CFP: Retirement Planning & Employee Benefits MIDTERM
Which of the following employees is highly compensated for 2024? Matt, an officer of the company, who earns $105,000 per year and owns 2% of the company. Missy, who earns $13,000 per year and owns 5% of the company. Tara, an officer of the company who earns $160,000. Julie, a 10% owner of the company who earns $4,000 per year as a secretary. A.4 only B.3 and 4 C.1 and 3 D.2 and 4
B.3 and 4 Highly compensated is: An owner of greater than 5% this year or last year or Compensation in excess of $155,000 for 2024 (Last year, and if elected, add "and in top 20% of employees ranked by salary").
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
B.50 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.
Superannuation, or outliving retirement assets, is the primary risk with which of the following retirement capital needs analysis methods? A. Annuity Method. B. Purchasing Power Preservation Method. C. Capital Preservation Method. D. Capitalization of Earnings Method.
A. Annuity Method. The annuity method assumes that the person spends all money as of the expected life expectancy. Choices B, C, and D are incorrect. These methods are more conservative and presume there will be funds at the point of life expectancy, thus mitigating the risk of superannuation.
To take an income tax deduction for contributions for a particular tax year, the profit sharing plan must be adopted by the last day of the previous tax year. A.False B.True
A. False To take an income tax deduction for contributions for a particular tax year, the plan must be adopted by the due date of the tax return, including extensions (changed from the last day of the tax year by the SECURE Act)
Emily, age 58, has been a participant in the Icon, Inc. ESOP for fifteen years. She plans to retire at 65. At the end of this year, Emily's entire account balance is comprised of Icon stock valued at $1,000,000. Emily believes that Icon has a bumpy future ahead and would like to diversify some of her ESOP investments. (She has not diversified any interest in ICON prior to this time.) How much must Icon allow Emily to diversify this year? A.$250,000 B.$500,000 C.$750,000 D.$1,000,000
A.$250,000 After Emily attained the age of 55 (since she had already attained ten years of participation), the ESOP must allow her to diversify 25% of her investments in the 5 years following qualification. In the 6th year, Emily must be allowed to diversify up to 50%. In this case, Emily is not in her 6th year so she must be able to diversify up to 25% reduced by the percentage diversified in prior years. Since Emily has not diversified any amounts in the past she must be allowed to diversify the full 25% in the current year.
On April 30, Janet, age 42, received a distribution from her qualified plan of $150,000. She had an adjusted basis in the plan of $500,000 and the fair market value of the account as of April 30 was $625,000. Calculate the taxable amount of the distribution and any applicable penalty. A.$30,000 taxable, $3,000 tax penalty B.$30,000 taxable, $0 tax penalty C.$120,000 taxable, $12,000 tax penalty D.$150,000 taxable, $15,000 tax penalty
A.$30,000 taxable, $3,000 tax penalty Because the distribution to Janet does not qualify for the exception to the 10% penalty, the taxable amount of the distribution will be subjected a 10% penalty. To calculate the amount of the distribution that is return of adjusted basis, the adjusted basis in the plan is divided by the fair market value of the plan as of the day of the distribution. This ratio is then multiplied times the gross distribution amount. As such, $120,000 (($500,000/$625,000) × $150,000) of the $150,000 distribution is return of adjusted taxable basis. Accordingly, $30,000 ($150,000 - $120,000) will be subject to income tax, and there will be a $3,000 ($30,000 × 10%) tax penalty.
Which of the following vesting schedules may a top-heavy qualified profit sharing plan use under PPA 2006? A.1-5 year graduated B.5-year cliff C.3-7 year graduated D.4-8 year graduated
A.1-5 year graduated Under PPA 2006, a profit sharing plan must utilize a vesting schedule which provides a participant with vested benefits at least as rapidly as either a 2-6 year graduated vesting schedule or a 3 year cliff vesting schedule, without regard to its top heavy status. Option a is the only vesting schedule that meets this requirement.
Bobby owns Advertising Solutions, Inc. (ASI) and sells 100% of the company stock on July 1 of the current year to an ESOP for $3,000,000. Bobby had an adjusted basis in the ASI stock of $450,000. If Bobby reinvests in qualified replacement securities before the end of the current year, which of the following statements is true? A.Bobby will not recognize long term capital gain or ordinary income in the current year. B.Bobby must recognize $2,550,000 of long term capital gain in the current year. C.Bobby must recognize $450,000 of ordinary income in the current year. D.If Bobby dies before selling the qualified replacement securities, his heirs will have an adjusted taxable basis in the qualified replacement securities of $450,000, Bobby's carryover adjusted basis.
