Unit 3 Book 2

In order to be eligible to establish and maintain a SIMPLE 401(k), an employer must have no more than:

100 employees who earned more than $5,000 last year.

Jean, age 38, earns $200,000 annually as an employee for Waste Distributors. Her employer sponsors a SIMPLE, and matches all employee contributions to the plan dollar-for-dollar, up to 3% of compensation. What is the maximum contribution (employer and employee) that can be made to Jean's SIMPLE account in 2019?

19000

Which of the following percentages is the maximum of an owner's net self-employment income that can be contributed to a Keogh profit-sharing plan?

20%.

Taylor Engineering has just established a safe harbor Section 401(k) plan. From which of the following may the company be exempt with the safe harbor arrangement?

ADP test. ACP test. Top-heavy rules.

Which of the following are examples of a cross-tested plan?

Age-based profit-sharing plan. New comparability profit-sharing plan.

Which of the following is an advantage to an employer under a defined contribution plan?

All of these are advantages.

Stock bonus plans:

Are defined contribution plans. Are not required to have contributions based upon profits. Allow a portion of the appreciation in the stock to be tax-deferred until the stock is sold when a qualifying lump-sum distribution is taken. Provide the employer a deduction for plan contributions.

The plan trustee of an employee stock ownership plan (ESOP):

Can borrow funds to purchase employer stock. Is using leverage when the trustee borrows money to provide contribution to the plan. Uses loan proceeds to purchase stock of the employer from the corporation itself

Which of the following requirements must be satisfied in order to pass the actual contribution percentage (ACP) nondiscrimination test for employer-matching contributions and employee contributions?

Either the 1.25 requirement or the 200%/2% difference requirement.

Tax implications regarding Section 401(k) plans include:

Employee elective deferrals are subject to FICA and FUTA taxes. Employer contributions are deductible by the employer up to 25% of total covered compensation. Employees do not pay federal income taxes on elective deferrals contributed to a Section 401(k) plan until distributed.

Which of the following is a type of defined contribution profit-sharing plan(s)?

Employee stock ownership plan (ESOP).

Which of the following companies might NOT be allowed to have a Keogh plan?

Limited liability company.

Which of the following are types of Section 401(k) plans?

Roth 401(k). SIMPLE 401(k). Traditional Section 401(k) plan. Safe harbor Section 401(k) plan.

Which of the following are characteristics of a stock bonus plan?

The assets of a stock bonus plan are invested primarily in employer stock.

Which of the following statements regarding profit-sharing plans is (are) CORRECT?

The maximum tax-deductible employer contribution to a profit-sharing plan is 25% of total covered employee compensation.

Which of the following statements regarding stock bonus plans and employee stock ownership plans (ESOPs) are CORRECT?

They can be costly and administratively cumbersome. They create a market for employer stock.

Thrift plans allow participants to:

make after-tax contributions.

A Section 401(k) plan does not have to satisfy the ADP and ACP tests if it meets one of the safe harbor provisions. All of the following statements about the safe harbor provisions are correct EXCEPT:

mandatory employer contributions under the safe harbor provisions may be subject to 3-year cliff vesting requirement.

A Keogh plan is fundamentally like any other qualified plan EXCEPT:

net self-employment income takes the place of compensation (W-2) income in the contribution calculation for the self-employed participant.

A type of qualified retirement plan in which participating employees are divided into groups or classes and each group or class receives an employer contribution equal to a percentage of compensation is a(n):

new comparability plan.

Keogh plans are:

sponsored by a partnership or self-employed individual.

Don is a sole proprietor who earned $70,000 of net Schedule C income. Don's business maintains a profit-sharing plan with a 25% contribution rate for all employees. Don's deductible contribution as an owner-participant of the business is:

$13,011.

Ronald, age 44, works for two private tax-exempt employers. One has a Section 403(b) plan and one maintains a nongovernmental Section 457 plan. If Ronald defers $10,000 into the Section 403(b) plan in 2019, what is the maximum amount he may defer into the Section 457 plan?

$19k

In 2019, James earns an annual salary of $200,000. He has an elective deferral of $19,000 into his Keogh plan. His company matches elective deferrals dollar-for-dollar of the first 3% of compensation deferred. Because of employee turn-over, $1,000 of forfeitures is added to his account. What is the maximum amount the company can add to a defined contribution plan on James' behalf?

$30,000

The Pension Protection Act of 2006 (PPA) includes safe harbor rules that would relieve a qualified automatic contribution arrangement (QACA) from special nondiscrimination testing. Such an arrangement will automatically satisfy Section 401(k) plan nondiscrimination testing if a participant's automatic deferral percentage (ADP) is increased each year by 1% until reaching at least what percentage of compensation?

6%.

An age-weighted profit-sharing plan is appropriate when:

A closely held business or professional corporation has a relatively large number of key employees who are approximately age 50 or older. There are older employees whose retirement benefits would be inadequate under a traditional profit-sharing plan because of the relatively few years remaining for participation in the plan. An alternative to a defined benefit plan is needed to provide older employees adequate retirement benefits but has the lower cost and simplicity of a defined contribution plan. The employer wants to terminate an existing defined benefit plan to avoid the increasing cost and regulatory burdens associated with these plans.

