Retirement Planning CFP

Which of the following statements regarding plan requirements for SIMPLE IRAs is(are) CORRECT? To establish a SIMPLE IRA, a business generally cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation). Assets in SIMPLE IRAs can be invested in life insurance.

1

Which of the following statements regarding the incidental death benefit test for life insurance inclusion in a qualified plan is(are) CORRECT? For defined contribution plans, no more than 25% of the retirement plan's assets may be in the form of universal life insurance. For defined benefit pension plans, the life insurance death benefit cannot exceed 100 times the expected monthly benefit for an employee. A)

2, For defined contribution plans, no more than 25% of the employer contributions (not plan assets) can be used to purchase universal life or term insurance. No more than 50% of the employer contributions in a defined contribution plan can be used to purchase whole life insurance.

Which of the following questions must be answered when applying the top-heavy test? What percentage of employees are rank-and-file? Who is a key employee? Which employers will be treated as single employers for purposes of the top-heavy test?

2/3

Although traditional Section 401(k) plans are subject to the ADP and ACP tests, there are certain employer contribution methods that qualify as safe harbors and allow the employer to avoid this discrimination testing. Which of the following statements regarding safe harbor contributions is(are) CORRECT? Employers will meet the safe harbor provisions if they provide a nonelective contribution of at least 2% of covered compensation for all eligible employees. Employers can choose to match dollar-for-dollar for deferrals up to 2% and 50% for deferrals ranging from 2% to 4%. Employers may qualify for the safe harbor provisions by providing a dollar-for-dollar match on any amounts up to 3% and then a 50% match from 3-5%. A) 2 and 3. B) 1 only. C) 1 and 2. D) 3 only.

3. An employer may either make specified matching contributions or nonelective contributions to meet safe harbor provisions. Dollar-for-dollar matching contribution, up to 3% of compensation, and a 50% match on the next 2% of compensation; and A nonelective contribution of 3% of compensation. This nonelective contribution must be made for all eligible employees, regardless of participation. Employer contributions under both of these alternatives must be immediately 100% vested to the employee. There are different rules for plans with automatic enrollment provisions.

The incidental benefit rule provides that term life insurance in a defined benefit pension plan is generally limited to A) a face value equal to 100 times the monthly retirement benefit. B) a face value no greater than 100 times the annual employer contribution on behalf of the participant. C) a face value no greater than $305,000 (2022). D) a face value equal to the lesser of 100% of the participant's covered compensation, or $61,000 (2022).

A . The incidental benefit rule for term life insurance in a defined benefit pension plan relates to the death benefit or face value, and not to the amount of contribution on the participant's behalf. The maximum limit is 100 times the monthly retirement benefit. Therefore, if the participant's monthly retirement benefit is $1,200, the term life insurance death benefit cannot exceed $120,000 without any restriction on premium.

Michael was divorced after 12 years of marriage. He has 2 dependent children, ages 4 and 6, who are cared for by their mother. He was currently, but not fully, insured under Social Security at the time of his death. The benefits that his survivors are entitled to include: A lump sum death benefit of $255. A children's benefit. A divorced spouse's benefit. A parent's benefit for deceased workers' parents who are over the age of 62. A) 1 and 2. B) 1, 2, and 3. C) 1, 2, 3, and 4. D) 3 and 4.

A lump sum death benefit of $255 is payable to the surviving spouse or children of the deceased worker if he was fully or currently insured. The children's benefit is payable because Michael was either currently or fully insured. The mother of the children would be entitled to a benefit because she is caring for Michael's children who are under the age of 16. However, that is not called the "divorced spouse benefit." It is the "surviving spouse caring for a dependent child" benefit. The parents are not entitled because Michael was not fully insured. Statements 3 and 4 are benefits only available under fully insured status. A

Which of the following statements is CORRECT regarding a target benefit pension plan? A) The participant does not know ahead of time exactly the retirement benefit they will receive. B) Contributions to the plan are flexible. C) Forfeitures reallocated by the employer to participants are not considered in applying the annual additions limit. D) The employer bears the investment risk.

A participant in a target benefit plan will not know the amount of retirement benefit they will receive because benefits depend on the plan's investment returns. A target benefit pension plan is a defined contribution with individual participant accounts. Therefore the investment risk is borne by the participant and the account balance determines the final benefit. Pension plans require mandatory annual funding. Forfeitures reallocated to participants are included in the application of the annual additions limit. A

If nondeductible contributions have been made to an IRA, then distributions from the IRA A) would be tax free up to the amount of the nondeductible contributions. B) would be based upon first-in first-out to determine if any of the distribution would be taxable. C) The nondeductible portion of the IRA is treated as a Roth IRA. D) are only partially taxable.

A portion of these distributions is considered to be a nontaxable return of contribution. D

The XYZ Company has two employees: John, who earns $300,000 annually, and his assistant, Sally, age 26, who has worked for John for four years. Sally earns $40,000 annually. XYZ has a profit-sharing plan with Section 401(k) provisions using the longest allowed graded vesting. Sally's total account balance of $5,500 in the plan consists of the following: Employee contributions: $1,500 Employer contributions: $2,000 Earnings on employee contributions: $800 Earnings on employer contributions: $1,200 If Sally terminated employment with XYZ this year after four years of employment, what is her vested account balance? A) $4,860 B) $3,580 C) $4,220 D) $2,940

A profit-sharing plan is a type of defined contribution plan; therefore, the longest allowed graded vesting schedule is a 2-to-6-year graded vesting schedule. Sally is vested 60% in the employer's contributions and earnings plus 100% in her own contributions and earnings. The total vested account balance is $4,220 [(0.60 × $2,000) + (0.60 × $1,200) + $1,500 + $800 = $4,220]. C

Netcyber, Inc. is a 5-year-old C corp that has experienced dramatic growth during 3 of the past 5 years. There are currently 68 employees. The 2 owners, 28 and 31 years old, wish to establish a retirement plan. Which plan would probably be the best for them? A) Target benefit pension plan. B) Age-weighted profit-sharing plan. C) Money purchase pension plan. D) Profit-sharing plan.

A profit-sharing plan would be most appropriate as the owners could choose when to make contributions. Also, because the owners are young, they would have more time to receive contributions on their own behalf. A money purchase pension plan or target benefit pension plan would not be appropriate because this young company would not want to commit a large sum of money every year. The company probably would want the ability to reinvest the money in the firm if needed. The target benefit pension and age-weighted profit-sharing plans are also designed for older owner-employees.

The plan administrator: A) must comply with the reporting and disclosure requirements under Employee Retirement Income Security Act (ERISA). B) is not responsible for the Summary Plan Description (SPD). C) of a small company (50 employees or less) must file a detailed annual report (IRS Form 5500) each year. D) all of these.

A. A trustee or insurance company may take over a significant number of the plan administrator's duties; however, the plan administrator is still responsible for plan compliance with IRS and DOL regulations. Small plans may not be required to file Form 5500 each year.

Which of the following statements regarding stock bonus plans and employee stock ownership plans (ESOPs) are CORRECT? A) They create a market for employer stock. B) They always decrease corporate cash flows. C) ESOPs and stock bonus plans allow employees to defer all income taxes on distributed stock until the stock is sold. D) They are inexpensive to administer.

A. Both ESOPs and stock bonus plans give employees a stake in the company through stock ownership. Employees must pay income tax on the value of the stock contributed to the plan at the time of distribution. Gain on the stock prior to a lump sum distribution is net unrealized appreciation (NUA) and is not taxed until the employee-participant sells the stock. They may increase company cash flow because employers make cashless contributions to the retirement plan and create a market for employer stock. In addition, they both limit the 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 (put option) if their stock is not readily tradable on an established market.

Joe, age 46, has owned his company for 18 years and wishes to retire at age 70. All of Joe's employees are older than he is and have an average length of service with the company of eight years. Joe would like to adopt a qualified retirement plan that would favor him and reward employees who have rendered long service. Joe has selected a traditional defined benefit pension plan with a unit benefit formula. Which of the following statements regarding Joe's traditional defined benefit pension plan is(are) CORRECT? A) A traditional defined benefit pension plan will maximize Joe's benefits and reward long-term employees based on length of service. B) A unit benefit plan formula allows for higher levels of integration than other defined benefit pension plans. C) A unit benefit plan formula rewards older employees hired in their 50s or 60s more than most flat benefit plans would. D) Increased profitability would increase both Joe's and his employees' pension contributions.