A.Bobby will not recognize long term capital gain or ordinary income in the current year. A major advantage for an ESOP is the ability of the owner to diversify his interest in a closely held corporation. In this case, if Bobby reinvests in qualified replacement securities within 12 months of the sale to the ESOP, he will not recognize capital gain or ordinary income on the sale to the ESOP. If Bobby dies the heirs will receive the securities with an adjusted taxable basis equal to the FMV at Bobby's date of death or the alternate valuation date.
Which of the following qualified plan distributions will be subjected to a 10% early withdrawal penalty? A.Brielle, age 28, takes a $8,000 distribution from his profit sharing plan to pay for his first home purchase. B.Mearl, age 45, took her first and only $1,000 distribution from her 401k for a car repair. She has a vested account balance of $28,000. C.Partha, age 57, decides to leave the TriOne Co. after 4 years of employment to spend more time with family. After 2 months she withdraws $30,000 of her $92,000 balance from the company profit sharing plan. D.Gerald, age 36, begins taking equal distributions over his life expectancy from his qualified plan. The annual distribution is $1,300.
A.Brielle, age 28, takes a $8,000 distribution from his profit sharing plan to pay for his first home purchase. Brielle could make this distribution if he was a participant for over 2 years and the plan document included a option for in-service distributions. The distribution would be subject to the 10% early withdrawal penalty. Distributions from an IRA on the other hand, would qualify for a 10% penalty exception. Choice B is incorrect. Distributions for a personal emergency up to $1,000 are exempt from the 10% withdrawal penalty. Choice C is incorrect. Distributions for separation of service after age 55 are exempt from the 10% withdrawal penalty. Choice D is incorrect. The distribution describes the exception for substantially equal periodic payments which are exempt from the 10% withdrawal penalty.
Which of the following statements best describes the importance of an investment plan as part of planning for retirement? A.Constructing an appropriate asset allocation for the investment portfolio is the most critical element in developing a retirement plan. B. An investment plan is not very important for retirement planning since most funds come from savings rather than investment returns. C. Equities should always dominate the portfolios of young investors but bonds should always dominate for retirees. D.The specific investments chosen are the main determinant of retirement accumulation rather than the asset allocation.
A.Constructing an appropriate asset allocation for the investment portfolio is the most critical element in developing a retirement plan. Asset allocation is responsible for most of the variation in investment portfolio returns and is thus the most critical element in retirement planning. Choice B is incorrect because studies show that the majority of retirement accumulation comes from investment returns rather than savings. Choice C is incorrect because equities typically remain a critical component throughout retirement to guard against inflation and more importantly the asset allocation will be specific to each individual's situation. Choice D is incorrect because research shows asset allocation is more important than specific investments chosen in determining portfolio returns.
Thomas, age 55 and the owner of a computer repair shop, has come to you to establish a qualified plan. The repair shop, which employs mostly young employees, has had steady cash flows over the past few years, but Thomas foresees shaky cash flows in the future as new computer prices decline. Thomas would like to allocate as much of the plan contributions to himself as possible. He is the only employee whose compensation is in excess of $100,000. Which of the following qualified plans would you advise Thomas to establish? A.Profit sharing plan B.Defined benefit pension plan C.Cash balance pension plan D.Money purchase pension plan (Integrated)
A.Profit sharing plan A profit sharing plan would be the best choice for Thomas' company. All of the other options described pension plans that require mandatory funding. A pension plan would not be an appropriate choice due to the company's unstable cash flows.
Which of the following is not a requirement for the owner of corporate stock who sells to an ESOP to qualify for the nonrecognition of gain treatment? A.The ESOP must own at least 55% of the corporation's stock immediately after the sale. B.The owner must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale. C.The ESOP may not sell the stock within three years of the transaction unless the corporation is sold. D.The owner must not receive any allocation of the stock through the ESOP.
A.The ESOP must own at least 55% of the corporation's stock immediately after the sale. The ESOP must own at least 30% of the corporation's stock immediately after the sale. All of the other statements are true.
Profit sharing plans may permit in-service withdrawals after a participant has attained two years of service in the plan. A.True B.False
A.True Qualified defined contribution plans are permitted to allow in-service withdrawals after two years of participation. The plan must elect this option, it is not standard for a qualified plan set up. The plan document should be reviewed for availability.
Myter has been employed with Bounty Labs for five years and meets the definition of key employee. Bounty Labs offers a profit sharing plan and has contributed $18,000 per year that Myter has been eligible and she currently has a balance of $115,000 in her account. Myter is considering terminating her employment with Bounty Labs, and is concerned about the value of the profit sharing plan she can rollout of the company plan. She was told upon enrollment that the plan was top-heavy and under the least generous vesting schedule permitted. If Myter terminated employment with Bounty Labs Resort today what is the vested balance of her profit sharing plan? A. $69,000 B. $92,000 C. $97,000 D. $115,000
B. $92,000 Myter's vested balance in the profit sharing plan account is $92,000. Under PPA 2006, the least generous (vests the slowest) vesting schedule permitted for a profit sharing plan is a 2 to 6 year graduated vesting schedule. The top-heavy status of the plan does not impact the vesting schedule under PPA 2006. Myter is 80% vested in the contributions to the account. 80% of $115,000 = $92,000.
