Retirement Planning - Module 1

Mac, age 39, works for the SLH Company. He has a salary of $28,000 and a 401(k) there. Mac also has another job with AKH, Inc., making $65,000. SLH and AKH are not related. Mac is deferring $10,500 into the 401(k) at SLH. How much can he defer into the 401(k) at AKH?

$10,000

What is the permitted disparity for a defined contribution plan with a current base contribution percentage of 6%?

5.7%

In the administration of a qualified retirement plan, which of the following individuals is considered to be a fiduciary?

A financial planner handling the investment of plan assets

Which of the following is the easiest type of retirement plan for an employer to adopt?

A prototype plan

Which of the following describe differences between a tax-advantaged retirement plan and a qualified plan? IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions. Employer stock distributions from a tax-advantaged plan do not benefit from NUA tax treatment.

Both I and II

With an integrated defined contribution plan, what is the maximum permitted disparity?

For an integrated defined contribution plan, the permitted disparity is the lower of the base amount, or 5.7%.

Qualified retirement plans are which of these? They are subject to ERISA requirements. They offer tax-deferred earnings to employees. They can discriminate in favor of highly compensated employees. They provide a deferred tax deduction for employer funding

I and II

Jerry wants to establish a qualified plan for his business to provide employees of the company with the ability to save for retirement. Which of the following plans is a qualified plan? Profit-sharing plan Simplified employee pension (SEP) plan SIMPLE IRA Section 457 plan

I only

If a defined benefit pension plan is determined to be top heavy, what is one practical significance of this determination?

One of two accelerated vesting schedules must be used.

Which of the following is an example of a qualified retirement plan?

Section 401(k) plan

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

Section 403(b) plan

Window Washers, Inc., is establishing a profit-sharing plan using Social Security integration. The base contribution percentage for the profit-sharing plan will be 5%, and the owners have come to you with some questions about Social Security integration. Which one of the following statements is CORRECT?

The excess contribution percentage for the plan could be as high as 10%. The excess contribution percentage for the plan could be as high as 10%. The excess contribution percentage is the base contribution percentage plus the permitted disparity. The permitted disparity for the defined contribution plan is the lesser of the base benefit percentage and 5.7%. Thus, in this case, the permitted disparity is 5% and the maximum the excess benefit percentage could be would be 10%.

Which of these statements regarding prohibited transactions is FALSE?

The lending of money or other extension of credit between the plan and a party in interest is never a prohibited transaction exemption.

Able Company is considering various types of qualified plans and seeks your advice. You are asked how a plan participant's benefits at retirement are determined in a defined benefit plan with a flat benefit formula that uses the offset method of integration. Which of these statements would best answer the company's question?

The percentage of pay benefit specified by the plan is reduced by a specific percentage of the retired employee's Social Security benefit.

ERISA requirements for qualified plans include

all of these

ERISA requires reporting and disclosure of plan information to all of the following except

plan sponsors.

Scott is the fiduciary of the BSB retirement plan. The entity responsible for monitoring his actions as a fiduciary is

the DOL.

Susan makes $400,000 working for Great Grapes, Inc. She defers 4% into the 401(k) and receives the 4% match. How much will go into her account in 2022?

$24,400 Only the first $305,000 of compensation may be used to determine contributions to qualified retirement plans in 2022. Thus, she contributes 4% of $305,000 in 2022. This amount is matched, so $305,000 × 0.08 = $24,400

The Jones Corporation has a profit-sharing plan with a 401(k) provision. The company matches dollar-for-dollar up to 5%. Pedro makes $150,000 and defers 5% into the 401(k) for 2022. The Jones Corporation has had a banner year and is considering a large contribution to the profit-sharing plan. What is the most that could be contributed to Pedro's profit-sharing account this year?

$46,000 The maximum allowed contribution for 2022 is $46,000. The Section 415 annual additions limit for 2022 is $61,000. However, Pedro has already contributed $7,500, and this amount has been matched. Thus, $15,000 has already gone toward the $61,000 annual additions limit for 2022.

Nigel's employer, Alpha, Inc., maintains a qualified defined benefit pension plan. There are 100 eligible employees working for Alpha, Inc. What is the minimum number of employees the retirement plan must cover to satisfy the 50/40 test?

40

Which of these statements regarding top-heavy plans is CORRECT? An accelerated vesting schedule is used when a defined benefit pension plan is top heavy. A qualified plan is considered top heavy if it provides more than 50% of its aggregate accrued benefits or account balances to key employees. Top-heavy defined benefit plans must provide a minimum benefit accrual of 2% per year of service for up to 10 years (20%) for all non-key employees. For a top-heavy plan, a key employee is an employee who owns more than 3% of the employer with compensation greater than $135,000 (2022).