A. Contributions to traditional defined benefit pension plans are not dependent on the profitability of a company. A unit benefit plan formula will not allow higher integration levels. A flat percentage formula favors workers with less longevity. For example, a flat benefit plan in which everyone with more than 10 years of service receives 50% of final salary would give a higher benefit to someone hired at age 54 who retires at 65 than a 1.5%/year unit benefit formula.

In a defined contribution plan that uses plan forfeitures to reduce future employer plan contributions, which of the following must be considered in complying with the maximum annual additions limit? Forfeitures that have been reallocated to plan participants Plan earnings After-tax employee contributions Pretax employee contributions A) 1, 3, and 4 B) 1, 2, and 3 C) 1, 2, and 4 D) 2 and 4

A. Plan forfeitures that reduce future employer plan contributions to the remaining plan participants accounts have to be considered in the maximum annual additions limit. Plan earnings are also not considered. Both pretax and after-tax employee contributions are included in the annual additions limit. For 2022, the annual additions limit is the lesser of 100% of the employee's compensation or $61,000.

Sue's father passed away at age 62 and named Sue, age 40, as beneficiary of his retirement plan. How rapidly must the account balance be fully distributed to Sue if she begins taking distributions as quickly as possible? A) The entire account must be distributed by December 31 of the 10th anniversary of her father's death. B) Within five years of the participant's death. C) Within 12 months of the participant's death. D) Over the participant's life expectancy.

A. Sue is not an eligible designated beneficiary. Therefore, the only RMD requirement for her is that the entire account must be distributed by December 31 of the year that includes the 10th anniversary of her father's death.

Mary is 32 years-old. She worked in high school resulting in her earning two credits. She didn't work while in college or graduate school. She was employed at a non-profit for three years after graduating. After two years of employment, she married Juan. A year later, she had a child and was a homemaker for the next five years. She reentered the workforce one year ago following a divorce. Which of the following are true concerning the Social Security program? She is fully insured. She is currently insured. Mary would receive Social Security disability benefits if she experienced a qualifying disabling event this year. Upon her death, her child would receive survivor benefits. A) 1 and 4 B) 2 and 3 C) 2 and 4 D) 1 and 3

A. The best way to process a scenario is working backwards in time. If the question says someone worked "a year" or "for 6 years," etc., assume they get four credits per year. She has 4 of the last 4 credits. Then she has none of the previous 20 credits. She has 12 of the next 12 credits and she has 2 of all previous credits. Thus, she has 18 total credits. She is fully insured. She needs 10 credits (32 - 22) and she has 18. She is not currently insured because she only has 4 of the most recent 13 credits, not 6 of the last 13. Mary is not currently eligible for disability benefits. Even though she is fully insured, she is age 31 and over with less than 20 of the most recent 40 credits. She has 16 of the 40 most recent credits. Her child would receive survivor benefits because she is fully insured.

Jonathan wants to use $10,000 from his traditional IRA as collateral for a business loan. All of his contributions to the IRA were deductible. As his financial planner, you advise him that: A) the $10,000 will be considered a taxable distribution, even though he does not remove it from the IRA. B) using the IRA as collateral for the loan is a permitted transaction and Jonathan will not incur a penalty. C) the $10,000 will not be a taxable distribution to Jonathan if it is only used as collateral. D) the transaction incurs no tax consequences but may incur a penalty.

A. Whenever any portion of an IRA is used as security or collateral for a loan, it is considered a taxable distribution, even though the money is not actually removed from the account.

Given the following information regarding the employees of D-Star Corporation, which of the following statements is(are) CORRECT? Assume the company elected to include only employees in the top 20% of compensation as highly compensated. EmployeeSalary, $Ownership of company, %Laura, CEO250,00045Michael, CFO145,00015Joshua, Vice President of Operations138,00014Sara136,0008Daren, Vice President of Recovery Services136,0004Lisa85,0003Hans30,0003Daniel25,0001Melissa25,0003Allison25,0002 There are more highly compensated employees than key employees. There are fewer than four key employees. Sara is a key employee. Joshua is a highly compensated employee (HCE). A) 3 and 4 B) 2 and 3 C) 1, 3 and 4 D) 1 and 2

A. Without the 20% election, five employees: Laura, Michael, Joshua, Sara, and Daren would be considered HCEs due to earning more than 135,000 (2022). Under the 20% election, however, only four employees: Laura, Michael, Joshua, and Sara are highly compensated. At first it seems like only Laura and Michael should be highly compensated. They are the top 20% of earners (2 out of 10). However, Joshua and Sara are still classified as highly compensated because they own more than 5% of the company. The top 20% election only applies to pay. It does not apply to ownership percentage. Joshua and Sara own more than 5% so they are still HCEs even if the 20% election is made. Darren, however, doesn't own more than 5% of the company so the top 20% election would result in him not being an HCE. There are also four key employees: Laura, Michael, Joshua, and Sara. A greater than 5% owner will always be considered both a key employee and an HCE, regardless of compensation.

George, age 48, an employee of RST Company, is participating in RST's money purchase pension plan. His spouse, Betty, age 45, has an IRA currently valued at $12,000. She opened her IRA several years ago with a nondeductible contribution of $2,000, which represents the only contribution she made to her IRA. All of the following statements regarding distributions from these plans are correct EXCEPT: A) Betty's IRA assets are not protected from creditors if she files bankruptcy. B) Any distribution Betty would receive from George's pension plan under a QDRO would not be subject to a 10% early withdrawal penalty. C) If Betty withdraws the entire balance from her IRA, she would have to pay an early distribution penalty of $1,000. D) The RST plan must meet ERISA's preretirement and joint and survivor annuity rules.

A.. IRA assets are afforded protection from creditors (up to $1,362,800 (4/1/2019 - 4/1/2022) inflation-indexed) in case of bankruptcy. Betty must pay a 10% early withdrawal penalty on the amount withdrawn in excess of her basis in the IRA ($12,000 − $2,000). All qualified pension plans must provide a participant's spouse with a preretirement survivor annuity and a joint and survivor annuity at retirement. Distributions made to an alternate payee pursuant to a QDRO are not subject to the 10% early withdrawal penalty.

Which of the following people would be eligible to receive some type of Social Security benefit? A) Susan, age 52. She has been disabled for ten years. Her husband Peter has died recently of a heart attack. Peter was 59 and has been working in the retail industry since he was 20 years old. B) Sandra is 64 and was married to Jerry for seven years when they were in their 20s. Sandra has not remarried. Jerry is 66. Sandra has lived with her parents since the divorce. She has 34 credits. C) John, the son of a fully insured worker who has passed away. John is 19 years old and finishing high school this year. D) Tina is 34. She has 20 credits, but she has not worked in six years because she has been staying home taking care of her children.Tina was in an accident and has lost the use of her arms and legs.

A.. Susan is a disabled widow who is 50 or older, and her husband was fully insured when he died. Thus, she will get survivor benefits worth 71.5% of Peter's PIA. John was eligible for survivor benefits past age 18 as long as he was still in high school. However, when he turned 19 his benefits stopped even though he was still in high school. Sandra would be old enough for spousal retirement benefits based on a spouse who was married to her for at least 10 years; however, her marriage lasted only seven years. Her 34 credits are not enough to qualify her for retirement benefits, but if she went back to work and earned the remaining six credits she would become eligible. Tina has plenty of credits to be fully insured. At 34 she would only need 12 credits (34 - 22). However, she is 31 or over so in addition to being fully insured she would also need 20 of the last 40 credits when she became disabled. Since she has not worked for compensation that pays into the Social Security system for the last six years, she does not have the last 24 credits. Thus, the most she could have would be 16 of the last 40 credits. That means she is not eligible for Social Security disability benefits (even though she is fully insured).

Which of the following statements regarding top-heavy plans are CORRECT? A) A qualified plan is considered top heavy if it provides more than 50% of its aggregate accrued benefits or account balances to key employees. B) An accelerated vesting schedule is used when a defined benefit plan is top heavy. C) For a top-heavy plan, a key employee is an employee who owns more than 3% of the employer. D) SIMPLE IRA and SIMPLE 401(k) plans are required to comply with top-heavy plan requirements.