Monarch Machines sponsors a 15% money purchase pension plan and 401(k) profit sharing plan in which the employees are permitted to defer up to 75% of their compensation. Monarch Machines matches employee deferral contributions 100% up to 6% of deferred compensation. If James, age 31, is a highly compensated employee who earns $270,000, what is the maximum he will receive as an employer match from Monarch in 2024 if the ADP of the NHC is 4%? A.$0 B.$14,250 C.$16,200 D.$28,500
B.$14,250 The maximum amount that may be contributed to qualified plans on James' behalf is $69,000 (2024). If James receives an allocation from Monarch's money purchase pension plan of $40,500 ($270,000 × 15%), he can only receive an additional $28,500 from other sources. The ADP of the NHC is 4%, so James, as a HC employee could, based upon the ADP test, defer up to 6% of his compensation and Monarch will match him 100%. However, James cannot defer 6% of his compensation because this would cause him to exceed the annual additions limit, and he would not benefit from the 100% match from Monarch. If James deferred $16,200 (6% of $270,000) of his compensation, then Monarch would match $16,200; however, that would exceed the limit. He will have received total annual additions of $72,900 ($40,500 + $16,200 + $16,200). If James reduces his contribution to roughly 5.28%, his contributions will total $69,000 ($40,500 +14,250 +$14,250).
Rachel has attained 2 years of service with her employer, Fiasco, Inc. (FI). FI sponsors a top-heavy qualified profit sharing plan and Rachel's account balance within the plan is $200,000. If the plan follows the least generous graduated vesting schedule permitted under PPA 2006, and considering Rachel has never taken a plan loan before, what is the maximum loan Rachel can take plan permitting? A.$0. Plan loans are not permissible from a top-heavy profit sharing plan. B.$20,000 C.$40,000 D.$50,000
B.$20,000 The maximum loan permissible is the lesser of 50% of the participant's vested account balance or $50,000, reduced by the highest outstanding loan balance within the 12 months prior to taking the new plan loan. In this case, Rachel is 20% vested (the least generous graduated vesting schedule permitted under PPA 2006 for a top-heavy plan would be a 2 to 6 graduated vesting schedule) in her profit sharing plan account balance because she has only attained 2 years of service with the organization. 50% of her vested account balance would be $20,000 (50% of $40,000 ($200,000 × 20%)), which is less than $50,000. Since she has not taken any previous loans, her maximum loan would not be adjusted any further.
Perry operates In-N-Out Pharmacy, a sole proprietorship. In-N-Out sponsors a profit sharing plan. Perry had net income of $205,000 and paid self employment taxes of $20,184 (assumed) during the year. If Perry makes a 15% of salary contribution on behalf of all of his employees to the profit sharing plan, how much is the contribution to the profit sharing plan on behalf of Perry? A.$24,100 B.$25,416 C.$38,980 D.$48,726
B.$25,416 $205,000 Net Income ($10,092) Less 1/2 SE Tax $194,908 Net SE Income × 0.1304 0.15/1.15 $25,416
Jared, age 52, earns $360,000 per year and is a participant in his employer's 401(k) plan. What is the maximum total contribution amount that Jared will have under the 401(k) plan in 2024, assuming his company contributes using a non-elective deferral in a Safe Harbor Plan? A.$30,500 B.$40,850 C.$41,300 D.$69,000
B.$40,850 The general employee elective deferral limitation for 2024 is $23,000, and Jared can defer an additional $7,500 (2024) as a catch-up contribution because he is over 50. The company match is 3% of $345,000 (covered compensation limit for 2024), giving him an additional $10,350 for a total contribution of $23,000 + $7,500 + $10,350 = $40,850. You can deduce the company match percentage based on the plan description in the question.
Jason turned 73 in November of 2024 and is retired. He was a participant in his employer's profit sharing plan. His profit sharing plan had an account balance of $250,000 on December 31, 2023, and $200,000 on December 31, 2024. According to the Uniform Lifetime Table the factors for ages 72, 73, and 74 are 27.4, 26.5, and 25.5 respectively. What is Jason's approximate required minimum distribution for the 2024 tax year? A.$7,547. B.$9,434. C.$9,124. D.$9,542.
B.$9,434 $250,000 / 26.5 = $9,433.96. The RMD required to distribute by April 1,2025 is for tax year 2024, when Jason is age 73. The profit sharing balance is used from prior year, December 31, 2023. Although Jason turns 73 in 2024 and can delay the first RMD until the next year, it will have to be taken by April 1, 2025. SECURE Act 2.0 revised the Required Begin Date for Required Minimum Distributions to age 73 for anyone turning 72 after 12/31/22.
