Retirement Unit 4
Which of the following can provide Section 403(b) plans (TSAs) for their employees?
Chambers of commerce. Public schools. Public universities. Humane societies
Which of the following statements regarding Section 403(b)/TSA plan employee elective deferrals in 2019 is CORRECT?
Employee elective deferrals are subject to FICA (Social Security and Medicare) and FUTA (federal unemployment) payroll taxes. The maximum employee elective deferral contribution is $19,000 for 2019 with a $6,000 catch-up contribution for participants age 50 and older
The Section 403(b)/TSA special lifetime catch-up contribution:
is limited to a maximum lifetime of $15,000.
Max, age 47, has been participating in his employer's SIMPLE IRA for one year. If he withdraws $1,000 from this plan this year and the withdrawal is not covered by an exception to the penalty tax on premature withdrawals, he will owe a penalty tax of:
$250 Premature withdrawals made from a SIMPLE IRA within two years of initial participation are subject to a penalty tax of 25%. Max's penalty would be $250.
What is the maximum amount possible that may be contributed to a simplified employee pension (SEP) on behalf of a participant for 2019?
$56,000
Which of the following statements regarding plan requirements for SIMPLE IRAs is CORRECT.
All eligible employees have the opportunity to make elective pretax contributions of up to $13,000 for 2019 or $16,000 if age 50 or older. The employer must notify participants that they have a 60-day election period just prior to the calendar year end in order to make a salary deferral election or modify a previous election for the following year. To establish a SIMPLE IRA, a business cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation).
Which of the following are characteristics of a SIMPLE?
The ACP test is not required for a SIMPLE. Distributions from a SIMPLE IRA used to pay higher education costs are exempt from the early withdrawal penalty. After-tax contributions are not permitted with a SIMPLE. An employer sponsoring a SIMPLE cannot maintain a qualified plan.
What makes the SIMPLE IRA so attractive to business owners?
There is no ADP testing. The ability to defer up to $13,000 (2019) without regard to employee participation.
Section 403(b) plan funds may be invested only in:
annuities and mutual funds.
Which of the following retirement plans, maintained by an employer, would also permit an eligible employer to establish a SIMPLE?
Section 457 plan
Simplified employee pension (SEP) IRAs are primarily used by:
Sole proprietorships. Small, closely held businesses.
What is the maximum elective deferral limit for a Section 403(b)/TSA plan in 2019, assuming no catch-up provisions apply?
$19,000
Which of the following statements regarding SIMPLE IRA employer contributions are CORRECT?
A 2% (of employee compensation) non-elective employer contribution can be made for all eligible employees. A dollar-for-dollar matching contribution up to 3% of compensation can be contributed solely for participating employees who have elected to make contributions.
Which of the following regarding a SIMPLE is (are) CORRECT?
A 25% early withdrawal penalty may apply to distributions taken within the first 2 years of participation in the SIMPLE IRA plan.
Which of the following are reasons a small business might choose the SIMPLE over a Section 401(k) plan?
Because a SIMPLE is less costly to operate, it is generally the better choice if the employer is not concerned about the design constraints of the plan. The employer expects that it could not satisfy the Section 401(k) nondiscrimination test. If a Section 401(k) plan would be top heavy (benefits for key employees will exceed 60% of total benefits), and the employer wants to minimize employer contributions.
Generally, distributions from TSA/Section 403(b) plans are made only upon:
Disability. Death. Termination of employment. Attainment of age 59½.
Which of the following statements regarding Section 403(b) plans is (are) CORRECT?
Section 403(b) plans are eligible for rollover treatment to IRAs.
In which of the following retirement plans is a participant NOT considered an active participant for determining the deductibility of traditional IRA contributions?
A participant in a Section 457 plan.
Which of the following are common features of a TSA/Section 403(b) plan?
The plan is typically funded by employee elective deferrals. The benefit is dependent on the investment results. The investment risk is borne by the employee. The plan may permit in-service withdrawals.
Which of the following statements regarding TSAs/Section 403(b) plans are CORRECT?
The sponsor must be a tax-exempt organization that meets the requirements of Section 501(c)(3), a governmental organization, or public educational organization. In-service withdrawals may be permitted.
Which of the following SIMPLE IRA options are CORRECT?
Employers can match employee contributions dollar-for-dollar up to 3%. Employers can contribute up to 2% non-elective contributions for each eligible employee. For a SIMPLE IRA, an employer is required to satisfy one of two contribution formulas: match dollar-for-dollar employee contributions up to 3% of employee's income, OR contribute at least a 2% non-elective contribution for each eligible employee.