An accelerated vesting schedule is used when a defined benefit plan is top heavy. A qualified plan is considered top heavy if it provides more than 60% of its aggregate accrued benefits or account balances to key employees. SIMPLE IRA and SIMPLE 401(k) plans are exempt from top-heavy plan requirements. A key employee is an employee who at any time during the plan year is more than a 5% owner. B

age-weighted profit-sharing plan

An age-weighted profit-sharing plan is a qualified plan that would offer maximum benefits for the shareholders, who are older. An age-weighted profit-sharing plan would also offer flexible contributions and low administrative costs. A defined benefit pension plan would not have contribution flexibility or low administrative costs. Although a profit-sharing plan would offer contribution flexibility and low administrative costs, it would not allow maximum benefits for the principals. A SEP is not a qualified plan.

During your 2021 annual review with Tess, who turns 72 next year in October, you bring up the looming issue of RMDs starting next year. She has plenty of income without the RMDs coming from her Social Security and she continues to work for a friend's business. She plans to work there for another five years or so. Even though she has $400,000 in IRAs invested with you ($75,000 in a Roth IRA and $325,000 in a traditional IRA which she funded solely with a transfer from a previous employer's SIMPLE IRA) and she has another $150,000 in her Section 401(k) at work, she is worried about outliving her income and would like to decrease her RMDs. Which of these strategies might decrease her future RMDs? A) Roll her traditional IRA into her retirement plan at work before December 31 of this year. B) Convert some of her Section 401(k) at work into a Roth 401(k) account. C) Roll her retirement plan at work into her IRA. D) Allocate $135,000 in 2022 from her IRAs into a qualified longevity annuity contract (QLAC).

As long as Tess is working at the end of the year and she does not own more than 5% of the employer, she can delay RMDs from the employer retirement plan past 72. Her traditional IRA is subject to the RMD rules. Converting employer retirement plan money into Roth employer money would not change the RMD rules for money in the employer plan. Roth 401(k) money inside the 401(k) is subject to RMDs like any other employer retirement plan money. In her case, Tess will not be subject to RMDs from her employer retirement account as long as she is still working. Qualified Longevity Annuities are limited to the lesser of $135,000 or 25% of the account. Thus, Tess, can choose to move up to $81,250 (25% of her overall traditional IRA balance) from her IRA to a qualified longevity annuity and decrease her RMDs, but not $135,000 A

Mickey owns a manufacturing company with 60 employees. He would like to implement a retirement plan that is easy to administer and permits both employee and employer contributions. What type of plan would you recommend? A) DB(k) plan. B) SIMPLE IRA. C) SEP plan. D) Section 401(k) plan.

B. A SIMPLE IRA would be easy to administer and would allow contributions by both the employer and employee. The other choices would not be appropriate: A DB(k) would not be easy to administer because it is a qualified plan requiring administration for both the defined benefit element and the Section 401(k) element. A Section 401(k) plan must meet ERISA requirements, such as ADP testing. Therefore, the plan would not be easy to administer. A SEP plan does not permit employee contributions.

A nonqualified plan is considered funded: A) if a reserve is set up to pay a nonqualified benefit, but the assets are retained by the corporation and are subject to creditor's claims. B) when a firm contributes specific assets to an escrow account in which the employee has a current beneficial interest. C) if it is available to the company's creditors. D) if it is a rabbi trust.

B. A reserve set up to pay a nonqualified benefit where the assets are retained by the corporation and subject to creditor's claims is informally funded, which means that it is unfunded for income tax and Employee Retirement Income Security Act (ERISA) purposes. A rabbi trust and a plan that is available to the company's creditors refer to features of nonqualified informal or unfunded plans.

What is the minimum number of employees that must be covered in a defined benefit pension plan to conform to ERISA requirements for a company having 200 eligible employees? A) 40. B) 50. C) 140. D) 200.

B. According to the 50/40 rule, defined benefit pension plans must cover the lesser of 50 employees or 40% of all eligible employees.

John, age 65, terminated his employment with ABC Manufacturing, Inc. As a result, he received a lump-sum distribution from the company's employee stock ownership plan (ESOP) in the form of 2,500 shares of ABC stock. He elected NUA treatment. The market value at the time of distribution was $125,000. The cost basis of the stock when contributed to the plan on John's behalf was $100,000. Two years later, John sold the stock for $150,000. What is the amount of long-term capital gain on which John will be taxed because of the sale? A) $10,000. B) $50,000. C) $25,000. D) $28,000.

B. At the time of the lump-sum distribution, John had ordinary income of $100,000 from the distribution, which becomes his basis in the stock. He has $25,000 of NUA at the time of the distribution, which is taxed as LTCG upon the sale. He has an additional $25,000 gain from the time of the lump-sum distribution to the time of the sale. This gain is also LTCG because he held the stock 2 years from the time of the lump-sum distribution. His total LTCG is $50,000.

David began receiving Social Security benefits in June 2022. He later learned that he should have delayed receipt of his benefits until a later age. He has until _______ to pay back all payments and refile for increase benefits at a future date. A) December 2023 B) June 2023 C) December 2022 D) There is no "redo" option.

B. Claimants have 12 months from the date they filed their original claim to pay back all payments, and they can then refile for increased benefits at a later date. This strategy (repaying all benefits within 12 months of filing) can be employed to increase benefits at any age. There is another strategy that can only be used after attaining FRA: "suspending" benefits. For example, Anita, who is single, started receiving her benefits three years early. Her PIA is $2,000/month. Starting three years early meant a 20% reduction, so her actual benefit is $1,600/month. She will reach her FRA of 67 next month. She has recently taken a new job and does not need her Social Security income. She would like to increase her monthly Social Security benefits down the road when she eventually retires from her new job. She has taken Social Security benefits for more than 12 months so she cannot pay back the benefits received and reset her claiming age. However, if she suspends her benefit starting at her FRA of age 67, she can earn delayed retirement credits. Delayed retirement credits increase PIA by 8/12ths of a percent per month until age 70. If she suspended her Social Security until she was 70, she would earn a delayed credit of 24% of her PIA. Assuming her PIA stayed at $2,000/month, a 24% increase would mean an additional benefit of $480/month. This would be added to her $1,600/month and her final benefit at age 70 would be $2,080/month. Note: If her working from 67 to 70 or older meant she made enough to replace some of her 35 highest inflation-adjusted years of working, then her PIA would also increase due to her higher earnings history.

To qualify for Social Security disability benefits, which of the following definitions of disability must be met? A) The inability to perform the complete duties of the occupation engaged in before the disability. B) The inability to engage in any substantial gainful activity by reason of disability expected to last at least 12 months or result in death. C) The inability to perform substantially all duties required of the prior occupation, and the inability is caused by a disability expected to last 12 months or result in death. D) The inability to engage in any occupation for which one is reasonably suited by training, education, or experience.

B. Disability is defined for Social Security as the inability to perform any substantial gainful activity and the disability is expected to last at least 12 months or result in death.

Which of the following qualified plan distributions is subject to the 10% penalty for early withdrawal? A) A lump-sum benefit payable to a disabled employee-participant age 57. B) An in-service hardship distribution from a Section 401(k) plan to an employee-participant age 55. C) A lump-sum distribution made to an employee-participant age 63 from a profit-sharing plan after the funds have been in the plan for two years. D) A death benefit payable to a beneficiary upon the death of an employee age 52.

B. Even if the distribution is a hardship withdrawal, the penalty applies unless the employee-participant has attained the age of 59½ (or one of the other 10% penalty exceptions applies).

Tony, age 65, is a nonowner employee of Widget, Inc. He wants to defer his retirement from Widget, Inc., until age 75 and continue to work. Tony contributes 6% of his pay to the Section 401(k) plan, and his employer matches 100%. Which of the following statements regarding Tony's distribution options is CORRECT? A) Tony will be subject to a 10% early withdrawal penalty on distributions received from his Section 401(k) plan. B) Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he retires if he does retire after age 72. C) Tony cannot contribute to his Section 401(k) plan after age 72. D) Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he attains age 72.

B. Generally, an individual must receive his first minimum distribution by April 1 following the year the individual attains age 72. However, if the individual remains employed beyond age 72, he may defer minimum distributions until April 1 of the year following the year of retirement. This exception to the general rule only applies to the employer's qualified plan (not IRAs). Therefore, the other choices are incorrect. Also, this exception is not available if the individual is a greater-than-5% owner of the company sponsoring the retirement plan.

