Retirement Planning and Employee Benefits - Final Exam

Armageddon Company provides a Profit Sharing plan for its employees. What is the largest contribution that it may make this year if covered compensation is equal to $629,777?

$157,444 The correct answer is 25% of $629,777 equals $157,444.

Lou works for Delticon Corp. who provides and pays for group life insurance coverage of two times salary to eligible employees. Lou has worked for the company for 6 years and earns $85,000 per year. Lou is 45 years old. The Uniform Premium Table shows a cost of 15 cents per thousand per month for that age. What amount, if any, of taxable income is included on Lou's W-2 at the end of the year as a result of this insurance benefit?

$216.00 The correct answer is C -$216.00. The company is paying the entire cost of $170,000 of insurance coverage (two times $85,000). However, the first $50,000 of coverage does not incur any tax liability. That leaves $120,000 of insurance coverage that will be subject to the Table I cost of 15 cents per thousand per month. $ .15 x 120 = $18.00 x 12 months = $216.00.

Dan has been purchasing company stock through his employer's Employee Stock Purchase Plan for the past several years at a 15% discount. He sells 50 shares of stock at $18.50 per share. He purchased those shares several years ago when their market price was $12.94. What is the tax impact of this sale?

$278.00 of Long Term Capital Gain and $97.00 of Ordinary Income Since the stock was held longer than one year, he will owe long term capital gains on the difference between the stock price of $12.94 and the sale price of $18.50 ($18.50 - $12.94 = 5.56 x 50 shares = $278.00. Since he was able to purchase the stock at a 15% discount, he will owe ordinary income on the value of the discount per share ($1.94 x 50 shares = $97.00).

Louise has a 401(k) plan with her company, Allen & Co. With only eight years to go until eligibility for social security benefits, Louise wants to take advantage of her retirement plan options. This year she has made elective deferrals of $16,200 which have earned an additional $4,320 of earnings. Her account has also benefited thanks to matching contributions of $6,455 plus earnings of $1,980 from Allen & Co. Lastly, the company made a profit sharing contribution which equaled $3,455 plus $1,045 of earnings. The total value of her plan assets is $33,455. Louise has just celebrated her fourth year of service with Allen & Co. Louise has decided to leave the company for a better job. Allen & Co. maintains the longest vesting period allowed by law. If Louise leaves, how much of her $33,455 is vested?

$28,281

You and your client have determined that the retirement income need for the first year of retirement will be $62,000. If retirement will start in 11 years, the client assumes that inflation will average 3% annually and that assets will grow at a 7% average annual rate of return, what will be the amount of the first year retirement income withdrawal after accounting for inflation?

$85,822 The correct answer is $85,822. PV = $62,000, i = 3%, n = 11 and solve for FV

If Paul should die before he has received any distributions from his IRA, which of the following options are available to his family or the executor of his estate? (I) If no beneficiary has been designated, the entire amount must be distributed within five years. (II) If Maxine is designated as Paul's beneficiary to receive the full amount, she could receive payment of this amount over her life expectancy or she could elect to treat Paul's IRA as part of her own IRA. (III) If the full amount is payable equally to Michelle and Graham, Michelle may elect a lump-sum distribution and Graham may elect to receive his share over his life expectancy starting on the date his father would have attained age 70 1/2.

(I) and (II) only

Which of the following types of annuity payout options offer the promise of a lifetime payout? That is, payments made for the entire lifetime of the insured, regardless of how long he or she lives. (I) Single Life Annuity (II) Joint and Survivor 50% (III)Single Life Annuity with Refund (IV) Life Annuity 15 Year Certain (V) 20 Year Fixed Term Payout

(I), (II), (III) and (IV) Only

Which of the following is/are exceptions to the 10% penalty for withdrawals from an IRA prior to age 59 ½? (I)College Tuition (II) Dental Insurance Premiums (III) Disability (IV) New Car Purchase (V) Down Payment for First Home

(I), (III) and (V) Only

John, age 56, takes a distribution from his six-year old ROTH IRA. Which taxes will he owe? (I) None, he's over 55½. (II) He'll owe the 10% excise tax on premature withdrawals of earnings. (III) He'll owe tax on the earnings attributable to his contributions if he withdraws them. (IV) He'll owe the 10% excise tax plus ordinary income tax on the entire amount.

(II) and (III) only

Which of the following statements concerning distributions that Maxine may take from her employer's TSA plan is (are) correct? (I) A lump-sum distribution must be included in Maxine's gross income, but the special 10-year averaging rules are available to Maxine. (II) If a lump-sum distribution consists of Maxine's after-tax contributions or Table 2001 life insurance costs, these amounts will not be subject to federal income taxes. (III) If Maxine retires at age 57, she can take taxable withdrawals from her TSA account without a 10% penalty

(II) and (III) only

If a Rabbi Trust is used by a company for its non-qualified plan, which of the following statements about a Rabbi Trust is/are correct? (I) It is an irrevocable trust but assets within the trust are available to creditors. (II) Because the trust is irrevocable, assets placed in the trust are taxable to the employees at the time of contribution.

- (I) Only Trust assets are available to creditors but no taxation to the employee occurs at contribution because constructive receipt does not occur.

