Retirement Planning Final Ch. 8

Tracy, age 46, is a self-employed financial planner and has Schedule C income from self-employment of $56,000. He has failed to save for retirement until now. Therefore, he would like to make the maximum contribution to his profit sharing plan. How much can he contribute to his profit sharing plan account for 2020?

$10,409 $56,000Schedule C net income - 3,956(less 1/2 self-employment taxes at 15.3% x 0.9235) $52,044Net self-employment income x 0.20 (0.25 ÷ 1.25) $10,409Keogh profit sharing contribution amount

Beth Ann, age 55, is an attorney who is self employed. Her assistant, Buffy, has worked with her for five years. Beth Ann is establishing a SEP for this year and is willing to make a contribution of 10 percent of Buffy's salary to the SEP. If Beth Ann earns $90,000 after paying Buffy, her expenses, and the contribution to Buffy's SEP, what is the most that she can contribute to the SEP on her behalf for 2020?

$7,604 $90,000 Schedule C Net Income $6,358 Less 1/2 Self-Employment Tax $90,000 x 92.35% x 15.3% x 1/2 $83,642 x 9.09%(10%/1.10) $7,604 SEP Contribution Limit Beth Ann is limited to the same percentage contribution as her employer. However, because she is self employed, the 10% is based on earned income. The short-cut is to use 9.09% (10% / 1.10).

Employees generally contribute to which of the following plans? 1. 401(k) plans 2. Thrift plans. 3. Cash balance pension plans. 4. Defined benefit pension plans

1 & 2 Cash balance pension plans and defined benefit pension plans are almost always exclusively funded by the employer (noncontributory). 401(k) plans and thrift plans allow employee contributions

Investment portfolio risk is generally borne by the participant/employee in all of the listed qualified plans, EXCEPT: 1. Defined benefit pension plan. 2. Cash balance pension plan. 3. 401(k) plan. 4. Profit sharing plan.

1 & 2 In defined benefit and cash balance pension plans, the employer bears the investment risk

Generally, older age entrants are favored in which of the following plans? 1. Defined benefit pension plans. 2. Cash balance pension plans. 3. Target benefit pension plans. 4. Money purchase pension plans.

1 & 3 Cash balance and money purchase pension plans generally favor younger age entrants. While defined benefit and target benefit pension plans favor older age entrants with less time to accumulate and require higher funding levels

Which of the following qualified plans require mandatory funding? 1. Defined benefit pension plans. 2. 401(k) plans with an employer match organized as a profit sharing plan. 3. Cash balance pension plans. 4. Money purchase pension plans

1, 3, & 4 pension plans

The target benefit pension plan and the money purchase pension plan provide some employee/participant investment diversification protections by limiting the investment amount in employer stock to less than or equal to:

10% Defined benefit, cash balance, target benenit, and money purchase pension plans limit contributions of company stock to 10%.

Which of the following statements is correct regarding the calculation of self-employment tax? 1. For a taxpayer who has both W-2 income and SE income, W-2 income earned during a year will always reduce the amount of self-employment tax due on self-employment income. 2. Two separate sources of self-employment income for a taxpayer are combined to determine the total self-employment tax owed by the taxpayer. 1 only. 2 only. Both 1 and 2. Neither 1 nor 2.

2 only

A distress termination of a qualified retirement plan occurs when: 1. The PBGC initiates a termination because the plan was determined to be unable to pay benefits from the plan. 2. An employer is in financial difficulty and is unable to continue with the plan financially. Generally, this occurs when the company has filed for bankruptcy, either Chapter 7 liquidation or Chapter 11 reorganization. 3. The employer has sufficient assets to pay all benefits vested at the time, but is distressed about it. 4. When the PBGC notifies the employer that it wishes to change the plan due to the increasing unfunded risk.

2 only Statement 2 is the definition of a distress termination. Statement 3 describes a standard termination. Statement 1 describes an involuntary termination. Statement 4 is simply false

Generally, which of the following are contributory plans?

401(k) and thrift plans

Westgate Inc., recently adopted a profit sharing plan. Westgate has two offices, the North Westgate office and the South Westgate office. There are 10 employees in the North Westgate office, 5 of which are eligible for the plan; and 15 employees in the South Westgate office that are all eligible for the plan. Which of the following statements is true?

A Summary Plan Description must be furnished to each participant within 120 days of plan establishment. Option a is incorrect because the employees must be notified by mail between 10 and 24 days before mailing the determination letter. Option c describes a master plan. Option d is incorrect because all employees must be notified if they work in an office where an eligible employee works.

Qualified retirement plans that permit the employer unlimited investment in sponsor company stock are: 1. 401(k) plans. 2. Stock bonus plans. 3. Profit sharing plans. 4. ESOPs.