Sally Jones is 68 this year. She has been a widow for five years. She is receiving a pension of $60,000/year for life. She earned $40,000 working part-time this year. She also made $2,000 this year in muni bond interest and took a qualified distribution from her Roth IRA of $20,000. Her Social Security retirement benefits for this year are $30,000. Which of the following is correct? A) Her Social Security retirement benefit was set when she started receiving the benefits. Her earnings for this year cannot change her Social Security benefits in the future. B) She will be income taxed on up to 85% of her Social Security benefits. C) Her earned income will reduce her Social Security benefits for this year. D) The qualified withdrawal from her Roth IRA may mean more of her Social Security benefits will be subject to income taxes.

B. She will be income taxed on up to 85% of her Social Security benefits. Her provisional income is $117,000 ($60,000 from the pension + $40,000 of earned income + $2,000 of muni bond interest + half of her Social Security benefits). This is well over the second threshold of $34,000 for a single person. At age 68 she is older than 67, which is the oldest age at which someone can reach their FRA. Thus, her earned income will not reduce her Social Security benefits. Next, qualified distributions from a Roth IRA are not counted into someone's provisional income, thus they cannot make more of anyone's Social Security benefits subject to income taxes. Finally, if the earnings for this year are among her highest 35 years of earnings subject to Social Security taxation, then her future Social Security benefits would increase. The increase is due to a higher number replacing the lowest of the 35 years formerly taken into account. This substitution will increase the AIME and therefore the PIA.

Which of the following statements describes a disadvantage of a target benefit pension plan, compared with a traditional defined benefit pension plan? A) For a given compensation level, a target benefit pension plan requires the same contribution for all employees regardless of age. B) Contributions to a target benefit pension plan are subject to the annual additions limit of the Internal Revenue Code. C) A target benefit pension plan will always have less stringent vesting requirements than does a traditional defined benefit pension plan. D) A target benefit pension plan must cover all eligible employees, whereas a traditional defined benefit pension plan can exclude certain nonhighly compensated employees.

B. Target benefit pension plans are defined contribution plans and are subject to the $61,000 (for 2022) annual additions limit per employee. Traditional defined benefit pension plans are not subject to this limit; employer contributions to traditional defined benefit pension plans can be much higher. Target benefit pension plans favor older participants. Employer contributions are weighted according a participant's age. Both target benefit pension plans and traditional defined benefit pension plans are qualified plans. Under ERISA, employers can exclude a certain percentage of nonhighly compensated employees from coverage under both the traditional defined benefit pension and target benefit pension plans. Target benefit pension plans are a type of defined contribution pension plan and must use one of the accelerated vesting schedules for employer contributions while traditional defined benefit pension plans that are not top heavy may use either 5-year cliff or 3-to-7-year graded vesting schedules.

Which of the following statements regarding integration rules are CORRECT? A) It is possible to offset the participant's entire plan benefit when offset integration is used. B) Permitted disparity is a method of integrating Social Security benefits and qualified plan benefits so that a permissively discriminatory benefit can be paid to the highly compensated workers in a qualified pension plan. C) The offset form of integration can be used in both a defined benefit pension plan and a defined contribution plan. D) The integration rules are designed to allow a qualified plan to discount the presence of Social Security retirements in the plan benefit formula.

B.. The integration rules are designed to allow a qualified plan to account for the presence of Social Security. The offset form of integration is limited to defined benefit pension plans only. The Internal Revenue Code (IRC) provides various rules specifying what maximum integration a plan can use, as well as the associated percentage spreads.

Distributions from a Roth IRA are qualified distributions if the 5-year holding period has been met and: the distributions are due to the owner's death or disability. the distributions are used for buying, building or rebuilding a first time home (up to $10,000 lifetime maximum). the owner has attained the age of 59½. the distributions are used for college tuition costs. A) 2 and 3. B) 1 and 4. C) 1, 2, and 3. D) 1, 2, 3, and 4.

C Only statement 4 is incorrect. A qualified distribution from a Roth IRA is a distribution after the 5-year holding period has been met and the distribution satisfies one of the following four requirements: attainment of the age of 59½, death, disability or first-time home purchase up to $10,000. College tuition is not a qualified special purpose distribution. However, it is an exception for the 10% early withdrawal penalty. Thus, with a Roth distribution for college costs only the earnings would be subject to income tax after all contribution and conversion amounts were withdrawn.

Which of these statements regarding SEP employee coverage and contribution requirements are CORRECT? Contributions must be made for all employees who have attained age 21, assuming all other applicable requirements have been met. Contributions must be made for all employees who received a minimum of $650 of compensation for the year, assuming all other applicable requirements have been met. All employer contributions to a SEP are immediately 100% vested to the participants. The plan can exclude employees who are members of collective bargaining units if retirement benefits have been the subject of good faith bargaining. A) 1, 2, and 3 B) 2 and 4 C) 1, 2, 3, and 4 D) 3 and 4

C.

Bill's employer maintains a target benefit pension plan. Bill is age 59. The plan was originally designed to benefit a 38-year-old key employee. There is also substantial turnover at Bill's company. Which of the following statements is CORRECT? A) Bill knows exactly what retirement benefit to expect. B) Bill's retirement benefit is funded through elective deferrals. C) Annual contributions to the plan are certain. D) Forfeitures are likely to be allocated equally to Bill and the 38-year-old employee.

C. Annual contributions to the plan are certain. Benefits depend on the plan's account balances. Forfeitures in a target benefit pension plan are likely to be unequal as a result of unequal compensation. Retirement benefits in a target benefit pension plan are funded by mandatory annual employer contributions.

Steve Jackson, age 52, is the owner of Glen Falls Plumbing Supply, Inc., which he has operated successfully for the past 12 years. Over the past six years, his profits have increased an average of 20% per year. Employee tenure averages three to four years. Steve would like to retire at age 65 and is considering establishing a qualified plan. Following is the employee census: EMPLOYEEAGESERVICECOMPENSATIONSteve5212 yrs.$75,000Daniel181 yr.12,000Mike222 yrs18,000John283 yrs.20,000Bill302 yrs.20,000Doug323 yrs.25,000 How would a money purchase pension plan benefit Steve? A) A money purchase pension plan would provide him with the largest possible retirement benefit. B) His contributions would be flexible each year. C) He would receive most of the plan's forfeitures. D) He would receive an equal percentage of the corporate contribution.

C. Because Steve's compensation is the highest, he would receive a larger corporate contribution than the other participants. Because the employee tenure averages only three to four years, and Steve will be there the longest, he will also benefit from the reallocation of forfeitures as employees terminate with unvested benefits. With a money purchase pension plan, his contributions would not be flexible. The contributions are a fixed percentage of compensation as defined in the plan document. A traditional defined benefit pension plan would provide Steve with a larger retirement benefit than a money purchase pension plan because he is older and has fewer years to fund his retirement.

In which of the following retirement plans can forfeitures be reallocated to participants to increase account balances of plan participants? A) Traditional defined benefit pension plans B) Cash balance pension plans C) ESOPs D) SIMPLE IRAs

C. Defined benefit pension plan forfeitures must be used to offset plan costs. Cash balance pension plan forfeitures must be used to offset plan costs. A cash balance pension plan is a type of defined benefit pension plan. ESOPs can use forfeitures to increase the account balances of remaining participants. An ESOP is a type of profit-sharing plan featuring ownership of employer stock. SIMPLE IRAs require 100% immediate vesting.

Alexander Enterprises, a professional service corporation with 20 accountants as employees, sponsors a traditional defined benefit pension plan with a 5-year cliff vesting schedule. At retirement, the plan provides 50% of participants' average earnings over their careers with the company. Over the last few years, the average age of a new employee participating in the plan has increased and investment returns have not been as high as expected. All of the following statements regarding Alexander Enterprises' defined benefit plan are correct EXCEPT: A) plan costs can be expected to rise. B) the plan is subject to ERISA requirements for qualified plans. C) the plan is subject to mandatory insurance coverage by the PBGC. D) an employee reaching normal retirement age after three years of participation in the plan will be fully vested.

C. If new participants are older and investment returns are lower than expected, additional funding must be made to account for earlier retirements and the shortfall of investment results. A defined benefit pension plan maintained by a professional service employer with 25 or fewer employees does not have to be covered by the PBGC. Professional individuals include accountants, attorneys, architects, engineers, and doctors. All defined benefit plans are subject to ERISA requirements (e.g., participation, funding, and vesting). Employer contributions are 100% vested at normal retirement age, regardless of the number of years the employee has participated in the plan.