Which of the following is/are fiduciaries of a Qualified Pension Plan? (I) Ralph Edwards, a 10% owner of the company and a trustee of the plan. (II) Edwina Bertocci, who is not an owner of the company but is a trustee of the plan. (III) Mickey Gilley, the investment broker for the plan. (IV) Astrid Bella, CPA, the accountant for the plan. (V) Andy Van Eagle, a lawyer who provides services for the plan when requested.

- (I) and (II) Only Ralph and Edwina are fiduciaries, as they are both owners of the company and Ralph is a trustee of the plan. The rest of the list simply provide services for the plan for which they are paid.

Which of the following statements concerning a group carve-out plan is (are) correct? (I) The coverage is available on a discriminatory basis. (II) The use of a split-dollar plan is a practical approach to the use of a group carve-out plan.

- (I) and (II) only

Which of the following persons will receive Social Security retirement, survivor, or disability benefits? (Ignore the family maximum) (I) Gary Prinsen, age 67, who worked as a life insurance agent for 30 years before retiring this year and who will receive $20,000 of renewal commissions this year. (II) Mary Harding, age 58, a full time homemaker for 25 years whose husband is 65 and retiring this year. (III) Judy Cliff, age 57 and disabled, whose husband died this year at age 66. (IV) Bill Steward, age 60, took early retirement after working 30 years for the same utility company. He has one child age 15 who lives with him and his wife.

- (I) and (III) Only Gary Prinsen will receive retirement benefits because benefits are no longer reduced for those who have reached their Full Retirement Age (FRA) and who have excess earnings. Mary Harding will not receive benefits because she is not yet age 62. Judy Cliff will receive a widow's benefit because her husband died and she is disabled. Bill Steward will not receive retirement benefits because he is not yet age 62.

Assume that George Adrian made after-tax contributions of $40,000 to ALCO's qualified profit-sharing plan during his working years. After his annuity starting date, George expects to receive total annuity benefits of $160,000, based on his life expectancy. George will receive monthly payments of $1,000 starting at age 67. Which of the following statements is (are) correct? (I) The total amount George may exclude from his gross income over his lifetime is $40,000. (II) George may exclude the same amount annually from his gross income as long as he lives, even if he lives to age 100. (III) Sometime in George's life, the full $1,000 a month may be includible in his gross income.

- (I) and (III) only After recovering his basis of $40,000 without taxation, Shawn's monthly payments will be fully taxable.

Paul has just been notified that he is the sole beneficiary of his father's IRA. His father died last month at the age of 66. The IRA is valued at $146,000. What options is/are correct? (I)He can take the value of the IRA and pay income tax but he would not pay the penalty on it. (II) He can transfer the IRA to his existing IRA. (III) He can take withdrawals at will and pay taxes only on the amounts withdrawn. (IV) He can take withdrawals based on his life expectancy.

- (I) and (IV) Only As a non-spouse beneficiary of an IRA, he can certainly take all the money and pay taxes on it but may also take withdrawals based on his life expectancy. He cannot roll the money to his IRA and may not take withdrawals at will.

Which of the following statements regarding SEP-IRA plans is/are correct? (I) SEP-IRA's are not considered qualified plans (II) SEP-IRA contributions must be coordinated with contributions to either a Traditional IRA or a Roth-IRA. (III) Regular C-corporations may not use a SEP-IRA (IV) For any year in which a SEP-IRA is used, no other plan may be utilized during that same year. (V) SEP-IRA accounts may be funded at any time up until tax filing, including extensions.

- (I) and (V) Only SEP-IRA's are not considered qualified plans and can be funded at any time up until income tax filing including extensions. Contributions do not coordinate with IRA contributions of any kind and they can be used by all forms of business structures.

John and Mary file jointly and have an adjusted gross income of $76,000. Their broker has advised them to convert their regular IRA to a Roth IRA. As their retirement planner, what tax consequences can you tell them to expect in 2006? (I) They will owe tax on the pre-tax and earnings portion of the regular IRA in the year of conversion. (II) They will suffer a 10% excise tax if they convert before one of them turns 59 ½. (III) They will have a choice of immediately paying the tax on the earnings and pre-tax portion of the regular IRA or spreading the same calculated tax over a four-year period. (IV) They will suffer a 10% excise tax on only the pre-tax contributions plus the earnings attributable to them.

- (I) only Taxpayers do not suffer the 10% excise tax on conversions, but must pay income tax on the full account value.

Which of the following is/are allowable investment choices for an IRA? (I) Individual Stocks (II) Real Estate (III) Mutual Funds (IV) Artwork (V) Life Insurance

- (I), (II) and (III) Only Stocks, mutual funds and real estate are allowable investments in an IRA, collectibles and life insurance are not.

Which of the following plans is/are pension plans? (I) Cash Balance Plans (II) Target Benefit Plans (III) Money Purchase Plans (IV) Profit Sharing Plans (V) Defined Benefit Plans

- (I), (II), (III) and (V) Only Money Purchase, Target Benefit, Defined Benefit and Cash Balance Plans are pension plans. Profit Sharing Plans are profit sharing plans.