Which of the following statements is true regarding nondiscrimination testing for profit-sharing plans? A.Contributions cannot be higher for highly compensated employees compared to rank-and-file employees. B.Contributions can be higher for shareholders, officers, and highly compensated employees as long as a required minimum contribution is made for rank-and-file employees C.The contributions must be equal for all employees D.There is no requirement to do nondiscrimination testing on profit-sharing plan contributions.
B.Contributions can be higher for shareholders, officers, and highly compensated employees as long as a required minimum contribution is made for rank-and-file employees Contributions cannot discriminate against the rank-and-file employees for the benefit of shareholders, officers, and highly compensated employees. That, however, does not mean that the contributions to rank-and-file employees have to be equal to the contributions to shareholders, officers, and highly compensated employees. Choice A is incorrect. Contributions can be higher for certain groups like shareholders and officers as long as testing shows the plan itself does not discriminate. Choice C is incorrect. The contribution do not have to be equal, just meet nondiscrimination testing rules. Choice D is incorrect. Nondiscrimination testing is required on profit-sharing plans.
The plan participant bears the investment risk of the assets within a defined benefit pension plan. A.True B.False
B.False
Marcus, age 61, is a participant in a stock bonus plan. The value of the employer stock contributions to the plan over the course of his participation totaled $165,000. On December 1, 20x1, Marcus takes a full distribution of the employer stock from the plan at a value of $550,000. Fourteen months later, Marcus sells all of the stock for $400,000. Which of the following statements is true? A.Marcus has a long-term capital gain of $385,000 for 20x1. B.Marcus has ordinary income of $165,000 in 20x1. C.Marcus has a long-term capital loss of $150,000 in 20x3. D.Marcus has ordinary income of $165,000 and long-term capital gain of $385,000 in 20x1
B.Marcus has ordinary income of $165,000 in 20x1 Because Marcus is taking a lump sum distribution from a qualified plan of employer stock, he will not have to recognize the net unrealized appreciation until he disposes of the employer stock. However, at the time of the distribution, the value of the stock, as of the date of contribution to the plan, will be taxable as ordinary income. Any gain on the subsequent sale of the stock will be taxable as long-term capital gain. In this case, Marcus will recognize $165,000 of ordinary income at the date of the distribution and long-term capital gain of $235,000 ($400,000 - $165,000) at the date of sale.
Which of the following employees is a key employee? A.Brynn, age 25, a 4% owner who earns $59,000. She is an officer. B.Prealla, age 37, a 6% owner who earns $92,000. She is also an officer. C.Sunny, age 29, a 0% owner who earns $225,000. She is not an officer. D.Patton, age 53, a 4% owner who earns $105,000. She is an officer
B.Prealla, age 37, a 6% owner who earns $92,000. She is also an officer. Prealla is the key employee. The criteria for a key employee in 2024 is:1) greater than 5% owner, 2) greater than 1% owner and compensation in excess of $150,000, or 3) an officer with compensation in excess of $220,000 (2024). Choice A is incorrect, She would need to earn greater than $150k as a greater than 1 % owner. Choice C is incorrect. She would need to be an officer or be more than a 1% owner. Choice D is incorrect. She would either need to be a greater than 1% owner with her current salary or be an officer with her current salary.
Which of the following is not a requirement imposed by law on qualified tax-advantaged retirement plans? A.Plan limits on Benefits and Contributions. B.Employee Coverage C.Selective employee participation. D.Employee Eligibility.
C.Selective employee participation. Broad employee participation, as opposed to selective participation, is a requirement of a tax-advantaged retirement plan. Choices A, B, and D are requirements for "qualified" plans.
Baja's employer sponsors a discretionary profit sharing plan and a 12% Money Purchase Pension Plan. For the current year, aggregate covered compensation totaled $1,500,000. If the company would like to contribute the maximum deductible amount to the profit sharing plan, how much can they contribute? A. $0 B. $180,000 C. $195,000 D. $375,000
C. $195,000 The combined limit for contributions to multiple plans is 25% of employer covered compensation, $375,000 ($1,500,000 x 25%). In this case, since Baja's employer made a mandatory MPPP contribution of $180,000, they could only make a contribution of $195,000 ($375,000 - $180,000) to the profit sharing plan.
Kellen has compensation of $96,000 from Widgets R'us. Widgets sponsors a 401(k) plan with a 6% dollar for dollar match. Kellen is deferring $7,000 of her compensation this year. What amount of Kellen's earnings are subject to payroll tax? A. $7,000 B. $89,000 C. $96,000 D. $103,000
C. $96,000 Kellen's full earnings of $96,000 are subject to payroll taxes. The $7,000 deferral would reduce the amount of compensation subject to federal income tax. The employer's matching contributions are not subject to payroll taxes.
