CFP - Retirement Planning: Qualified Plan Limits Lecture & Quiz

Defined Contribution Plan Characteristics

- Annual Contribution Limit: 25% of covered comp - assumes the investment risk: Employee - How are forfeitures allocated: Reduce Plan Costs or allocate to other participants - subject to PBGC coverage: no - separate investment accounts: yes, participants have account balances - Can credit be given for prior service: no

Defined Benefit Plan Characteristics

- Annual Contribution Limit: Not less than the unfunded current liability* - assumes the investment risk: Employer - How are forfeitures allocated: Reduce Plan Costs - subject to PBGC coverage: Yes (except professional firms with less than 25 employees) $86 per plan participant $46 per $1,000 of underfunding (per participant cap - $582) $72,409 (2018) max benefit - separate investment accounts: No, commingled, participants have accrued benefits - Can credit be given for prior service: Yes

Pension Plan Characteristics

- Legal Promise of Plan: Paying a pension at retirement - In-Service Withdrawals: No* - Mandatory Funding: Yes** - Investment in ER Securities: 10% - QJSA & QPSA: Yes

Profit Sharing Plan Characteristics

- Legal Promise of Plan: deferral of compensation - In-Service Withdrawals: Yes (after 2yrs) - Mandatory Funding: No - Investment in ER Securities: 100% - QJSA & QPSA: No

Defined Benefit Plan Limits

- covered comp: $290k (2021) - lesser of: $230k or 100% of avg of EE's 3 highest consecutive yrs salary (check plan doc*)

Defined Contribution Plan Limits

- lesser of: 100% of EE's comp or $58,000 (2021) - +$6,500 (catch-up 50y/o) = $64,500 - limit consists of EE contribs + ER contribs + forfeitures allocated to participant's account

Profit Sharing Plans (all Defined Contribution Plans)

- profit sharing plans (ER funded) - stock bonus plans (ER funded) - ESOPs (ER funded) - 401(k) plans - thrift plans - new comparability plans - age-based profit sharing plans

C. 15.7%

Abe's Apples has an integrated stock bonus plan. If the plan makes a 10% contribution for the current year what is the maximum excess rate? A. 5.7% B. 10% C. 15.7% D. 20%

D. May not allow "permissible disparity" or integration formulas. (Integration formulas are not allowed under an ESOP plan but are allowed under a stock bonus plan)

All of the following accurately reflect the characteristics of a stock bonus plan, except: A. Useful in cash flow planning for plan sponsor due to cashless contributions. B. Provides motivation to employees because they become "owners." C. 20% withholding does not apply to distributions of employer securities and up to $200 in cash. D. May not allow "permissible disparity" or integration formulas.

C. The cash balance plan has no guaranteed annual investment return to participants.

All of the following statements concerning cash balance pension plans are correct EXCEPT: A. 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. B. The cash balance plan is a defined benefit plan. C. The cash balance plan has no guaranteed annual investment return to participants. D. The cash balance plan is subject to minimum funding requirements.

B. The amount of annual contributions needed to fund single life annuities for the participants at retirement.

An actuary establishes the required funding for a defined benefit pension plan by determining: A. The lump sum equivalent of the normal retirement life annuity benefit of each participant. B. The amount of annual contributions needed to fund single life annuities for the participants at retirement. C. The future value of annual employer contributions until the participant's normal retirement date, taking an assumed interest rate, the number of compounding periods, and employee attrition into account. D. The amount needed for the investment pool to fund period certain annuities for each participant upon retirement.

