CFP Retirement Midterm review

The early distribution penalty of 10 percent does not apply to qualified plan distributions: 1. Made after attainment of the age of 55 and separation from service. 2. Made for the purpose of paying qualified higher education costs. 3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions. A)1 only. B)1 and 3. C)2 and 3. D)1, 2, and 3.

B - chapter 7 Statement 2 is an exception for distributions from IRAs, not qualified plans. Statements 1 and 3 are exceptions to the 10% penalty for qualified plan distributions.

Which of the following are requirements for a qualified stock bonus plan? 1. Participants must have pass through voting rights for stock held by the plan. 2. Participants must have the right to demand employer securities at a distribution, even if the plan sponsor is a closely held corporation. A)1 only. B)2 only. C)Both 1 and 2. D)Neither 1 nor 2.

C Rationale Both statements are true.

JJ is a Marine, who served our country for the last 25 years. He has $250,000 in his U.S. Government Thrift Savings Plan. Which of the following plans is JJ's Thrift Plan most similar to? A)Defined benefit plan. B)Cash balance plan. C)Profit sharing plan. D)401(k) plan.

D Rationale The U.S. Government Thrift Savings Plan is very similar to a 401(k) plan. It allows for the same employee deferral limits and maximum contribution limits as a 401(k) plan. The other choices are not correct.

Which phrase best completes the following sentence: "A repurchase option allows a terminating employee the choice to receive the cash equivalent of the employer's stock if the stock is _____." A)Convertible. B)Tradeable. C)Not readily tradeable. D)Not readily tradeable on an established market.

D Rationale This phrase is directly from IRC §409(h)(1).

Which of the following statements is/are correct regarding the early distribution 10 percent penalty tax from a qualified plan? 1. Retirement at age 55 or older exempts the distributions from the early withdrawal penalty tax. 2. Distributions used to pay medical expenses in excess of the 7.5% of AGI for a tax filer who itemizes are exemptfrom the early withdrawal penalty. 3. Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant are exempt from the early withdrawal penalty. A)3 only. B)1 and 3. C)2 and 3. D)1, 2, and 3.

D - chapter. 7

can S corps establish ESOPs? Can S corp securities be put into an IRA?

No and no

Can you withdraw funds prior to age 55 in a qualified plan to pay premiums on insurance (in a different plan not within the QP)? What situation would you be exempt of the 10% penalty?

No you can't you could only do it in an IRA if you were unemployed

Alison earned $100,000 during the year. She elected to defer $4,000 of her earnings into her employer's 401(k) plan and her employer matched this deferral dollar-for-dollar. In this year, what amount of Alison's earnings were subject to payroll taxes? $92,000 $96,000 $100,000 $104,000

Solution: The correct answer is C. Alison's earnings of $96,000 that were not deferred to the 401(k) plan would be subject to payroll taxes plus her deferrals of $4,000 to the 401(k) plan would be subject to payroll taxes. The employer's matching contributions are not subject to payroll taxes. The amount subject to payroll taxes would be $100,000 ($96,000 + $4,000). RPCH3

Outliving retirement assets is the primary risk with which of the following retirement capital needs analysis methods? Annuity Method. Capital Preservation Method. Purchasing Power Preservation Method. 1 only 1 and 2 only 1, 2 and 3 None of the above

The correct answer is A. The annuity method assumes that the person spends all money as of the expected life expectancy. The other two methods are more conservative and presume there will be funds at the point of life expectancy, thus mitigating the risk of superannuation. RPCH2

All of the following are advantages of profit sharing plans to businesses and business owners EXCEPT: Allows discretionary contributions. Must limit withdrawal flexibility. Controls benefit costs. May provide legal discrimination in favor of older owner-employees.

The correct answer is B. An advantage of profit sharing plans is that they PERMIT withdrawal flexibility. Options a, c, and d are also advantages of a profit sharing plan to the business and business owner. RPCH5

The plan participant bears the investment risk of the assets within a defined benefit pension plan. True False

The correct answer is B. The employer takes on the risk in a defined benefit plan. RPCH4

Jared, age 52, earns $350,000 per year and is a participant in his employer's 401(k) plan. What is the maximum total contribution amount that Jared will have under the 401(k) plan in 2022, assuming his company contributes using a non-elective deferral in a Safe Harbor Plan? $31,000 $36,150 $61,000 $67,500

The correct answer is B. The general employee elective deferral limitation for 2022 is $20,500, and Jared can defer an additional $6,500 (2022) as a catch-up contribution because he is over 50. The company match is 3% of 305,000, giving him an additional $9,150 for a total contribution of $20,500 + $6,500 + $9,150 = $36,150 RPCH5

Which of the following is not a type of profit sharing plan? Stock Bonus. 401(k) plan. Target Benefit. Thrift Plan.

The correct answer is C. A Target Benefit plan is a defined contribution pension plan. There are 7 types of profit sharing plans; Profit Sharing, Stock Bonus Plans, ESOP, 401k, Thrift Plans, Age-based Profit Sharing Plans, and New Comparability Plans. Be careful not to think of the specific plan, but the category (type) of profit sharing plans. RPCH5

Which of the following is (are) a defined benefit plan formula(s)? Unit credit (a.k.a. percentage-of-earnings-per-year-of-service) formula Flat-percentage formula Flat-amount formula All of the above

The correct answer is D. All of the above are benefit formulas used by defined benefit plans. Unit benefit tends to be utilized most often as it ties in years of service. RPCH4

Which of the following qualified plans would allocate a higher percentage of the plans current contributions to a certain class or group of eligible employees? A profit sharing plan that uses permitted disparity. An age-based profit sharing plan. A defined benefit pension plan. A target benefit pension plan. 2 and 3 1, 2, and 3 2, 3, and 4 1, 2, 3, and 4

The correct answer is D. All of the listed plans would allocate a higher percentage of a plans current cost to a certain class of eligible employees. RPCH4

For profit sharing plans: What is the most the company can contribute towards the profit sharing plan? (What %)

25% of covered compensation

BigCorp, LLC has a 401(k) plan that allows for hardship distributions. Sandra would like to return to school to get a Masters degree. She has $3,000 in her savings account to use, but would like to take a hardship distribution from her 401(k) plan for the maximum amount available. Sandra's program will take two years and cost $7,000 per year. Sandra's 401(k) account balance is $20,000. Sandra has never made any hardship distributions and her elective contributions to the plan total $10,000. How much can Sandra withdraw as a hardship distribution? A)$4,000. B)$7,000. C)$10,000. D)$20,000.

A Rationale A distribution for payment of up to the next 12 months of post-secondary education and room and board expenses is deemed to be on account of an immediate and heavy financial need. Sandra can take a distribution up to the immediate hardship expense less other assets available to pay the hardship expense ($7,000 for one year of tuition - $3,000 in savings).

Davin sells stock six months after he received it as a distribution from a qualified stock bonus plan. When the stock was distributed, he had a net unrealized appreciation of $7,500. He also had ordinary income from the distribution of $29,000. The fair value of the stock at the time of sale was $81,000. How much of the sale price will be subject to long-term capital gain treatment? A)$7,500. B)$44,500. C)$52,000. D)$73,500.

A Rationale Appreciation on the stock after the date of distribution is taxed as long-term capital or short-term capital gain, depending upon the holding period beginning at the date of distribution. In this case, only the net unrealized appreciation of $7,500 is treated as long-term capital gain because the holding period for the sale was only six months. The remaining $44,500 of gain is taxed as short-term capital gain. $81,000 ($29,000) Basis $52,000 Total capital gain ($7,500)NUA long-term capital gain $44,500Short-term capital gain

Rustin recently retired from Fox, Inc., a national plastics supplier. When Rustin retired his stock bonus plan had 10,000 shares of Fox, Inc. stock. Fox, Inc. took deductions equal to $20 per share for the contributions made on Rustin's behalf. At retirement, Rustin took a lump-sum distribution of the employer stock. The fair market value of the stock at distribution was $35 per share. Six months after distribution, Rustin sold the stock for $40 per share. What amount was subject to ordinary income tax on Rustin's tax return at the date Fox, Inc. contributed the stock to the plan? A)$0. B)$200,000. C)$350,000. D)$400,000.