In a Section 401(k) plan, which of the following must be considered in complying with the maximum annual additions limit? A) Dividends paid on life insurance held within the plan B) Catch-up contributions for an employee age 50 or older C) Qualified nonelective contributions D) Dividends paid on employer stock held in the Section 401(k) plan

C. Qualified nonelective and matching contributions, and employee after-tax and pre-tax contributions are all included in the annual additions limits. Neither dividends from stock or life insurance, nor catch up contributions are included.

Humphrey Dental Co. (HDC) sponsors a money purchase pension plan for its employees. Under the plan, the company makes annual contributions equal to 10% of each participant's salary. HDC is considering providing life insurance through its plan. Buddy, an employee earning $80,000 annually, is a participant in the plan. Which of the following statements regarding life insurance in the plan is(are) CORRECT? The death benefit cannot exceed 100 times Buddy's expected monthly benefit under the pension plan. No more than $2,000 of the employer's contribution can be used to purchase universal life insurance for Buddy. Buddy must include the pure protection cost of any life insurance in the plan as currently taxable income. The death benefit paid to a beneficiary from a life insurance policy funded within a qualified plan is subject to income tax. A) 1 and 2. B) 1, 3, and 4. C) 2 and 3. D) 1 only.

C. Statement 1 is incorrect. This 100-to-1 ratio test applies to defined benefit pension plans only. Statement 2 is correct. No more than 25% of the employer contribution of $8,000 can be used to purchase life insurance other than whole life insurance for Buddy. Statement 3 is correct. The cost that must be included in income is the lesser of the Table 2001 cost or the actual cost. Statement 4 is incorrect. The cash surrender value, less any costs included in income by the decedent during the decedent's lifetime, is subject to income tax.

Target benefit pension plans A) adjust the contribution formula annually. B) are defined benefit plans. C) require a fixed contribution formula. D) provide a guaranteed retirement benefit.

C. Target benefit pension plans have a fixed contribution formula that is based on an actuarial calculation and the participant's age at plan inception or plan entrance. The plan allows higher contributions for older participants. Although the plan is technically a defined contribution plan, its intention is to fund for a targeted benefit at retirement, based on the participant's age and number of years to retirement. The actual contributions may or may not achieve the targeted benefit, therefore, the retirement benefit is not guaranteed. The plan sponsor does not actuarially adjust the participant's contribution percentage annually.

Raul is a 50-year-old businessowner with one employee, who earns $18,000 per year. Raul earns $170,000 per year and is establishing a profit-sharing plan that uses an age-weighted feature. The age-weighting formula allocates $27,850 to Raul and $350 to the employee. Which of the following statements is CORRECT? A) A 3 to 7-year graded vesting schedule would be appropriate for this plan. B) The contribution for worker is $350 and it will be deductible. C) The contribution that must be made to the employee's account is $540. D) The plan cannot allow the employee to direct the investment of his share of the plan's assets. E) Raul can make a deductible contribution of up to $4,500 for his employee.

C.. The plan is top heavy, resulting in a minimum contribution to all nonkey employees of 3%. Therefore, the contribution that must be made to the employee's account is $540 (3% of $18,000). Top-heavy plans must use either a 3-year cliff or a 2- to 6-year vesting schedule. An employer can actually contribute more than $4,500 for employees as long as total contributions for all employees do not exceed 25% of aggregate covered compensation and the contributions do not violate the nondiscrimination rules. Either the employer (or plan trustee) can invest the plan's assets or employees can be allowed to choose from among several different investment options in which to invest their own account balance.

Which of the following statements regarding qualified retirement plans is(are) CORRECT? Money purchase pension plans, employee stock ownership plans (ESOPs), target benefit pension plans, and stock bonus plans are all examples of qualified retirement plans. SERPs and top-hat plans are two types of qualified plans. A) II only. B) Both I and II. C) Neither I nor II. D) I only.

D

Which of the following statements regarding permitted disparity rules as they relate to qualified retirement plans are CORRECT? A defined benefit pension plan using the permitted disparity rules may be an excess method plan. A defined benefit pension plan using the permitted disparity rules may be an offset method plan. A defined contribution plan using the permitted disparity rules may be an excess method plan. A defined contribution plan using the permitted disparity rules may be an offset method plan. A) 2, 3, and 4. B) 1, 2, 3, and 4. C) 1 and 4. D) 1, 2, and 3.

D. A defined contribution plan can satisfy the permitted disparity (integration) rules only if it uses an excess method plan integration formula. Therefore, statement 4 is incorrect. Defined contribution plans cannot use an offset method plan formula because they have no promised benefit formula. Defined benefit pension plans can use either an offset or an excess method plan formula for integration.

Stephen was told by his company's strategic management team that his role is extremely important to the company. They also mentioned that they are going to put together a nonqualified deferred compensation plan to reward him for his importance to the company's strategic goals. Stephen set up a meeting with his CFP® professional, Julie, to help him comprehend how a nonqualified deferred compensation plan will help him meet his retirement planning goals. Which of these statements is the least accurate and should not be used in Julie's communications with Stephen? A) A nonqualified deferred compensation plan is typically used when an employer wants to recruit, retain, reward, or retire an employee. B) A nonqualified plan can sometimes be referred to as the golden handcuffs that help bind the employee to the company. C) The company may choose to purchase a surety bond to help ensure that funds are available to fulfill their promise to the employee. D) A nonqualified deferred compensation plan does not meet the tax and labor law (ERISA) requirements applicable to qualified pension and profit-sharing plans.

D. An executive may consider purchasing a surety bond if there is concern about receiving the deferred compensation payment from the former employer. This bond ensures that the benefit will be paid if, for any reason, the employer is unable to make good on its promise. However, the executive must pay the premium for the bond without being reimbursed by the employer. The IRS has ruled, in that case, the purchase of the bond does not create a current vested right to the deferred compensation that would result in current income taxation.

Based on IRS regulations, the minimum distribution rules for IRAs and qualified retirement plans A) impose a 10% excise tax on the amount by which a distribution falls short of the minimum required distribution. B) require the participant to determine a beneficiary by the required minimum distribution beginning date. C) have a required beginning date of age 59½. D) make it easier to calculate the required minimum distribution amount based on the participant's life expectancy.

D. Based on IRS regulations, minimum distribution rules have been simplified by providing a uniform table that can be used by all participants (except when a spouse is more than 10 years younger) to determine the minimum distribution required during their lifetimes. This makes it easier to calculate the required minimum distribution (RMD) because participants would neither need to determine their beneficiary by the required minimum distribution beginning date, nor would they have to decide whether to recalculate their life expectancies each year. The excise tax is 50%, not 10%. The required beginning date is April 1 of the year following the year the person reaches age 72 (according to the SECURE Act) for IRAs and qualified plan participant owners of 5% or more of the company. The required beginning date for Section 403(b) plans, Section 457 plans, and qualified plans is April 1 of the year after the employee reaches age 72. It is advisable for the owner of an IRA or qualified plan account to name an individual as beneficiary, but there is no requirement such a beneficiary be determined prior to the owner attaining age 72.

Steve is age 75 and has withdrawn more than the required minimum distribution from his IRA over the last 4 years. Which of the following statements regarding minimum required distributions for the current year is CORRECT? A) Steve will be subject to the early withdrawal penalty. B) Steve can defer the current year minimum distribution until next year. C) Steve is not required to take a distribution this year. D) Steve must receive the minimum distribution for the current year by December 31.

D. Even though Steve has received more than the required minimum distributions over the last 4 years, he is still required to take a minimum distribution for the current year.

Michael is an employee of JJ Enterprises (JJE), where he earns $75,000. JJE sponsors a Section 401(k) plan with a 50% match for contributions up to 6% of salary. Michael always defers the maximum. In addition, JJE sponsors a cash balance plan that provides for a 3% contribution with a guaranteed return equal to 85% of the 5-year Treasury rate. Michael is also a Cajun chef who does catering on the weekends. He typically earns $20,000 from his catering business after his expenses. He is a rather frugal individual and wants to defer as much of his income from catering as possible. However, he does not want to have to worry about administrative issues because of his busy schedule. What retirement plan would you recommend? A) Target benefit plan. B) SIMPLE. C) Cash balance plan. D) SEP plan.

D. Focusing on his goals, he wants to save the most money from his catering business without many administrative responsibilities. A SIMPLE or SEP plan would be appropriate. Because he is already contributing maximum elective deferrals for the year into the JJE Section 401(k) plan, he would not be permitted to defer a portion of his salary into a SIMPLE. Therefore, a SEP plan is the best choice.

