HS 326 - Lesson 8

Employers or individuals can establish a 403(b) plan. a. True b. False

b. False Explanation: Only employers may establish 403(b) plans. Individuals may not establish 403(b) plans.

SIMPLE plans may operate on a calendar or fiscal year basis. a. True b. False

b. False Explanation: SIMPLE plans may only operate on a calendar year basis.

For 2023, an employer can contribute an additional $22,500 to a 457 plan in addition to the employee deferral contribution of $22,500. a. True b. False

b. False Explanation: The 457 contribution limit includes both employee contributions and employer matching contributions.

SIMPLE IRA plans are permitted for tax-exempt employers and governmental entites. a. True b. False

a. True

SIMPLE plans can only be established for businesses that employ 100 for fewer employees. a. True b. False

a. True

A 457 plan may accept after-tax contributions from employees. a. True b. False

b. False Explanation: After-tax contributions to 457 plans are not permitted.

Professor Ramiro contributes $85,000 to one of his university "retirement type" plans. He is not sure of the differences between the plans. What type of plan did he contribute the funds to? a. Tax sheltered annuity. b. Public 457 plan. c. Private 457 plan. d. Ineligible 457 plan.

d. Ineligible 457 plan. Explanation: The only plan that Professor Ramiro could contribute that amount of money is a 457(f) plan, which is an ineligible 457 plan.

Churches may establish 457 plans. a. True b. False

b. False Explanation: Churches may not establish 457 plans.

Employers that sponsor SIMPLE 401(k) plans must allow for catch-up contributions for particiapnts age 50 and older. a. True b. False

b. False Explanation: An employer may, but is not required to, allow for catch-up contributions for particiapnts age 50 and older.

Additional catch-up contributions to a 403(b) plan may be after-tax contributions from the employee. a. True b. False

b. False Explanation: Catch-up contributions may not be made with employee after-tax contributions.

Rex works for New Orleans Museum of Art, which sponsors a 403(b) plan. If Rex is 45 years old and has worked at the museum for the last 20 years, what is his maximum elective deferral for 2023? a. $22,500. b. $25,500. c. $30,000. d. $33,000.

a. $22,500. Explanation: The salary reduction for 2023 is $22,500. An additional catch-up contribution of $7,500 is allowed for individuals who have attained age 50. The other type of catch-up contribution is not available to employees of employers such as museums.

Which of the following are correct regarding 403(b) plans? 1. Employee elective deferrals may be contributed to a Roth account within a 403(b) plan. 2. 403(b) plans must comply with the ADP and ACP tests. 3. An employee of the New Orleans Museum of Art (a not-for-profit organization) could defer morethan $30,000 into the Museum's 403(b) plan. a. 1 only. b. 1 and 2. c. 1 and 3. d. 2 and 3.

a. 1 only. Explanation: Choice 2 is incorrect as 403(b) plans do not have to comply with the ADP test. Choice 3 is not correct as the only way to exceed $30,000 (2023) would be to make use of the additional catch-up contribution, which is not available to an employee of a museum - only health, education or religion.

All of the following statements is/are correct regarding tax-sheltered annuities (403(b) plans) except? 1. The non-age-based catch-up provision is available to employees of all 501(c)(3) organization employers that sponsor a TSA. 2. Active employees who take withdrawals from TSAs prior to age 591⁄2 are subject to a 10% penalty tax. 3. TSAs are available to all employees of 501(c)(3) organizations who adopt such a plan. 4. If an employee has had at least 15 years of service with an eligible employer, an additional catch-up contribution may be allowed. a. 1 only. b. 1 and 2. c. 1, 2, and 3. d. 2, 3, and 4.

a. 1 only. Explanation: Statement 1 is incorrect. The catch-up provision requires specified service and the correct kind of employer. Statements 2, 3, and 4 are correct.

