Module 4 QBank Quiz

Sharon Bender, age 52, has been a teacher in the Lammer County School District for 18 years. Recently, she inherited a large sum of money and wants to minimize her income tax. What is her maximum 403(b) deferral in 2023? A) $33,000 B) $22,500 C) $30,000 D) $66,000

A) Explanation Sharon can defer the basic $22,500 allowed in 2023, plus $7,500 for the age 50 catch-up and $3,000 for the long service catch-up (15 years of service or more). LO 4.3.1

Which of these statements describing how qualified plans are similar to simplified employee pension (SEP) plans and savings incentive match plans for employees (SIMPLEs) is (are) CORRECT? Qualified plans, SEP plans, and SIMPLEs all provide for deferral of income taxation. Plan sponsors of qualified plans, SEP plans, and SIMPLEs make contributions to either a trust, an insurance contract, or an individual retirement account depending on the type of plan. A) Both I and II B) I only C) II only D) Neither I nor II

A) Explanation The answer is both I and II. Deferred compensation is provided in qualified plans, SEP plans, and SIMPLEs. Depending on the type of the plan, the plan sponsors of qualified plans, SEP plans, and SIMPLEs make contributions to either a trust, an insurance contract, or an individual retirement account. Only qualified plans can make contributions to an insurance contract. LO 4.2.2

What is the maximum amount possible that may be contributed to a simplified employee pension (SEP) on behalf of a participant for 2023? A) $22,500 B) $66,000 C) $30,000 D) $15,500

B) Explanation For 2023, the maximum contribution possible on behalf of a participant to a SEP is the lesser of 25% of employee covered compensation or $66,000. LO 4.2.2

Which of the following statements regarding plan requirements for SIMPLE IRAs is CORRECT? To establish a SIMPLE IRA, a business normally cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation). Assets in SIMPLE IRAs can be invested in life insurance. A) II only B) I only C) Neither I nor II D) Both I and II

B) Explanation Statement II is incorrect because SIMPLE IRAs, like SEP plans, are funded with individual retirement accounts, and these assets cannot be invested in life insurance or collectibles. LO 4.2.1

In which of the following plans would you typically find a lump sum distribution that may qualify for favorable income tax treatment? A) A Section 403(b) plan B) A profit sharing plan C) A SEP plan D) A traditional defined benefit pension plan

B) Explanation The possibility of favorable income tax treatment for a lump sum distribution (like NUA treatment) is available only for qualified (versus tax-advantaged) plans. In addition, the lump sum distribution option is typically available only in a defined contribution type of plan, such as a profit sharing plan. LO 4.1.1

Claudia's SEP plan balance is $60,000. She wants to know her options for taking a loan from her SEP plan to pay some college expenses for her daughter, Caroline. Which of the following statements is CORRECT? A) SEP plan loan repayments must be in level installments, payable at least quarterly over a five-year period. B) Claudia may borrow up to 50% of her SEP account balance to pay for Caroline's college expenses because she is 100% vested in the account contributions. C) Because Claudia is 100% vested in the SEP plan, she may borrow up to $50,000 from the plan. D) Claudia may not make a loan from her SEP plan account.

D) Explanation A SEP plan is a type of IRA. A participant is not permitted to borrow from a SEP plan. LO 4.2.2

Which of these is a disadvantage of a SIMPLE IRA? A) Simple to understand and explain to employees B) Easy to install and administer C) No actual deferral percentage (ADP) or actual contribution percentage (ACP) tests D) Lower contribution limits than a 401(k)

D) Explanation The answer is lower employee contribution limits than a 401(k). Employees may make an elective deferral as a percentage of compensation up to $15,500 (2023). This is a disadvantage because the maximum employee elective deferral for 401(k) plans is higher. The other statements are advantages of a SIMPLE IRA. LO 4.2.1

Shock Limited just established a simplified employee pension (SEP) plan for the benefit of its employees. The company has more than 500 employees, 15% of whom are highly compensated. This year, Shock contributed 6% of each eligible employee's salary to the SEP plan. Several of the employees of the company are unfamiliar with the provisions of SEP plans and have come to you requesting information. Which of the following statements regarding the basic provisions of SEP plans is CORRECT? Employees can roll money that is distributed from a SEP plan into a different IRA within 60 days without withholding or penalty as long as it is not a required minimum distribution. Contributions must be made for any employee, age 21 or over, who has performed services for the company in three of the past five years and has earned at least $750 during 2023. Employer contributions are 100% vested immediately. A SEP plan may exclude members of unions if the unions have their own retirement plan. A) I, II, III, and IV B) II, III, and IV C) I, II, and III D) I, III, and IV