Hardship withdrawals are only allowed from Section 401(k) plans if specifically stated in the plan document and typically for expenses such as A) first time purchase of a second home. B) insurance premiums. C) vacation costs. D) college tuition costs.

D. Hardship withdrawals are typically allowed for medical expenses, college tuition and fees, to purchase a principal residence, burial expenses for spouse or dependents, and to prevent eviction from one's principal residence or foreclosure on the mortgage of such residence.

Assume an employer implements a SIMPLE IRA with a 3% employer-matching contribution. What is the effective includible compensation limit for employees younger than age 50 for a SIMPLE IRA for 2022? A) $61,000 B) $245,000 C) $305,000 D) $466,667

D. If an employer decides to elect the 3% matching contribution for a SIMPLE IRA, the includible compensation limit in 2022 is effectively $466,667, or $14,000 ÷ 0.03. For a SIMPLE 401(k), it is the same includible compensation amount ($305,000) in 2022 as for other qualified retirement plans. If a SIMPLE IRA has the 2% mandatory employer contribution, the 2% stops at $305,000 in 2022. Notice that the law is designed to encourage a higher total contribution. It allows the owner to get more of a contribution with a match than with a mandatory annual employer contribution. Many people would not contribute without the match, so their retirement savings rate would be 2%. The same people will often do the 3% worker contribution to get the match, so their effective savings rate becomes 6%—thus, allowing the owner to save a little bit more ends up tripling the retirement savings account for many workers.

A simplified employee pension (SEP) plan: Requires employer contributions on a nondiscriminatory basis. Can be integrated with Social Security. Participation cannot be denied on the basis of age to any employee 21 years of age or older. Imposes mandatory employer contributions. A) 1 and 2. B) 3 and 4. C) 1, 2, 3, and 4. D) 1, 2, and 3.

D. Only statement 4 is incorrect. A SEP plan is a retirement plan that uses an IRA as the receptacle for employer/employee contributions. The SEP plan is often a good choice for very small companies because of its low cost and ease of administration. All employer contributions to a SEP plan are discretionary.

A simplified employee pension (SEP) plan A) includes a loan provision. B) requires a specific employer contribution each year. C) allows employee contributions. D) must follow the rule regarding nondiscriminatory contributions.

D. SEP plans must follow nondiscrimination rules. Loans are not permissible from a SEP plan because it consists of IRAs and employee contributions are not allowed.

Which of the following statements regarding a simplified employee pension (SEP) plan is CORRECT? A) An employer can exclude part-time employees with less than 1,000 hours from participation in the SEP plan. B) Contributions to a SEP plan can be used to purchase universal life insurance within specified limits. C) Employees are eligible to participate if they have earned $5,000 in the two preceding calendar years and expected to earn at least $5,000 in the current year. D) The employer is not required to contribute each year to a SEP plan.

D. The employer is not required to contribute to the SEP plan each year. Contributions to a SEP plan are tax-deductible. An employee must be included in a SEP plan if the employee meets all of the following requirements: Age 21 Worked for the employer three out of the last five years (one hour of service counts as a year of service). $650 or more of compensation earned by the employee in the current year. Life insurance is not allowed in a SEP plan because the plan is an IRA.

A prospective client's objectives are to adopt a plan that only requires an employer contribution of a fixed percentage of employee compensation, is administratively convenient, is easily communicated to employees, and does not need to participate in PBGC. Which plan represents the best choice? A) Traditional defined benefit pension plan B) Cash balance pension plan C) A Section 401(k) plan with a matching employer contribution D) Money purchase pension plan

D.. A traditional defined benefit pension plan maximizes owner-key employee and older employee benefits, but its costs are unpredictable and high. The money purchase pension plan fulfills all the client's objectives. The cash balance plan benefits are guaranteed by PBGC, and making an annual contribution to guarantee a fixed return on the investments is required. The Section 401(k) plan has increased administrative costs and complexity.

If the actual deferral percentage (ADP) for nonhighly compensated employees is 9%, what is the maximum deferral percentage for highly compensated employees? A) 18.00% B) 11.00% C) 12.50% D) 11.25%

D.. For amounts higher than 8%, the allowable spread between NHCEs and HCEs is 1.25 (125%). So for this question, 9% × 1.25 = 11.25%. Besides the 1.25 times test, the other test is the 200% rule with a maximum difference of 2%. In this case, 200% is 18%, but the maximum difference of 2% brings this test down to 11%. Since 11.25% is higher, that test decides how much highly compensated employees could contribute.

Mincher Publications just implemented a safe harbor Section 401(k) plan. Which of the following may be avoided with a safe harbor Section 401(k) plan? ADP test. ACP test. Top-heavy rules. Coverage tests. A) 1, 2, and 4. B) 3 and 4. C) 1 and 2. D) 1, 2, and 3.

D.. Safe harbor Section 401(k) plans are not required to comply with ADP, ACP, or top-heavy rules. However, all plans must meet the general coverage nondiscrimination rules under Section 410(b).

Which of the following statements regarding a nonqualified Roth IRA distribution is NOT correct? A) Conversion amounts may avoid the 10% penalty for the conversion portion. B) A distribution that is made before the 5-year period may not be subject to the 10% penalty. C) Earnings will always incur a 10% penalty for that portion of the distribution. D) A distribution from an inherited Roth IRA could be subject to income tax.

Earnings are not always subject to the 10% penalty. Although the penalty would generally apply, there are exceptions under IRC Section 72(t) that may exclude the distribution from the penalty (such as proceeds used for qualified higher education costs or being older than 59½). C

Napoleon Enterprises sponsors a SIMPLE 401(k) for its employees. Under the plan, the company matches employee contributions up to 3% of compensation. Which of the following statements about Napoleon Enterprises' SIMPLE 401(k) is CORRECT? A) Napoleon Enterprises can match as little as 1% of compensation for 2 out of 5 years. B) Napoleon Enterprises' contributions must be vested using either a 3-year cliff or 2-to-6-year vesting schedule. C) Withdrawals made within 2 years of initial participation are subject to a 25% premature distribution penalty tax. D) Employees cannot make after-tax contributions to the plan.

Employee after-tax contributions are not allowed. All the other statements are incorrect: Unlike SIMPLE IRAs, employers that sponsor SIMPLE 401(k)s cannot reduce the matching percentage to below 3%. Employer contributions to a SIMPLE 401(k) are 100% vested. The 25% penalty applies only to SIMPLE IRAs. D

Which of the following could be classified as a highly compensated employee for 2022? Assume no special elections were made by the different employer sponsors for each of their their retirement plans. A) Anna, who earned $84,000 in the previous year, and is in the top 20% of paid employees B) Maria, who earned $70,000 in the previous year, and is in the top 20% of paid employees C) John, a 1% owner, who earned $125,000 in the previous year D) Bill, a 6% owner, who earned $28,000 in the previous year

For 2022, an HCE is anyone who is a greater than 5% owner or anyone who received in excess of $135,000 in compensation during the previous year (2021). Because the law includes a look-back provision, employees who earned more than $130,000 in 2021 are generally considered HCEs for 2022 plan year testing. D

In 2022, Benjamin, age 45, worked for both RST Company and XYZ Enterprises, which are not part of a controlled group. Both companies offer a profit-sharing plan. He earned $240,000 from RST Company and $250,000 from XYZ Enterprises in 2022. Forfeitures allocated to Benjamin under the XYZ Company plan were $5,000 for the year. What are the total additional employer contributions that can be made on behalf of Benjamin in 2022? A) $20,500 B) $117,000 C) $61,000 D) $122,000

For 2022, the maximum that RST can contribute for Benjamin is $61,000. XYZ can also contribute a maximum additional amount of $56,000 ($61,000 maximum − $5,000 forfeiture). Because the two companies are not part of a controlled group, each company can contribute the maximum annual additions limit. The total additional amount is $117,000. Benjamin, on the other hand, is limited to total retirement plan contributions of $20,500 of pre-tax or Roth elective deferrals with these two companies. If he would have contributed toward either retirement plan, it would have lowered the amount the employer could have contributed such that the total contribution for the employer was $61,000 in 2022. B

Max is a participant in the DG Co. traditional defined benefit pension plan. His salaries for the last 18 years are shown below. YearSalariesYearSalaries1−6$135,00013$240,0007$150,00014$225,0008$145,00015$200,0009$170,00016$210,00010$270,00017$230,00011$275,00018$240,00012$295,000 Which of these statements is correct? A)