A Rationale Rustin will not be subject to ordinary income at the date contributions are made to the stock bonus plan.

Wanka Factory has 100 non-excludable employees, 10 of whom are highly compensated. Eight of the 10 highly compensated and 63 of the 90 non-highly compensated employees are covered under Wanka's qualified plan. The average accrued benefits for the highly compensated is 4% and the average accrued benefit for the non-highly compensated is 1.5%. Which of the following statements is true regarding coverage? 1. The plan passes the ratio percentage test. 2. The plan passes the average benefits test. A)1 only. B)2 only. C)Both 1 and 2. D)Neither 1 nor 2.

A Rationale The ratio percentage test compares the % of nonhighly compensated to the % of highly compensated covered. The ratio must be greater than or equal to 70% for the plan to pass the ratio percentage test. The calculation for Wanka's qualified plan is as follows:NHC = 63 ÷ 90 = 70%HC = 8 ÷ 10 = 80%70% ÷ 80% = 87.5% (pass)Wanka's plan passes the ratio percentage test requirement of 70%. The average benefits test requires the average benefit of the non-highly compensated employees to be at least 70% of the average benefit of the highly compensated. Wanka's plan does not satisfy the average benefits test because the average benefit of the non-highly compensated compared to the average benefit of the highly compensated is less than 70% (1.5%/4% = 37.5%) (fail).

Which of the following is not true regarding profit sharing plans? A)The plan is established and maintained by the individual employee. B)Allows employees to derive benefit from profits of the company. C)Profit sharing plans cannot discriminate in favor of officers and shareholders. D)Profit sharing plans provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan.

A Rationale Answer a is not true regarding profit sharing plans. A profit sharing plan is established and maintained by the employer. The remaining options are true statements.

Which of the following are costs of a stock bonus plan?1. Periodic appraisal costs.2. Periodic actuarial costs. A)1 only. B)2 only. C)Both 1 and 2. D)Neither 1 nor 2.

A Rationale Stock bonus plans require an independent appraisal of the stock value at contribution and distribution. Stock bonus plans do not require actuarial work.

Roger and Robin were happily married until Roger fell in love with Sam. As a result, Roger and Robin have agreed they need to get a divorce. As part of the process, the court has provided a domestic relations order that calls for Robin's profit-sharing plan to be divided into equal portions such that Roger will have his own account with half of the value of the retirement account. What type of approach has been taken? A)The separate interest approach. B)The split payment approach. C)The shared payment approach. D)The divided account approach.

A - chapter 7 Rationale The separate interest approach calls for splitting a retirement account into two separate accounts. Each party is free to act with regard to their separate account without the interference or consent of the other party. There is not such term as split payment approach or divided account approach.

Stevie has a qualified plan with an account balance of $2,000,000. In which of the following circumstances would a third party be able to alienate the assets within Stevie's qualified plan?1. A QDRO in favor of a former spouse.2. A federal tax levy.3. Creditors in a personal bankruptcy. A)3 only. B)1 and 2. C)1 and 3. D)1, 2, and 3.

B Rationale Because a qualified plan is designed to provide individuals with income at their retirement, ERISA provides an anti-alienation protection over all assets within a qualified plan. This anti-alienation protection prohibits the plan assets from being assigned, garnished, levied, or subject to bankruptcy proceedings while the assets remain in the plan so that the individual has income at their retirement. Qualified plan assets are not protected from alienation due to a qualified domestic relations order, a federal tax levy, or from a judgment or settlement rendered upon an individual for a criminal act involving the otherwise protected qualified plan.

Rustin recently retired from Fox, Inc., a national plastics supplier. When Rustin retired his stock bonus plan had 10,000 shares of Fox, Inc. stock. Fox, Inc. took deductions equal to $20 per share for the contributions made on Rustin's behalf. At retirement, Rustin took a lump-sum distribution of the employer stock. The fair market value of the stock at distribution was $35 per share. Six months after distribution, Rustin sold the stock for $40 per share. What amount was subject to ordinary income on Rustin's tax return at the date the stock was distributed? A)$0. B)$200,000. C)$350,000. D)$400,000.

B Rationale Rustin will be subject to ordinary income at the date the stock is distributed equal to the value of the contributions made by the employer ($200,000).

MaryAnn, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial advisor inadvertently moved the funds into a taxable account. MaryAnn did not make the request of the IRS until six months after the mistake was made. Will the IRS permit the waiver? A)No. The IRS never waives this requirement, except under the most extreme of circumstances. B)Yes. The mistake was the fault of the financial advisor and the IRS regularly grants waivers in these circumstances. C)No. MaryAnn waited beyond 90-days for filing such a request. D)No. MaryAnn waited an unreasonable amount of time before filing the request.

B - Chapter 7 Rationale The IRS generally grants such requests if timely made.

Brooks, a participant in the Zappa retirement plan, has requested a second plan loan. His vested account balance is $80,000. Brooks borrowed $27,000 eight months ago and still owes $18,000 on that loan. How much can he borrow as a second loan? A)$13,000. B)$22,000. C)$23,000. D)$31,000.

B - Chapter 7 Rationale Brooks can borrow the lesser of $50,000 or half of the vested account balance. The $50,000 must be reduced by the highest outstanding balance in the last twelve months which equals $23,000. Half of the vested account balance ($40,000) less the outstanding loan of $18,000 equals $22,000.

Steve, age 69, is an employee of X2, Inc. He plans to work until age 75. He currently contributes 6 percent of his pay to his 401(k) plan, and his employer matches with 3 percent. Which one of the following statements is true? A)Steve is required to take minimum distributions from his 401(k) plan beginning April 1 of the year after he attains age 72. B)Steve is required to take minimum distributions from his 401(k) plan beginning April 1 of the year after he retires. C)Steve is required to take minimum distributions from his Traditional IRA beginning April 1 of the year after he retires. D)Steve cannot contribute to his 401(k) plan after age 72 in any case.

B: Chapter. 7 Generally, an individual must receive his or her first minimum distribution by April 1 following the year the individual attains age 72. However, if the individual remains employed beyond age 72, he or she 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. Therefore, answers a and c are incorrect. Answer d is incorrect because Steve can continue to contribute to the 401(k) plan as long as he is still working for X2, Inc. and the plan permits.

Qualified plans have many benefits to the employee and the employer. However they must satisfy many tests and comply with many limits to maintain their qualified status. Which of the following is correct regarding coverage tests? A)Profit sharing plans must satisfy only the three coverage tests. B)Defined benefit plans must satisfy any two of the four coverage tests. C)Coverage testing can include leased employees as part of the calculation D)Employees who do not meet the eligibility requirements are still included in the determination of at least one of the coverage tests.

C .Rationale Choice a, b, and d are incorrect. Qualified plans must satisfy one of the three coverage tests and DB plans must pass one of the three coverage tests and the 50/40 test. The 50/40 test is based on total employees, not necessarily non-highly compensated employees. However, all coverage tests exclude non-eligible employees from the calculation. Any person who provides services to the employer and is not an employee will be considered a leased employee if the following criteria are met: the services provided are pursuant to an agreement between the employer and a leasing organization; such person has performed services for the employer on a substantially full-time basis for a period of at least one year; and such services are performed under the primary control of employer.

Which of the following are true as to leveraged ESOPs?1. The corporation makes tax deductible contributions to the trust in the form of both principal and interest for the loan.2. The trust purchases shares of corporate stock from the principal shareholder, but these shares are not pledged as security for the bank loan.3. The corporation and the principal shareholder (seller) guarantee the loan and the corporation's assets are pledged as collateral for the loan. 4. Prior to the allocation of the actual shares to the participant's account within the trust, the pledged shares are held in a separate holding account and are referred to as unallocated. A)1 and 3. B)1, 2, and 3. C)1, 3, and 4 D)All of the above.

C .Rationale Statement 2 is false because such shares are normally pledged as security for the bank loan.

Which of the following is (are) required for an investment advisor to be deemed a fiduciary under ERISA's "renders investment advice" definition? 1. The investment advisor renders advice pursuant to an agreement. 2. The investment advisor is paid for the advice provided. 3. The investment advisor has influence approaching control over the plan's investment decisions. 4. The investment advisor affirmatively elects to be a fiduciary. A)2. B)1 and 3. C)1, 2, and 3. D)1, 2, 3, and 4.

