Retirement Unit 3
In order to be eligible to establish and maintain a SIMPLE 401(k), an employer must have no more than:
100 employees who earned more than $5,000 last year.
Examples of a cross-tested plan?
Age-based profit-sharing plan. New comparability profit-sharing plan.
How is an age-weighted profit-sharing plan similar to a traditional defined benefit pension plan?
Contribution allocations to older participants may be maximized, while allocations to younger participants may be minimized. Retirement benefits are determined by the participant's final account balance in defined contribution plans. Employer contributions can be flexible in an age-weighted profit-sharing plan, but not in a defined benefit pension plan. Vesting is not more liberal in these plans than in other types of plans.
A Section 401(k) plan does not have to satisfy the ADP and ACP tests if it meets one of the safe harbor provisions. All of the following statements about the safe harbor provisions are correct.....
Employees must be immediately 100% vested in mandatory employer contributions that are made under the safe harbor provisions. The mandatory contributions can take the form of either a non-elective contribution to all eligible employees or matching contributions to participating non-highly compensated employees who participate in the plan.
A major advantage of a profit-sharing plan is the option for in-service distributions, particularly a withdrawal from the plan due to a financial hardship. A hardship withdrawal must meet which of the following tests?
Resources test. Financial needs test. The financial needs test requires that the hardship must be due to an immediate and heavy financial need of the participant. The resources test demands that the participant must not have any other financial sources capable of satisfying the need.
Distributions from a stock bonus plan?
They are generally made in the form of employer stock. Stock bonus plans are essentially profit-sharing plans wherein the employer contributions are generally made with company stock. Distributions must generally be made available in the form of stock; therefore, this type of plan can be a cashless one for the employer.
Which of the following statements regarding stock bonus plans and employee stock ownership plans (ESOPs) are CORRECT?
They can be costly and administratively cumbersome. They create a market for employer stock.
The major difference between a stock bonus plan and a traditional profit-sharing plan is that:
a stock bonus plan generally distributes benefits in employer stock, not cash.
All of the following statements regarding a traditional profit-sharing plan are correct
company profits are not a prerequisite for employer contributions profit-sharing plans are suitable for companies that have unstable cash flows. profit-sharing plans are qualified defined contribution plans.
Sally, age 37, works for two employers, ABC Corporation and XYZ Corporation, both of which maintain Section 401(k) plans. If Sally defers $6,000 to ABC's Section 401(k) plan in 2019, how much can she then defer to XYZ's plan this year?
$13,000 The maximum allowable elective deferral for 2019 is $119,000. If Sally contributes $6,000 to ABC's plan, then she can only contribute up to $13,000 to XYZ's plan ($19,000 − $6,000 = $13,000)
What is the maximum elective deferral a participant can make to a Section 401(k) plan in 2019, assuming no catch-up provisions apply?
$19,000.
In 2019, James earns an annual salary of $200,000. He has an elective deferral of $19,000 into his Keogh plan. His company matches elective deferrals dollar-for-dollar of the first 3% of compensation deferred. Because of employee turnover, $1,000 of forfeitures is added to his account. What is the maximum amount the company can add to a defined contribution plan on James' behalf?
$30,000 (Section 415 annual additions limit) − (elective deferral + company match + forfeiture) = contribution $56,000 (2019) − ($19,000 + $6,000 of matching + $1,000) = $30,000
Which of the following percentages is the maximum of an owner's net self-employment income that can be contributed to a Keogh profit-sharing plan?
20%
Which of the following requirements must be satisfied in order to pass the actual contribution percentage (ACP) nondiscrimination test for employer-matching contributions and employee contributions?
Either the 1.25 requirement or the 200%/2% difference requirement.
A qualified automatic contribution arrangement (QACA) will automatically satisfy Section 401(k) nondiscrimination testing if it:
Provides for an automatic deferral percentage (ADP) of between 3% and 10% of employee compensation. Provides an employer contribution to non-HCEs of either an employer match of 100% of the first 1% deferred plus 50% of the next 5% or a 3% non-elective profit-sharing contribution in lieu of the matching contribution.
What are considered profit-sharing plans?
Stock bonus plan. Traditional Section 401(k) plan. Thrift/savings plan. Employee stock option plan (ESOP).
Which of the following are characteristics of a stock bonus plan?
The assets of a stock bonus plan are invested primarily in employer stock. Stock bonus plan benefits are generally distributed in the form of employer stock, not cash. The employer contributes either cash or employer securities to the plan. Stock bonus plans are subject to the same nondiscrimination requirements as profit-sharing plans. The assets of a stock bonus plan can be invested primarily in employer stock or securities.
A a type of defined contribution profit-sharing plan(s)?