In traditional defined benefit pension plans, employees obtain tax-deferred, not tax-free, retirement savings. Only the plan sponsor (employer) pays PBGC premiums. The maximum annual compensation that can be considered for the calculation in 2022 is $305,000. Employers that sponsor defined benefit plans are subject to recurring annual, mandatory funding, whether the company is profitable or not. C

Garces Products Wholesalers Inc., a C corporation, is considering the adoption of a qualified retirement plan. The company has experienced fluctuating cash flows in the recent past and the fluctuations are expected to continue. The average age of nonowner employees at Garces Products is 24, and the average number of years of service is 3, with the high being 4 and the low 1. Approximately 25% of the 12-person labor force turns over each year. The salaries of the two owners account for approximately two-thirds of covered compensation. Which is the most appropriate plan for Garces Products Wholesalers? A) Traditional defined benefit pension plan B) Profit-sharing plan C) Money purchase pension plan D) Target benefit pension plan

Irregular cash flows suggest a profit-sharing plan. All of the other plans listed have some mandatory contribution component.B

Dr. J. Carlton Fowler feels very confident in his ability to select investments for the defined benefit plan covering his small medical practice. He wants to open a margin account for the retirement plan and purchase securities on margin. He says this approach will help the plan make more money and thus decrease the annual contributions. What is your best response? A) This is illegal. A retirement plan is not allowed to purchase stock on margin. The retirement plan would have a prohibited transaction. B) The dividends and capital gains on these stocks would be considered unrelated business taxable income and subject the retirement plan itself to income tax on these inflows. This would also put Dr. Fowler and the other plan fiduciaries in a questionable position. C) Dr. Fowler could be charged by the IRS with self-dealing for trying to lower the contribution. D) Since he is the owner of the business, he gets to make the call without any immediate effects. If things go poorly, he will just have to make larger contributions later.

It is not illegal for a retirement plan to invest on margin, but it does subject the earnings to UBTI (Unrelated Business Taxable Income). A lawyer might want to know why it was best for the plan to be forced to pay income taxes on this UBTI. If a lawyer is involved, the initial investment probably is now known as a poor one. With hindsight, the investment might have a hard time being considered prudent in the first place by a jury. B

Pension Benefit Guaranty Corporation (PBGC) insurance premiums are required for which of the following plans? A) Money purchase pension plan. B) Profit-sharing plan. C) Target benefit pension plan. D) Defined benefit pension plan.

Money purchase pension plans, profit-sharing plans, and target benefit pension plans do not require PBGC insurance. Only defined benefit pension plans require the payment of PBGC insurance premiums. D

XYZ Inc., a for-profit company, has 80 employees this year and is expected to employ the same number next year. The company is considering the adoption of a retirement plan next year. The company's objectives are to use elective deferral contributions of employees and then contribute an appropriate employer match providing for immediate vesting. Which of the following plans would be appropriate for XYZ Inc.? A) SARSEP B) SIMPLE 401(k) C) Profit-sharing plan D) Section 403(b) plan

New SARSEPs can no longer be established. Section 403(b) plans are for not-for-profit organization under Section 501(c)(3), and XYZ, Inc. is a for-profit company. A SIMPLE 401(k) is appropriate for the company. A profit-sharing plan does not allow elective deferrals (without an attached 401[k]). B

Which of the following statements regarding taxes on Section 401(k) employee elective deferrals are CORRECT? Deferrals are subject to FICA. Deferrals are subject to FUTA. Deferrals are exempt from current income tax. Deferrals are subject to current income tax. A) 2, 3, and 4. B) 1, 2, and 3. C) 1, 2, and 4. D) 1 and 3.

Only statement 4 is incorrect. Employee elective deferrals are made with pretax dollars and are not subject to current income tax. They are, however, subject to FICA (Social Security) and FUTA (unemployment) taxes.

Your client has the following beliefs about the allocation of forfeitures of contributions to employees who leave the company. Which of the following statements is (are) correct? (CFP® Certification Examination, released 01/99) Departing plan participants are entitled to their entire account balances regardless of the vesting schedule in effect. Forfeitures could be allocated to plan participants in exactly the same manner as the employer's contributions. Unless specific steps were taken to the contrary, the allocation of forfeitures in this company's plan over time would tend to discriminate in favor of the relatively few longer-hired and more highly-paid employees. The company could use forfeitures to offset amounts it would otherwise contribute to employees' accounts. A) II, III and IV B) I and IV C) II only D) III and IV

Only statement I is incorrect. Vesting is critical to entitlement. Statement II is a permitted method of allocating forfeitures. Statement III is a typical outcome of these types of plans. Statement IV is also correct.

Higher income earners will have an income replacement ratio that is A) none of these. B) the same as low income earners. C) higher than low income earners. D) lower than low income earners.

Replacement rates, or the amount of one's paycheck that is replaced by Social Security, favor lower earners by replacing about 90% of their (very low) earnings. Higher earners will see only a 26% replacement. In other words, higher earners receive more dollars from Social Security, but lower earners receive higher replacement rates D

Abby, owner of ARD Co., would like to provide her employees with a simplified employee pension (SEP) plan. ARD Co. also sponsors a SERP for its executives. Which of the following statements is CORRECT? A) Contributions to the SERP reduce the amount that can be deducted for contributions to the SEP plan. B) Contributions to the SEP are not subject to FICA and FUTA. C) To implement a SEP plan, ARD Co. must be a C corporation. D) The SEP plan can limit coverage to all full-time employees who are at least 21 years of age.

SEP plans may be established by C corporations, S corporations, partnerships, and sole proprietorships. SEP plans must also cover all employees (including part-time) who are at least 21 years of age, who have worked for the employer during three out of the preceding five calendar years, and who have had compensation of at least $650 (for 2022). Direct employer contributions are not subject to FICA and FUTA and only the employer can contribute to a SEP. Contributions to a SERP, which is a nonqualified plan, are not taken into account when calculating maximum deductible SEP plan contributions. B

Napoleon Enterprises sponsors a SIMPLE 401(k) for its employees. Under the plan, the company matches employee contributions up to 3% of compensation. Which of the following statements is CORRECT? A) Because it is a SIMPLE, Napoleon Enterprises can match as little as 1% of compensation for two out of five years. B) A SIMPLE 401(k) is not subject to the ADP test. C) Napoleon Enterprises' contributions must be vested using an accelerated vesting schedule of either a 3-year cliff or 2- to 6-year graded schedule. D) Employees can make after-tax contributions to the plan.

SIMPLE 401(k)s are not subject to the actual deferral percentage (ADP) test. Employee after-tax contributions to a SIMPLE are not allowed. Unlike SIMPLE IRAs, employers that sponsor SIMPLE 401(k)s cannot reduce the matching percentage to below 3%. Employer contributions to a SIMPLE 401(k) are 100% vested when made by the employer. B

Albert, 52, is the sole proprietor of a consulting business that will have Schedule C net income of $80,000 this year. The business maintains a profit-sharing Keogh plan and Albert is the only plan participant. What is the maximum that can be contributed to the plan this year on Albert's behalf? The self-employment tax for Albert is $11, 304. A) $16,680 B) $14,870 C) $20,000 D) $23,500

Schedule C net income$ 80,000Less 7.65%(6,120)Self-employment income subject to self-employment taxes$ 73,880Times 15.3%Self-employment tax$ 11,304 One-half of the self-employment tax is deductible as an adjustment to income. In this example, the deductible portion is $5,652 ($11,304 ÷ 2). Determine the adjusted contribution percentage for the Albert, the business owner. Maximum percentage contribution for participants (employee %) .25Divided by (1 + employee %)1.25Equals adjusted contribution percentage for owner= .20 Schedule C net profit (business profit)$80,000Less income tax deduction allowed (1/2 self-employment tax)($5,652)Net earnings from self-employment$74,348Multiply by .20 =Owner's contribution$14,870 Note that $14,870 is 25% of $59,478 and $59,478 is the amount you get from taking the net earnings of $74,348 and subtracting $14,870. Thus, the IRS would argue that the self-employed owner is getting the same 25% contribution as the worker after all the accounting is factored in.

