CFP - Retirement Planning - Chapter 6 - SEPs, SIMPLEs, and 403(b) Plans

All those who receive payment for services from a qualified tax-exempt organization or public school are considered eligible employees for purposes of making contributions to the organization's 403(b) plan. T/F?

False. Full-time and part-time employees of a qualified employer will be eligible employees if they are so-called common-law employees. However, if they are independent contractors instead of common-law employees, they cannot be covered by the organization's 403(b) plan.

Today, employers can establish a salary reduction SEP. T/F?

False. Salary reduction SEPs cannot be established anymore.

A 403(b) plan that contains employer contributions must satisfy ERISA requirements and meet coverage and nondiscrimination requirements that apply to qualified plans. T/F?

True.

A SEP cannot contain a loan provision. T/F?

True.

A simplified employee pension (SEP) plan is a retirement plan that uses an individual retirement account or an individual retirement annuity as the receptacle for contributions. T/F?

True.

All amounts contributed to a SEP are immediately 100 percent vested in the participant. T/F?

True.

Full-time employees willing to defer $200 or more generally have to be eligible to make salary deferrals under a 403(b). T/F?

True.

If an employee participates in a 401(k) plan or a SEP, the salary reduction contributions under those plans are aggregated with 403(b) deferrals when applying the salary deferral limit to the 403(b) plan. T/F?

True.

Regardless of whether a 403(b) plan is subject to ERISA, it must be maintained pursuant to a written document. T/F?

True.

Salary deferral contributions to a 403(b) plan must be fully vested at all times. T/F?

True.

Similar to 401(k) plan, a 403(b) plan can allow for a Roth election and provide for automatic enrollment. T/F?

True.

The employer who has few rank-and-file employees interested in participating in the plan should consider the SIMPLE over the 401(k) plan. T/F?

True.

The same salary deferral dollar limit that applies to 401(k) plans applies to 403(b) plans as well. T/F?

True.

All the following statements concerning SEPs are correct, EXCEPT: (HL 6.2-6.3) (A) SEPs are easy to set up and administer. (B) Employer contributions are required each year, even for part-time employees. (C) Employer contributions must provide a benefit that is a level percentage of compensation. (D) Employer contributions are 100% vested immediately.

B is the answer. An employer is not required to make contributions each year for any employee. Contributions are completely discretionary. They do not have to be "substantial and recurring." However, a SEP must account for part-time employees, the same as for regular employees if they have $600 in compensation. A, C, and D are correct statements.

Under the rules for SEPs, an employer can require that a participating employee in the employer's SEP must meet all the following participation requirements, EXCEPT: (A) Attainment of age 21 (B) Performance of services for the employer for at least 3 of the immediately preceding 5 years (C) Performance of services for the employer on a full-time basis (D) A minimum of $600 in compensation in 2017

C is the answer. C is not a correct statement because both part-time and full-time employees are eligible to participate in a SEP.

A 403(b) plan is subject to the ADP test that applies to a 401(k) plan. T/F?

False. 403(b) plans are only subject to ACP test.

A 403(b) plan cannot be designed to permit participant loans. T/F?

False. A 403(b) plan can be designed to permit participant loans.

A candidate that has a large number of part-time employees should choose a SEP because it can be designed to exclude part-time employees. T/F?

False. A part-time employee with $600 (as indexed in 2017) or more in earnings in 3 of the previous 5 years must be covered under a SEP.

Employers are allowed to discriminate in a SEP with regard to contributions that can be made to highly compensated employees. T/F?

False. Even though a simplified employee pensions plan is not a qualified plan, some of the rules that apply to qualified plans apply to SEPs, including the rule regarding nondiscriminatory contributions.

A SEP is a popular plan design choice for large corporations. T/F?

False. Large corporations usually do not choose SEPs because of the rigid coverage requirements.

A SIMPLE can allow participants to borrow from the plan. T/F?

False. SIMPLEs are funded with IRAs. Like SEPs, such plans cannot provide for participant loans. Other IRA rules apply as well, such as immediate vesting and no investments in life insurance or collectibles.

The employer can make both the 3 percent matching contribution and the 2 percent nonelective contribution to the SIMPLE. T/F?

False. The contributions requirement can be either 3 percent matching or 2 percent nonelective contribution, not both.

An employer can sponsor both a SIMPLE and a money-purchase pension plan. T/F?

False. What makes the SIMPLE different from all other types of retirement plans is that a sponsor cannot maintain any other type of tax-advantaged plan at the same time it sponsors the SIMPLE.

Describe a SIMPLE plan to a prospect

Savings incentive match plan for employers Employer sponsored plan Limits on sponsorship—any type of employer as long as there is no other plan and 100 or fewer employers • Salary deferral contributions—eligible participants can defer $12,500 (in 2017) • Catch-up election—participants over age 50 can defer an additional $3,000 (in 2017) • Employer contributions—sponsor must contribute either a specified matching or nonelective contribution (but not both) • Eligibility—must cover all employees with 2 years of $5,000 or more of compensation • Vesting—full and immediate vesting required • Withdrawal restrictions—eligible for withdrawal at any time, but subject to special 25 percent penalty tax in first 2 years of participation • Investment restrictions—like other IRAs, cannot invest in life insurance or most collectibles • Taxation—like other IRAs, subject to ordinary income tax upon distribution

Which of the following statements concerning SIMPLEs is correct? (A) There is a mandatory employer contribution requirement. (B) Elective pretax contributions by employees are not permitted. (C) Participant loans may be permitted if in-service withdrawals are not allowed by the plan. (D) Plan assets can be invested in life insurance.