Which of the following is/are considered "Annual Additions"? (I) Employer Matching Contributions (II) Pre-Tax Elective Deferrals (III) After-Tax Elective Deferrals (IV) Profit Sharing Contributions (V) Forfeitures

- (I), (II), (III), (IV) and (V)

Which of the following statements concerning excess contributions to an IRA made in 2006 is (are) correct? (I) The excess is subject to a 6% excise tax. (II) The taxpayer may correct the excess contribution by making withdrawals, but the investment income earned while the excess is invested is includible in the taxpayer's gross income. (III) The penalty tax is levied each year until the excess contribution is corrected.

- (I), (II), and (III)

If a person dies before any required distributions have been made from his or her IRA account, which of the following is (are) permitted? (I) If no portion is payable to a designated beneficiary, the entire amount must be distributed in 5 years. (II) If the balance is payable to a nonspouse beneficiary, the distributions may be payable over the life expectancy of the nonspouse beneficiary. (III) If the deceased has named his or her spouse as beneficiary, distributions may be deferred until the date on which the deceased would have attained age 70½.

- (I), (II), and (III) Under the new regulations adopted in 2001, the life expectancy of the designated beneficiary applies when the IRA owner dies before the required beginning date for distributions. If no beneficiary is named, the 5-year rule applies. When a spouse is the designated beneficiary, one option is to wait until the deceased would have been age 70½.

If an employer's plan for providing noncash benefits for employees meets the other government requirements for such plans, which of the following categories of noncash benefits may be provided without giving rise to taxable income for the employees? (I) Employer-operated athletic facilities (II) Dependent care assistance programs (III) Group legal service plans (IV) Personal use of company car

- (I), (II), and (III) only (IV) gives rise to income for the employee that is includible in the employee's gross income. (I), (II), and (III) do not give rise to income that is includible in the employee's gross income.

Allison works for the Ashbury Town School Department. She has taught in Ashbury for 25 years, starting there when she was 28 years old. Ten years ago, Allison began to take advantage of the 403(b) plan offered to her through the town. Currently, her account has a value of $78,000. At this point in her career, she wants to contribute as much as possible, taking advantage of the tax deduction for contributions. Recently, after reading an article in Money Magazine, Allison has some questions about her 403(b) plan? Which of the following statements about Allison's situation is/are correct? (I) Allison may contribute $22,500 to her plan, fully pre-tax, in 2012. (II) While still working, Allison may roll her 403(b) over to an IRA and still make contributions to the 403(b) account. (III) Alice can borrow up to $50,000 from her 403(b) account. (IV) Alice is eligible for an additional catch-up election of $3,000 per year beyond the normal limits. (V) Allison can contribute the maximum possible contribution to both a 403(b) plan and a 457 plan simultaneously.

- (I), (IV) and (V) Only She can contribute up to $22,500 in 2012 ($17,000 regular and $5,500 catch-up), is eligible for the 15 years of service with the same employee catch-up of $3,000 per year for five years and can contribute to both a 403(b) and 457 at the same time, each to their proscribed limits. Loans are limited to the lesser of 50% of the vested balance or $50,000 and plan assets cannot be rolled over to an IRA until age 59 1/2 or separation from service.

Mary wants to establish a retirement plan for her dried flower business. Which one of the following statements is correct about Mary's retirement plan options? (I) Mary can establish and contribute to a SIMPLE 401(k) and an SEP for Mary and Liz. (II) Mary can establish and contribute to a SIMPLE IRA for Mary, Liz, and Missy. (III) Mary can establish and contribute to an SEP for Mary, Liz, and Missy. (IV) Mary cannot establish and contribute to an SEP for Mary and Liz and Missy.

- (II) and (III) only (I) is incorrect as Mary is not allowed to have any other plan if she has a SIMPLE plan. (II) and (III) are correct as Mary could set up either a SEP- IRA or SIMPLE-IRA plan. She would have to modify the plans to allow younger employees to participate as well as shorten the eligibility period but she is allowed to do that. She cannot set the participation age higher than 21 or the years of service greater than 3 years for either plan. (IV) is incorrect as she can set up a SEP for everyone. As noted previously, she simply has to make enrollment in the plan more generous as to age and years of service.

Which of the following types of retirement plans is (are) available to businesses that are sole proprietorships? (I) Stock bonus plans (II) 401(k) plans (III) SEP plans (IV) ESOPs

- (II) and (III) only A sole proprietorship has no stock, so Stock Bonus Plans and ESOPS are incorrect. A sole proprietorship is eligible for a 401(k), a SEP, or a non-qualified plan.

Which of the following statements concerning the criteria that may be used to determine an employee's eligibility to participate in a SEP and have contributions made to his or her account is (are) correct? (I) The participant must be age 21 and, during the last five years, must have completed three years of service in which the employee worked at least 1,000 hours per year. (II) The employee must have received compensation of at least $450 as indexed for inflation for 2006. (III) Members of a collective bargaining unit may be excluded, provided that retirement benefits were the subject of good-faith bargaining.

- (II) and (III) only A year of service in a SEP is any year in which the employee performed service and received at least $450 (as indexed) of compensation.