SEPs and SIMPLEs are tax advantaged retirement plans that are less complex than qualified plans and easier to implement. Which of the following statements is (are) true regarding SEPs and SIMPLEs? 1. For an employee with a salary of $30,000, more money can be contributed (from both employee and employer) to a SEP than a SIMPLE. 2. The vesting and distribution rules for both plans are almost identical. 3. Both plans have the same coverage and participation rules. a. 2 only. b. 1 and 2. c. 2 and 3. d. 1, 2, and 3.

a. 2 only. Explanation: Statements 1 is not correct as the deferral into a SIMPLE is greater than 25% of the $30,000 salary, without regard to a catch-up and/or a match by the employer. Statement 2 is correct. SIMPLEs do have the extra penalty for two years, but other than that they are the same. Statement 3 is not correct. SIMPLEshave a $5,000 earnings eligibility threshold, SEPs have a $750 (in 2023) eligibility threshold.

Which of the following plans is not permitted to offer a Roth account as part of the plan? a. Private 457(b) plan. b. Governmental 457(b) plan. c. 403(b) plan. d. 401(k) plan.

a. Private 457(b) plan. Explanation: Private 457(b) plans cannot offer a Roth Account. The other plans are permitted.

403(b) plans generally provide for 100% immediate vesting of contributions. a. True b. False

a. True

403(b) plans may be covered under ERISA. a. True b. False

a. True

Distributions from a 457 plan may be subject to the 10% penalty for early withdrawal prior to age 59.5. a. True b. False

a. True

Distributions from non-Roth SIMPLE IRAs are generally taxed like traditional IRAs. a. True b. False

a. True

Employers who sponsor a SIMPLE IRA must make either matching contributions or nonelective contributions. a. True b. False

a. True

Funds within a 403(b) plan may only be invested in annuity contracts, mutual funds, or collective investment trusts. a. True b. False

a. True

The 457 deferral limit for 2023 is $22,500. a. True b. False

a. True

Tobias, aged 42, has compensation of $72,000. The normal retirement age for his 457(b) plan is age 62. Tobias has unused deferrals totaling $22,500 as of the beginning of the year. How much can Tobias defer into his 457(b) public plan for 2023? a. $19,500 b. $22,500 c. $25,500 d. $45,000

b. $22,500 Explanation: Tobias is not within 3 years of the plan's normal retirement age and therefore can only defer the normal $22,500 (2023). The $7,500 catch up (2023) for those participants who are 50 years old or older is not available because he is only 42 years old.

Catherine, aged 42, earns $300,000 annually as an employee for DUN, Inc. Her employer sponsors a SIMPLE retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to 3 percent of covered compensation. What is the total contribution (employer and employee) that can be made to Catherine's SIMPLE account in 2023? a. $22,000 b. $24,500 c. $25,000 d. $26,000

b. $24,500 Explanation: The maximum employee contribution for 2023 is $15,500. The employer has chosen to make matching contributions of up to 3 percent of compensation (the SIMPLE maximum). Therefore the employer can make a contribution of up to $9,000, or $300,000 compensation × 3%. Added together we have $24,500 that can be contributed to her account

Which of the following is/are correct regarding SIMPLE plans? 1. A SIMPLE plan does not require annual testing. 2. A SIMPLE IRA must follow a 3-year cliff vesting schedule if the plan is top-heavy. 3. A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in a SIMPLE plan. 4. The maximum elective deferral contribution to a SIMPLE 401(k) plan is $22,500 for 2023 and $30,000 for 2023 for an employee who has attained the age of 50. a. 3 only. b. 1 and 3. c. 1, 2, and 3. d. 2, 3, and 4.

b. 1 and 3. Explanation: Statement 1 is correct. Statement 2 is incorrect. A SIMPLE plan is not subject to vesting rules, and contributions are always a 100% vested. Statement 3 is correct. The early withdrawal penalty is 25% for distributions taken within the first two years of participation. Statement 4 is incorrect. The maximum deferral to a SIMPLE plan is $15,500 for 2023. Employees who have attained age 50 by the end of the tax year will also be eligible to make a catch-up contribution ($3,500 for 2023).