A) Explanation All of the statements are correct. LO 4.2.2

Dorothy is a 36-year-old jewelry designer who owns her own small gallery. For most of the year, she works alone, handling the designing and sales herself. However, during the busy holiday season, she hires Yvonne and Mirabelle, two part-time sales clerks to help her. Each of these employees works approximately 300 hours, earning an average salary of $4,000. Dorothy would like to establish a retirement plan that would allow her to save for her own retirement, but not require her to cover the part-time employees. She also doesn't want to pay expensive administrative costs. Which one of the following plans would be most appropriate for Dorothy? A) SEP plan B) SIMPLE IRA C) Traditional Section 401(k) plan D) Section 457 plan

B) Explanation A SEP plan would not be appropriate because it would require coverage of Dorothy's part-time employees. A traditional Section 401(k) is not appropriate because it would involve special nondiscrimination testing and annual filing of the Form 5500 series. A Section 457 plan is not appropriate because it is available only for certain, private tax-exempt organizations. A SIMPLE IRA would be the most appropriate plan because it involves little administrative costs and would meet Dorothy's retirement planning goals. LO 4.2.1

Christopher works for the Ex-March Company, a small business with 75 employees. Ex-March has decided to establish a SIMPLE IRA plan for all of its employees and will make a 2% nonelective contribution for each of its eligible employees. Christopher's annual salary is $40,000, and he has determined that he cannot afford to make an elective deferral to his SIMPLE IRA. Which of the following statements regarding Christopher's SIMPLE IRA contribution is CORRECT? A) Ex-March must make a nonelective contribution of $1,200 for Christopher. B) Ex-March Company must make a nonelective contribution of $800 for Christopher. C) Ex-March is not required to make a contribution for Christopher. D) Christopher must make a 2% minimum contribution this year.

B) Explanation Ex-March must make a nonelective contribution of $800 for Christopher. Though Christopher does not make a contribution this year, Ex-March must make a nonelective contribution of $800 (2% × $40,000) on his behalf. Under the employer contribution election Ex-March has selected, even if an eligible employee does not contribute to the SIMPLE IRA, that employee would still receive an employer nonelective contribution to his SIMPLE IRA equal to 2% of compensation. LO 4.2.1

Are the investment options available to 401(k) and 403(b) plans different in any way? A) Yes, because 401(k) plans can only be invested in mutual funds and/or annuity contracts. B) No, because both a 401(k) and a 403(b) have unlimited access to all the same investment products. C) Yes, because 403(b) plans are limited to investing in annuity contracts and/or mutual funds. D) No, because both a 401(k) and a 403(b) are qualified plans.

C) Explanation A 403(b) plan is limited to investing in mutual funds and/or annuity contracts. Conversely, the Internal Revenue Code does not specify which instruments 401(k) funds can be invested in. A 403(b) plan is technically not a qualified plan under the Employee Retirement Income Security Act of 1974 (ERISA). LO 4.3.1

Generally, for SIMPLE contributions, A) employer contributions are not deductible business expenses. B) only the first $3,000 contributed is tax deferred. C) earnings within the account are tax deferred. D) contributions to the account are after-tax dollars for the employee.

C) Explanation Earnings within the account are tax deferred. Contributions by the employee are made with pretax dollars, and the employer may deduct its contributions as an ordinary business expense. For 2023 and following, SECURE 2.0 allows workers to make Roth contributions to SIMPLEs (both SIMPLE IRAs and SIMPLE 401[k]s). Additionally, workers are allowed to treat employer contributions to many defined contributions, such as SEPS, as Roth contributions. LO 4.2.1

Gary, age 50, participates in an eligible Section 457 plan through his non-church-controlled, private, tax- exempt employer. Which of the following statements regarding Gary's nongovernmental plan is CORRECT? If Gary has elected the three-year catch-up provision, he may also use the regular age-50-and-over catch-up provision in the same tax year. He must pay income tax on distributions when there is no longer a substantial risk of forfeiture, which may be earlier than when the distribution is actually paid. During the last three years of employment before the plan's normal retirement age, Gary's elective deferral may be increased to up to $45,000 in 2023. Section 457 plan distributions are not eligible for net unrealized appreciation treatment. A) I, II, and III B) I, II, III, and IV C) II, III, and IV D) II and III

C) Explanation Only Statement I is incorrect. Gary is not eligible for the regular age-50-and-over catch-up provision because he is a participant in a nongovernmental plan and has elected the three-year special catch-up provision. LO 4.3.2

Linda works for a Section 501(c)(3) organization that sponsors a Section 403(b) plan. Which of the following statements regarding a Section 403(b) plan is false? A special catch-up provision available for Section 403(b) plan participants allows the elective deferral amount to be doubled in the last three years before retirement. Funding in the plan is limited to annuity contracts or mutual funds. Because the organization is a nonprofit, employer contributions to the plan are currently taxable to the employees. The elective deferral limit (not considering any available catch-up contribution) is $66,000 for 2023. A) III and IV B) II only C) I, III, and IV D) I, II, III, and IV

