CH 5 Retirment
Which of the following is not true regarding profit sharing plans? A) The plan is established and maintained by the individual employee. B) Allows 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 (The plan is established and maintained by the individual employee. Rationale)
BigCorp, LLC has a 401(k) plan that allows for hardship distributions. Sandra would like to return to school to get a Masters degree. She has $3,000 in her savings account to use, but would like to take a hardship distribution from her 401(k) plan for the maximum amount available. Sandra's program will take two years and cost $7,000 per year. Sandra's 401(k) account balance is $20,000. Sandra has never made any hardship distributions and her elective contributions to the plan total $10,000. How much can Sandra withdraw as a hardship distribution? A) $4,000. B) $7,000. C) $10,000. D) $20,000.
A ($4,000. Rationale Sandra can take a distribution up to the hardship expense less other assets available to pay the hardship expense ($7,000 for one year of tuition - $3,000 in savings).)
Thibodaux Company sponsors an integrated profit sharing plan with a base percent of 20%. Boudreaux, who is 60 years old, earns $330,000 per year. Assuming the plan uses the 2017 Social Security wage base as the integration level, how much more will Boudreaux receive because the plan is integrated over a plan that contributes a flat 20% of compensation? A) $0. B) $5,500. C) $8,139. D) $11,560.
A ($0. Rationale He would not get any benefit from integration if the base percent is 20% because 20% of $270,000 (2017 compensation limit) equals $54,000 (2017 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 (1 only.)
Aztec Clay Distributor is a family owned business that is owned by Alice, Bill, Chad and Zion. Alice and Bill are over 50. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. Aztec sponsors a 401(k) plan. The employee census information is in the chart below. Assuming the company did not elect the exception to the definition of highly compensated employees, the average ADP of the highly compensated employees can be no greater than what percent? A) 7.53%. B) 8.32%. C) 8.65%. D) 11.98%.
A (7.53%. Rationale The non-highly compensated employees are Frank, Ginger, Haley, Irish and Jen. The ADP for the NHCEs equals 5.53% [[16% + 0% + 6.67% + 5% + 0%] ÷ 5]. Adding 2 percentage points equals 7.53%. Chad is HC since he is attributed ownership from his parents.)
Skatium, the city's most popular roller skating rink, has a profit sharing plan for their employees. Skatium has the following employee information: Employee Age Length of Service Brett 62 14 years Greer 57 14 years Jennifer 32 6 months Dan 22 2 years Karen 19 2 years Mike 17 6 months Craig 16 1 year The plan requires the standard eligibility and the least generous graduated vesting schedule available. The plan is not top-heavy. All of the following statements are correct except: A) Dan and Karen are 20 percent vested in their benefits. B) Brett and Greer became 100 percent vested when they had been employed for six years. C) Three of the seven people are eligible to participate in the plan. D) Craig is not eligible for the plan.
A (Dan and Karen are 20 percent vested in their benefits. Rationale The standard vesting schedule requires individuals to be 21 years of age and have one year of service before becoming eligible for the plan. Brett, Greer, and Dan are the only individuals that meet that criteria. The least generous vesting schedules are 3-year cliff and 2 to 6 year graduated vesting. The facts say they use the least generous graduated vesting. Therefore, Dan is 20% vested and Greer and Brett became 100% vested in the 6th year. Craig is not eligible because he is 16 years old. Karen is not vested because she is not eligible due to her age.)
Which of the following entities is unable to establish a 401(k) plan? A) Government entity. B) LLC. C) Partnership. D) Tax-exempt entity.
A (Government entity. Rationale A government entity can no longer establish a 401(k) plan. The remaining entities may establish a 401(k) plan.)
Sheehan works for Andy Company and is a superior sales guy. 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 2017? A) $14,300. B) $22,704. C) $22,989. D) $54,000.
B ($22,704. Rationale The excess percentage is 11% (twice the base percentage). Therefore, Sheehan receives 5.5% from zero to the wage base of $127,200 (2017) and 11% on income above the wage base up to the covered compensation limit of $270,000 (2017). [[$270,000 - $127,200] x 11% + $127,200 x 5.5%]. $15,708 + $6,996 = $22,704.)