C Rationale If statements 1, 2, and 3 are true, the investment advisor is deemed a fiduciary under ERISA's renders investment advice definition. The advisor does not make an election to become a fiduciary or to avoid becoming a fiduciary, it is based on the advisor's relationship with the plan.

Which of the following is not an example of a qualified retirement plan? A)ESOP. B)Age-based profit sharing plan. C)ESPP. D)401(k) plan.

C Rationale An ESPP, Employee Stock Purchase Plan, is not a qualified retirement plan. The ESPP will be discussed in detail in Chapter 14. All of the other plans listed are qualified retirement plans.

Which of the following statements is true? A)Profit sharing plans may not offer in-service withdrawals. B)Pension and profit sharing plans are both subject to mandatory funding requirements. C)Profit sharing plans allow annual employer contributions up to 25 percent of the employee's covered compensation. D)The legal promise of a profit sharing plan is to pay a pension at retirement.

C Rationale Answer c is the only true statement. Profit sharing plans allow annual contributions of up to 25 percent of covered compensation. Answer a is false because profit sharing plans can allow in-service withdrawals. Answer b is false because while pension plans are subject to mandatory funding standards, profit sharing plans are not. Answer d is false because the legal promise of a profit sharing plan is the deferral of compensation and the legal promise of a pension plan is to a pay a pension at retirement.

The following definition applies to which of the following terms: "the corporation makes tax deductible contributions to a trust in the form of both principal and interest for the loan." A)A stock bonus plan. B)An ESOP. C)A leveraged ESOP. D)A S corp ESOP.

C Rationale Only a leveraged ESOP will have a loan and thus, have principal and interest payments.

Brianna sells stock several years after she received it as a distribution from a qualified stock bonus plan. When the stock was distributed, she had a net unrealized appreciation of $7,500. Brianna also had ordinary income from the distribution of $29,000. The fair market value of the stock and the sales price at the time of sale was $81,000. How much of the sale price will be subject to long-term capital gain treatment? A)$7,500. B)$44,500. C)$52,000. D)$73,500.

C Rationale Sale Price - Adjusted Basis. $81,000 - $29,000 = $52,000 long-term capital gain. The NUA of $7,500 is always LTCG. The additional gain after distribution is LT because the stock was sold at least one year and one day after distribution.

Taylor, age 65, retires from Tickle Tile corporation and receives 25,000 shares of Tickle Tile stock with a fair market value of $500,000 in 2022. Taylor recognized $48,000 of ordinary income upon the distribution. What is Taylor's NUA immediately after the distribution? A)$48,000. B)$348,000. C)$452,000. D)$500,000.

C Rationale The NUA immediately after the distribution is $452,000 ($500,000 - $48,000).

ESOP distributions can be made in installments: 1. No longer than 5 years under any scenario. 2. No longer than 5 years unless the account balance exceeds $1,230,000 for 2022, in which case an additional year is allowed for each $245,000 (2022) over $1,230,000 but not more than 5 additional years. 3. In substantially equal payments. A)3 only. B)1 and 3. C)2 and 3. D)All of the above.

C Statement 1 is false because the scenario with an excess of $1,230,000 allows an additional year for each $245,000 over $1,230,000.

SK owns SK Ltd, which is a professional firm with five employees that sponsors both a defined benefit plan and a profit sharing plan with a cash or deferred arrangement. The covered compensation for SK Ltd is $600,000. Salary deferrals total $30,000. If the required funding for the defined benefit plan is $120,000, then how much can be contributed to the profit-sharing plan? A)$0. B)$30,000. C)$36,000. D)$150,000.

C Rationale Salary deferrals are not taken into consideration for the multi-plan limits. Since the plan is not subject to PBGC (professional firm with less than 25 employees), the combined limits will apply unless the defined contribution does not exceed six percent. The funding for the defined contribution plan is the greater of the remaining 25 percent limit after taking into consideration the defined benefit funding or six percent. Therefore, $36,000 can be contributed to the defined contribution plan since it is greater than $30,000 (25 percent of $600,000 less $120,000).

Nex sponsors a DB(k) plan that provides benefits for all employees. Nex adopted the plan four years ago. Kleen, who is age 55 and earns $100,000, has been employed for the last ten years with Nex. Which of the following statements is correct regarding Kleen's benefits under Nex's DB(k) plan? A)Kleen will be limited on his deferral to the 401(k) plan because of the required contribution to the DB part of the plan. B)If the DB(k) plan provides for a cash balance option, then Kleen should be receiving pay credits of 6% per year. C)All benefits provided under the DB(k) plan will be 100 percent vested for Kleen. D)Because this plan is a proto-type DB (k) plan, Nex will not have to file a Form 5500.

C Rationale Option a is not correct. He could defer up to the annual limit. Option b is not correct. Since Kleen is over age 50, he would be receiving pay credits of 8% per year. Option d is not correct because DB(k) plans must file a single Form 5500.

Which of the following is/are elements of an effective waiver for a pre-retirement survivor annuity? 1. Both spouses must sign the waiver. 2. The waiver must be notarized or signed by a plan official. 3. The waiver must indicate that the person(s) waiving understand the consequences of the waiver. A)2 only. B)1 and 3. C)2 and 3. D)1, 2, and 3.

C - chapter 7 Only the nonparticipant spouse must sign the waiver. Note that when the waiver is a separate document, only the nonparticipant spouse must sign the waiver form. In practice, many plan administrators include the waiver as part of the same document in which the participant elects a different form of benefit or different beneficiary, which requires the participant's signature for those elections; however, only the nonparticipant spouse must sign the waiver section.

Which of the following distributions from a qualified plan would not be subject to the 10% early withdrawal penalty, assuming the participant has not attained age 59½? 1. A distribution made to a spouse under a Qualified Domestic Relations Order (QDRO). 2. A distribution from a qualified plan used to pay the private health insurance premiums of a current employee of Clinical Trials Company. 3. A distribution to pay for costs of higher education. 4. A distribution made immediately after separation from service at age 57. A)1 and 2. B)1 and 3. C)1 and 4. D)2 and 3.

C - chapter 7 Rationale Statement 2 is incorrect for two reasons. The exception to the 10 percent early withdrawal penalty for health insurance premiums is only applicable to unemployed individuals. In addition, this exception is only available for distributions from IRAs, not qualified plans. Statement 3 is incorrect because the exception to the 10 percent penalty for higher education expenses only applies to distributions from IRAs, not qualified plans.

Maren, a participant in the Zappa retirement plan, has requested a second plan loan. Her vested account balance is $70,000. Maren borrowed $30,000 ten months ago and still owes $20,000 on that loan. Could she increase his maximum permissible loan if she repaid the outstanding loan before taking the new loan? A)No. Paying off the loan will not increase an available loan. B)Yes. Paying off the loan will increase the loan available by $15,000. C)Yes. Paying off the loan will increase the loan available by $5,000. D)No. He is not permitted to pay off the loan.

C: Maren can borrow the lesser of $50,000 or half of the vested account balance. However, the $50,000 must be reduced by the highest outstanding balance ($30,000) in the last twelve months, which equals a maximum new loan of $20,000. Half of the vested account balance ($70,000/2 = $35,000) less the outstanding loan of $20,000 equals $15,000. If the loan of $20,000 is repaid, which it could be, then the available loan would increase by $5,000 to $20,000.

Which of the following statements are true regarding put options: 1. They are also referred to as "repurchase options" under ESOPs. 2. If the employer securities are not readily tradeable on an established market, the participant has the right to require that the employer repurchase the employer securities under a fair market valuation formula. 3. The put option is widely considered to be a substantial benefit to an employee-participant of an ESOP. 4. Rank-and-file employees at a closely held corporation are protected with the put option because the employee may force the corporation to "buy back" the stock at the fair market value when there otherwise would be no market for the stock. A)1 and 4. B)1, 2, and 3. C)2, 3, and 4. D)All of the above.