C. $36,300

Calculate the maximum contribution that could be contributed for an employee, age 41, earning $140,000 annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary. A. $19,500 B. $16,800 C. $36,300 D. $58,000

A. The safe harbor 401(k) plan has more liberal (better for employees) vesting for employer matching contributions as compared to 401(k) plans with a qualified automatic contribution arrangement. (Safe harbor plans require 100% vesting, while 401(k) plans with QACAs require two year 100% vesting)

Cody is considering establishing a 401(k) for his company. He runs a successful video recording and editing company that employs both younger and older employees. He was told that he should set up a safe harbor type plan, but has read on the Internet that there is the safe harbor 401(k) plan and a 401(k) plan with a qualified automatic contribution arrangement. Which of the following statements accurately describes the similarities or differences between these types of plans? A. The safe harbor 401(k) plan has more liberal (better for employees) vesting for employer matching contributions as compared to 401(k) plans with a qualified automatic contribution arrangement. B. Both plans provide the same match percentage and the same non-elective contribution percentage. C. Employees are required to participate in a 401(k) plan with a qualified automatic contribution arrangement. D. Both types of plans eliminate the need for qualified matching contributions, but may require corrective distributions.

A.$14,500 (contribution will be limited by the covered compensation limit of $290,000)

Corey is covered under his employer's Profit-Sharing Plan. He currently earns $500,000 per year. The plan is top heavy. The employer made a 5% contribution on behalf of all employees. What is the company's contribution for him? A.$14,500 B. $25,000 C. $58,000 D. $290,000

B. Flat-percentage formula. (flat amount would provide higher benefits for Nurse Nancy)

Dr. Dylan James is a 55-year-old Doctor who just started his gastroenterologist practice and hired Nurse Nancy, who is age 25. Dr. DJ is expected to earn annual income of $350,000 that will increase at least at the rate of inflation. Inflation is expected to be 3 percent. Which of the following defined benefit plan formulas would you recommend if Dr. DJ wants to maximize his benefits in retirement, which is expected to occur at age 65? A. Unit benefit (a.k.a. percentage-of-earnings-per-year-of-service) formula. B. Flat-percentage formula. C. Flat-amount formula. D. New comparability formula.

C. $67,000

Dr. Woods, age 29, is a new professor at Public University (PU) where he has a salary of $111,000. PU sponsors a 403(b) plan and a 457 plan. Dr. Woods also has a consulting practice called Damage Estimate Claims (DEC). He generates $200,000 of revenue and has $50,000 of expenses for DEC. Assume his self-employment tax is $20,000. What is the most that he could contribute to all of the retirement plans this year assuming he establishes a Keogh plan for DEC? A. $38,000 B. $58,000 C. $67,000 D. $73,000

I, II, III and IV.

Factors which would affect a participant's retirement benefits in a target benefit plan include: I. The actuarial assumptions used to determine plan contributions. II. The total return on plan assets. III. The age of the participant. IV. The includible compensation for the plan year for the participant.

B. $12,000 (non-elective contribution on a QACA is 3% as a standard part of the plan)

Financial Training Team (FTT) develops training materials for finance professionals across the country. Chad, who just turned age 48, owns 15% of FTT and earns $200,000 per year and is a participant in his employer's 401(k) plan, which includes a qualified automatic contribution arrangement and the associated mandatory non-elective contribution. The actual deferral percentage test for the non-highly compensated employees is 2.5 percent. FTT made a 20% profit sharing plan contribution during the year to Chad's account. What is the maximum amount that Chad can defer in the 401(k) plan during 2021? A. $26,000 B. $12,000 C. $13,500 D. $19,500

C. $58,000

Fred's Po-boy shop sponsors an age based profit sharing plan and contributes 20 percent of total covered compensation to the plan. What is the most that could be contributed by the employer to Will's account if his annual compensation is $230,000 for 2021? Assume Will is 58 years old. A. $36,000 B. $42,000 C. $58,000 D. $63,500

II and IV only.

Generally, younger entrants are favored in which of the following plans? I. Defined benefit pension plans. II. Cash balance pension plans. III. Target benefit pension plans. IV. Money purchase pension plans.

B. Traditional defined benefit plans define an employee's benefit as a series of monthly payments for life to begin at retirement, but the cash balance plan defines the benefit in terms of a stated account balance.