Traditional Section 401(k) plan.
An age-based profit-sharing plan is a plan in which:
allocations to participants are made in proportion to the participant's age-adjusted compensation.
Thrift plans allow participants to:
make after-tax contributions.
A Keogh plan is fundamentally like any other qualified plan EXCEPT:
net self-employment income takes the place of compensation (W-2) income in the contribution calculation for the self-employed participant.
A type of qualified retirement plan in which participating employees are divided into groups or classes and each group or class receives an employer contribution equal to a percentage of compensation is a(n):
new comparability plan
Keogh plans are:
sponsored by a partnership or self-employed individual.
All of the following statements for 2019 regarding age-based profit-sharing plans are correct:
the maximum annual additions limit is $56,000. the plan favors older employees. the maximum annual compensation considered is $280,000. the participant's compensation is adjusted by using a discount factor based on the participant's age and the interest rate elected by the plan sponsor.
Traditional profit-sharing plans:
they may allow hardship withdrawals. they allow funding flexibility for the employer. they are suitable for employers with fluctuating cash flows. employees bear the risk of poor investment performance.
Don is a sole proprietor who earned $70,000 of net Schedule C income. Don's business maintains a profit-sharing plan with a 25% contribution rate for all employees. Don's deductible contribution as an owner-participant of the business is:
$13,011 Calculated as follows: Schedule C income $70,000 Less: deductible share of SE tax paid − 4,945 ($70,000 × 0.9235 × 0.0765) Equals $65,055 Multiply by net contribution rate × 0.20 (25% ÷ 1.25) Maximum deductible contribution $13,011
In 2019, James earns an annual salary of $200,000. He has an elective deferral of $19,000 into his Keogh plan. His company matches elective deferrals dollar-for-dollar of the first 3% of compensation deferred. Because of employee turn-over, $1,000 of forfeitures is added to his account. What is the maximum amount the company can add to a defined contribution plan on James' behalf?
$30,000 (Section 415 annual additions limit) − (elective deferral + company match + forfeiture) = contribution
John Irving, the 55-year old owner of ABC Corporation wants to implement a new comparability plan. John's salary is $150,000. The remaining eligible participant census is as follows: Employee A: 35: $50,000 Employee B: 33: $45,000 Employee C: 54: $60,000 Employee D: 41: $35,000 Employee E: 43: $36,000 If John wants to contribute an aggregate total of $41,300 to the plan this year, what is the maximum amount John can contribute to the comparability plan for himself?
$30,000 John can contribute a maximum $30,000 (20%) of his salary to the plan while limiting his other employees to as little as 5% of salary. In this example, the total compensation of the eligible employees is $226,000. A 5% contribution for this group totals $11,300, leaving $30,000 of the total $41,300 for John's benefit.
Valerie earns $290,000 annually from XYZ Corporation. The company profit-sharing plan provides for a contribution of 25% of participant compensation. What is the amount of the company's contribution for Valerie for 2019?
$56,000 Valerie earns $290,000 annually in 2019. The plan provides for a contribution of 25% of participants' compensation. However, the maximum compensation that can be taken into consideration is $280,000. 25% of $280,000 = $70,000. Finally, the maximum annual additions limit is $56,000, making the maximum company contribution for Valerie $56,000.
The Pension Protection Act of 2006 (PPA) includes safe harbor rules that would relieve a qualified automatic contribution arrangement (QACA) from special nondiscrimination testing. Such an arrangement will automatically satisfy Section 401(k) plan nondiscrimination testing if a participant's automatic deferral percentage (ADP) is increased each year by 1% until reaching at least what percentage of compensation?
6% If the ADP under the plan is less than 6%, a participant's ADP must be increased each year by 1% until reaching at least 6% of compensation.
An age-weighted profit-sharing plan is appropriate when:
A closely held business or professional corporation has a relatively large number of key employees who are approximately age 50 or older. There are older employees whose retirement benefits would be inadequate under a traditional profit-sharing plan because of the relatively few years remaining for participation in the plan. An alternative to a defined benefit plan is needed to provide older employees adequate retirement benefits but has the lower cost and simplicity of a defined contribution plan. The employer wants to terminate an existing defined benefit plan to avoid the increasing cost and regulatory burdens associated with these plans.
Taylor Engineering has just established a safe harbor Section 401(k) plan. From which of the following may the company be exempt with the safe harbor arrangement?
ADP test. ACP test. Top-heavy rules. However, as a qualified plan, it still must comply with the general nondiscrimination tests or coverage rules.
Which of the following companies might NOT be allowed to have a Keogh plan?
An LLC might not have a Keogh plan if it elects to be taxed as a regular C corporation, rather than some type of flow-through entity.