Which of the following statements is/are correct regarding TSAs and 457(b) deferred compensation plans? 1. Both plans require contracts between an employer and an employee. 2. Participation in either a TSA or a 457 plan will cause an individual to be considered an "active participant" for purposes of phasing out the deductibility of traditional IRA contributions. 3. Both plans allow a special "final 3-year" catch-up contribution. 4. Both plans must meet minimum distribution requirements that apply to qualified plans. a. 1 only. b. 1 and 4. c. 2, 3, and 4. d. 1, 2, and 4.

b. 1 and 4. Explanation: Statements 1 and 4 are correct. Statement 2 is incorrect because a 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an "active particiapnt". Statement 3 is incorrect. Only 457(b) plans allow a "final 3-year" catch-up contribution. TSAs have a different special catch-up contribution for employess with at least 15 years of service.

457 plans have a special final three-year catch-up provision that allows employees to contribute up to 100% of their compensation in the last three years. a. True b. False

b. False Explanation: The final three-year catch-up provision essentially allows participants to double their contributions in the last three years, but is limited by the deferrals not taken in prior years.

For 403(b) plans the "most recent year of service" is always based on a calendar year of service. a. True b. False

b. False Explanation: The most recent year of service is not necessarily equal to a calendar year.

If an employee earning $60,000 had access to multiple plans, which combination would allow for the largest employee contributions? a. 401(k) plan and profit sharing plan. b. Governmental 457(b) plan and a 403(b) plan. c. Profit sharing plan and SEP. d. 401(k) plan and a 403(b) plan.

b. Governmental 457(b) plan and a 403(b) plan. Explanation: The employee could defer $22,500 (2023) to the 457 plan and the 403(b) plan for a total of $45,000 in 2023. That amount is larger than the other combinations. The reason for this is that the "one deferral per year rule" that applies to 401(k) plans and 403(b) plans does not apply to 457 plans.

All of the following statements are correct regarding 403(b) plans, EXCEPT: a. 403(b) plans are eligible for rollover treatment to IRAs, qualified plans, and other 403(b) plans. b. Investments in stocks, bonds, and money markets are available. c. Assets in a 403(b) plan are generally 100 percent vested. d. Typically, 403(b) plans have a lower threshold of entry than do 401(k) plans.

b. Investments in stocks, bonds, and money markets are available. Explanation: The second option is incorrect because investments are limited to insurance annuities and mutual funds. All of the other statements are correct.

Harper, age 45, earns $400,000 annually from Atlas, which sponsors a SIMPLE, and makes the minimum required non-elective contribution to all eligible employees. What is the maximum total contribution to Harper's account in 2023, including both employee and employer contributions? a. $15,500 b. $19,000 c. $22,100 d. $23,500

c. $22,100 Explanation: Harper can defer up to $15,500 for 2023. The non-elective contribution equals 2% of his salary limited to the 2023 limit of $330,000, which is $6,600. Thus, the total equals $22,100.

Monique, age 42, earns $350,000 annually as an employee for CTM, Inc. Her employer sponsors a SIMPLE IRA retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to 3% of compensation. What is the maximum contribution (employer and employee) that can be made to Monique's SIMPLE account in 2023? a. $19,800. b. $21,000. c. $26,000. d. $31,000.

c. $26,000. Explanation: The maximum total contribution is $26,000. ($15,500 maximum employee contribution for 2023 + $10,500 employer match). The maximum employee contribution for 2023 is $15,500. The employer has chosen to make matching contributions of up to $10,500 ($350,000 compensation x 3%). Note that the annual compensation limit of $330,000 (2023) does not apply with the SIMPLE IRA match (but does apply with a nonelective contribution).

Jacques, who is 52 years old, works for NYU and is a participant in NYU's tax-sheltered annuity (TSA) program. How much could he defer in the TSA in 2023 if he has a salary of $121,000? a. $7,500. b. $22,500. c. $30,000. d. $66,000.

c. $30,000. Explanation: The deferral for a 403(b) plan or TSA is $22,500 for 2023. There is an additional catch-up contribution of $7,500 that is allowed for individuals who have attained age 50.