The answer is (A). (B) is incorrect because elective pretax contributions by employees are a key feature of SIMPLEs. (C) is incorrect because SIMPLEs, do not permit participant loans and in-service withdrawals must be allowed by the plan. (D) is incorrect because plan assets cannot be invested in life insurance or collectibles. (Chapter 6)

Which of the following statements correctly describes a simplified employee pension (SEP) plan? (A) The plan can exclude employees who are aged 25 or younger. (B) The plan must provide for immediate and full vesting. (C) The plan can exclude employees who work fewer than 1,000 hours a year. (D) The allocation formula cannot be integrated with Social Security.

The answer is (B). (A) is incorrect because the plan can only exclude employees from participation prior to age 21. (C) is incorrect because the plan can disregard only those part-time employees who earn less than a specified dollar limit ($600 in 2017). (D) is incorrect because SEPs can have an allocation formula that is integrated with Social Security. (Chapter 6)

Which of the following statements about 403b. (B) plans is (are) correct? I. A 403b. (B) plan can be designed to include independent contractors. II. A 403b. (B) plan can allow participants to make Roth elections on their salary deferral contributions. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (B). I is incorrect because 403(b) plans are not allowed to cover independent contractors. (Chapter 6)

A SIMPLE would be an appropriate choice for which of the following businesses? (A) a business with 150 employees (B) an employer that experiences cash-flow problems (C) an employer that wants to create a retirement planning partnership with its employees (D) an employer looking for flexibility in plan design

The answer is (C). (A) is incorrect because a business is not eligible to sponsor a SIMPLE if it has more than 100 employees. (B) is incorrect because a SIMPLE has a mandatory employer contribution that creates an annual financial commitment that may not be met if there are cash-flow problems. (D) is incorrect because a SIMPLE has little design flexibility. (Chapter 6)

Which of the following statements concerning contributions to a SIMPLE is correct? (A) The employer can elect to provide a 50-cent match for each dollar that the employee elects to defer, as long as the employer matches a salary deferral of up to 6 percent of compensation. (B) Employee salary deferrals are subject to a nondiscrimination test. (C) A contribution for all eligible employees in the amount of 2 percent of compensation satisfies the employer-contribution requirement. (D) The employer has the option to skip making contributions for a specific year.

The answer is (C). (A) is incorrect because the employer-matching contribution to a SIMPLE must be a dollar-for-dollar match up to 3 percent that employees elect to defer. (B) is incorrect because employees can make pretax salary deferrals of up to the maximum deferral limit without regard to how much the other employees contribute. (D) is incorrect because the employer must always contribute either a matching contribution or a nonelective contribution. (Chapter 6)

Which of the following statements concerning the SIMPLE is correct? (A) To sponsor a SIMPLE, an employer must have 25 or fewer employees. (B) An employer can sponsor both a SIMPLE and a SEP. (C) An employer cannot place any restrictions on participant withdrawals. (D) The deferral limit for a SIMPLE is the same as for a 401(k) plan.

The answer is (C). (A) is incorrect because the maximum number of employees an employer can have and still sponsor a SIMPLE is 100, not 25. (B) is incorrect because a SIMPLE sponsor cannot sponsor any other tax-advantaged retirement plan, including qualified plans, SEPs, and 403(b) plans. (D) is incorrect because the maximum employee salary deferral in a SIMPLE is lower than in a 401(k) plan. (Chapter 6)

All of the following statements concerning 403b. (B) plans are correct EXCEPT (A) A 403 (b) plan cannot cover independent contractors. (B) 403(b) salary deferrals must be fully vested at all times. (C) The 403(b) plans must be funded by purchasing an annuity from an insurance company. (D) If employer contributions are included in a 403(b) annuity plan, the plan is subject to ERISA.

The answer is (C). A 403(b) plan may be funded either by purchasing an annuity from an insurance company or by purchasing shares in a mutual fund. (Chapter 6)

All of the following statements concerning SEPs are correct EXCEPT (A) The employer may make contributions on a discretionary basis. (B) All contributions are made directly to each participant's IRA. (C) All contributions to a SEP must immediately be 100 percent vested. (D) Participants are not permitted to withdraw their account balance until termination of employment.

The answer is (D). A SEP participant must be given the opportunity to withdraw his or her account balance at any time. (Chapter 6)

What are the coverage requirements of a SEP? T/F?

The rules require that contributions be made for all employees who have met all there of the following requirements: - attained age 21 - performed services for the employer for at least 3 of the immediately preceding 5 years - earned the required minimum compensation from the business for they year ($600 in 2017)

A 403(b) plan can only be funded with an annuity contract or a mutual fund. T/F?

True.