D

Company A has been capitalized by MJBJ Vulture Capital, a venture capital company. Company A's cash flows are expected to fluctuate significantly from year to year, due to phenomenal growth. They expect to go public wthin three years. Which of the following would be the best qualified plan for them to consider adopting? A)Profit sharing plan. B)New comparability plan. C)401(k) plan with a match. D)Stock bonus plan.

D A stock bonus plan will allow equity participation without the use of cash flows and the public offering will eventually provide liquidity.

Marie, a long-time widow, has always treated the employees like her family and the company has experienced very low turnover. She would like to use the retirement plan to assist her in transferring ownership interest to the employees as she is ready to retire. She has a strong preference for avoiding and deferring taxes. She is opposed to mandatory funding and indifferent to integration. Which plan would be appropriate for Marie? A)Stock bonus plan. B)Money purchase pension plan. C)Defined benefit plan. D)Employee stock ownership plan.

D An ESOP would be the most appropriate plan to meet Marie's objectives. The stock bonus plan would allow Marie to transfer stock, but would not assist her immediately in her retirement plans. The defined benefit and money purchase pension plan would require mandatory funding. The ESOP would provide her with tax benefits and a diversified portfolio because of her age.

SJ, Inc. covered the following employees under a qualified plan. 1. Joan, a 9% owner and employee with compensation of $30,000. 2. Lind, a commissioned salesperson with compensation of $260,000 last year (the highest paid employee). 3. Reilly, the chief operating officer, who had compensation of $152,000 last year but was not in the top 20% of paid employees. 4. Garner, the president, who was in the top 20% of paid employees with compensation of $205,000.Assuming the company made the 20% election when determining who is highly compensated, which of the following statements is correct? A)Exactly three people are key employees. B)Exactly two people are highly compensated. C)Lind is a key employee but is not highly compensated. D)Reilly is neither highly compensated nor a key employee.

D For 2022, a key employee is an employee who at any time during the plan year or prior year met one of the following definitions: • A greater than 5% owner; • A greater than 1% owner with compensation > $150,000 (not indexed); or • An officer with compensation in excess of $200,000 ($185,000 for 2021). For 2022, highly compensated employees are employees that are: • A more than 5 percent owner at any time during the plan year or preceding plan year, or • An employee with compensation in excess of $135,000 ($130,000 for 2021) for the prior plan year, and if elected, is in the top 20% of paid employees ranked as to compensation.

Bailey is 56 years old and obtained ten years of participation in the Blackwater ESOP in Year 1. Assume she elects to diversify 20% of her 200 shares during the 90-day period following Year 1. Which of the following is correct? A)If the total number of shares contributed as of the end of Year 3 was 300 shares, Bailey could diversify 75 shares during the 90-day period following Year 3. B)Bailey can diversify additional shares, up to a cumulative total of 25%, anytime before the final year of the election period. C)Bailey can diversify an additional 10 shares anytime before the final year of the election period. D)During the 90-day period following Year 6, Bailey could diversify up to 250 shares, on a cumulative basis with prior diversification amounts, assuming a cumulative total of 500 shares had been contributed to her account as of the end of Year 6.

D Rationale Choice a is incorrect as she could not diversify 75 shares, rather, she could diversify that amount on a cumulative basis. Choice b and c are incorrect because it is only during the 90-days following the end of the year. Choice d is correct as she can diversify 50% for the final year.

Which of the following is true regarding QDROs? A)The court determines how the retirement plan will satisfy the QDRO. (i.e. split accounts, separate interest). B)In order for a QDRO to be valid, the order must be filed on Form 2932-QDRO provided by ERISA. C)All QDRO distributions are charged a 10% early withdrawal penalty. D)A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient's qualified plan.

D Rationale The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is required. Form 2932-QDRO is not a real form. QDRO distributions may be subject to the 10% early withdrawal penalty if the distribution is not deposited into the recipient's qualified plan or IRA.

Which of the following statements are correct regarding assets reverting back to the sponsor or a qualified plan?1. Under a merger, assets from a qualified plan can revert back to the plan sponsor without regard to the relationship between the value of the plan assets compared to the value of the obligations under the plan.2. Any reversion of plan assets will always be subject to a 20% penalty. A)1 only. B)2 only. C)Both 1 and 2. D)Neither 1 nor 2.

D Statement 1 is incorrect because the assets must exceed the plan liabilities. Statement 2 is incorrect because the penalty may be 20 percent or 50 percent.

Angela owns NOCTM, Inc. and sells 100 percent of the corporate stock (all outstanding stock) on January 1, 2022 to an ESOP for $5,000,000. Her adjusted basis in the stock was $2,400,000. Which of the following is correct? 1. If Angela reinvests the $5,000,000 in qualified domestic securities within 18 months, she has a carryover basis of $2,400,000 in the qualified domestic security portfolio and no current capital gain. 2. Angela has a long-term capital gain of $2,600,000 reduced by the 20 percent small business credit; therefore, his gain is $2,080,000 if she does not reinvest in qualified domestic securities within 18 months. A)1 only. B)2 only. C)Both 1 and 2. D)Neither 1 nor 2.

D The $5,000,000 must be reinvested within 12 months and there is not a 20% small business credit. In addition, to qualify for nonrecognition of gain treatment, the NOCTM, Inc. stock must have been owned by Angela for at least three years.

Carlton recently died at the age of 63, leaving a qualified plan account with a balance of $1,000,000. Carlton was married to Vanessa, age 53, who is the designated beneficiary of the qualified plan. Which of the following is correct? A)Vanessa must distribute the entire account balance within five years of Carlton's death. B)Vanessa must begin taking distributions over Carlton's remaining single-life expectancy. C)Any distribution from the plan to Vanessa will be subject to a 10 percent early withdrawal penalty until she is 59½. D)Vanessa can receive annual distributions over her remaining single-life expectancy, recalculated each year.

D Vanessa can receive distributions over her remaining single-life expectancy. A spouse beneficiary is an eligible designated beneficiary who may distribute over her life expectancy and can recalculate life expectancy each year. Statement a is incorrect. She is not required to distribute the entire account within 5 years. Statement b is incorrect. Vanessa can wait until Carlton would have been 72 and begin taking distributions over her life expectancy. Statement c is incorrect. The distribution will not be subject to the early withdrawal penalty because the distributions were on account of death. Vanessa could also roll the account over to her own IRA and begin distributions when she attains age 72.

Crystal, age 39, is an employee of Star, Inc., which has a profit sharing plan with a CODA feature. Her total account balance is $412,000, $82,000 of which represents employee elective deferrals and earnings on those deferrals. The balance is profit sharing contributions made by the employer and earnings on those contributions. Crystal is 100 percent vested. Which of the following statements is/are correct? 1. Crystal may take a loan from the plan, but the maximum loan is $41,000 and the normal repayment period will be 5 years. 2. If Crystal takes a distribution (plan permitting) to pay health care premiums (no coverage by employer) she will be subject to income tax, but not the 10% penalty. A)1 only. B)2 only. C)Both 1 and 2. D)Neither 1 nor 2.

D - chapter Rationale Statement 1 is incorrect because she can take a loan equal to one-half of his total vested account balance up to $50,000. Statement 2 is incorrect because the medical insurance premium exemption from the 10% penalty only applies to IRAs and only to the unemployed.

Bobby would not listen to his financial advisor and decided to rollover his qualified plan assets to a traditional IRA. Which of the following is correct? A)Bobby is entitled to the same alternative tax options in an IRA that are available in a qualified plan. B)Bobby has the same or more investment options in his IRA as compared to his qualified plan. C)Bobby can now convert the funds to a Roth IRA, where before he could not. D)Bobby has lost some of his creditor protection by moving the funds from a qualified plan to an IRA.

D - chapter 7 Choice a is not correct because ten year forward averaging, pre-74 capital gain treatment and NUA treatment are available in a qualified plan, but not available in an IRA. Choice b is not correct because qualified plans can investment in life insurance and collectibles, which is not permitted in an IRA. Choice c is not correct, as he could have converted direct from a qualified plan to a Roth IRA. Choice d is correct as the assets are no longer protected under ERISA. The assets will be protected under bankruptcy law, but not ERISA.