Which of the following employees would be categorized as a highly compensated employee in a top-heavy plan? (I) Milly, who owns 5% of the company and earns $36,000 (II) Carol, whose base salary and commissions will total $117,000 this year (slightly less than last year's total.) (III)Al, the Vice-President of the company with salary of $91,500. (IV) Alice, who owns 65% of the company (V)Peter, who owns 3% of the company and earns $85,000.

- (II) and (IV) Only Highly compensated employees are Carol, whose income exceeds $115,000 (2012) and Alice, whose ownership exceeds 5%. Milly doesn't own more than 5% and neither Al or Peter owns more than 5% or earns above $115,000.

Which of the following types of plans allow unlimited amounts of employer stock to be held within the plan? (I) Money Purchase Plans (II) Profit Sharing Plans (III) Stock Bonus Plans (IV) ESOP (V) Cash Balance Plans

- (II), (III) and (IV) Only Only profit sharing plans (stock bonus and ESOP are forms of Profit Sharing Plans) can hold unrestricted amounts of employer stock. Pension plans such as Money Purchase and Cash Balance Plans cannot hold more than 10% of their assets in employer stock.

Which of the following is/are characteristics of a Profit Sharing Plan? (I) The employer is limited to contributions of no more than $17,000 per participant (with an additional $5,500 if the participant is age 50 or older). (II) The plan may hold an unlimited amount of employer stock. (III) They tend to benefit younger participants more than older participants. (IV) They provide maximum flexibility to the employer. (V) The employer may or may not make a contribution each year.

- (II), (III), (IV) and (V) Only All are correct except for I. The $17,000 limit is for employee elective deferrals.

A distribution from which of the following should be subject to a mandatory tax withholding? (I) Traditional IRA (II) Money Purchase Plan (III) Profit Sharing Plan (IV) 403(b) Plan (V) SEP-IRA Plan

- (II), (III), and (IV) Distributions from Qualified Plans and 403(b) accounts are subject to the mandatory 20% withholding. IRA's and SEP-IRA's are not.

Mark is a single taxpayer with a Health Savings Account. Which of the following is/are characteristics of his HSA? (I) As a 52 year old individual, he may contribute an additional $900 to the HSA account as a "catch- up" contribution. (II) He may not roll over an HSA from a previous employer into his current HSA. (III) An excise tax of 10% is assessed on over-contributions to the HSA. (IV) If Mark's estate is the beneficiary of the Health Savings Account, there will be no income in respect of a decedent and the value of the account at death will be counted as part of his estate.

- (IV) only If Mark dies, the value of the HSA will be included in his estate and will not be treated as IRD. Over-contributions are charged with a 6% excise tax. Additional contributions of $1000 can be made after age 55. Once per 12 month period, a plan can be rolled over into another plan.

In a Cafeteria Plan, an employee may allocate dollars to which of the following choices?

- A 401(k) Plan

An employee may allocate the dollars accumulated in his or her cafeteria plan to which one of the following options?

- A 401(k) plan A flexible spending plan may allocate dollars to purchase any benefit that is an acceptable cafeteria plan option. The rest are prohibited transactions for purposes of allocating dollars that are in an employee's flexible spending account.

Louise works for Athos, Inc., a manufacturing company, and is a highly compensated employee. As such, she has been restricted from contributing the maximum 401(k) amount allowed under the regulations. To alleviate her concerns and to help tie her to the company, Athos, Inc. has arranged for a nonqualified retirement plan for Louise which allows her to defer additional income beyond the limitations placed on 401(k) contributions. This plan is most likely which type of plan?

- A Deferred Compensation Plan A plan in which the employee defers income is a deferred compensation plan. Excess Beneft, SERPS and Salary Continution Plans are usually funded with employer dollars. A corporation is not eligible for Section 457 plans.

Louise works for Athos, Inc., a manufacturing company, and is a highly compensated employee. As such, she has been restricted from contributing the maximum 401(k) amount allowed under the regulations. To alleviate her concerns and to help tie her to the company, Athos, Inc. has arranged for a nonqualified retirement plan for Louise which allows her to defer additional income beyond the limitations placed on 401(k) contributions. This plan is most likely which type of plan?

- A Deferred Compensation Plan A plan in which the employee defers income is a deferred compensation plan. Excess Beneft, SERPS and Salary Continution Plans are usually funded with employer dollars. A corporation is not eligible for Section 457 plans.

All the following statements concerning MSAs are correct EXCEPT:

- A person would be disqualified if he or she had either an individual disability income policy or long-term care insurance coverage. Although a participant is prohibited from having other medical expense coverage, a participant may own non-medical expense insurance.

All the following entities may establish Keogh (HR 10) plans EXCEPT:

- A professional corporation Keogh plans may only be adopted by sole proprietors, partnerships, and other types of unincorporated businesses, but not by corporations.

Which of the following factors is NOT part of the retirement planning process?

- Adjusting the plan based on the concerns of the client's heirs All of these are taken into account except for the wishes of the client's heirs.

Which of the following statements regarding COBRA is correct?