How do cash balance plans differ from traditional defined benefit pension plans? A. Traditional defined benefit plans are required to offer payment of an employee's benefit in the form of a series of payments for life while cash balance plans are not. B. Traditional defined benefit plans define an employee's benefit as a series of monthly payments for life to begin at retirement, but the cash balance plan defines the benefit in terms of a stated account balance. C. In Cash Benefit Plans, these accounts are often referred to as hypothetical accounts because they do not reflect actual contributions to an account or actual gains and losses allocable to the account, whereas in a Defined Benefit Pension Plan they do. D. Pension Plans are available to retirees in a lump sum payment, whereas Cash Balance Plans are not.

II and IV only.

IRC Section 415(c) applies an "annual addition" limited to certain qualified plans. Which of the following statements is correct? I. The limit is the lesser of 25% of compensation or $58,000 for the current year. II. The limit only applies to defined contribution plans. III. Includable additions include forfeiture reallocations, employer and employee contributions and investment earnings. IV. Salary deferrals are included as part of the annual additions limit.

IV only.

In a money purchase plan that utilizes plan forfeitures to reduce future employer plan contributions, which of the following components must be factored into the calculation of the maximum annual addition limit? I. Forfeitures that otherwise would have been reallocated. II. Annual earnings on all employer and employee contributions. III. Rollover contributions for the year. IV. Employer and employee contributions to all defined contribution plans.

B. Compensation exceeding $290,000.

In determining the allowable annual additions per participant to a defined-contribution pension plan account in the current year, the employer may NOT include: A. The lesser of 100% of income or $58,000 (indexed). B. Compensation exceeding $290,000. C. Compensation exceeding the defined-benefit limitation in effect for that year. D. Bonuses.

I, II and III only. (normal retirement age must be stated in a defined benefit plan)

In order to be qualified, money purchase plans must contain which of the following? I. A definite and non-discretionary employer contribution formula. II. Forfeitures can be reallocated to the remaining participants' accounts in a non-discriminatory manner or used to reduce employer contributions. III. An individual account must be maintained for each employee of employer contributions. IV. The normal retirement age must be specified.

D. Cannot be determined by the information given.

J.P. is covered under his employer's Profit-Sharing Plan. He currently earns $500,000 per year. The plan is top heavy. The employer made a 10% contribution on behalf of all employees. What is the maximum retirement benefit that can be paid to him? A. $28,500 B. $50,000 C. $58,000 D. Cannot be determined by the information given.

A. $58,000 (ER does not contrib the catch-up amount, the T/P would in a contributory plan, which a Money Purchase Plan is not)

Jeb, age 54, works for Gamma Corporation and Epsilon Corporation. Gamma and Epsilon are both part of the same parent-subsidiary control group. Gamma and Epsilon both sponsor a 25% money purchase plan. If Jeb earns $200,000 at Gamma and $40,000 at Epsilon what is the maximum employer contribution that can be made to both plans? A. $58,000 B. $60,000 C. $63,500 D. $81,000

A. $7,000

Lisa, age 35, earns $175,000 per year. Her employer, Reviews Are Us, sponsors a qualified profit sharing 401(k) plan, which is not a Safe Harbor Plan, and allocates all plan forfeitures to remaining participants. If in the current year, Reviews Are Us makes a 20% contribution to all employees and allocates $5,000 of forfeitures to Lisa's profit sharing plan account, what is the maximum Lisa can defer to the 401(k) plan in 2021 if the ADP of the non-highly employees is 2%? A. $7,000 B. $13,500 C. $17,000 D. $19,500

C. $26,022

Marilyn Hayward is the sole proprietor and only employee of unincorporated Graphics for Green Promotions. In 2021, Marilyn established a profit sharing Keogh plan with a 25% contribution formula. As of December 31, 2021, Marilyn has $140,000 of Schedule C net earnings. The deduction for one-half of the self-employment tax is, therefore, $9,891. What is the maximum allowable Keogh contribution that Marilyn can make? A. $19,500 B. $24,311 C. $26,022 D. $32,560

B. Money purchase plan.

Match the following statement with the type of retirement plan which it most completely describes: "A plan which requires annual employer contributions equal to a formula determined by each participant's salary" is a... A. Profit sharing plan. B. Money purchase plan. C. SIMPLE IRA. D. Defined benefit plan.