I and III

Which of the following statements can be made regarding any qualified plan that Brad installs at Woodmasters? (Assume that the plan admits any employee who is eligible under the ERISA age and one-year service requirements and that all eligible employees are participating.) The plan passes the ratio percentage test. Three employees (in addition to Brad) will be eligible to participate. The plan passes the participation (50/40) test, although it may not be required to do so. Information is insufficient to perform coverage and participation tests.

I and III Since the plan admits all ERISA-eligible employees, relevant percentages for the coverage and participation tests will be 100%; the plan will pass the ratio percentage test. Two employees are not eligible to participate. Jim is under 21. Todd has less than a year of service. Also, Brad is highly compensated under both tests. He makes more than $135,000 in 2022 and he owns more than 5%. Since the lesser of 50 participants or 40% of the ERISA-eligible employees is two and because three (100%) actually participate, the plan passes the 50/40 test. The 50/40 test only applies to defined benefit plans.

In a Section 401(k) plan, which of these must be considered in complying with the maximum annual additions limit? Employee contributions Catch-up contributions for an employee age 50 or older Dividends paid on employer stock held in the Section 401(k) plan Employer contributions

I and IV Employee contributions are counted against the annual additions limit. Statement II is incorrect. Catch-up contributions for an employee age 50 or older are not counted against the annual additions limit. Statement III is incorrect. Earnings on plan investments are not taken into account when computing the maximum annual additions limit. Statement IV is correct. For 2022, the annual additions limit is the lesser of 100% of the employee's compensation, or $61,000.

Prohibited transactions are those that are not in the best interest of plan participants and include which of these? A loan between the plan and any party in interest The acquisition of employer securities or real property in excess of legal limits A transfer of plan assets to or use of plan assets for the benefit of a party in interest The sale, exchange, or lease of any property between the plan and a party in interest

I, II, III, and IV

Qualified retirement plans should do which of the following? They must meet specific vesting requirements. They have special tax advantages over nonqualified plans. They must provide definitely determinable benefits. They require an annual profit to allow funding for the plan.

I, II, and III

Which of the following are minimum coverage tests for qualified retirement plans? Nondiscrimination test Average benefits percentage test Ratio test Maximum compensation test

II and III

Which of the following penalties apply to prohibited transactions? A tax equal to 15% of the amount involved applies unless it can be demonstrated that the transaction satisfies ERISA's fiduciary standards. The transaction must be corrected and the plan placed in a financial position no worse than if the transaction had never occurred. Plan participants who engage in prohibited transactions are subject to income tax on a judicially determined amount. Transactions that continue uncorrected into subsequent years are subject to additional penalties.

II and IV The law requires correction (i.e., undoing) of a prohibited transaction and restoring a plan to the position it would have been in, had the transaction never occurred. Ongoing transactions (e.g., loans, leases) create additional prohibited transactions in subsequent years (and additional penalties) until corrected. Options I and III are incorrect for the following reasons. Once the prohibited transaction has taken place, the 15% penalty cannot be waived for extenuating circumstances. Income tax consequences may or may not apply depending on the nature of the underlying prohibited transaction. Usually, the IRS (not the courts) determines the amount of tax involved.

Which of the following statements regarding a top-heavy plan is CORRECT? A top-heavy plan is one that provides more than 50% of its aggregate accrued benefits or account balances to key employees. A top-heavy defined pension benefit plan must provide a minimum benefit accrual of 2% multiplied by the number of years of service (up to 20%). For a top-heavy defined contribution plan, the employer must make a minimal contribution of 3% of annual covered compensation for each eligible non-key employee. If the contribution percentage for key employees is less than 3%, the contribution percentage to non-key employees can be equal to the key employees' percentage. A top-heavy defined benefit pension plan must provide accelerated vesting.

II, III, and IV Only Statement I is incorrect. A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees.

Max is the finance director for Bland Foods, Inc. He is trying to implement a new qualified retirement plan for the company. There are numerous federal guidelines with which the company must comply. Which of the following federal agencies is tasked with supervising the creation of new, qualified retirement plans?

IRS

Jim, the president of East Dover Construction Company, has requested your advice in setting up a defined benefit pension plan for eligible employees in the company. Jim founded the company 17 years ago and now has 200 employees, most of whom are under 35 years of age. Due to the nature of the work and ongoing management difficulties, tenure among the employees has averaged under two years. Jim has just fired the managers who were creating problems, but turnover is likely to remain high due to ongoing morale problems. Jim's current salary is $300,000, and he wants the plan to provide him with annual retirement income of $100,000 per year. He expects to retire in 13 years, at age 64. Which of the following statements describes information you need to convey to Jim about factors that could affect the amount of his retirement benefit?

The excess integration method could be used to increase the amount of his plan benefit in retirement.