Which of the following is not an advantage of choosing a more liberal vesting schedule? A. To foster employee morale. B. Keeping the plan competitive in attracting employees. C. Reduces the cost attributable to employee turnover. D. Increased participation in the plan.
C. Reduces the cost attributable to employee turnover. Liberal vesting generally increases cost attributable to employee turnover. Liberal vesting schedules, provide vesting immediately or on an accelerated schedule causing the employer to pay out higher portions of the contribution. Choice A, B, and D are advantages. Liberal vesting schedules allow employees to gain the benefit of contributions sooner which fosters morale, keeps the plan competitive and increases participation in the plan.
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 $295,000, what is the maximum pension benefit that can be payable to Kim at her retirement in 2024? A.$23,000 B.$69,000 C.$275,000 D.$295,000
C.$275,000 The maximum amount payable from a defined benefit pension plan is the lesser of $275,000 (2024) or 100% of the average of the employee's three highest consecutive years compensation. Because the average of Kim's compensation is $295,000, she would be limited to receiving a pension benefit at her retirement of $275,000
Bobby, age 54, has worked for Cairns Airlines for 15 years. He earns $450,000 per year and is covered by a qualified defined benefit pension plan with a funding formula of (1.5% × Years of Service × Last Year's Salary). What is Bobby's accrued benefit under this defined benefit plan given the funding formula, his earnings and his years of service? A.$51,525 B.$69,000 C.$77,625 D.$101,250
C.$77,625 Because of the covered compensation limit of $345,000 (2024), Bobby's compensation in excess of $345,000 cannot be considered for purposes of calculating his accrued benefit. The answer of $77,625 is calculated as 1.5% × 15 × $345,000.
Which of the following statements concerning the use of life insurance as an incidental benefit provided by a qualified retirement plan is (are) correct? The premiums paid for the life insurance policy within the qualified plan will trigger a taxable event for the participant at the time of payment. 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 at or before retirement. A.1 only B.2 only C.Both 1 and 2 D.Neither 1 nor 2
C.Both 1 and 2 Every year the plan participant pays income tax on the dollar value of the actual insurance protection -- approximately equal to the term insurance cost. This is commonly called the Table 1 costs (formally PS58 cost). The sum of all those costs is the participant's basis. A taxable event is not the same as taxable. The premium creates a taxable event, the portion of the premium attributed to the Table 2001 costs are taxable.
Which of the following statements concerning stock bonus plans and ESOPs is(are) true? They both give employees a stake in the company through stock ownership and allow taxes to be delayed on stock appreciation gains. They both limit availability of retirement funds to employees if an employer's stock falls drastically in value and create an administrative and cash-flow problem for employers by requiring them to offer a repurchase option (a.k.a. put option) if their stock is not readily tradable on an established market. A.1 only B.2 only C.Both 1 and 2 D.Neither 1 nor 2
C.Both 1 and 2 Statement 1 lists advantages of choosing stock ownership plans and ESOPs. Statement 2 lists the disadvantages.
Which of the following statements is true? A.In the year that Electron Products, Inc. has a loss for income tax purposes, they do not have to make a contribution to the 10% money purchase pension plan established in the prior year. B.Because of the risk of mismanagement of plan assets, plan sponsors of defined benefit plans are prohibited from investing more than 5% of the plan's assets in the stock of the plan sponsor. C.In calculating the minimum funding amount for a cash balance plan, the actuary considers plan forfeitures. D.The Pension Benefit Guaranty Corporation (PBGC) guarantees that the participants of a defined benefit plan will receive their accrued benefit as calculated under the private plan funding formula.
C.In calculating the minimum funding amount for a cash balance plan, the actuary considers plan forfeitures. Statement C is true as the actuary does consider the plan forfeitures when calculating the minimum funding amount. The plan forfeitures of a cash balance plan are allocated to the future plan funding costs. Statement A is incorrect as Electron will be required to contribute at 10% to the money purchase pension plan as part of the mandatory funding requirements. Statement B is incorrect as the actual limit of investment in the plan sponsor's stock is 10%. Statement D is incorrect as the PBGC only insures to a certain amount - not the full accrued benefit.
What is the basis of the 25 times annual expenses target for financial independence under the FIRE movement? A.It attempts to create a larger asset base than normal retirement strategies. B.It is an arbitrary number chosen as a goal. C.It allows for annual investment income equal to 4% of accumulated assets to cover expenses. D.It is based on average returns in the stock market.