Reese has assets both in her Roth IRA and in her Roth account that is part of her employer's 403(b) plan. However, she is not sure about the differences between the two types of accounts. Which of the following statements would you tell her is correct? A)Both Roth IRAs and Roth accounts have a five-year holding period requirement, but the establishment of the first Roth IRA or Roth account starts the five-year holding period for all Roth IRAs and Roth accounts. B)Both Roth IRAs and Roth accounts have the same rules regarding the definition of a qualified distribution. C)The minimum distribution rules for Roth IRAs and Roth accounts are the same. D)The nature of the income received by beneficiaries in a qualified distribution is the same for distributions from both Roth IRAs and Roth accounts.

D - chapter. 7 Rationale Choice a is not correct because the five year holding period is separate for each type of account. Choice b is not correct because the Roth IRA has an additional distribution exception for first time home buying. Otherwise the rules are the same. Choice c is not correct because Roth IRAs do not have to comply with minimum distribution rules upon attainment of age 72, while Roth accounts do have to comply.

Laura, age 43, has several retirement accounts and wants to know what accounts can be rolled over to other accounts. Which of the following statements regarding rollovers is not correct? A)She could take a distribution from her SEP IRA and roll it over to a qualified plan without incurring a 20% withholding. B)She could rollover her government 457(b) plan to her new employer's qualified plan. C)She could rollover the funds from her old employer's qualified plan to her new employer, who sponsors a 401(k) plan with a Roth account, and be able convert the funds in an in-plan Roth rollover. D)She could rollover her traditional IRA to her designated Roth account in her 40(b) plan.

D - chapter. 7 Rationale Choices a, b and c are all correct and permissible. She cannot roll over traditional IRA funds to a Roth account.

To qualify for nonrecognition of gain treatment, the following requirements apply: A)The ESOP must own at least 30% of the corporation's stock immediately after the sale. B)The corporation that establishes the ESOP must have no class of stock outstanding that is tradable on an established securities market. C)The seller and 25% shareholders in the corporation are precluded from receiving allocations of stock acquired by the ESOP through the rollover. D)The stock sold to the ESOP must be common or convertible preferred stock and must have been owned by the seller for at least 3 years prior to the sale. E)All of the above.

E Rationale All of the above apply to nonrecognition of gain treatment.

2022 Profit sharing plans must be established by the entity tax filing deadline (plus extensions) for the year for which the employer wants to make contributions, and contributions must be made by the due date of the return including extensions. True False

The correct answer is A. RPCH5

Profit sharing plans may permit in-service withdrawals after a participant has attained two years of service in the plan. True False

The correct answer is A. RPCH5

Bobby owns Advertising Solutions, Inc. (ASI) and sells 100% of the company stock on July 1 of the current year to an ESOP for $3,000,000. Bobby had an adjusted basis in the ASI stock of $450,000. If Bobby reinvests in qualified replacement securities before the end of the current year, which of the following statements is true? Bobby will not recognize long term capital gain or ordinary income in the current year. Bobby must recognize $2,550,000 of long term capital gain in the current year. Bobby must recognize $450,000 of ordinary income in the current year. If Bobby dies before selling the qualified replacement securities, his heirs will have an adjusted taxable basis in the qualified replacement securities of $450,000, Bobby's carryover adjusted basis.

The correct answer is A. A major advantage for an ESOP is the ability of the owner to diversify his interest in a closely held corporation. In this case, if Bobby reinvests in qualified replacement securities within 12 months of the sale to the ESOP, he will not recognize capital gain or ordinary income on the sale to the ESOP. If Bobby dies the heirs will receive the securities with an adjusted taxable basis equal to the FMV at Bobby's date of death or the alternate valuation date. RPCH6

Thomas, age 55 and the owner of a computer repair shop, has come to you to establish a qualified plan. The repair shop, which employs mostly young employees, has had steady cash flows over the past few years, but Thomas foresees shaky cash flows in the future as new computer prices decline. Thomas would like to allocate as much of the plan contributions to himself as possible. He is the only employee whose compensation is in excess of $100,000. Which of the following qualified plans would you advise Thomas to establish? Profit sharing plan Defined benefit pension plan Cash balance pension plan Money purchase pension plan (Integrated)

The correct answer is A. A profit sharing plan would be the best choice for Thomas' company. All of the other options described pension plans that require mandatory funding. A pension plan would not be an appropriate choice due to the company's unstable cash flows. RPCH3

Emily, age 58, has been a participant in the Icon, Inc. ESOP for fifteen years. She plans to retire at 65. At the end of this year, Emily's entire account balance is comprised of Icon stock valued at $1,000,000. Emily believes that Icon has a bumpy future ahead and would like to diversify some of her ESOP investments. (She has not diversified any interest in ICON prior to this time.) How much must Icon allow Emily to diversify this year? $250,000 $500,000 $750,000 $1,000,000

The correct answer is A. After Emily attained the age of 55 (since she had already attained ten years of participation), the ESOP must allow her to diversify 25% of her investments in the 5 years following qualification. In the 6th year, Emily must be allowed to diversify up to 50%. In this case, Emily is not in her 6th year so she must be able to diversify up to 25% reduced by the percentage diversified in prior years. Since Emily has not diversified any amounts in the past she must be allowed to diversify the full 25% in the current year. RPCH6

Which of the following statements is true? A conservative retirement planner may estimate an individual to have a longer life expectancy than truly expected. To ensure that an individual does not outlive their retirement funds, a retirement planner may use a higher estimated rate of return than realistically expected. A more conservative financial planner uses the annuity method to determine an individual's retirement needs rather than the capital preservation method. A more conservative financial planner uses the annuity method to determine an individual's retirement needs rather than the purchasing power preservation model.

The correct answer is A. Answer A is a true statement as it is a more conservative approach for a financial planner to consider a longer life expectancy than is truly expected based on family history, thus providing the retiree with more funds during a longer retirement. Answer b is incorrect as using a higher rate of return is a less conservative method of completing a retirement plan. It assumes greater earnings, thus less required savings. Answer c is incorrect as the capital preservation method is more conservative than the annuity method because the capital preservation method assumes the retiree does not use any of the principal retirement savings. Answer d is incorrect as the purchasing power preservation model is more conservative than the annuity method because the purchasing power preservation model assumes the retiree does not use any of the principal retirement savings and it also assumes that the principal retirement savings is adjusted for inflation. RPCH2

On April 30, Janet, age 42, received a distribution from her qualified plan of $150,000. She had an adjusted basis in the plan of $500,000 and the fair market value of the account as of April 30 was $625,000. Calculate the taxable amount of the distribution and any applicable penalty. $30,000 taxable, $3,000 tax penalty $30,000 taxable, $0 tax penalty $120,000 taxable, $12,000 tax penalty $150,000 taxable, $15,000 tax penalty

The correct answer is A. Because the distribution to Janet does not qualify for the exception to the 10% penalty, the taxable amount of the distribution will be subjected a 10% penalty. To calculate the amount of the distribution that is return of adjusted basis, the adjusted basis in the plan is divided by the fair market value of the plan as of the day of the distribution. This ratio is then multiplied times the gross distribution amount. As such, $120,000 (($500,000/$625,000) × $150,000) of the $150,000 distribution is return of adjusted taxable basis. Accordingly, $30,000 ($150,000 - $120,000) will be subject to income tax, and there will be a $3,000 ($30,000 × 10%) tax penalty. RPCH6

Which of the following qualified plan distributions will be subjected to a 10% early withdrawal penalty? Lonnie, age 35, takes a $400,000 distribution from his profit sharing plan to pay for his son's college tuition. Carolyn, age 56, was terminated from UBEIT Corporation. Carolyn takes a $125,000 distribution from the UBEIT retirement plan to pay for living expenses. Brad, age 47, takes a $1,000,000 distribution from his employer's profit sharing plan. Six weeks after receiving the $800,000 check (reduced for 20% withholding), Brad deposited $1,000,000 into a new IRA account. Tara, age 22, begins taking equal distributions over her life expectancy from her qualified plan. The annual distribution is $2,000. Solution

The correct answer is A. The distribution described in answer A will be subjected to the 10% penalty. Education expenses are only an exception to the 10% penalty for IRAs, not qualified plans. All of the other options are exceptions to the 10% early withdrawal penalty. Option B describes the exception for separation from service after age 55. Option C describes the exception for the rollover of qualified plan assets. Option D describes the exception for substantially equal periodic payments. RPCH7

Which of the following vesting schedules may a top-heavy qualified profit sharing plan use under PPA 2006? 1-5 year graduated 5-year cliff 3-7 year graduated 4-8 year graduated

The correct answer is A. Under PPA 2006, a profit sharing plan must utilize a vesting schedule which provides a participant with vested benefits at least as rapidly as either a 2-6 year graduated vesting schedule or a 3 year cliff vesting schedule, without regard to its top heavy status. Option A is the only vesting schedule that meets this requirement. Employers can always be more generous than the standard vesting schedule, meaning they can vest faster. RPCH3

Which of the following is not a requirement for the owner of corporate stock who sells to an ESOP to qualify for the nonrecognition of gain treatment? The ESOP must own at least 55% of the corporation's stock immediately after the sale. The owner must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale. The ESOP may not sell the stock within three years of the transaction unless the corporation is sold. The owner must not receive any allocation of the stock through the ESOP.

