CHAPTER 6

Nonprofit Organization

An organization that uses its surplus to fulfill its purpose instead of disturbing the surplus to it's owners or members.

Under the 401 K bonus or thrift plan, the employer will contribute...

An undetermined percentage for each dollar contributed by the employee. - Under the bonus thrift plan, the employer will contribute certain amount or percentage for each dollar contributed by the employee. There is no specific rule as to how much the employer must contribute.

If a retirement plan is 'qualified', what does that mean?

It is approved by the IRS.

Two attorneys operate their practice as a partnership. They want to start a program through their practice that will provide retirement benefits for themselves and three employees. They would likely choose...

HR-10 (Keogh Plan) - These are plans that are specifically for self - employed and their employees.

Gross Income

Amount of money earned before payroll taxes

SIMPLE Plans require all of the following EXCEPT

At least 1,000 employees.

For a retirement plan to be qualified, it must be designed for whose benefit?

Employees. - Qualified plans are designed for the exclusive benefit of the employees and their beneficiaries.

Which of the following is NOT true regarding a non qualified retirement plan?

It need IRS approval. - Non qualified retirement plans do not meet the IRS requirements for favorable tax treatment of deductions and contributions; therefor, they do not need to be approved by IRS.

Which of the following is an IRS qualified retirement program for the self employed?

Keogh Plan or HR-10 Plan allows self employed individuals to establish tax favored retirement plans for themselves and their eligible employees.

What is the primary purpose of a 401K plan?

Retirement - A 401K retirement plan allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. The company can also somehow match the employees contribution, whether it is dollar for dollar or on a percentage basis.

Which of the following applicants would NOT qualify for a Keogh Plan?

Someone who works 400 hours per year. - A person must have worked at least 1,000 hours per year to be eligible for a Keogh Plan.

The advantage of qualified plans to employers is

Tax-deductible contributions.

A 403b plan, commonly referred to as a TSA, is available to be used by

Teachers and not-for-profit organizations.

Which of the following describes the tax advantage of a qualified retirement plan?

The earnings in the plan accumulate tax deferred.

All of the following are general requirements of a qualified plan EXCEPT...

The plan must provide an offset for social security benefits. - Plans must meet the general requirements established by IRS.

How are contributions to a tax-sheltered annuity treated with regards to taxation?

They are not included as income for the employee, but are taxable upon distribution. - Funds contributed are excluded from the employee's current taxable income, but are taxable upon return.

Earned Income

salary, wages, or commissions; but not income from investments, unemployment benefits, and similar sources of income

Rollover

withdrawal of the money fro one qualified plan and placing it into another plan

Qualified Retirement Plan

Approved by the IRS, which then gives both the employer and employee benefits such as deductible contributions and tax-deferred growth. Have tax advantages.

Non-Qualified Plans

Contributions NOT currently TAX DEDUCTIBLE Plan DOES NOT NEED IRS APPROVAL Plan CAN DISCRIMINATE Earnings grow TAX DEFERRED EXCESS over cost basis is TAXED

Qualified Plans

- Contributions currently Tax Deductible - Plan APPROVED by the IRS - Plan CANNOT DISCRIMINATE - Earnings grow TAX DEFERRED - ALL WITHDRAWALS are TAXED

Pretax Contribution

contribution made before federal and/or state taxes are deducted from earnings

Vesting

the right of a participant in a retirement plan to retain part or all of the benefits.