Chapter 15 Retirement Plans

Which of the following statements best describes a Keogh (HR-10) plan? A) It is a non-qualified retirement plan for self-employed individuals and their eligible employees. B) It is a qualified retirement plan for self-employed individuals only. C) It is a qualified retirement plan for self-employed individuals and their eligible employees. D) It is a non-qualified retirement plan for self-employed individuals only.

C

Susan, age 52, withdrew $5,000 from her traditional individual retirement account, which consisted entirely of pretax contributions, to purchase her first home. What are the tax consequences? A) Susan must pay a 10% penalty on the withdrawal. B) Susan must pay a 10% penalty plus income tax on the withdrawal. C) Susan will not be assessed a 10% penalty if she pays back the funds within 60 days. D) Susan will not be assessed the 10% penalty on her early withdrawal.

D With few exceptions, any distribution from a traditional IRA before age 59½ will be subject to income tax and a 10% penalty. However, up to $10,000 may be withdrawn before age 59½ to pay for the purchase of a first home without being assessed the 10% penalty.

ERISA encourages employers to provide health benefits for their employees by: A) allowing them to self-insure their own plans. B) requiring them to maintain a list of health providers that will treat their employees at a discount. C) providing federal money for employers to fund an insurance plan for their employees. D) requiring employees to show evidence of insurance as a condition of employment.

A A goal of ERISA was to encourage individual employers to establish employee health plans. It did this by allowing employers to self-insure the plans. As a result, an employer may establish a health plan for its employees and their dependents.

To enroll in an employer's qualified retirement plan, employees must: A) complete 1 year of service. B) be at least 18 years old. C) be at least 18 years old and complete 1 year of service. D) be at least 21 years old and complete 1 year of service.

D In general, employees who are at least 21 years old and have completed 1 year of service must be allowed to enroll in a qualified plan. If the plan provides for 100% vesting upon participation, they may be required to complete 2 years of service before enrolling.

Contributions to a simplified employee pension (SEP) are not included in the employee's taxable income for the year made as long as the contribution does not exceed: A) 25% of the employee's income, with no individual maximum limit being applicable. B) 25% of the employee's income up to a specified maximum amount. C) 50% of the employee's compensation up to a specified maximum amount. D) 75% of the employee's compensation.

B

Which of the following statements regarding Section 529 plans is CORRECT? A) Both types of Section 529 plans, prepaid tuition and college savings, lock in college costs. B) Section 529 plans are also referred to as Qualified Tuition Programs. C) Contributions are made with pre-tax dollars. D) Certain contribution restrictions may apply based upon the income of the contributor.

B Contributions to Section 529 plans are made with after-tax dollars and there are no income limitations on making contributions. Prepaid tuition plans do lock in tuition prices, but college savings plans do not.

Cynthia is scheduled to receive a $36,000 lump-sum distribution from her former employer's qualified pension plan and wishes to establish a rollover IRA to avoid paying taxes on the money that year. Within how many days must the rollover be completed to avoid paying taxes? A) 60 days. B) 120 days. C) 30 days. D) 90 days.

A

What entity qualifies retirement plans? A) Federal government. B) State insurance department. C) Insurance company underwriting the fund. D) Sponsoring employer.

A Qualified plans are those that meet requirements established by the federal government and, consequently, receive favorable tax treatment.

All of the following statements pertaining to SIMPLE plans are correct EXCEPT: A) SIMPLE plans allow employers to set up tax-favored retirement savings plans for their employees without having to comply with complicated qualification requirements. B) SIMPLE plans may be structured like IRAs or 401(k) plans. C) all employees are fully and immediately vested in SIMPLE plans. D) these plans are reserved for employers with 500 or more employees.

D 100 or less small businesses

A primary difference between a SEP and an IRA is that: A) the amount an employer can contribute to a SEP is unlimited. B) the employer can contribute to an IRA but not to a SEP. C) the amount contributed by an employer to a SEP is included in the employee's gross income. D) the limit of money an employer is permitted to contribute to a SEP each year is higher than the limit for an IRA.

D A SEP is an arrangement whereby an employee establishes and maintains an individual retirement account to which the employer contributes. Employer contributions are not included in the employee's gross income. A primary difference between a SEP and an IRA is the much larger amount that can be contributed each year to a SEP. The allowable limit for a SEP is much higher than that of an IRA.