While Section 403(b)/TSA plans are an excellent source of retirement savings, they do have some disadvantages, such as:
Investments are limited to mutual funds and annuities. Section 403(b) plans must comply with the ACP test for employer matching contributions.
Which of the following are advantages of a SIMPLE IRA?
No actual deferral percentage (ADP) or actual contribution percentage (ACP) tests. Allows employee pretax contributions. Easy to install and administer. Simple to understand and explain to employees.
Which of the following statements regarding the tax ramifications of SIMPLEs is CORRECT?
Employee elective deferrals are subject to payroll tax.
Which of the following are reasons a qualified employer may consider implementing a TSA/Section 403(b) plan?
Employees are interested in accumulating retirement funds with pretax dollars. Employees are interested in reducing their taxable income while saving for the future. The employer doesn't want to bear the full cost of a retirement plan.
Which of the following statements describing how qualified plans are similar to SEP plans and SIMPLEs is (are) CORRECT?
Qualified plans, SEP plans, and SIMPLEs all provide for deferred compensation. Plan sponsors of qualified plans, SEP plans, and SIMPLEs make contributions to either a trust, an insurance contract, or an individual retirement account depending on the type of plan.
Which of the following statements regarding plan requirements for SIMPLE IRAs is(are) CORRECT?
To establish a SIMPLE IRA, a business normally cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation) SIMPLE IRAs, like SEP plans, are funded with individual retirement accounts, and these assets cannot be invested in life insurance or collectibles
Basic provisions of SIMPLE IRAs include:
employees are 100% vested in their elective deferrals. SIMPLE IRAs are not subject to ADP nondiscrimination rules generally applicable to qualified plans (including top-heavy rules). Employers with fewer than 100 employees who earned $5,000 during any two preceding years and are reasonably expected to earn at least $5,000 during the current year must be allowed to participate. The employee is 100% vested in both his elective deferrals as well as any employer contributions.
A savings incentive match plan for employees (SIMPLE) can be:
Established as an IRA. Established as a Section 401(k) plan. Offered by employers who have 100 or fewer employees.
A simplified employee pension plan (SEP):
can be established by any type of employer. A SEP plan is a very simple retirement plan that provides for flexible funding and allows employers to make contributions directly to participant's individual IRAs and can be established by any type of employer. The percentage contributed by the employer can fluctuate each year as long as it is the same for every employee. Up to 25% of an employee's covered compensation is allowable for the tax benefit, up to a maximum of $56,000 (2019).
Myra, age 52, has worked for XYZ Educational Opportunities ("The last word in not-for-profit education") for the past 18 years. XYZ sponsors a Section 403(b)/TSA plan. Myra wants to contribute the maximum amount possible to her TSA. Assuming Myra has never before used her available catch-up allowance, what is the total maximum amount she can contribute to her TSA plan for 2019?
$28,000
How does simplified employee pension (SEP) plan participation affect an employee's IRA contributions?
The deductibility of an active participant's IRA contribution depends upon his MAGI. SEP plan participation does not reduce or eliminate an employee's ability to fund an IRA. Employees who participate in a SEP plan are considered active participants in an employer-sponsored retirement plan for the tax year in which an employer contribution is made.
Christopher works for the Ex-march Company, a small business with 75 employees. Ex-march has decided to establish a SIMPLE IRA plan for all of its employees and will make a 2% non-elective contribution for each of its eligible employees. Christopher's annual salary is $40,000 and he has determined that he cannot afford to make an elective deferral to his SIMPLE IRA. Which of the following statements regarding Christopher's SIMPLE IRA contribution is CORRECT?
Ex-march must make a non-elective contribution of $800 for Christopher.
All of the following statements regarding simplified employee pension (SEP) plans are correct
their major advantage is simplicity. they can be established by any form of business entity. A SEP must cover any employee who is at least 21 years old and who worked for the employer, even on a part-time basis, for three of the preceding five years. employer contributions are discretionary.
Generally, for SIMPLE contributions:
earnings within the account are tax deferred. contributions by the employee are made with pretax dollars and the employer may deduct its contributions as an ordinary business expense.
All of the following statements regarding the basic provisions of a Section 457 plan are correct
distributions from a Section 457 plan are not subject to an early withdrawal penalty. the contribution limit is doubled in the 3 years prior to an individual's retirement. in 2019, an individual who has attained age 50 may make additional catch-up contributions of up to $6,000. A Section 457 plan is not a qualified plan. This plan is a deferred compensation plan that may be established by governmental units or agencies and non-church-controlled, tax-exempt organizations. Section 457 plans have special catch-up rules.