C.It allows for annual investment income equal to 4% of accumulated assets to cover expenses. The 25 times expenses target comes from the 4% safe withdrawal rate used in retirement planning. At a 4% withdrawal rate, 25 times expenses would generate investment income equal to annual expenses. Choice A is incorrect. The asset base created is equivalent to that in retirement strategies, 25x expenses so that one can have a 4% withdrawal rate. While additional growth would be beneficial, the purpose of 25 times expenses is to generate sufficient investment income at a 4% withdrawal rate to cover annual expenses. Choice B is incorrect. The 25 times target is not an arbitrary number, but rather is based on the safe withdrawal rate concept. Choice D is Incorrect. While historical market returns are important, the 25 times expenses target specifically comes from the safe withdrawal rate of 4% used in retirement planning.
Randy, age 63, is a participant in the stock bonus plan of XYZ, Inc., a closely held corporation. Randy received contributions in shares of XYZ stock to the stock bonus plan and XYZ, Inc. had the following income tax deductions: YearsNumber of SharesValue of Share (at contribution)1 100 $12 2 125 $15 3 150 $8 4 200 $18 5 400 $20 TOTAL975 $14.60 Simple Average Price Randy terminates employment in Year 6 and takes a distribution from the plan of 975 shares of XYZ, Inc., having a fair market value of $24,000. Which of the following correctly describes Randy's tax consequences for Year 6 from this distribution if Randy does not sell the XYZ stock until Year 8? A.Randy has ordinary income of $15,875 and long term capital gain of $8,125 in Year 6. B.Randy has long term capital gain of $24,000 in Year 6. C.Randy has ordinary income of $15,875 in Year 6. D.Randy has a long term capital gain of $8,125 in Year 6.
C.Randy has ordinary income of $15,875 in Year 6. Randy's ordinary income is exactly equal to XYZ, Inc.'s deduction at the time of contribution, $15,875 (see chart below) and this will be taxable in the year of the distribution. Randy's net unrealized appreciation is $8,125 ($24,000 - $15,875) and will be taxed as a long-term capital gain when the stock is sold in Year 8.Total value of contributions = $15,875
Robin began taking required minimum distributions from her profit sharing plan several years ago. Robin died after suffering a heart attack on January 2nd this year. She had named her twin sister Johanna as beneficiary of her profit sharing plan. Which of the following statements is false? A.Johanna may take a full distribution of the profit sharing plan's assets in the year of Robin's death. B.After Johanna's death, her named beneficiary will need to distribute the balance of the account within 10 years of Johanna's death. C.Robin's sister must take a distribution of the profit sharing plan account balance by the end of the fifth year after the year of her death. D.The required minimum distribution can be taken over Johanna's life, the year following Robin's death.
C.Robin's sister must take a distribution of the profit sharing plan account balance by the end of the fifth year after the year of her death. SECURE Act 2019 changed the distribution rules following the account owner's death. The new rules do not differentiate between death before or after RMDs start. Johanna is an Eligible Designated Beneficiary and will be able to distribute the account over her life expectancy. Any balance upon Johanna's death is subject to the 10 year rule. Johanna could elect to take the distributions faster than her life expectancy if she wishes. She will not be subject to distribution within 5 years.
Which of the following statements is true? A.Social Security will provide most individuals with an equal wage replacement percentage during retirement. B.Because of the high cost, many small businesses are precluded from establishing a retirement plan. C.The U.S. Government offers many tax incentives to employers who establish and maintain qualified retirement plans. D.Large employers usually establish defined benefit plans because investment risk is shifted to employees.
C.The U.S. Government offers many tax incentives to employers who establish and maintain qualified retirement plans. Answer C is a true statement. Employers are permitted to deduct contributions to qualified retirement plans and the contributions are not subjected to payroll taxes. Answer A is incorrect as Social Security will only provide an adequate wage replacement ratio for those individuals with very low pre-retirement income. Answer B is incorrect as small business may establish inexpensive and easy-to-maintain retirement plans. Answer D is incorrect because DB plans require the employer to be responsible for investment risk.
Which of the following statements is true regarding cash balance pension plans? A.The assets are managed by the plan participants who control the investments B.The accounts shown to participants are real individual accounts with actual balances C.The employer is subject to mandatory funding requirements like other defined benefit plans D.The plans are not subject to actuarial valuations
C.The employer is subject to mandatory funding requirements like other defined benefit plans Cash balance plans, a type of defined benefit plan, requires mandatory funding by the employer to adequately fund the plan.Choice A Is incorrect. The assets are managed by the plan sponsor, not the participants.Choice B Is incorrect. The accounts shown to participants are hypothetical, not real individual accounts. The assets are in a combined account.Choice D Is incorrect. Cash balance plans must obtain annual actuarial valuations like other defined benefit pension plans.
Angelo's Bakery has 105 employees. 90 of the employees are nonexcludable and 15 of those are highly compensated (75 are nonhighly compensated). The company's qualified profit sharing plan benefits 8 of the highly compensated employees and 40 of the nonhighly compensated employees. Does the profit sharing plan sponsored by Angelo's Bakery meet the coverage test? A.Yes, the plan meets the average benefits percentage test. B.Yes, the plan meets the general safe harbor test. C.Yes, the plan meets the ratio percentage test. D.Yes, the plan meets ratio percentage test and the general safe harbor test.