The correct answer is A. The ESOP must own at least 30% of the corporation's stock immediately after the sale. All of the other statements are true. RPCH6

Perry operates In-N-Out Pharmacy, a sole proprietorship. In-N-Out sponsors a profit sharing plan. Perry had net income of $205,000 and paid self employment taxes of $23,197 (assumed) during the year. If Perry makes a 15% of salary contribution on behalf of all of his employees to the profit sharing plan, how much is the contribution to the profit sharing plan on behalf of Perry? $24,100 $25,220 $29,010 $30,750

The correct answer is B. $205,000 Net Income ($11,598.50) Less 1/2 SE Tax $193,401.50 Net SE Income × 0.1304 (SE Contribution rate: 0.15/1.15) $25,219.55 (round up to 25,220) RPCH5

Marcus, age 61, is a participant in a stock bonus plan. The value of the employer stock contributions to the plan over the course of his participation totaled $165,000. On December 1, 20x1, Marcus takes a full distribution of the employer stock from the plan at a value of $550,000. Fourteen months later, Marcus sells all of the stock for $400,000. Which of the following statements is true? Marcus has a long-term capital gain of $385,000 for 20x1. Marcus has ordinary income of $165,000 in 20x1. Marcus has a long-term capital loss of $150,000 in 20x3. Marcus has ordinary income of $165,000 and long-term capital gain of $385,000 in 20x1.

The correct answer is B. Because Marcus is taking a lump sum distribution from a qualified plan of employer stock, he will not have to recognize the net unrealized appreciation until he disposes of the employer stock. However, at the time of the distribution, the value of the stock, as of the date of contribution to the plan, will be taxable as ordinary income. Any gain on the subsequent sale of the stock will be taxable as long-term capital gain. In this case, Marcus will recognize $165,000 of ordinary income at the date of the distribution and long-term capital gain of $235,000 ($400,000 - $165,000) at the date of sale. RPCH6

Which of the following employees is highly compensated for 2022? Matt, an officer of the company, who earns $105,000 per year and owns 2% of the company. Missy, who earns $13,000 per year and owns 5% of the company. Tara, an officer of the company who earns $150,000. Julie, a 10% owner of the company who earns $4,000 per year as a secretary. 4 only 3 and 4 1 and 3 2 and 4

The correct answer is B. Highly compensated is: An owner of greater than 5% this year or last year or Compensation in excess of $135,000 for 2022 (Last year, and if elected, add "and in top 20% of employees ranked by salary"). RPCH3

Jason turned 71 in November 2021 and is retired. He was a participant in his employer's profit sharing plan. His profit sharing plan had an account balance of $250,000 on December 31 of last year (2021), and $200,000 on December 31 of the prior year. According to the Uniform Lifetime Table the factors for ages 72 and 73 are 27.4 and 26.5 respectively. What is Jason's approximate required minimum distribution amount that must be taken by April 1, 2022? $7,300. $0. $7,547. $9,124.

The correct answer is B. SECURE Act changed the Required Begin Date for Required Minimum Distributions to age 72 for anyone turning 70 1/2 after 12/31/19. Jason will be required to take his first RMD for the tax year 2022, which may be delayed until April 1, 2023. RPCH7

Packlite company has a defined benefit plan with 200 nonexcludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the requirements set forth in the IRC? 40 50 80 100

The correct answer is B. The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. Here 40% would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees. RPCH3

Monarch Machines sponsors a 15% money purchase pension plan and 401(k) profit sharing plan in which the employees are permitted to defer up to 75% of their compensation. Monarch Machines matches employee deferral contributions 100% up to 6% of deferred compensation. If James, age 31, is a highly compensated employee who earns $235,000, what is the maximum he will receive as an employer match from Monarch in 2022 if the ADP of the NHC is 4%? $0 $12,875 $14,100 $25,750

The correct answer is B. The maximum amount that may be contributed to qualified plans on James' behalf is $61,000 (2022). If James receives an allocation from Monarch's money purchase pension plan of $35,250 ($235,000 × 15%), he can only receive an additional $25,750 from other sources. The ADP of the NHC is 4%, so James, as a HC employee could, based upon the ADP test, defer up to 6% of his compensation and Monarch will match him 100%. However, James cannot defer 6% of his compensation because this would cause him to exceed the annual additions limit, and he would not benefit from the 100% match from Monarch. If James deferred $14,100 (6% of $235,000) of his compensation then Monarch would match $14,100 but that would exceed the limit. In this case, James will have received total annual additions of $61,000 ($35,250 + $12,875 + $12,875). RPCH3

Rachel has attained 2 years of service with her employer, Fiasco, Inc. (FI). FI sponsors a top-heavy qualified profit sharing plan and Rachel's account balance within the plan is $200,000. If the plan follows the least generous graduated vesting schedule permitted under PPA 2006, and considering Rachel has never taken a plan loan before, what is the maximum loan Rachel can take plan permitting? $0. Plan loans are not permissible from a top-heavy profit sharing plan. $20,000 $40,000 $50,000

The correct answer is B. The maximum loan permissible is the lesser of 50% of the participant's vested account balance or $50,000, reduced by the highest outstanding loan balance within the 12 months prior to taking the new plan loan. In this case, Rachel is 20% vested (the least generous graduated vesting schedule permitted under PPA 2006 for a top-heavy plan would be a 2 to 6 graduated vesting schedule) in her profit sharing plan account balance because she has only attained 2 years of service with the organization. 50% of her vested account balance would be $20,000 (50% of $40,000 ($200,000 × 20%)), which is less than $50,000. Since she has not taken any previous loans, her maximum loan would not be adjusted any further. RPCH3

Of the following employees, who is(are) a key employee(s)? Janice, age 52, a 5% owner who earns $45,000. She is not an officer. Wendy, age 45, a 6% owner who earns $92,000. She is also an officer. Pat, age 26, a 2% owner who earns $205,000. She is also an officer. A) Janice B) Pat and Wendy C) Janice and Wendy D) Wendy only

The correct answer is B. Both Pat and Wendy are key employees. The criteria for being a Key Employee in 2022 are: 1) greater than 5% owner, 2) greater than 1% owner and compensation in excess of $150,000, or 3) an officer with compensation in excess of $200,000 (2022). Wendy is a greater than 5% owner. Pat meets both the >1% and officer criteria with compensation over the limits. Janice does not meet any of the criteria. CHP3

Michelle is a key employee participant in a top-heavy profit sharing plan which follows the least generous graduated vesting schedule permitted under PPA 2006. Each year of her five year employment with Silky Oaks Resort, she has received an employer contribution equal to $12,000 to her profit sharing plan account. Today the balance of her profit sharing plan is $65,000. If Michelle terminated employment with Silky Oaks Resort today what is the vested balance of her profit sharing plan? A) $39,000 B) $52,000 C) $55,000 D) $65,000

The correct answer is B. Michelle's vested balance in the profit sharing plan account is $52,000. Under PPA 2006, the least generous graduated vesting schedule permitted for a profit sharing plan is a 2 to 6 year graduated vesting schedule. The fact that the plan is top-heavy does not impact the vesting schedule under PPA 2006. Therefore, Michelle is 80% vested in the contributions to the account. There were no employee deferral contributions to the plan. Thus, 80% of $65,000 = $52,000. CH5

Which of the following statements is true? A) Social Security will provide most individuals with an equal wage replacement percentage during retirement. B) Because of the high cost, many small businesses are precluded from establishing a retirement plan. C) The U.S. Government offers many tax incentives to employers who establish and maintain qualified retirement plans. D) Large employers usually establish defined benefit plans because investment risk is shifted to employees.