- An employer with less than 20 employees is exempt from COBRA. Only employers with less than 20 employees are exempt from COBRA. COBRA benefits may extend from 18 to 36 months. Employees who separate from service for any reason, except for gross misconduct, are covered by COBRA. The penalty to an employer for failure to notify employees of COBRA benefits is $100 per day

Assume Bill established a Roth IRA in 2009, making contributions of $3,000 in 2009, 2010, and 2011 (total contributions of $9,000). In 2012, Bill plans to distribute $10,000 from his Roth IRA to help pay Missy's final year tuition at State University. Which one of the following statements is correct?

- Bill will have to report taxable income of $1,000, and pay a 10% penalty on $1,000. Withdrawals of contributions can be made at any time without taxes or penalties owed. Amounts over basis are taxable and subject to the 10% penalty if under age 59 ½.

Which of the following statements regarding VEBA's is/are correct? (I) Membership is voluntary (II)Discrimination in favor of highly compensated employees is not allowed.

- Both (I) and (II)

Which of the following is (are) true regarding Health Savings Accounts (HSA)?

- Contributions made by the employer are for the employee's benefit. - The 2006 HSA deduction for single coverage is $2,700 and for family coverage it is $5,400. The 2006 deduction for HSA contributions is $2,700 (single coverage) or $5,400 (family coverage). Contributions to a health savings account made by an employer are for the employee's benefit and contributions for family members are allowed. HSAs can be rolled over into another HSA once per 12-month period

Which of the following statements concerning the basic characteristics of non-qualified deferred compensation arrangements is correct?

- During working years, the employee enjoys similar tax treatment under a non-qualified plans or qualified plans. In a qualified plan and a non-qualified deferred compensation arrangement, the employee will not incur income tax liability on the money contributed to the plan. The employer receives a deduction whenever the employee recognizes income regardless of whether the employee is employed or not. Substantal risk of forfeiture is not needed in a unfunded plan.

All the following rules apply to distributions from SIMPLE IRAs EXCEPT:

- Early withdrawals are subject to a 15% penalty. Early withdrawals are subject to a 25% early withdrawal penalty tax, in the first two years, then 10%.

Margaret's health plan has few deductibles and low co-pays. It covers a wide variety of services which are provided by her primary physician. Her coverage is most likely provided by which of the following types of plans?

- HMO The HMO plan provides a wide variety of services with low co-pays and modest deductibles using a primary care physician.

Frank has company stock inside his 401(k) that he has been accumulating over the past 26 years with the company. The record keeper has determined that the cumulative value of the stock when all shares were contributed (basis) is $47,000. This is the amount that his employer took as a deduction for his stock. The current market value of the stock is $210,445. Frank is 64 and plans on leaving the company this year. He likes the stock and is thinking about keeping it. If he rolls all of his assets out of the plan but takes the stock as a distribution, what will be the tax impact?

- He will pay ordinary income tax on the basis. The basis of the stock will be subject to ordinary income. When the stock is sold, the unrealized net appreciation (gain) will be subject to Long Term Capital Gains.

Assume that George Adrian has been with ALCO for the thirty years of the corporation's existence. Assume also, that today, both George Adrian and employee Y are age 65, the normal retirement age for the Company. Employee Y's earnings have averaged $30,000 for the 15 years he has been with the Company. The Company's defined benefit pension plan provides a retirement benefit equal to 40% of the employee's average annual earnings. The Company's retirement plan reduces plan benefits by 1/30 for each year of service less than 30. If George Adrian's average annual earnings are $60,000, which of the following statements is correct?

- If George's annual pension benefit is $24,000, the minimum permitted benefit for employee Y is $6,000. George's benefit is equal to $24,000 ($60,000 x .40 = $24,000 with no reduction as he had at least 30 years of service. Y's benefit is $6,000 per year. With 15 years of service, Y's benefit of $12,000 ($30,000 x .4 = $12,000) was reduced by 50 % (1/30 x 15 years = 50%

Which of the following statements is (are) true regarding Archer Medical Savings Accounts (MSA)?

- If a worker changes employers, the MSA is portable. In an Archer Medical Savings Account, or MSA, both employees and employers can contribute up to 75% of the annual deductible of a high-deductible health plan. Contributions must be made by April 15th of the following year, and any excess contributions are subject to a 6% excise tax. If a worker changes employers, the MSA is portable.

Jasper and Jill Dill have AGI of $159,500. Jasper has a Keogh plan at his work place, but Jill's employer does not have a plan. Which of the following statements concerning their contributions to IRAs and Roth IRAs is correct?

- Jasper can contribute $200 to a Roth IRA and Jill can deduct $200 to an IRA. Since Jasper has an employer plan and their AGI is over $85,000, he cannot make a deductible contribution to an IRA. Jasper can contribute to a Roth IRA, because his AGI is below $160,000. Since the amount Jasper is allowed to contribute is below the minimum, he can make the minimum contribution of $200. Jill can contribute to a deductible IRA because she is not an active participant in an employer plan and their AGI is below $160,000. The minimum deductible contribution is $200.

Which of the following statements concerning lump-sum distributions to participants in a Keogh plan is correct?