A traditional Section 401(k) plan is most appropriate when:

An employer wants to encourage employees to save for their own retirement. An employer wants an attractive, savings supplement to its existing qualified retirement plan. An employer wants to provide a qualified retirement plan for employees, but needs to keep costs down.

How is an age-weighted profit-sharing plan similar to a traditional defined benefit pension plan?

Contribution allocations to older participants may be maximized, while allocations to younger participants may be minimized.

A qualified automatic contribution arrangement (QACA) will automatically satisfy Section 401(k) nondiscrimination testing if it:

Provides for an automatic deferral percentage (ADP) of between 3% and 10% of employee compensation. Provides an employer contribution to non-HCEs of either an employer match of 100% of the first 1% deferred plus 50% of the next 5% or a 3% non-elective profit-sharing contribution in lieu of the matching contribution.

In addition to meeting the financial needs and resources tests for hardship withdrawals, money may only be withdrawn from profit-sharing plan accounts for the following reasons:

Purchase of a primary residence. Payment of unreimbursed medical expenses. Payment necessary to prevent foreclosure on the participant's primary residence. Payment of higher education expenses for the participant, spouse, or dependent children.

Which of the following are characteristics of defined contribution plans?

Retirement benefits are not guaranteed. Contributions may be flexible for defined contribution profit-sharing plans. Each participant has an individual account.

A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary or bonuses simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following statements are rules that apply to Section 401(k) plans?

Section 401(k) elective deferrals are immediately 100% vested and cannot be forfeited. A Section 401(k) plan may allow in-service distributions. Eligible catch-up contributions are not considered in the application of the maximum annual additions limit. The maximum elective deferral contribution for 2019 is $19,000 with an additional $6,000 catch-up for individuals age 50 or older.

Mary, age 56 and earning a current salary of $125,000, works for a company that sponsors a Section 401(k) plan. The plan allows her to contribute up to 15% of her salary each year, up to the annual Section 401(k) plan elective deferral limit. The company matches her contribution dollar-for-dollar, up to 3% of compensation. Because Mary would like to retire within the next 5 years, she is concerned about having a sufficient retirement benefit from the Section 401(k) plan. Based on life expectancy tables, Mary is expected to live until age 85. Which of the following factors can affect Mary's retirement benefits from her Section 401(k) plan?

The participant's investment selections. The value of the participant's account balance at retirement.

Which of the following phrases regarding factors that can affect the retirement benefits from a defined contribution plan is (are) CORRECT?

The selection of the investments by the participant. The value of the participant's account balance at retirement.

Which of the following is a type of defined contribution profit-sharing plan(s)?

Traditional Section 401(k) plan.

All of the following statements regarding a traditional profit-sharing plan are correct EXCEPT:

a company that adopts a profit-sharing plan is required to make contributions each year.

The major difference between a stock bonus plan and a traditional profit-sharing plan is that:

a stock bonus plan generally distributes benefits in employer stock, not cash.

An age-based profit-sharing plan is a plan in which:

allocations to participants are made in proportion to the participant's age-adjusted compensation.

All of the following statements for 2019 regarding age-based profit-sharing plans are correct EXCEPT:

the plan favors younger employees.

All of the following statements regarding traditional profit-sharing plans are correct EXCEPT:

they require the employer to assume the risk of poor investment performance.

Sally, age 37, works for two employers, ABC Corporation and XYZ Corporation, both of which maintain Section 401(k) plans. If Sally defers $6,000 to ABC's Section 401(k) plan in 2019, how much can she then defer to XYZ's plan this year?

$13,000.

What is the maximum elective deferral a participant can make to a Section 401(k) plan in 2019, assuming no catch-up provisions apply?

$19,000.

A major advantage of a profit-sharing plan is the option for in-service distributions, particularly a withdrawal from the plan due to a financial hardship. A hardship withdrawal must meet which of the following tests?

Resources test. Financial needs test.

In 2019, James earns an annual salary of $200,000. He has an elective deferral of $19,000 into his Keogh plan. His company matches elective deferrals dollar-for-dollar of the first 3% of compensation deferred. Because of employee turnover, $1,000 of forfeitures is added to his account. What is the maximum amount the company can add to a defined contribution plan on James' behalf?

$30,000

Valerie earns $290,000 annually from XYZ Corporation. The company profit-sharing plan provides for a contribution of 25% of participant compensation. What is the amount of the company's contribution for Valerie for 2019?

$56,000.

A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary or bonuses simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following statements is (are) rules that apply to Section 401(k) plan elective deferrals?

Section 401(k) plan elective deferrals are immediately 100% vested and cannot be forfeited. An extra nondiscrimination test called the actual deferral percentage test applies to elective deferral amounts.

Which of the following are considered profit-sharing plans?

Stock bonus plan. Traditional Section 401(k) plan. Thrift/savings plan. Employee stock option plan (ESOP).

Which of the following best describes distributions from a stock bonus plan?

They are generally made in the form of employer stock.