The correct answer is C. Answer C is a true statement. Employers are permitted to deduct contributions to qualified retirement plans and the contributions are not subjected to payroll taxes. Answer A is incorrect as Social Security will only provide an adequate wage replacement ratio for those individuals with very low pre-retirement income. Answer B is incorrect as small business may establish inexpensive and easy-to-maintain retirement plans. Answer D is incorrect because DB plans require the employer to be responsible for investment risk. CH1

Bobby, age 54, has worked for Cairns Airlines for 15 years. He earns $450,000 per year and is covered by a qualified defined benefit pension plan with a funding formula of (1.5% × Years of Service × Last Year's Salary). What is Bobby's accrued benefit under this defined benefit plan given the funding formula, his earnings and his years of service? $55,125 $61,000 $68,625 $101,250

The correct answer is C. Because of the covered compensation limit of $305,000 (2022), Bobby's compensation in excess of $305,000 cannot be considered for purposes of calculating his accrued benefit. The answer of $68,625 is calculated as 1.5% × 15 × $305,000. RPCH4

Which of the following regarding vesting is (are) true? Two advantages of choosing a restrictive vesting schedule are: (1) to reduce costs attributable to employee turnover and (2) to help retain employees. Three advantages of choosing a liberal vesting schedule, to have immediate and full vesting are: (1) to foster employee morale (2) keep the plan competitive in attracting employees, and (3) to meet the designs of the small employer who desires few encumbrances to participation for the "employee family." 1 only 2 only Both 1 and 2 Neither 1 nor 2

The correct answer is C. Both 1 and 2 are correct. RPCH3

All of the following statements describing retirement are true EXCEPT: Traditional retirement generally begins when an individual leaves the workforce in their 60s with a retirement life expectancy correlated to their health. The FIRE movement is an extreme version of saving and working hard towards an early retirement in an attempt to get the most out of life. People often sacrifice their youth and the prime of their life in an attempt to work hard and accumulate wealth through a mini retirement or sabbatical. Financial independence is the ability to live comfortably without working for income and can happen at any stage as an adult.

The correct answer is C. Choices A, B, and D are all true statements. Choice C is a false statement because a mini retirement or sabbatical is considered by individuals who value their youth and prime not those who sacrifice their youth and prime of life to work hard and accumulate wealth. RPCH1

Which of the following statements concerning stock bonus plans and ESOPs is(are) true? They both give employees a stake in the company through stock ownership and allow taxes to be delayed on stock appreciation gains. They both limit 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 (a.k.a. put option) if their stock is not readily tradable on an established market. 1 only 2 only Both 1 and 2 Neither 1 nor 2

The correct answer is C. Statement 1 lists advantages of choosing stock ownership plans and ESOPs. Statement 2 lists the disadvantages. RPCH6

Which of the following statements is true? In the year that Electron Products, Inc. has a loss for income tax purposes, they do not have to make a contribution to the 10% money purchase pension plan established in the prior year. Because of the risk of mismanagement of plan assets, plan sponsors of defined benefit plans are prohibited from investing more than 5% of the plan's assets in the stock of the plan sponsor. In calculating the minimum funding amount for a cash balance plan, the actuary considers plan forfeitures. The Pension Benefit Guaranty Corporation (PBGC) guarantees that the participants of a defined benefit plan will receive their accrued benefit as calculated under the private plan funding formula.

The correct answer is C. Statement C is true as the actuary does consider the plan forfeitures when calculating the minimum funding amount. The plan forfeitures of a cash balance plan are allocated to the future plan funding costs. Statement A is incorrect as Electron will be required to contribute at 10% to the money purchase pension plan as part of the mandatory funding requirements. Statement B is incorrect as the actual limit of investment in the plan sponsor's stock is 10%. Statement D is incorrect as the PBGC only insures to a certain amount - not the full accrued benefit. RPCH4

A company's defined benefit pension plan utilizes a funding formula that considers years of service and average compensation to determine the pension benefit payable to the plan participants. If Kim is a participant in this defined benefit pension plan and she has 30 years of service with the company and average compensation of $275,000, what is the maximum pension benefit that can be payable to Kim at her retirement in 2022? $20,500 $61,000 $245,000 $275,000

The correct answer is C. The maximum amount payable from a defined benefit pension plan is the lesser of $245,000 (2022) or 100% of the average of the employee's three highest consecutive years compensation. Because the average of Kim's compensation is $275,000, she would be limited to receiving a pension benefit at her retirement of $245,000. RPCH4

Angelo's Bakery has 105 employees. 90 of the employees are nonexcludable and 15 of those are highly compensated (75 are nonhighly compensated). The company's qualified profit sharing plan benefits 8 of the highly compensated employees and 40 of the nonhighly compensated employees. Does the profit sharing plan sponsored by Angelo's Bakery meet the coverage test? Yes, the plan meets the average benefits percentage test. Yes, the plan meets the general safe harbor test. Yes, the plan meets the ratio percentage test. Yes, the plan meets ratio percentage test and the general safe harbor test.

The correct answer is C. The plan meets the ratio percentage test. The percentage of NHC employees covered by the plan is 53.33% and the percentage of HC employees covered by the plan is 53.33%. The ratio percentage of the NHC employees covered by the plan compared to the ratio percentage of the HC employees covered by the plan is 100% (53.33%/ 53.33%) which is greater than the ratio requirement of at least 70%. Another method of determining whether the plan meets the ratio percentage test is to determine the minimum number of nonexcludable NHC employees that must be covered by the plan to pass the ratio percentage test. This can be determined by calculating 70% of the percentage of HC covered by the plan multiplied by the number of nonexcludable NHC employees. In this problem, it would be calculated as follows: [((8/15) × 70%) × 75] = 28. 28 NHC employees must be covered to pass the ratio percentage test. The facts do not give us any information to determine if the plan meets the average benefits percentage test. The plan does not meet the general safe harbor test which requires that at least 70% of the NHC employees are covered by the plan.

Which of the following statements concerning the use of life insurance as an incidental benefit provided by a qualified retirement plan is (are) correct? The premiums paid for the life insurance policy within the qualified plan will trigger a taxable event for the participant at the time of payment. Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer's aggregate contributions to the participant's account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer's aggregate contributions to the participant's account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income at or before retirement. 1 only 2 only Both 1 and 2 Neither 1 nor 2

The correct answer is C. This is not the same question covered in class. Every year the plan participant pays income tax on the dollar value of the actual insurance protection -- approximately equal to the term insurance cost. This is commonly called the Table 1 costs (formally PS58 cost). The sum of all those costs is the participant's basis. A taxable event is not the same as taxable. The premium creates a taxable event, the portion of the premium attributed to the Table 2001 costs are taxable. The full premium is not taxable to the employee. RPCH4

All of the following statements concerning cash balance pension plans are correct EXCEPT: The cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand, and as a cost saving measure. The cash balance plan is a defined benefit plan. The cash balance plan has no guaranteed annual investment return to participants. The cash balance plan is subject to minimum funding requirements.

The correct answer is C. A basic component of a cash balance plan is the guaranteed minimum investment return. RPCH4

Each of the following are requirements imposed by law on qualified tax-advantaged retirement plans EXCEPT: Plan documentation. Employee vesting. Selective employee participation. Employee communications.

The correct answer is C. Broad employee participation, as opposed to selective participation, is a requirement of a tax-advantaged retirement plan. All of the others are requirements for "qualified" plans. RPCH3

Robin began taking required minimum distributions from her profit sharing plan several years ago. Robin died after suffering a heart attack on January 2, 2021. She had named her twin sister Johanna as beneficiary of her profit sharing plan. Which of the following statements is false? Johanna may take a full distribution of the profit sharing plan's assets in the year of Robin's death. After Johanna's death, her named beneficiary will need to distribute the balance of the account within 10 years of Johanna's death. Robin's sister must take a distribution of the profit sharing plan account balance by the end of the fifth year after the year of her death. The required minimum distribution can be taken over Johanna's life, the year following Robin's death.