I and II only.

Matt is a participant in a profit sharing plan which is integrated with Social Security. The base benefit percentage is 6%. Which of the following statements is/are true? I. The maximum permitted disparity is 100% of the base benefit level or 5.7%, whichever is lower. II. The excess benefit percentage can range between 0% and 11.7%. III. Elective deferrals may be increased in excess of the base income amount. IV. The plan is considered discriminatory because it gives greater contributions to the HCEs.

I and II.

One of the disadvantages of an ESOP is that the stock is in an undiversified investment portfolio. Which of the following statements is correct about ESOPs? I. An employee, age 55 or older, who has completed 10 years of participation in an ESOP may require that 25 percent of the account balance be diversified. II. An employee who receives corporate stock as a distribution from an ESOP may enjoy net unrealized appreciation treatment at the time of distribution.

B. $48,860

Prince, age 60, is the sole member of Symbols, LLC. Symbols sponsors a 401(k) / profit sharing plan. Prince's self-employment income (after expenses) was $123,000 and his self-employment taxes were $17,400 for the year. What is the maximum that could be contributed by the employer and Prince for the benefit of Prince for 2021? A. $42,360 B. $48,860 C. $49,600 D. $55,850

D. $28,400

Sherman, age 52, works as an employee for Cupcakes Etc, a local bakery. Cupcakes sponsors a 401(k) plan. Sherman earns $50,000 and makes a 10% deferral into his 401(k) plan. His employer matches the first 3% deferral at 100% and they also made a 5% profit sharing contribution to his plan. Sherman also owns his own landscaping business and has adopted a solo 401(k) plan. His landscaping business earned $40,000 for the current year. What is the total contribution that can be made to the solo plan, assuming his self-employment taxes are $6,000? A. $19,500 B. $21,000 C. $26,000 D. $28,400

B. $1,500 (plan is top heavy, therefore must provide a benefit to all non-key employees of at least 3%)

Spenser is covered under his employer's top-heavy New Comparability Plan. The plan classifies employees into one of three categories: 1) Owners, 2) Full-time employees, 3) Part-time employees. Assume the IRS has approved the plan and does not consider it to be discriminatory. The employer made a 4% contribution on behalf of all owners, 2% contribution on behalf of all Full-time employees and 1% contribution on behalf of all part time employees. If Spenser currently earns $50,000 per year and is a full-time employee, what is the contribution that should be made for him? A. $1,000 B. $1,500 C. $19,500 D. $58,000

D. Value of the participant's account at retirement.

The maximum retirement benefit a participant in a target-benefit plan will actually receive depends on the: A. Initial actuarial computation according to the plan's formula. B. Amount of contributions determined in reference to the targeted benefit. C. Maximum annual additional amounts. D. Value of the participant's account at retirement.

C. $10,000 ($39k+$4k+$10k+$5k=$58k)

WestN, Inc. sponsors a 401(k) profit sharing plan with a 50% match. In the current year, the company contributed 20% of each employee's compensation to the profit sharing plan in addition to the match to the 401(k) plan. The company also allocated a forfeiture allocation of $4,000. The ADP of the 401(k) plan for the NHC is 4%. Wade, who is age 45, earns $195,000 and owns 19% of the company stock. If Wade wants to maximize the contributions to the plan, how much will he defer into the 401(k) plan? A. $19,500 B. $11,700 C. $10,000 D. $5,000

Defined Benefit Pension Plans & Cash Balance Pension Plans

What are the two pension plans which are defined benefit plans?

Money Purchase Pension Plans & Target Benefit Pension Plans

What are the two pension plans which are defined contribution plans?

II, III and IV only.

Which of the following are basic provisions of an IRC Section 401(k) plan? I. Employee elective deferrals are exempt from income tax withholding and FICA / FUTA taxes. II. Employer's deduction for a cash or deferred contribution to a Section 401(k) plan cannot exceed 25% of covered payroll reduced by employees' elective deferrals. III. A 401(k) plan cannot require, as a condition of participation, that an employee complete a period of service greater than one year. IV. Employee elective deferrals may be made from salary or bonuses.