Frank received a lump-sum distribution of employer stock (10,000 shares) from his employer's qualified plan. He elected NUA treatment. The stock was valued at $1,000,000 at the time of distribution. The date-of-purchase value of the stock contributed to the trust over the years is $200,000. Which of these statements is(are) CORRECT? Frank's adjusted tax basis in the 10,000 shares is $200,000. $200,000 is considered return of basis and is not taxed upon distribution. $800,000 is treated as net unrealized appreciation and is not taxed upon distribution. If Frank sells shares of stock, he must report any amount received in excess of $20 per share as a capital gain. A) 1, 3 and 4. B) 3 only. C) 1 and 2. D) 1, 2 and 4.

Statement 1 is correct. Because $200,000 is treated as ordinary income at distribution, the adjusted taxable basis in the stock is $200,000. Statement 2 is incorrect. Frank has no basis in the stock at distribution. Statement 3 is correct. The excess of the stock's market value over the cost or basis of the securities to the trust (NUA) is not taxed upon distribution. NUA is taxed upon the disposition of the securities. Statement 4 is correct. When the stock is sold, the NUA (amount received for the stock over basis) is treated as a long-term capital gain. Any value upon sale in excess of $1,000,000 is treated as either long term or short term gain depending on the holding period since distribution.

Which of the following are subject to FICA and FUTA tax withholding? Thrift plan contributions. Section 401(k) elective deferral contributions by employees. Salary reduction SARSEP contributions by employees. Employer contributions to a SEP. A) 1, 2, and 3. B) 1 and 3. C) 2 and 3. D) 1 and 4.

Statement 4 is incorrect. Employer contributions to a SEP plan are not subject to FICA and FUTA taxes. All others are subject to FICA and FUTA taxes. New SARSEPs may no longer be established. All employee contributions to all employee benefit plans are subject to FICA and FUTA, except a flexible spending account. A

A worker's primary insurance amount (PIA) is the amount they receive from Social Security A) in their first year of retirement, regardless of age. B) at age 62. C) if he or she began payments at full retirement age. D) as a survivor benefit. Explanation

The PIA is the amount the worker would receive if he or she began payments at full retirement age.

Which of the following statements regarding a simplified employee pension (SEP) plan is CORRECT? A) Contributions made to a SEP plan by the employer can be used to purchase life insurance. B) Distributions used to fund college education costs for the participant's child are not subject to the 10% early withdrawal penalty. C) The plan can exclude all part-time employees working less than 1,000 hours per year. D) Distributions from a SEP plan will not be subject to the 10% early withdrawal penalty if the participant leaves the sponsoring company after attaining age 55.

The exception to the early withdrawal penalty for those who leave the employer after attaining age 55 applies only to qualified plans and Section 403(b) plans. A qualified plan can exclude employees working less than 1,000 hours. With a SEP plan, there is no minimum number of hours worked to accrue a year of service. Contributions to a SEP plan cannot be used to purchase life insurance. B

Which of these is NOT a characteristic of a traditional defined benefit pension plan? A) The plan specifies the benefit an employee receives. B) The plan assigns the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employee. C) The law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of salary or $245,000 (2022) per year. D) The plan has less predictable costs than defined contribution plans.

This is a characteristic of a defined contribution plan. Defined benefit pension plans assign the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employer. B

Dixon, Inc. is interested in establishing a qualified retirement plan. The primary motivation is to reward long-time and key employees, encourage employee retention, and attract new employees. Dixon, Inc. has a total of 60 full-time nonkey employees ranging in age from 21 to 42, with an average of three years of service. There are 5 key employees ages 40 to 51, all of whom have been with the company over 10 years and have salaries exceeding $95,000. The company is very profitable and has substantial cash flow; however, it would like some degree of flexibility and discretion with the contributions each year. Based on this information, what vesting schedule would be most advantageous to Dixon, Inc.? A) 2-to-6-year graded vesting. B) Immediate. C) 3-to-7-year graded vesting. D) 3-year cliff.

Two-to-six year vesting would be most appropriate for this situation because the key employees have over 10 years of service and the nonkey employees have an average service range of 3 years. This would allow the key employees to be immediately vested and will encourage the nonkey employees to remain with the company longer than three years. The retirement plan serves as an incentive to attract new employees in general, but a graded vesting schedule can also be seen as more attractive to new employees in the sense that they get vested in some of the retirement plan sooner. Next, because Dixon, Inc. wants flexibility and discretion with the contributions each year, the company is best served by a defined contribution plan. The longest a defined contributions plan can wait for full vesting is either three year cliff or two-six year graded vesting. In this case, the 2-to-6 year graded schedule is most advantageous to Dixon, Inc. because the average rank and file person stays there three years and thus would be fully vested. By extending the vesting schedule out to six years, the company can expect some forfeitures and the majority of the forfeitures would wind up in the retirement plans of the upper management or could be used to reduce the costs for the company. A

The Tops Corporation purchased a variable annuity in 2020 as part of a nonqualified deferred compensation (NQDC) plan for one of its key employees. In 2020 the annuity loses $20,000 in value and in 2021 the annuity gains $25,000 in value. Which of the following statements regarding the income tax treatment of this annuity in 2020 and 2021 is CORRECT? A) The $20,000 loss is deductible as a short-term capital loss, and the $25,000 gain is taxable as a long-term capital gain. B) The $20,000 loss is not deductible, and the $25,000 gain is taxable as ordinary income. C) The $20,000 loss is deductible as an ordinary loss, and the $25,000 gain is taxable as ordinary income. D) The $20,000 loss is not deductible, and the $25,000 gain is not taxable.

When a non-natural person such as a corporation owns an annuity, gains on the contract are taxed as ordinary income and losses are treated as ordinary losses. C

New Gizmos, Inc. was the brainchild of Clark Warren. Clark is 25 years old. He produces an astounding range of extremely popular internet apps. His company has exploded to 150 employees. The problem initially was that Clark mostly spends his time living in his mother's basement. He would rather play video games than run the company. The company really began to take off when Dylan Marshal, age 54 today, bought 45% of the company three years ago and created business order from the former chaos. New Gizmo's leadership would like to add a retirement plan. Which retirement plan would be most appropriate for Gizmo's Inc.? A) SIMPLE 401(k) B) Age-weighted profit sharing plan C) New Comparability Plan D) Money purchase pension plan

When the major shareholders are of vastly different ages, the new comparability plan allows them to be grouped together to skew larger contributions to the owners. C

Which of the following is(are) common feature(s) of a tax-sheltered annuity (TSA) plan? The plan is a salary reduction plan. The plan permits investing in mutual funds holding shares of gold-mining stocks. The investment risk is borne by the employee. The plan may permit in-service withdrawals.

all

Which of the following statements regarding nonqualified retirement plans is(are) CORRECT? A) Nonqualified plans are often used to supplement an executive's retirement income. B) All of these. C) Nonqualified plans entitle the employee to defer taxes on the benefit only if the employer's income tax deduction is deferred. D) Nonqualified plans entitle the employer to an immediate income tax deduction only if the employee is currently taxed on the benefit.

all

Which of the following statements regarding the safe harbor rules for Section 401(k) plans is(are) CORRECT? The employer can avoid ACP and ADP testing if it matches 100% up to 4% of compensation for nonhighly compensated employees. The employer can avoid ACP and ADP testing if it makes contributions of 3% or more of compensation for all employees who are eligible to participate in the plan, whether or not the employee chooses to participate. To meet the safe harbor requirements, the matching and nonelective contributions must be immediately 100% vested. The employer must provide notice to each eligible employee about rights and obligations under the plan. A) 3 and 4. B) 2 and 3. C) 4 only. D) 1, 2, 3, and 4.

all

Which of the following statements regarding employee death benefits is(are) CORRECT? Employees are generally taxed on the benefits promised from or the contributions made to a qualified plan at the time those benefits are received. When life insurance is purchased in a plan to provide death benefits, the current cost of the pure insurance protection is subject to taxation. A) I only. B) II only. C) Both I and II. D) Neither I nor II.

both

Which of the following statements regarding the application of mandatory death benefit rules concerning the status of a given participant is(are) CORRECT? If the participant's death occurs before retirement, a qualified plan must provide a spousal benefit called a qualified preretirement survivor annuity (QPSA) (with the exception of certain profit-sharing plans). If the participant's death occurs after retirement, a qualified plan must protect the plan participant's spouse by requiring that the normal form of distribution from the retirement plan for a married participant must be a joint and survivor annuity (with the exception of certain profit-sharing plans). A) II only. B) I only. C) Neither I nor II. D) Both I and II.

both