- Lump-sum tax treatment is available for owner/employees if death or disability occurs at any age. Lump-sum tax treatment is available to a regular employee if termination of employment occurs at any age. A self-employed person can qualify for lump-sum tax treatment if termination occurs after age 59½. The person does not have to wait until age 70½. Regular employees are eligible for lump-sum tax treatment whenever termination of employment occurs.

In the event Bill dies during the current year, Mary will be able to collect which of the following Social Security benefits?

- Mary can collect Social Security benefits as the surviving spouse as long as she has a child under the age of 16 living at home.

George Hershel died of a heart attack at age 58, leaving his wife Mildred, age 45, with three children under age 18. George's PIA is $1,200 and the family maximum is $2,160. What benefits are Mildred and the children entitled to receive?

- Mildred will receive $540 and each of the children will receive $540. Mildred and each of the children are entitled to receive 75% of the PIA of $1,200 which is $900. Since the total of these four benefits will exceed the family maximum, the benefits must be reduced proportionately. Mildred and each of the children will receive a fourth of $2,160 or $540.

Gorgonzola, Inc. offers a retirement plan to its employees. The company is required to contribute an amount equal to 7% of each eligible employee's compensation to the plan each year. The plan allows for the investment of up to 10% of Gorgonzola stock to be held in the plan. What type of qualified plan, most likely, is the Gorgonzola, Inc. plan?

- Money Purchase Plan The plan is most likely a Money Purchase plan. The annual contribution is set at 7% for all employees and is required.

A qualified retirement plan is considered top-heavy if the key employees receive which of the following percentages of either the cumulative accrued benefits or aggregate account balances?

- More than 60% A plan is top-heavy when more than 60% of the assets are attributable to key employees.

In two years, Mary will distribute $20,000 from her Roth IRA to expand her business. How will the distribution be treated?

- No amount is includible in taxable income; however, the full amount is subject to a 10% penalty. The withdrawals of converted money within five years will not be taxable but will be subject to the 10% penalty

Which of the following statements concerning loan provisions in qualified retirement plans is correct?

- No loan can exceed a $50,000 maximum. The maximum permitted amount of any loan is the lesser of $50,000 or one-half of the employee's accrued benefit, regardless of the employee's vested right to benefits or the amount of the employee's vested account balance. If the provisions of the plan agreement permit employee borrowing, the employee may borrow at any time authorized by the plan provisions. Usually, loans are not permitted until after at least two years of plan participation. The term of most loans is limited to five years, not three. A reasonable rate of interest must be charged. Some plans have a minimum loan amount of $10,000.

Patrice has Incentive Stock Options from her current employer set at $42. They were granted to her four years ago. She can purchase 750 shares of her employer stock. Noticing that the current stock price is $69 per share, Patrice exercises her options. What is the tax impact of this decision?

- No tax but possible AMT At exercise, ISO's are not taxable but may trigger AMT.

The government has proscribed which of the following requirements for SIMPLE plans?

- Only employers with 100 or fewer employees are eligible for a SIMPLE. A SIMPLE requires full vesting immediately. Employers desiring to establish a SIMPLE are forbidden to have any qualified plan.

Which of the following statements concerning premiums paid by individuals for long-term care insurance is correct?

- Only limited amounts of long-term care premiums may be included as medical expenses. Limited amounts of premiums paid may be included in medical expenses. But only total medical expenses in excess of the 7.5% threshold are deductible. There are limits on the amount of long-term care premiums that are deductible.

Which one of the following statements concerning COBRA is correct?

- Otherwise available conversion rights must be guaranteed when the maximum period for continuation coverage terminates. An employer's plan is exempt from COBRA provisions only if the employer averages fewer than 20 employees. Continuation coverage must be available to full-time employees shifting to part-time status, as well as to terminating employees. The government imposes a noncompliance fine of $100 per day per participant, not a $10 fine.

All of the following people are eligible for Medicare EXCEPT:

- Paula, who retired from General Electric last year at age 63 The correct answer is C, Paula is too young to collect. She must be age 65. Frank and Deidre are both 65 and therefore eligible. Maya is eligible as she has been disabled for more than 24 months. Lauren is not eligible for Medicare until age 65. Pat became eligible at age 65.

Which of the following statements regarding Phantom Stock Plans for a closely held corporation is correct?

- Repeatedly valuing the stock may be expensive to the company. A closely held corporation will have to periodically pay an outside firm to value the stock. This can be expensive. Executives don't' invest their own cash in the plan, only corporate money is used. Since the company can pay out benefits in cash instead of stock, no dilution usually occurs. As a "phantom" plan, the company never has to actually go out and buy the stock.

Jason Hewlett wanted to set up a special trust that would allow him to avoid income taxes on some of his property. The trust was constructed in such a way to to shelter any taxation produced. Jason wanted to be absolutely sure that what he was doing would pass muster with the IRS. Which of the following procedures would be most reasonable for Jason to try?

- Request a Private Letter Ruling. Jason can request a Private Letter Ruling which will rule authoritatively on his trust but the PLR will only apply specifically to him.