C) Explanation Statement II is correct. Funding in a Section 403(b) plan is limited to annuity contracts or mutual funds. Statements I, III, and IV are incorrect. Employer contributions to the plan are not currently taxable to the employees. The elective deferral limit is $22,500 in 2023 with an age-50-or-over catch-up contribution of $7,500. Special catch-up contribution provisions may be available to qualifying participants, but the maximum available special catch-up amount in a tax year is $3,000. LO 4.3.1

If an employer had the objective of maximizing discretionary retirement contributions from any source, which plan would be most appropriate? A) SIMPLE IRA B) Traditional IRA C) Roth IRA D) SEP IRA

D) Explanation Employers can make discretionary contributions to a SEP IRA of up to $66,000 in 2023. Employees cannot contribute to a SEP IRA. Employers cannot make discretionary contributions to a Traditional IRA or Roth IRA. The normal salary deferral limit in a SIMPLE IRA is $15,500. An employer can make either a 3% matching contribution or 2% nonelective contribution to a SIMPLE IRA. No other types of contributions may be made to a SIMPLE IRA. LO 4.2.2

Which of the following are characteristics of a Section 403(b) plan (TSA)? An employee, age 52, has a maximum contribution of $22,500 for 2023. Qualifying lump-sum distributions from a TSA are eligible for NUA tax treatment. Rollovers to IRAs are permitted. A) II and III B) I and II C) I and III D) III only

D) Explanation For 2023, the regular elective deferral limit for employee elective deferral contributions to a Section 403(b) plan is $22,500. Employees over age 50 would be allowed to defer an additional $7,500 (2023) as a catch-up contribution. An employee who has worked for an eligible plan sponsor for at least 15 years and has not maximized deferrals to the Section 403(b) plan in past years is also eligible for an additional $3,000 catch-up contribution. The eligible plan sponsors are health, educational, and church employers. With this, rollovers are allowable, and NUA tax treatment is not permitted for Section 403(b) plans because a not-for-profit employer does not have employer stock to distribute. LO 4.3.1

Assume an employer implements a SIMPLE IRA with a 3% employer-matching contribution. What is the effective includible compensation limit for employees younger than age 50 for a SIMPLE IRA for 2023? A) $330,000 B) $66,000 C) $265,000 D) $516,666

D) Explanation If an employer decides to elect the 3% matching contribution for a SIMPLE IRA, the includible compensation limit in 2023 is effectively $516,666, or $15,500 ÷ 0.03. For a SIMPLE 401(k), it is the same includible compensation amount ($330,000) in 2023 as for other qualified retirement plans. If a SIMPLE IRA has the 2% mandatory employer contribution, the 2% stops at $330,000 in 2023. Notice that the law is designed to encourage a higher total contribution. It allows the owner to get more of a contribution with a match than with a mandatory annual employer contribution. Many people would not contribute without the match, so their retirement savings rate would be 2%. The same people will often do the 3% worker contribution to get the match, so their effective savings rate becomes 6%—thus, allowing the owner to save a little bit more ends up tripling the retirement savings account for many workers. LO 4.2.1

Which one of these statements is CORRECT regarding a savings incentive match plan for employees (SIMPLE)? A) To be eligible to offer a SIMPLE plan, employers cannot have more than 50 employees earning $5,000 or more. B) In a SIMPLE IRA, employees can defer the lesser of 25% of compensation or $22,500 in 2023. C) State and local governments are not allowed to establish a SIMPLE IRA. D) Employers can provide either a nonelective or a matching contribution.

D) Explanation SIMPLE plans can have either a 2% nonelective contribution or a 3% match. For 2023 and following, SECURE 2.0 allows workers to make Roth contributions to SIMPLEs (both SIMPLE IRAs and SIMPLE 401[k]s). Additionally, workers are allowed to treat employer contributions to many defined contributions, such as SEPS, as Roth contributions. LO 4.2.1

A simplified employee pension (SEP) plan A) can deny participation to any employee 21 years of age or older based on age. B) cannot be integrated with Social Security. C) imposes mandatory employer contributions. D) requires employer contributions on a nondiscriminatory basis.

D) Explanation The answer is simplified employee pension (SEP) plan requires employer contributions on a nondiscriminatory basis. A SEP plan is a retirement plan that uses an IRA as the receptacle for employer/employee contributions. The SEP plan is often a good choice for very small companies because of its low cost and ease of administration. All employer contributions to a SEP plan are discretionary. LO 4.2.2

Mark's financial planner has recommended a retirement plan for implementation at Mark's business in 2023. He tells Mark that the plan must cover all employees who are at least age 21 and have worked for Mark for three of the last five years (part-time counts). Contributions must be made for employees who earned at least $750 (2023) in the prior year. The plan can exclude union members if they have their own retirement plan. Which type of plan has Mark's planner recommended? A) SIMPLE IRA plan B) Profit-sharing plan C) SARSEP plan D) Simplified employee pension (SEP) plan

D) Explanation The requirements listed are elements of a SEP plan. LO 4.2.2