) $66,000 C) $33,000 D) $30,000

C) Sharon can defer the basic $22,500 allowed in 2023, plus $7,500 for the age 50 catch-up and $3,000 for the long service catch-up (15 years of service or more).

Sally, age 37, works for two employers, ABC Corporation and XYZ Corporation, both of which maintain Section 401(k) plans. If Sally defers $6,000 to ABC's Section 401(k) plan in 2023, how much can she defer into XYZ's 401(k) in 2023? A) $39,000 B) $22,500 C) $16,500 D) $66,000

C) The maximum allowable elective deferral for 2023 is $22,500. If Sally contributes $6,000 to ABC's plan in 2023, then she can only contribute up to $16,500 to XYZ's plan ($22,500 − $6,000 = $16,500).

Margaret wants to establish a retirement plan for her small but profitable business. She wants the plan to allow employees to contribute for their own retirement but keep the employer contributions low. She is interested in an IRA plan form. Which of these plans would satisfy Margaret's requirement? SIMPLE IRA plan SEP plan A) Neither I nor II B) II only C) Both I and II D) I only

D) A SIMPLE IRA will allow for employee elective deferrals as a percentage of compensation of up to $15,500 (2023) annually. The plan would require the employer to match dollar for dollar up to 3% of the employee's compensation or a 2% of compensation nonelective contribution for each eligible employee. A SEP plan does not allow employee deferrals. According to SECURE 2.0, for 2023 and following, SEPs and SIMPLEs may offer their workers a chance to treat some or all of the employer's contribution as a Roth contribution. SIMPLES may accept worker Roth contributions.

Linda works for a Section 501(c)(3) organization, which has a Section 403(b) plan for its employees. Which of the following statements regarding a Section 403(b) plan is CORRECT? A) All employers who offer Section 403(b) plans must make a mandatory matching contribution or make a nonelective contribution for all eligible employees. B) The elective deferral limit is $66,000 annually for 2023. C) Because the organization is a nonprofit, employer contributions to the plan are currently taxable to the employees. D) Funding in the plan is limited to annuity contracts and/or mutual funds.

D) Funding in a Section 403(b) plan is limited to annuity contracts and/or mutual funds. Employer contributions to the plan are not currently taxable to the employees. Employer contributions to a Section 403(b) plan are permitted but not mandatory. The elective deferral limit is $22,500 annually (2023), with an age-50-and-over catch-up contribution of $7,500. A special catch-up provision may apply for employees with at least 15 years of service with an eligible employer.

Joyce has decided to offer a retirement plan to her employees. She has selected a savings incentive match plan for employees (SIMPLE) and is trying to decide between a SIMPLE IRA and a SIMPLE 401(k). All of the following statements apply to both types of SIMPLEs except there is a 25% penalty for early distributions from a participant's SIMPLE account within two years of entry into the plan. SIMPLE assets may only be rolled over into another SIMPLE within the first two years of initial participation in the plan by a participant. SIMPLEs are not subject to the top-heavy rules that apply to qualified plans. employer contributions to a SIMPLE are not subject to payroll taxes (FICA and FUTA). A) II and IV B) I, III, and IV C) II and III D) I only

D) Only early distributions from a SIMPLE IRA within the first two years of initial participation in the plan are subject to the 25% early withdrawal penalty.

n which of the following plans would you typically find a lump sum distribution that may qualify for favorable income tax treatment? A) A traditional defined benefit pension plan B) A SEP plan C) A Section 403(b) plan D) A profit sharing plan

D) The possibility of favorable income tax treatment for a lump sum distribution (like NUA treatment) is available only for qualified (versus tax-advantaged) plans. In addition, the lump sum distribution option is typically available only in a defined contribution type of plan, such as a profit sharing plan.