Chapt 5 Finc322
Which of the following is not true regarding profit-sharing plans? A. Profit-sharing plans are established and maintained by the individual employee. B. Profit-sharing plans allow 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 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.
The Crawfish Company sponsors an integrated profit-sharing plan with a base percent of 20%. Landry, who is 60 years old, earns $350,000 per year. Assuming the plan uses the 2023 Social Security wage base as the integration level, how much more will Landry receive because the plan is integrated over a plan that contributes a flat 20% of compensation? a $0. b $4,000. c $7,500. d $30,000.
a. Landry would not get any benefit from integration if the base percent is 20% because 20% of $330,000 (2023 compensation limit) equals $66,000 (2023 annual additions limit).
Which of the following is true regarding negative elections? 1 A negative election is a device where the employee is deemed to have elected a specific deferral unless the employee specifically elects out of such election in writing. 2 Negative elections are no longer approved by the IRS. 3 Negative elections are only available for employees who enter the plan when it is first established and are not available for new employees. a 1 only. b 1 and 2. c 2 and 3. d 1, 2, and 3.
a. Negative elections are approved by the IRS and they are available for both current and future employees. Qualified automatic contribution arrangements use negative elections. However, not all plans that employ a negative election will qualify as a qualified automatic contribution arrangement.
All of the following are advantages of a 401(k) plan except: a Employees are permitted to shelter current income from taxation in a 401(k) plan. b Employers can sponsor 401(k) safe harbor plans without committing to annual contributions and without creating a deferred liability. c Earnings grow tax-deferred until distributed. d Employers can establish 401(k) plans with minimal expense.
b. Answer b is false, and thus not an advantage of 401(k) safe harbor plans. Employers are generally required under the safe harbor rules to make either a matching contribution or a contribution to all employee's eligible for the plan whether they contribute or not.
Mikael opened a fabulous restaurant ten years ago.. Mikael, age 55, is the sole owner with compensation of $330,000. Mikael's son Jamel, age 28, is the master chef with compensation of $160,000. Jamel has been with the restaurant full time since he turned 18. Mikael also employs 15 other individuals whose ages range between 25 and 35 and have compensation on average of $40,000 per year. Mikael wants to establish a profit-sharing plan. Which of the following statements is true? a If Mikael selected the standard allocation method and the plan contributes 10 percent per individual, the plan will contribute $66,000 to Mikael's account. b If Mikael selected the permitted disparity method and the plan contributes 10 percent per individual, the contribution the company makes for Mikael will be increased. c Considering the needs and wants of Mikael and Jamel, an age-based profit-sharing plan is the best plan for both of them. d A new comparability plan is the least expensive, simplest way to meet both Mikael and Jamel's retirement needs.
b. By using permitted disparity, or integration with Social Security, Mikael can increase the contribution to both himself and Jamel. Answer a is false because the covered compensation limit is $330,000 for 2023; thus, the contribution to Mikael's account using a standard allocation of 10% is $33,000. Answer c is false because an age-based profit sharing is not necessarily in Jamel's best interest. The facts say that the 15 other employees range from age 25 to age 35, with some of these employees being older than Jamel. In this instance, some employees might be allocated a greater share of the contribution than Jamel. Answer d is false because a new comparability plan is generally more expensive to administer than other plans.
Sheehan works for Andy Company. His total compensation this year is $600,000. Andy sponsors an integrated profit-sharing plan with a base percentage of 5.5% and a maximum excess percentage. It uses the current wage base as the integration level. How much will the company contribute for Sheehan for 2023? a $22,500. b $27,489. c $30,000. d $33,000.
b. The excess percentage is 11% (twice the base percentage). Therefore, Sheehan receives 5.5% from zero to the wage base of $160,200 in 2023 ($147,000 in 2022) and 11% on income above the wage base up to the covered compensation limit of $330,000 in 2023 ($305,000 in 2022). [[$330,000 - $160,200] x 11% + $160,200 x 5.5%]. $17,380 + $8,811 = $27,489.
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 employer's covered compensation. d. The legal promise of a profit-sharing plan is to pay a pension at retirement.
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.
Which of the following statements is true regarding CODAs? a. A 401(k) plan must be established in such a way that employers are required to contribute to the plan. b. A CODA is allowed with a profit-sharing plan, stock bonus plan, and a cash balance pension plan. c. Contributions can only be made after-tax. d. CODAs are employee self-reliant plans.
d. 401(k) plans are not required to have employer contributions; however, they often do have matching or profit-sharing contributions. 401(k) plans can be established so that only the employees contribute to the plan. A CODA is not allowed with a cash balance pension plan (other than the special DB(k) plan). Contributions can be made pre- and post-tax.
Rex, age 47, an employee at Water Waste, is considering contributing to a 401(k) plan during 2023. Which of the following statements are true? a Rex can make a $30,000 elective deferral contribution to a 401(k) plan for 2023. b If Rex does make an elective deferral contribution, the amount is not currently subject to income or payroll taxes. c Rex can contribute $22,500 to a 401(k) plan and an additional $22,500 to a 401(k) Roth account in the current year. d Water Waste must deposit Rex's elective deferral contribution to the plan as soon as reasonably possible.
d. Rex can only make a $22,500 contribution for 2023. He would only be able to contribute $30,000 if he were age 50 or over. Employee deferrals are subject to payroll tax but not income tax. Rex cannot exceed the maximum deferral contribution amount of $22,500 by contributing to both a 401(k) and a 401(k) Roth account.
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. 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.
Simone's Cheerleading Uniforms has four employees. The company has a profit-sharing plan that has made contributions every year. The plan is designed to maximize the contribution to Simone and has reached Simone's 415(c) limit each year. The company made a 20 percent contribution yesterday on behalf of all employees. The employee census and account balances are as follows: Today, after a huge blow up, Simone fired Gabby. Which of the following statements regarding forfeitures is correct (assume the plan meets all necessary testing requirements)? a If the plan document permitted allocation of forfeitures based on compensation, then Simone would receive $5,280 (($330,000 ÷ $400,000) x $6,400) of Gabby's unvested plan balance. b If the plan document permitted reduction of plan contributions for forfeitures, Gabby's $8,000 balance could be used to offset future plan contributions. c Since Simone fired Gabby, Gabby becomes 100 percent vested in her plan assets and there is no forfeiture of plan assets. d Given the company census and plan information, the appropriate plan choice for forfeitures is to use them to reduce future plan contributions.
d. The most appropriate plan choice would be to use plan forfeitures (in the amount of $6,400) to reduce plan contributions. The facts state that the plan is designed to maximize the benefits to Simone. Allocating the contributions would not maximize the benefit to Simone because Simone has already maximized her contribution to the plan ($330,000 x 20% = $66,000). The plan could not allocate any of the forfeitures to Simone (thus answer a is incorrect).
Which of the following vesting schedules may a top-heavy profit-sharing plan not use? a 1-to-4-year graduated. b 35% after 1 year, 70% after 2 years, and 100% after 3 years. c 2-to-6 year graduated. d 4-year cliff.
d. The vesting schedule must be at least as generous as the statutory 3-year cliff or 2-to-6-year graduated schedule. The only choice that is not possible is a 4-year cliff, since 3-year cliff is the standard for a DC plan. Top heavy is irrelevant with vesting of DC plans after PPA 2006.