C.Yes, the plan meets the ratio percentage test. The plan meets the ratio percentage test. The percentage of NHC employees covered by the plan is 53.33% and the percentage of HC employees covered by the plan is 53.33%. The ratio percentage of the NHC employees covered by the plan compared to the ratio percentage of the HC employees covered by the plan is 100% (53.33%/ 53.33%) which is greater than the ratio requirement of at least 70%. Another method of determining whether the plan meets the ratio percentage test is to determine the minimum number of nonexcludable NHC employees that must be covered by the plan to pass the ratio percentage test. This can be determined by calculating 70% of the percentage of HC covered by the plan multiplied by the number of nonexcludable NHC employees. In this problem, it would be calculated as follows: [((8/15) × 70%) × 75] = 28. 28 NHC employees must be covered to pass the ratio percentage test. The facts do not give us any information to determine if the plan meets the average benefits percentage test. The plan does not meet the general safe harbor test which requires that at least 70% of the NHC employees are covered by the plan.
Lee, a single individual, turned 73 on December 13, 2024. The fair market value of his 401(k) plan was $400,000 on December 31, 2023, and $425,000 on December 31, 2024. The factors, according to the Uniform Life Table, for ages 73, and 74 are 26.5, and 25.5, respectively. What is the amount of Lee's initial required minimum distribution for 2024? A.$0 B.$16,037 C.$15,686 D.$15,094
D.$15,094 Lee will have to take a RMD for the tax year 2024 when he turned 73 but can defer distribution for his first RMD. Lee will not be required to begin taking minimum distributions until April 1, 2025 (April 1 of the year after he attains the age of 73). The calculated required minimum distribution using the plan balance as of the end of the prior year and the table life factor for his age as of the end of the distribution year would be $15,094.33 ($400,000/26.5). SECURE Act 2.0 revised the RMD begin age to 73 only for those that reach 72 after 12/31/22. Those that reach 72 prior to 12/31/22 are grandfathered under the old rules.
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? A profit sharing plan that uses permitted disparity. An age-based profit sharing plan. A defined benefit pension plan. A target benefit pension plan. A.2 and 3 B.1, 2, and 3 C.2, 3, and 4 D.1, 2, 3, and 4
D.1, 2, 3, and 4 All of the listed plans would allocate a higher percentage of a plan's current cost to a certain class of eligible employees.
Which of the following statements regarding determination letters for qualified plans is true? A.When a qualified plan is created, the plan sponsor must request a determination letter from the IRS. B.An employer who adopts a prototype plan must request a determination letter from the IRS. C.If a qualified plan is amended, the plan sponsor must request a determination letter from the Department of Labor. D.A qualified plan which receives a favorable determination letter from the IRS may still be disqualified at a later date.
D.A qualified plan which receives a favorable determination letter from the IRS may still be disqualified at a later date. Determination letters are issued by the IRS at the request of the plan sponsor. The plan sponsor is not required to request a determination letter. Even if the determination letter is requested and approved, the IRS may still disqualify the plan.
Each of the following must be accounted for in retirement planning EXCEPT: A.Inflation. B.Work life savings rate. C.Health of retiree. D.Age of self-sufficient heirs.
D.Age of self-sufficient heirs. Self-sufficient heirs do not need to be accounted for in a retirement plan. Self-sufficient heirs will have no impact on the retiree's plans or goals as there are no mandatory costs or payments to be made to them. In contrast, inflation must be considered as it erodes the purchasing power of the retirement savings and other retirement plan assets. Work life savings rate must also be accounted for as it will determine, coupled with other factors, the amount the retiree will have available during retirement. Finally, the retiree's health must be considered in the retirement plan as it is an indication of the retiree's life expectancy, and thus, the amount the years that will need to be funded.
Adelaide Ranch has 325 employees (300 NHC and 25 HC). Of these employees, 300 are nonexcludable (275 NHC and 25 HC). If 208 of these NHC are covered under the Adelaide qualified profit sharing plan, and 25 of these HC are covered under the Adelaide qualified profit sharing plan, with certainty, which of the following coverage tests does Adelaide pass? A.Safe Harbor Test B.Ratio Percentage Test C.Average Benefits Test D.Both the Safe Harbor Test and the Ratio Percentage Test
D.Both the Safe Harbor Test and the Ratio Percentage Test Both the Safe Harbor Test and the Ratio Percentage Test are certainly passed. The plan covers 208 of the nonexcludable NHC employees which is 75.6% - greater than the 70% required to pass the Safe Harbor Test. The ratio of the NHC covered to the HC covered is 75.6% (75.6%/100%), so the plan passes the Ratio Percentage Test also. The information does not provide the average benefit percentages of the employees to determine whether the plan passes the Average Benefits Test.