Andi, the 100 percent owner of Andi's Day Care, would like to establish a profit sharing plan. Andi's Day Care's tax year ends July 31 to coincide with the school year. What is the latest day Andi can establish and contribute to the plan? A) Andi must establish and contribute to the plan by December 31 of the year in which she would like to establish the plan. B) Andi must establish the plan by April 31 of the year in which she would like to have the plan and contribute by May 15 of the following year assuming she filed the appropriate extensions. C) Andi must establish the plan by July 31 of the year in which she would like to establish the plan an d contribute by December 31. D) Andi must establish the plan by December 31 of the year in which she would like to establish the plan and contribute to the plan by April 15 of the following year.
B (Andi must establish the plan by April 31 of the year in which she would like to have the plan and contribute by May 15 of the following year assuming she filed the appropriate extensions.)
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 (Employers can sponsor 401(k) safe harbor plans without committing to annual contributions and without creating a deferred liability.)
Mikael opened a fabulous restaurant ten years ago. The food is so exceptional that the restaurant has become one of the top spots in the city. Mikael, age 55, is the sole owner with compensation of $265,000. Mikael's son Jamel, age 28, is the master chef with compensation of $100,000. 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 $53,000 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 (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.)
Tyler's Bike Shop has a 401(k) plan that offers an employer match of dollar-for-dollar up to four percent of employee compensation. Although the plan provides for the least generous graduated vesting schedule available, it does allow employees to enter the plan on their hire date. The employee census is as follows: Employee Employee Age Covered Compensation Employee Deferral Years in Plan Tyler 57 $150,000 10% 10 Tanya 23 $100,000 Not yet participating Timmy 37 $80,000 20% 10 Tom 31 $76,000 4% 5 Tyler established the plan ten years ago to benefit him and his only employee, his son Timmy. Since then Tyler hired his other son, Tom, and his new wife Tanya. Tyler wanted to establish the 401(k) plan to encourage his children to save for their future. He also wanted a vesting schedule to ensure that they would learn the responsibility of sticking to their employment commitments. The family has come to you for recommendations to help them maximize their plan contributions. Since both of his sons have shown commitment over the past years, Tyler is willing to make some alterations to the plan in order to increase the retirement savings for all of them. Which of the following would not be one of your recommendations? A) Tyler and Tom should increase their contributions in order to reach the total maximum deferral limit. B) Tanya should enter the plan and contribute 20 percent of her salary. C) Tom is not 100 percent vested in the employer match, thus he should stay employed at least one more year. D) Tyler should consider adding a profit sharing contribution to the plan in order to increase the contributions.
B (Tanya should enter the plan and contribute 20 percent of her salary.)
ABC Company has three employees: Ann, Brenda, and Curtis. Their compensation is $50,000, $150,000, and $200,000 respectively. ABC is considering establishing a straight 10% profit sharing plan or an integrated profit sharing plan using a 10% contribution for base compensation and 15.7% for excess compensation. Which of the following statements are correct? A) If the integrated plan is selected, then the total contribution for all employees is $62,800. B) The effect of the integrated plan results in an increase in Brenda's contribution of $1,300. C) If the integrated plan is selected, the base contribution for all employees is $54,000. D) If the integrated plan is selected, Curtis' total contribution is $31,400.
B (The effect of the integrated plan results in an increase in Brenda's contribution of $1,300.)
Sew What, the best seamstress shop in town, sponsors a 401(k) plan. The plan provides a dollar-for-dollar match for employee contributions up to six percent and has immediate vesting for all contribution s. For ADP purposes, the company has not made the top 20 percent election for the determination of who is highly compensated. The company has the following employee information: Employee Ownership Compensation Elective Deferral Deferral Percentage Lois 93% $201,000 $14,000 6.97% Frank 5% $150,000 $14,000 9.33% Karen 2% $140,000 $12,600 9.00% Jeannette - $40,000 $4,000 10.00% Joyce - $30,000 - 0.00% Ronnie - $30,000 $1,800 6.00% Kali - $30,000 - 0.00% Which of the following statements is correct? A) Karen is not highly compensated. B) The plan passes the ADP test if Joyce and Kali were not eligible. C) Joyce and Kali are not considered when calculating the ADP test because they do not contribute. D) The top heavy rules require Sew What to make a 3% contribution for Jeanette, Joyce, Ronnie, and Kali.