All of them

Which of the following statements is required notifications is correct? 1. Employers are required to provide, free of charge, a summary of the details of the qualified retirement plan, called a summary plan description, to employees, participants, and beneficiaries under pay status (receiving benefits). The summary must be furnished within 90 days after the person becomes a participant. 2. Employers are required to provide the plan participants notices of any plan amendments or changes. This notice can be provided either through a revised Summary Plan Description or in a separate document, called a summary of material modifications. This document must be given to participants free of charge within 210 days after the end of the plan year in which a change is adopted and applies when there are substantive changes in the plan.

Both

Which of the following are acceptable reasons for an employer to terminate a qualified retirement plan? 1. The employer is not profitable and cannot afford to make plan contributions. 2. The employer wants to reduce the cost of retirement benefits. As a result, the employer terminates a defined benefit plan and replaces it with a 401(k) plan. a. 1only. b. 2 only. c. Both 1 and 2. d. Neither 1 nor 2.

C. Both

Marie, the sole shareholder in Marie's Pastries, is contemplating establishing a qualified plan. The corporation's employee census is as follows: 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?

ESOP 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.

Who generally makes elective deferrals to a 401(k) plan?

Employees only Generally, 401(k) plans are funded from both employee elective deferrals and employer matching contributions and non-elective deferrals, but the elective deferrals come from the employee.

Which of the following generally contribute to defined benefit plans, profit sharing plans, and money purchase pension plans? A. Employees B. Employers C. Both D. Both and government

Employer only. Employees contribute to 401(k) plans and thrift plans. The government does not make contributions to plans, except when it is the employer

Steve is self-employed as a marketing consultant. He works primarily with start-up internet companies helping to develop corporate brand programs. Several years ago, he established a 401(k) profit-sharing plan and has accumulated $385,000 in the plan. Which of the following forms should he file to meet his compliance requirements

Form 5500 EZ He must file Form 5500 EZ since it is a one-participant plan and total assets exceed $250,000. If assets were below this threshold, he would not have to file the form

Seth operates a small business with his wife Morgan. They have no other employees. They have $340,000 of assets in the plan. Which of the following forms must they file? Form 5500 EZ. Form 5500 SF. Form 5500. They do not have to file form 5500.

Form 5500 EZ.

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

Neither 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.

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?

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

Plans that require mandatory funding are generally funded by?

The employer

Baily owns and operates Ben's Red Truck Shop (BRT), which is a sole proprietorship. She has self- employment income of $150,000. How much self-employment tax does she owe for 2020? a. $21,092. b. $21,194. c. $21,425. d. $22,950.

a. $21,092

Dan owns and operates Schoepf's Sales Solutions (3S), a sole proprietorship. 3S sponsors a profit- sharing plan. Dan had net income of $250,000 and paid self-employment taxes of $22,000 (assumed) during the year. Assuming Dan is over the age of 50, what is the maximum amount that Dan can contribute to the profit sharing plan on his behalf for 2020? a. $47,800. b. $54,300. c. $57,000. d. $63,500

a. $47,800

Jordan owns and operates Jordan's Exotic Journeys (JEJ), a sole proprietorship. JEJ sponsors a profit- sharing plan. Jordan had net income of $150,000 and paid self-employment taxes of $20,000 (assumed) during the year. Jordan has decided to make a 15% contribution for her employees for the year. Assuming Jordan is over the age of 50, what amount will she contribute for herself to the plan for 2019? a. $16,957. b. $18,261. c. $28,000. d. $56,000.

b. $18,261

One of the purposes of a retirement plan is to accumulate retirement assets. Increases in retirement assets are a result of contributions by employers and employees as well as investment earnings on the retirement assets. Which of the following is correct regarding the investment management of retirement assets? a. The primary reason that employees are given the right to self-direct plan assets is to empower them. b. Employers can commingle assets from employees' retirement accounts and have the assets manged by a third-party asset manager or manage the assets in-house. c. Employers eliminate fiduciary responsibility by allowing employees to self-direct their retirement accounts. d. The employer cannot manage assets in a 401(k) plan.

b. Employers can commingle assets from employees' retirement accounts and have the assets manged by a third-party asset manager or manage the assets in-house.

Colin owns and operates Colin's Creative Coaching (3C), a sole proprietorship. 3C sponsors a 401(k)/ profit-sharing plan. Colin had net income of $200,000 and paid self-employment taxes of $20,000 (assumed) during the year. Assuming Colin is over the age of 50, what is the maximum amount that Colin and his company can contribute on his behalf to the plan for 2020? a. $25,000. b. $57,000. c. $63,500. d. $64,000

c. $63,500

Which of the following statements regarding determination letters for qualified plans is true? a. Employers must request a determination letter from the IRS for all qualified plans. b. Employers must request a determination letter from the DOL for all qualified plans that are materially modified or materially amended. c. Employers who receive a favorable determination letter are protected from the IRS disqualifying their qualified plan. d. Employers must follow each and every aspect of their qualified plan document.

d. Employers must follow each and every aspect of their qualified plan document.