Which of the following are most likely to be excluded from a retirement needs calculation for a worker 10 years from now? A.The inflation expectations. B.Expectations for return on investments. C.The savings amount and rate. D.Company sponsored defined benefit pension plans.
D.Company sponsored defined benefit pension plans. The majority of companies have eliminated defined benefit pension plans and only provide defined contribution plans. Choice A is incorrect. The inflation expectation are needed to determine how spending will increase. Choice B is incorrect. The return on investments are needed to estimate values for the retirement investment assets. Choice C is incorrect. The savings amount and rate are needed to estimate the savings balances.
Which of the following would not describe an aspect included for a sensitivity analysis of a retirement plan? A.Decrease the annual savings amount for 10 of the 15 years before retirement. B.Increase the inflation rate. C.Decrease the rate of return for the investment portfolio. D.Decrease the life expectancy by 3 years while maintaining the other variables.
D.Decrease the life expectancy by 3 years while maintaining the other variables. Sensitivity analysis consists of rotating each variable assumption toward the undesirable side of the risk to determine the impact of a small change in that variable on not achieving the overall plan Decreasing the life expectancy will likely increase the odds of success for the plan because assets will need to last a shorter period. Choice A is incorrect. Decreasing annual savings is a negative change in a variable that describes sensitivity analysis. Choice B is incorrect. Increasing inflation causes an undesirable impact of the retirement scenario as prices rise. Choice C is incorrect. Decreasing the rate of return on the investment assets is an undesirable variable that causes stress to the retirement plan.
Which of the following statements concerning accrued benefits in qualified plans is correct? A.In a defined benefit plan, the participant's accrued benefit at any point is the participant's present account balance. B.The defined benefit plan accrual for the specific year is the amount contributed to the plan on the employee's behalf for that year. C.In a defined contribution plan, the accrued benefit is the benefit earned to date, using current salary and years of service. D.Defined benefit plan's accrued benefit earned for the year is the additional benefit that has been earned based upon the current year's salary and service.
D.Defined benefit plan's accrued benefit earned for the year is the additional benefit that has been earned based upon the current year's salary and service. In a defined benefit plan, the accrued benefit is the benefit earned to date, using current salary and years of service. The accrued benefit earned for the year is the additional benefit that has been earned based upon the current year's salary and service. Choices A, B and C are incorrect. In each choice the correct plan name has been switched to the incorrect plan.
Which of the following is a defined benefit plan formula primarily used in Target Benefit pension plans? A.Unit benefit (a.k.a. percentage-of-earnings-per-year-of-service) formula B.Flat-percentage formula C.Flat-amount formula D.None of the above
D.None of the above Target benefit pension plan is a defined contribution pension plan and determines the contribution to the participant's account based on the benefit that will be paid from the plan at the participant's retirement. The plan formula may be written to provide a contribution to each participant during the plan year that is actuarially equivalent to the present value of the benefit at the participant's retirement. Choices A, B and C are incorrect . All of the formulas listed are benefit formulas used by defined benefit plans.
Each of the following describe a potential source of money conflict EXCEPT: A.Determining the work life balance and deciding which partner will fulfill the roles of the family. B.Establishing and working towards savings goals. C.Categorizing spending between wants and needs. D.One partner controlling all financial decisions, often referred to as financial enabling
D.One partner controlling all financial decisions, often referred to as financial enabling Choices A, B, and C are all true statements and are causes of potential money conflict. Financial enabling is displayed by continuing to give money in ways that keeps the recipient from taking responsibility and solving their own problems. What choice D is describing is undue financial influence, which is displayed when one partner exerts control over decisions concerning finances.
Each of the following is a characteristic of a defined benefit retirement plan EXCEPT: A.The plan specifies the benefit an employee receives at retirement. B.The law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of salary or the annually indexed defined benefit plan maximum. C.The plan has less predictable costs as compared to defined contribution plans. D.The plan assigns the risk of pre-retirement inflation, investment performance, and adequacy of retirement income to the employee.
D.The plan assigns the risk of pre-retirement inflation, investment performance, and adequacy of retirement income to the employee. Option D describes characteristics of a defined contribution plan. Defined benefit plans assign the risk of pre-retirement inflation, investment performance, and adequacy of retirement income to the employer, not the employee. DB plans have three benefit calculations covered in your textbook: unit benefit, flat dollar and flat percent. Only unit benefit uses 100% of average final compensation (or average highest 3 years). All use the max annually indexed benefit of defined benefit plans.
Which of the following is not a type of profit sharing plan? A.Stock Bonus. B.401(k) plan. C.Target Benefit. D.Thrift Plan.
D.Thrift Plan. A Target Benefit plan is a defined contribution pension plan. All of the others are types of profit sharing plans.