Which of the following are correct regarding SIMPLEs? a. An employer can maintain a SEP and a SIMPLE at the same time covering the same employees. b. A SIMPLE is predominantly an employer contribution plan. c. Once deposited in a SIMPLE IRA, funds can be distributed by the participant. d. Employers must provide a matching contribution to employees covered by a SIMPLE.

c. Once deposited in a SIMPLE IRA, funds can be distributed by the participant. Explanation: SIMPLEs cannot be maintained with any other plans. However, under the SECURE 2.0 Act, for plan years beginning after December 31, 2023, an employer sponsoring a SIMPLE IRA plan may elect at any time during the plan year to terminate the SIMPLE IRA and immediately replace it with a SIMPLE 401(k), safe harbor 401(k), QACA, or starter 401(k). A SIMPLE is primarily funded with employee deferrals, not employer contributions. Employers can provide a match or a non-elective contribution.

Fred, age 30, has a small but promising business with 5 current employees. He wishes to adopt an easily managed workplace plan that would allow himself and his employees to defer modest amounts of their salary into the plan. Fred isn't interested in maximizing his own deferrals because he is plowing most of the earnings back into the business. But he is concerned about maintaining plan choice flexibility in case his business suddenly expands in size. Which of the following plans would Fred prefer to adopt? a. SEP IRA b. Profit-sharing plan with 401(k) c. SIMPLE IRA d. Target benefit pension plan

c. SIMPLE IRA Explanation: A SIMPLE IRA would be ideal for Fred's business. A SEP IRA is incorrect because SEP IRA's don't allow employee salary deferrals. A Profit-sharing plan with a 401(k) is incorrect because the additional complexity to maintain a qualified plan and higher deferral limits don't match Fred's requirements. A target benefit pension plan is incorrect because target benefit pensions don't depend on employee salary deferrals.

Brady, age 51, earns $333,333 annually from Infinity, which has 20 employees and sponsors a SIMPLE IRA. Infinity matches all employee deferrals 100% up to a 3% contribution. What is the maximum total contribution to Brady's account in 2023 and 2024 (assume the indexed numbers for 2023 remain the same in 2024 and that Brady's salary also remains the same), including both employee and employer contributions? a. $15,500 in 2023 and $17,050 in 2024. b. $19,000 in 2023 and $20,900 in 2024. c. $25,500 in 2023 and 25,500 in 2024. d. $29,000 in 2023 and $30,900 in 2024.

d. $29,000 in 2023 and $30,900 in 2024. Explanation: Brady can defer up to $19,000 ($15,500 + $3,500) for 2023 because he is age 50 or older. The match for Brady is 3% of his compensation, or $10,000 (3% x $333,333). The maximum contribution to Brady's SIMPLE is $29,000 ($15,500 + $3,500 + $10,000) in 2023. Under the SECURE 2.0 Act, beginning in 2024, the regular contribution and catch-up limits are increased by ten percent for employers with 25 or fewer employees. Since the question states that the regular contribution and catch-up limits in 2024 are assumed to be the same as in 2023 ($15,500 and $3,500 respectively), the contribution limits for Brady will be $15,500 x 1.10 = $17,050 and $3,500 x 1.10 = $3,850. The maximum contribution to Brady's SIMPLE in 2024 is $30,900 ($17,050 + $3,850 + $10,000).

Dr. Durr has worked as a professor at Top-Notch University for the last 30 years. She has never deferred any money into her 457(b) plan. Dr. Durr has maxed out her 403(b) plan. She will attain normal retirement age under the 457(b) plan in 2023. How much can Dr. Durr contribute to her 457(b) plan for2023? a. $0. b. $22,500. c. $30,000. d. $45,000.

d. $45,000. Explanation: Dr. Durr is allowed to defer an additional $22,500 in 2023 because she has unused prior deferrals.