I, II and IV only.

Which of the following are legal requirements for 401(k) plans? I. Employer contributions do not have to be made from profits. II. Employee elective deferral elections must be made before the compensation is earned. III. Hardship rules allow in-service withdrawals which are not subject to the 10% early withdrawal penalty. IV. ADP tests can be avoided using special safe harbor provisions.

I only.

Which of the following characteristics apply to paired plans (also known as "tandem plans")? I. Generally combines a money purchase pension and a profit-sharing plan. II. Actuarial assumptions required. III. Total contributions to the paired plans limited to 15% of payroll by IRC Section 404. IV. Employer bears investment risk.

C. Negative election clause.

Which of the following clauses in a 401(k) plan can assist the plan in meeting the requirements of the ADP test? A. Attestation clause. B. No-Contest clause. C. Negative election clause. D. Deferral plan clause.

C. 403(b) plan. (tax-advantaged plan (tax qualified), not a qualified retirement plan)

Which of the following is not a qualified retirement plan? A. ESOP. B. 401(k) plan. C. 403(b) plan. D. Target benefit plan.

I, II, III and IV.

Which of the following qualified plans would allocate a higher percentage of the plan's current contributions to a certain class or group of eligible employees? I. A profit sharing plan that uses permitted disparity. II. An age-based profit sharing plan. III. A defined benefit pension plan. IV. A target benefit pension plan.

I, III and IV only.

Which of the following qualified retirement plans are subject to mandatory minimum funding requirements? I. Defined benefit pension plans. II. Profit sharing plans. III. Money purchase pension plans. IV. Target benefit plans. V. Section 401(k) plans. VI. SIMPLE IRA.

I only.

Which of the following statements accurately reflects the overall limits and deductions for employer contributions to qualified plans? I. An employer's deduction for contributions to a money purchase pension plan and profit sharing plan is limited to the lesser of 25% of covered payroll or the maximum Section 415 limits permitted for individual account plans. II. An employer's deduction for contributions to a defined benefit pension plan and profit sharing plan cannot exceed the lesser of the amount necessary to satisfy the minimum funding standards or 25% of covered payroll. III. Profit sharing minimum funding standard is the lesser of 25% or the Section 415 limits permitted for individual account plans.

D. The adoption of a cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand than a traditional defined benefit plan, and as a plan that has more predictable costs associated with its funding.

Which of the following statements concerning cash balance pension plans is correct? A. The cash balance plan is a defined benefit plan because the annual contribution is defined by the plan as a percentage of employee compensation. B. The cash balance plan provides a guaranteed annual investment return to participant's account balances that can be fixed or variable and is 100% guaranteed by the Pension Benefit Guarantee Corporation. C. The cash balance plan uses the same vesting schedules as traditional defined benefit plans. D. The adoption of a cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand than a traditional defined benefit plan, and as a plan that has more predictable costs associated with its funding.

I, II and III only

Which of the following vesting schedules may a non-top-heavy profit sharing plan use? I. 2 to 6 year graduated. II. 3-year cliff. III. 1 to 4 year graduated. IV. 3 to 7 year cliff.

A. 1 to 5 year graduated.

Which of the following vesting schedules may a top-heavy qualified profit sharing plan use? A. 1 to 5 year graduated. B. 5-year cliff. C. 3 to 7 year graduated. D. 4 to 8 year graduated.

B. Arbitrary annual contributions.

Which one of the following statements is NOT true for a defined benefit plan? A. Favors older participants. B. Arbitrary annual contributions. C. Requires an actuary on an annual basis. D. Maximum retirement benefit is $230,000 (2021) per year.

I, II and IV only.

Which statement(s) is/are true for a target benefit plan? I. It favors older participants. II. It requires actuarial assumptions. III. The employer's maximum deductible contribution is 25% of employee's salary. IV. The maximum individual annual additions is the lesser of 100% of pay or $58,000.