The correct answer is C. SECURE Act 2019 changed the distribution rules following the account owner's death. The new rules do not differentiate between death before or after RMDs start. Johanna is an Eligible Designated Beneficiary and will be able to distribute the account over her life expectancy. Any balance in the inherited IRA upon Johanna's death* is subject to the 10 year rule. Johanna could elect to take the distributions faster than her life expectancy if she wishes. She will not be subject to distribution within 5 years. *Note on answer choice B: After Johanna's death, the inherited IRA (from Robin) will need to be paid out to Johanna's beneficiary within 10 years of her death. RPCH7

Kenny's Aquatics, Inc. sponsors a discretionary profit sharing plan and a 10% Money Purchase Pension Plan. For the current year, aggregate covered compensation totaled $2,000,000. If Kenny's Aquatics would like to contribute the maximum deductible amount to the profit sharing plan, how much can they contribute? A) $0 B) $225,000 C) $300,000 D) $500,000

The correct answer is C. The combined limit for contributions to multiple plans is 25% of employer covered compensation, $500,000 ($2,000,000 × 25%). In this case, since Kenny's Aquatics made a mandatory MPPP contribution of $200,000, they could only make a contribution of $300,000 ($500,000 - $200,000) to the profit sharing plan. CH5

Which of the following would be completed as part of a sensitivity analysis of a retirement plan? Consider that the retiree retires one year earlier than originally planned. Calculate the retirement plan considering a greater inflation than expected. Estimate the annual savings amount each year considering a lesser rate of return. All of the above may be completed as part of a sensitivity analysis of a retirement plan.

The correct answer is D. All of the options may be completed as part of a sensitivity analysis - adjusting the variables of a retirement plan to determine the impact of a change in each variable. RPCH2

Adelaide Ranch has 325 employees (300 NHC and 25 HC). Of these employees, 300 are nonexcludable (275 NHC and 25 HC). If 208 of these NHC are covered under the Adelaide qualified profit sharing plan, and 25 of these HC are covered under the Adelaide qualified profit sharing plan, with certainty, which of the following coverage tests does Adelaide pass? Safe Harbor Test Ratio Percentage Test Average Benefits Test Both the Safe Harbor Test and the Ratio Percentage Test

The correct answer is D. Both the Safe Harbor Test and the Ratio Percentage Test are certainly passed. The plan covers 208 of the nonexcludable NHC employees which is 75.6% - greater than the 70% required to pass the Safe Harbor Test. The ratio of the NHC covered to the HC covered is 75.6% (75.6%/100%), so the plan passes the Ratio Percentage Test also. The information does not provide the average benefit percentages of the employees to determine whether the plan passes the Average Benefits Test. RPCH3

Question Carla would like to determine her financial needs during retirement. All of the following are costs she might eliminate in her retirement needs calculation except: The $175 per month of parking expenses for parking at her place of employment. Premiums on disability insurance. The Medicare taxes she pays each year. Premiums on her life insurance policy.

The correct answer is D. Depending on the client's objectives and needs, they may still need life insurance. It is unlikely she will need disability insurance during retirement. She would eliminate the parking expense, Medicare taxes, and OASDI since she would no longer have these expenses if she has no W-2 income during retirement. RPCH2

Which of the following statements regarding determination letters for qualified plans is true? When a qualified plan is created, the plan sponsor must request a determination letter from the IRS. An employer who adopts a prototype plan must request a determination letter from the IRS. If a qualified plan is amended, the plan sponsor must request a determination letter from the Department of Labor. A qualified plan which receives a favorable determination letter from the IRS may still be disqualified at a later date.

The correct answer is D. Determination letters are issued by the IRS at the request of the plan sponsor. The plan sponsor is not required to request a determination letter. Even if the determination letter is requested and approved, the IRS may still disqualify the plan. RPCH8

Lee, a single individual, turned 71 on December 13, 2021. The fair market value of his 401(k) plan was $400,000 December 31, 2021 and $425,000 on December 31, 2022 The factors, according to the Uniform Life Table, for ages 72, and 73 are 27.4, and 26.5, respectively. What is the amount of Lee's initial required minimum distribution for 2022? $16,038 $15,511 $15,094 $14,599

The correct answer is D. Lee will have to take a RMD for the tax year 2022 when he turned 72, but can defer distribution for his first RMD. Lee will not be required to begin taking minimum distributions until April 1, 2023 (April 1 of the year after he attains the age of 72 - he attained age 70 1/2 after to 12/31/19). The calculated required minimum distribution using the plan balance as of the end of the prior year and the table life factor for his age as of the end of the distribution year would be $14,599 ($400,000/27.4) SECURE Act change the RMD begin age to 72 only for those that reach 70 1/2 after 12/31/19. Those that reach 70 1/2 prior to 12/31/19 are grandfathered under the old rules.

Which of the following statements concerning accrued benefits in qualified plans is (are) correct? In a defined benefit plan, the participant's accrued benefit at any point is the participant's present account balance. The accrual for the specific year is the amount contributed to the plan on the employee's behalf for that year. In a defined contribution plan, the accrued benefit is the benefit earned to date, using current salary and years of service. The accrued benefit earned for the year is the additional benefit that has been earned based upon the current year's salary and service. 1 only 2 only Both 1 and 2 Neither 1 nor 2

The correct answer is D. Neither Statement 1 nor Statement 2 are correct because the plan names have been switched. Statement 1 describes a defined CONTRIBUTION plan and Statement 2 describes a defined BENEFIT plan. RPCH3

Each of the following is a characteristic of a defined benefit retirement plan EXCEPT: The plan specifies the benefit an employee receives at retirement. 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 currently. The plan has less predictable costs as compared to defined contribution plans. The plan assigns the risk of pre-retirement inflation, investment performance, and adequacy of retirement income to the employee.

The correct answer is D. Option D describes characteristics of a defined contribution plan. Defined benefit plans assign the risk of pre-retirement inflation, investment performance, and adequacy of retirement income to the employer, not the employee. DB plans have three benefit calculations covered in your textbook; unit benefit, flat dollar and flat percent. Only unit benefit uses 100% of average final compensation (or average highest 3 years). All use the max benefit of $245,000 (2022). RPCH3

Each of the following must be accounted for in retirement planning EXCEPT: Inflation. Work life savings rate. Health of retiree. Age of self-sufficient heirs.

The correct answer is D. Self-sufficient heirs do not need to be accounted for in a retirement plan. Self-sufficient heirs will have no impact on the retiree's plans or goals as there are no mandatory costs or payments to be made to them. In contrast, inflation must be considered as it erodes the purchasing power of the retirement savings and other retirement plan assets. Work life savings rate must also be accounted for as it will determine, coupled with other factors, the amount the retiree will have available during retirement. Finally, the retiree's health must be considered in the retirement plan as it is an indication of the retiree's life expectancy, and thus, the amount the years that will need to be funded. RPCH2

put options in esops apply in what scenarios How long is the time window to provide the put option "after an installment distribution of the employer stock, then the employer must repurchase the securities with ________ days to fulfill the put option"

if the company is not public and the employees cannot sell their assets on an establish market. at least 60 days within 30 days

in what scenario can an esop loan/distribution be paid back for OVER the typical 5 year limit? What scenario allows the longest time period?

if the esop has over 1,230,000 each 245k over that 1.23M allows for an additional year - 5 years max. Max would be 245,000 x 5 = $1,225,000 total over $2,455,000 would allow for 10 year pay back

If there is a corporation with 10 employees, 600k in covered compensation and they have a DB plan and profit sharing plan - with let's say 125k into the DB plan. How do you know how much could be put into the profit sharing plan?

well the first thing to notice is that it is under 25 employees, and no longer subject to the PBGC. So it is either the remaining amount of the 25% (in this case 600kx.25 = 150k, so 150k - 125k = 25k) or 6% of covered compensation - in this case 36k so this answer is 36k, but if it was a company over 25ppl with same comp, the answer would be 25k