Louise left her job at Gillette after 17 years of service. She is 57 and has a trust fund that can provide her with income. When she terminated, her 401(k) had a balance of $229,000. Without checking with you, she closed out her 401(k), requesting a full payout of cash directly to her. When the check came, she used it as seed money for a new Dunkin Donuts franchise that she is buying. It has now dawned on her that perhaps she should have talked to you first. What are the implications of her actions next April when she must file her taxes? (Ignore state taxes)

- She will most likely owe Federal Income Tax. She will most likely owe Federal Income Tax but no Penalty will be assessed as she left service with her employer at age 55 or older. The mandatory 20% was withheld when the money came out of her 401(k) but she will most likely owe more tax than that.

Althea has not paid her income taxes for the past five years. In fact, she hasn't even filed a tax return for those years. She has asked you what penalty the IRS will assess. Which of the following penalties will apply to Althea?

- She will owe 5% of the underpayment per month, up to a maximum of 25%. The penalty for failing to file is 5% of the underpayment per month up to 25%.

Denise receives 1,200 Non-Qualified Stock Options exercisable at $5 each, from Millicanent Corp. They vest after three years. Five years later, she exercises 500 of the options at $12 per share. What is the impact of this transaction?

- She will owe ordinary income tax and FICA on $3,500. At exercise, ordinary income tax and FICA wil be incurred on the bargain element, in this case $7 per share times 500 shares equals $3,500.

Mario has begun thinking about retirement. He and his wife live comfortably on their current income of $75,000 per year. Mario has suggested that his retirement plan should be based on maintaining his current lifestyle and therefore feels that you should plan his retirement calculations based on $75,000 per year of income (adjusted for inflation as time goes on). Which of the following suggestions would be your best response to Mario's suggestion?

- Show Mario that certain current expenses will not exist in retirement and that a lower income number may provide the same equivalent income at retirement. Mario needs to understand he will not be saving for retirement, paying FICA from income, and perhaps not paying on his mortgage during retirement. All of these lead to a lower income figure at retirement than his current gross figure. A specific percentage is not appropriate as he is too close to retirement to rely on a "rule of thumb" measure. A budget projection would be more useful.

All the following are among the three types of changes in an employee's or dependent's status that are considered to be qualifying events under COBRA EXCEPT:

- Spouse's loss of coverage because of the spouse's eligibility for Medicare

Which of the following statements concerning Qualified Retirement Plans is correct?

- Subject to certain requirements, a lump-sum distribution prior to age 59½ will be taxed on an unfavorable basis for the employee. Withdrawals made prior to age 59 1/2 are subject to an excise tax of 10% in addition to taxation as ordinary income unless the withdrawal is made for one of a number of exceptions. Investment income in a qualified plan is not taxed to the trust or to the employer. The penalty for excess contributions by an employer is 10%, not 15%.

Mary also mentioned she might be interested in establishing a Keogh plan for her dried flower business. Which of the following statements concerning Keogh plans is NOT correct?

- The Keogh plan may only be a defined contribution plan.

If ALCO were to establish a defined benefit pension plan using a basic unit benefit formula, which one of the following statements would NOT be correct?

- The formula will tend to favor key persons, regardless of the number of their years of service. The unit benefit formula rewards employees with long years of service at older ages.

If ALCO were to establish a defined benefit pension plan using a flat amount benefit formula, which one of the following statements concerning such a benefit formula would NOT be correct?

- The formula would work well if the objective is to provide higher benefits for employees with long periods of service. Long service doesn't figure into a flat benefit formula.

Which of the following statements concerning Simplified Employee Pension (SEP) plans is correct?

- The limit on employer contributions is 25% of the covered compensation. The limit on the exclusion for the employer is 25%. A participating employee may make both deductible and non-deductible contributions to the SEP when the employee treats the SEP as an IRA. There are no forfeitures in a SEP. All participants are 100% vested immediately.

Which one of the following would indicate that a group term life insurance plan is discriminatory?

- The plan is beneficial to 65% of the firm's employees. To be nondiscriminatory, a plan must be beneficial to a minimum of 70% of the firm's employees. Therefore, the plan is discriminatory, because the plan is only beneficial for 65% of the firm's employees.

Which of the following statements about Incentive Stock Options is correct?

- There is an effective limit of $100,000 on the amount of ISO's that can be granted in one year. Any more than $100,000 of ISO granted in a year to a single employee will be treated as NQSO's. The company receives no deduction at the grant of an ISO. The maximum term for an ISO is ten years. At exercise, no capital gain or income taxation occurs, however the exercise may be a preference item for AMT purposes.

All the following statements concerning Keogh (HR 10) plans are correct EXCEPT:

- They can be money-purchase plans, but not profit-sharing plans. Keogh plans can be either money-purchase or profit-sharing plans.

Which of the following statements concerning cafeteria employee benefit plans is correct?

- Under a cafeteria plan, a family can write its own benefit plan by selecting among options available. Cafeteria plans are suited for groups where employee benefit needs are NOT homogeneous. The law requires the employer to offer at least one cash benefit. The law also requires that the plan not discriminate in favor of highly compensated employees.

If a participant in a qualified plan dies before retirement, and annuity or installment payments are to be made to a designated nonspouse beneficiary, when must benefit payments begin?