The plan trustee of an employee stock ownership plan (ESOP):
Can borrow funds to purchase employer stock. Is using leverage when the trustee borrows money to provide contribution to the plan. Uses loan proceeds to purchase stock of the employer from the corporation itself.
Advantages to an employer under a defined contribution plan?
Employee bears investment risk. Easily determinable costs. Lower administrative costs. Lower plan costs and ease of understanding are also advantages to employers under a defined contribution plan.
Tax implications regarding Section 401(k) plans include:
Employee elective deferrals are subject to FICA and FUTA taxes. Employer contributions are deductible by the employer up to 25% of total covered compensation. Employee deferrals are not currently taxable income to the employee. Employees do not pay federal income taxes on elective deferrals contributed to a Section 401(k) plan until distributed.
Which of the following is a type of defined contribution profit-sharing plan(s)?
Employee stock ownership plan (ESOP).
In addition to meeting the financial needs and resources tests for hardship withdrawals, money may only be withdrawn from profit-sharing plan accounts for the following reasons:
Purchase of a primary residence. Payment of unreimbursed medical expenses. Payment necessary to prevent foreclosure on the participant's primary residence. Payment of higher education expenses for the participant, spouse, or dependent children.
A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary or bonuses simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following statements are rules that apply to Section 401(k) plans?
Section 401(k) elective deferrals are immediately 100% vested and cannot be forfeited. A Section 401(k) plan may allow in-service distributions. Eligible catch-up contributions are not considered in the application of the maximum annual additions limit. The maximum elective deferral contribution for 2019 is $19,000 with an additional $6,000 catch-up for individuals age 50 or older.
A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary or bonuses simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following statements is (are) rules that apply to Section 401(k) plan elective deferrals?
Section 401(k) plan elective deferrals are immediately 100% vested and cannot be forfeited. A Section 401(k) plan may allow in-service distributions prior to age 62. An extra nondiscrimination test called the actual deferral percentage test applies to elective deferral amounts.
Which of the following statements regarding profit-sharing plans is (are) CORRECT?
The maximum tax-deductible employer contribution to a profit-sharing plan is 25% of total covered employee compensation. Profits are not required to be able to make a contribution to a profit sharing plan. A current contribution may be made from retained earnings or current cash flow. Annual contributions are not required in a profit-sharing plan. Profit-sharing plans are suitable for companies with unstable earnings given that they have discretion over contributions.
Jean, age 38, earns $200,000 annually as an employee for Waste Distributors. Her employer sponsors a SIMPLE, and matches all employee contributions to the plan dollar-for-dollar, up to 3% of compensation. What is the maximum contribution (employer and employee) that can be made to Jean's SIMPLE account in 2019?
The maximum total contribution is $19,000 ($13,000 maximum employee contribution for 2019 + $6,000 employer match). The employer has chosen to make matching contributions up to 3% of compensation (the SIMPLE maximum). Therefore, the employer can make a contribution of up to $6,000 ($200,000 compensation × 3%).
Mary, age 56 and earning a current salary of $125,000, works for a company that sponsors a Section 401(k) plan. The plan allows her to contribute up to 15% of her salary each year, up to the annual Section 401(k) plan elective deferral limit. The company matches her contribution dollar-for-dollar, up to 3% of compensation. Because Mary would like to retire within the next 5 years, she is concerned about having a sufficient retirement benefit from the Section 401(k) plan. Based on life expectancy tables, Mary is expected to live until age 85. Which of the following factors can affect Mary's retirement benefits from her Section 401(k) plan?
The participant's investment selections. The value of the participant's account balance at retirement.
Which of the following phrases regarding factors that can affect the retirement benefits from a defined contribution plan is (are) CORRECT?
The selection of the investments by the participant. The value of the participant's account balance at retirement.
Ronald, age 44, works for two private tax-exempt employers. One has a Section 403(b) plan and one maintains a nongovernmental Section 457 plan. If Ronald defers $10,000 into the Section 403(b) plan in 2019, what is the maximum amount he may defer into the Section 457 plan?
$19,000 Ronald can separately defer the maximum of $19,000 (2019) into the Section 457 plan because Section 457 plan limits are not aggregated with the Section 403(b) plan limits.
A traditional Section 401(k) plan is most appropriate when:
An employer wants to encourage employees to save for their own retirement. An employer wants an attractive, savings supplement to its existing qualified retirement plan. An employer wants to provide a qualified retirement plan for employees, but needs to keep costs down
Stock bonus plans:
Are defined contribution plans. Are not required to have contributions based upon profits. Allow a portion of the appreciation in the stock to be tax-deferred until the stock is sold when a qualifying lump-sum distribution is taken. Provide the employer a deduction for plan contributions.