B (The plan passes the ADP test if Joyce and Kali were not eligible.)
Aztec Clay Distributor is a family owned business that is owned by Alice, Bill, Chad and Zion. Alice and Bill are over 50. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. Aztec sponsors a 401(k) plan. The employee census information is in the chart below. If Aztec established a profit-sharing plan, what is the most that Aztec could contribute for 2017 to the profit-sharing plan? A) $220,000 B) $252,250. C) $260,000. D) $275,000.
C ($260,000. Rationale Aztec can contribute 25% of covered compensation. The total covered compensation is $1.1 million less the $60,000 of compensation for Alice that is above the 2017 limit of $270,000 or $1,040,000. The contribution equals $260,000.)
Nex sponsors a DB(k) plan that provides benefits for all employees. Nex adopted the plan four years ago. Kleen, who is age 55 and earns $100,000, has been employed for the last ten years with Nex. Which of the following statements is correct regarding Kleen's benefits under Nex's DB(k) plan? A) Kleen will be limited on his deferral to the 401(k) plan because of the required contribution to the DB part of the plan. B) If the DB(k) plan provides for a cash balance option, then Kleen should be receiving pay credits of 6% per year. C) All benefits provided under the DB(k) plan will be 100 percent vested for Kleen. D) Because this plan is a proto-type DB (k) plan, Nex will not have to file a Form 5500.
C (All benefits provided under the DB(k) plan will be 100 percent vested for Kleen. Rationale Option a is not correct. He could defer up to the annual limit. Option b is not correct. Since Kleen is over age 50, he would be receiving pay credits of 8% per year. Option d is not correct because DB(k) plans must file a single Form 5500.)
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 (Profit sharing plans allow annual employer contributions up to 25 percent of the employer's covered compensation.)
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 (4 year cliff. Rationale 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 DC plans after PPA 2006.)
JJ is a Marine, who served our country for the last 25 years. He has $250,000 in his US 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 (401(k) plan.)
Ansley's Art Gallery has a profit sharing plan. The plan requires employees to be employed two years before they can enter the plan. The plan has two entrance dates per year, January and July 1st. Assume today is December 1, 2018 and the Gallery has the following employee information. Employee Age Start Date Ansley 42 1/1/2017 Ginny 37 5/1/2017 Max 31 8/12/2017 Alex 29 6/4/2018 Which of the following statements is true? A) As of today, three individuals have entered the plan. B) Ginny entered the plan on 5/1/2018. C) Alex will enter the plan on 1/1/2020. D) As of today, three individuals are eligible for the plan.
D (As of today, three individuals are eligible for the plan.)
Which of the following statements is true regarding CODAs? A) A 401(k) can only be established as a stand alone 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 (CODAs are employee self-reliant plans.)
Kathi's Cheerleading Uniforms has 4 employees. The company has a profit sharing plan that has made contributions every year. The plan is designed to maximize the contribution to Kathi and has reached Kathi'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: Employee Ownership Covered Compensation Current Balance Nonvested Plan Balance Vested Plan Balance Kathi 100% $270,000 $201,000 $0 $201,000 Darrin 0% $30,000 $15,600 $10,800 $4,800 Carroll 0% $20,000 $8,000 $6,400 $1,600 Lee 0% $20,000 $8,000 $6,400 $1,600 Total 100% $340,000 $232,600 $23,600 $209,000 Today, after a huge blow up, Kathi fired Carroll. 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 Kathi would receive $5,082.35 of Carroll's unvested plan balance. B) If the plan document permitted reduction of plan contributions for forfeitures, Carroll's $8,000 balance could be used to offset future plan contributions. C) Since Kathi fired Carroll, Carroll 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 (Given the company census and plan information, the appropriate plan choice for forfeitures is to use them to reduce future plan contributions.)
Rex, age 47, an employee at Water Waste, is considering contributing to a 401(k) plan during 2017. Which of the following statements are true? A) Rex can make a $24,000 elective deferral contribution to a 401(k) plan for 2017. B) If Rex does make an elective deferral contribution, the amount is not currently subject to income or payroll taxes. C) Rex can contribute $18,000 to a 401(k) plan and an additional $18,000 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 (Water Waste must deposit Rex's elective deferral contribution to the plan as soon as reasonably possible.)