All of the following statements regarding Section 457 plans are correct
may allow for special catch-up contributions in the participant's last three years of employment prior to retirement. it is a non-qualified deferred compensation plan of state and local government units and agencies, and non-church-controlled, tax-exempt organizations. church-related organizations, such as schools, may be eligible to establish a Section 457 plan. Contributions to a Section 457 plan are pre-tax and funds grow tax deferred
Which of the following is (are) characteristics of both a SEP plan and a SIMPLE IRA?
An investment in life insurance is prohibited. There is immediate participant vesting in the entire balance. Early withdrawal (pre-age 59½) penalties may apply (with certain exceptions).
Which of the following items is (are) permitted investments in a Section 403(b) plan?
Annuity contract from insurance company. Growth stock mutual fund.
Which of the following statements regarding SEP plan employee coverage and contribution requirements is (are) CORRECT?
Contributions must be made for all employees who have attained age 21 and meet the service requirements. Contributions must be made for all employees who have performed services for the employer for at least three of the past five years and meet age and compensation requirements. Contributions must be made for all employees who received a minimum of $600 of compensation for the year and meet other participation requirements.
Penalty-free Section 457 distributions can only be made:
For an in-service withdrawal. For an unforeseen emergency. For separation from service. In the year the participant attains age 70½.
Section 403(b)/TSA employer contributions:
Must abide by the annual additions limit. Must not discriminate in favor of highly compensated employees.
Tax issues relating to Section 457 plans include:
Section 457 plans are sponsored by tax-exempt entities; therefore, deductibility of contributions is not an issue for the employer. Public (government) plans do not incur a 10% penalty for early withdrawal prior to retirement or upon termination of employment. Distributions from a Section 457 plan are not eligible for favorable lump sum distribution treatment (10-year averaging, capital gain treatment, NUA) allowed for qualified plans.
The simplified employee pension (SEP) IRA is one of the easiest plans to set up and maintain. A SEP IRA plan eliminates:
The administrative complexity found in many retirement plans. Lengthy and detailed government reporting. Numerous nondiscrimination tests. Complicated restrictive contribution formulas associated with many retirement plans.
Which of the following statements regarding plan requirements for SIMPLE IRAs is CORRECT?
The employer must notify participants that they have a 60-day election period just prior to the calendar year end in order to make a salary deferral election or modify a previous election for the following year. To establish a SIMPLE IRA plan, a business cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation). All eligible employees with sufficient compensation have the opportunity to make elective pretax contributions of up to $13,000 for 2019 or $16,000 if age 50 or older. SIMPLE IRAs, like SEP plans, are funded with individual retirement accounts. Assets in individual retirement accounts cannot be invested in life insurance or collectibles.
Jacob, age 58, is an employee of ABC Company, which sponsors a SIMPLE IRA. The company provides a dollar-for-dollar matching contribution up to 3% of annual compensation. If Jacob's annual compensation is $300,000, what is the maximum employer contribution he will receive in 2019?
The maximum employer contribution Jacob would receive would be $9,000. Employers make contributions to the SIMPLE IRA using one of the following two formulas: An employer match of up to 3% of employee compensation (the employer can match as little as 1% of employee compensation in no more than two out of five years); or A 2% of compensation non-elective contribution for each eligible employee. However, there is an operational oddity when these contribution rules are applied to a SIMPLE IRA. If the employer elects the 3% match, the covered compensation limit of $280,000 applicable to qualified plans in 2019 does not apply. Rather, the operative amount is $433,333 ($13,000 divided by 0.03). In this situation, all of Jacob's $300,000 compensation can be taken into account, even though it exceeds the annual compensation limit of $280,000. In the application of compensation limit to all tax-advantaged plans, this is the only exception to the $280,000 compensation limit. Alternatively, if the employer of a SIMPLE IRA uses the non-elective 2% option, the covered compensation limit does apply and no more than $280,000 of compensation may be taken into account.
A simplified employee pension (SEP) plan:
Uses an individual retirement account as a funding vehicle. Must follow the rule regarding nondiscriminatory contributions. SEP plans use an IRA to hold the assets and the plan must follow nondiscrimination rules. Loans are not permissible from a SEP plan because it consists of IRAs.
Which of the following statements with respect to simplified employee pension (SEP) contributions made by an employer is CORRECT? Contributions are:
currently excludible from the employee's gross income.