- Within one year after the year of death A non-spouse beneficiary must withdraw all assets no later than five years after death. They may instead elect to withdraw the assets over their lifetime, but must elect to begin that strategy no later than December 31 of the year following the year after death

Distribution from an IRA must begin

- on or before April 1 of the year following the year in which the owner attains age 70½. Distributions from an IRA must begin on or before April 1 of the year following the year in which the owner attains age 70½.

Revenue Ruling 60-31 states that a non-qualified deferred compensation arrangement does not provide an economic benefit to a participant if:

- the plan only provides a promise of benefits. Revenue Ruling 60-31 provides that if the participant only receives a "mere promise", then no tax liablity wil be incurred.

Which of the following statements concerning deductible IRA contributions for those under age 50 is correct?

-A married couple with both spouses working may each contribute the maximum permitted a single wage-earner. Each spouse may make a deductible contribution that is the lesser of $4,000 or 100% of his or her compensation. $4,000 is the maximum deductible contribution permitted for 2005 for those under age 50. $8,000 is the maximum deductible contribution permitted a married couple (assuming the working spouse earns at least $8,000). Being a participant in a defined benefit does not automatically eliminate a deduction, it merely makes AGI a factor. Any withdrawals must be partly deductible and partly nondeductible, if nondeductible contributions have been made. In other words, some of each withdrawal will have some taxable amount included.

All the following statements concerning group-term life insurance are correct EXCEPT:

-It must benefit at least 55% of all employees. For additional information about this question please refer to the Employee Benefit Plans module and its associated reading assignments.

For 2012, the maximum benefit that a participant can realize by a Defined Benefit Plan is:

100% of compensation or $200,000 The correct answer is 100% of compensation or $200,000. The other limits apply to Defined Contribution Plans, Elective Deferrals, highly paid compensation level and maximum compensation amount, in that order.

Quagmire Construction maintains a Profit Sharing Plan. They plan on making a contribution of 6% for this year. Nelson will earn $183,000 this year as Quagmire's top sales executive. If the Quagmire plan is integrated with social security, what percentage of pay will Nelson be paid on income above the integration level (assuming the integration level is the social security wage base?

11.7%. He receives an additional 5.7% on income above the social security wage base.

An elderly businessowner who wants to maximize retirement benefits for himself or herself from a newly-installed retirement plan should select which of the following?

A defined-benefit plan

Mason participates in his company's flexible spending plan. Which of the following statements regarding the FSA is INCORRECT?

Employers can elect to allow participants a 4 month grace period to avoid forfeiture.

What is the single most distinctive characteristic of nonqualified deferred compensation plans?

Employers may discriminate with regards to coverage and benefits.

If the Adrian Loomis Company established a defined benefit pension plan in 2011, which one of the following statements concerning the maximum annual retirement benefits permitted the employees under the law in force in 2012 would NOT be correct?

For a person age 55 retiring in 2012, the maximum annual benefit would be $90,000 annually.

Which one of the following statements concerning the use of a funding standard account for a defined benefit pension plan the Adrian Loomis Company might establish would NOT be correct?

If there is under-funding, benefits will be reduced pro rata.

The date is 1/1/2006 and 58-year-old Jim is considering early retirement. He first contributed to his ROTH IRA in 2001. What can you advise him about the tax consequences of withdrawals from this account?

Jim can withdraw the entire amount of his contributions without any taxation or penalty, however the withdrawal of any gains will be subject to taxation and a 10% penalty.

Which of the following statements correctly describes IRS regulations that the Gordons would be required to follow in contributing to an IRA for this year?

Since Maxine is a participant in her employers TSA, and the Gordons have an adjusted gross income over $183,000, neither Paul nor Maxine would be permitted an annual deductible IRA contribution.

Which of the following represents the highest level of authority?

Statutory Law

Alicia teaches at the Middlebury Middle School and contributes to a 403(b) Roth plan. She is 26 years old. If she continues to contribute to this plan, she will able to do which of the following?

Take a tax-free withdrawal after she retires at age 62

Which one of the following statements is not correct concerning actuarial assumptions for calculating Adrian Loomis Company contributions to a defined benefit pension plan?

The higher the employee termination rate, the larger should be the corporation's assumed contribution rate.

Which of the following is not a benefit for an employer to use nonqualified pension plans?

The plan itself is a tax-exempt fund.

Which of the following is considered to be the LEAST important business objective in retirement planning?

To facilitate promotion of employees

Kenneth has determined that he will need to accumulate a total of $1,250,000 by the beginning of his retirement in 18 years. Currently, between his employer plans and IRA accounts, he has a total of $356,923 saved. He assumes that his invested retirement assets can grow at an average annual rate of 8% and that inflation will average 4% per year. How much additional money must Kenneth save at the end of each year from now until his retirement begins in order to achieve his goal?

$0 The correct answer is zero. The current value of saved assets of $356,923 will grow to $1,426,271 which is more than he needs.

Jim, age 42, files a federal income tax return for 2005 as a single person. His adjusted gross income is $105,000 and he does not have a retirement plan available at work. How much can he contribute to his Roth IRA for this tax year?

$1,334