PFPL 540 Module 4: Tax-Advantaged Plans and Nonqualified Plans

Which of the following are permitted investments in a Section 403(b) plan? I. Variable annuity contract from an insurance company II. Growth stock mutual fund (open-end investment company) III. A self-directed brokerage account invested in individual stocks IV. Whole life insurance A. I and II B. I and IV C. II and III D. III and IV

A. I and II Section 403(b) plan accounts must be invested either in annuity contracts (fixed or variable) or mutual funds (open-end investment companies). Such accounts may not be invested in individual stocks or whole life insurance.

Which one of the following plans is NOT permitted to invest in life insurance? A. A SIMPLE 401(k) B. A traditional profit-sharing plan C. A SIMPLE IRA D. An ESOP

C. A SIMPLE IRA Like a SEP, a SIMPLE IRA is a form of IRA and, therefore, cannot invest in life insurance as a funding vehicle. Each of the other plans listed is a type of qualified plan and may, within limits, invest in life insurance.

Which of the following are disadvantages of a SEP? a. A SEP requires mandatory annual contributions. b. A SEP is a "simplified employee pension." Therefore, it is classified as a pension plan. c. A worker cannot contribute to a SEP. d. A SEP is may have three-year cliff or a two-to-six year graded vesting schedule.

c. A worker cannot contribute to a SEP. SEPs can only receive employer contributions. Contributions to a SEP are 100% immediately vested. SEPs do not require mandatory annual contributions. Even though a SEP is a "simplified employee pension," it is classified under the heading of a "profit-sharing plan" instead of as a pension plan. Perhaps we should all chip in a buy Congress a dictionary.

Which of the following plans is NOT permitted to invest in life insurance? A. A SIMPLE 401(k) B. A traditional profit-sharing plan C. A SIMPLE IRA D. An ESOP

C. A SIMPLE IRA A SIMPLE IRA is a form of IRA and, therefore, cannot invest in life insurance (in the plan's name). All the other types of plans are qualified plans and are, within limits, permitted to invest in life insurance

Which of the following statements are true with regard to a simplified employee pension (SEP) plan? I. Requires employer contributions on a nondiscriminatory basis II. Can be integrated with Social Security III. Participation cannot be denied on the basis of age to any employee 21 years of age or older IV. Imposes mandatory employer contributions a. I and II only b. III and IV only c. I, II, and III only d. I, II, III, and IV

c. I, II, and III only Only statement IV is incorrect. 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. Participant cannot be denied on the basis of age for any employee who earns at least $650 in 2022. However, there is another qualification for coverage with a SEP. The worker must have also worked for the employer for at least three of the preceding five years (including working part-time).

What is the maximum employee contribution limit (elective deferral) for a TSA in 2022, assuming no catch-up provisions apply? A. $3,000 B. $13,500 C. $20,500 D. $61,000

C. $20,500 The employee elective deferral limit for 2022 to a TSA is $20,500

What is the maximum salary reduction contribution someone age 45 with 10 years of service could make to a 403(b) for 2022? a. $6,500 b. $14,000 c. $20,500 d. $27,000

c. $20,500 The maximum elective deferral into a 403(b) for someone under age 50 is $20,500 in 2022.

Which of the following are permitted investments in a Section 403(b) plan? I. Variable annuity contract from an insurance company II. Growth stock mutual fund (open-end investment company) III. A self-directed brokerage account invested in individual stocks IV. Whole life insurance A. I and II B. I and IV C. II and III D. III and IV

A. I and II Section 403(b) plan accounts must be invested in either annuity contracts (fixed or variable) or mutual funds (open-end investment companies). Such accounts may not be invested in individual stocks or whole life insurance

Which of the following statements with respect to SEP contributions made by an employer is CORRECT? A. Contributions are subject to FICA and FUTA. B. Contributions are currently excludible from the employee's gross income. C. Contributions are subject to income tax withholding. D. Contributions are capped at $20,500 (2022).

B. Contributions are currently excludible from the employee's gross income. This is the only correct response. Contributions to a SEP plan are not subject to FICA, FUTA, or income tax withholding and are excluded from the employee's current income. The SEP plan contribution limit is the lesser of 25% of the employee's compensation or $61,000 (2022), not the elective deferral limit of $20,500 (2022)

Which of the following statements regarding a Section 457 plan is FALSE? A. In 2022, an individual who is age 50 or older may generally make additional catch-up contributions of up to $6,500. B. It is a qualified plan of governmental units or agencies and nonchurch-controlled, tax-exempt organizations. C. The participant contribution limit in a governmental 457 plan may be doubled in the last three years (limited to unused deferrals in prior years) before the plan's normal retirement age. D. The time of taxable distribution depends on the type of plan and the eligible participant

B. It is a qualified plan of governmental units or agencies and nonchurch-controlled, tax-exempt organizations. "It is a qualified plan of governmental units or agencies and non-churchcontrolled, tax-exempt organizations" is a false statement. A 457 plan is not a qualified plan. Rather, it is a nonqualified deferred compensation plan of governmental units or agencies and non-church-controlled taxexempt organizations. In only a governmental 457 plan, the participant contribution limit may be doubled in the last three years (limited to unused deferrals in prior years) before the plan's normal retirement age. This provision is unique to a governmental 457 plan

Tim, age 48, works for 2 private tax-exempt employers. One has a Section 403(b) plan, and one maintains a nongovernmental Section 457 plan. If Tim defers $10,000 into the Section 403(b) plan in 2021, how much can he separately defer into the Section 457 plan? (Assume he has sufficient compensation to fund both plans to the maximum.) A. $9,500 B. $10,000 C. $19,500 D. $39,000

C. $19,500 Tim can separately defer the maximum of $19,500 into the Section 457 plan because 457 plan limits are not aggregated with the Section 403(b) plan limits.

Leon, age 48, works for two private, tax-exempt employers. One has a Section 403(b) plan and one maintains a nongovernmental Section 457 plan. If Tim defers $10,000 into the Section 403(b) plan in 2022, how much can he separately defer into the Section 457 plan? (Assume he has sufficient compensation to fund both plans to the maximum.) A. $9,000 B. $10,500 C. $20,500 D. $27,000

C. $20,500 Leon can separately defer the maximum of $20,500 into the Section 457 plan in 2022 because Section 457 plan limits are not aggregated with the Section 403(b) plan limits

Which of the following statements with respect to SEP contributions made by an employer is(are) CORRECT? I. Contributions are subject to FICA and FUTA. II. Contributions are currently excludable from the employee's gross income. III. Contributions are subject to income tax withholding. IV. Contributions are capped at $19,500 for 2021. A. I only B. I and III C. II only D. II and IV

C. II only Statement II is the only correct response. Contributions to a SEP are not subject to FICA, FUTA, or income tax withholding and are excluded from the employee's current income. The SEP contribution limit is the lesser of 25% of covered compensation or $58,000 and not the elective deferral limit of $19,500.

Jean, age 38, earns $300,000 annually as an employee of Junk Trash, Inc. Her employer sponsors a SIMPLE IRA retirement plan and matches all employee contributions to the plan 100% up to 3% of compensation. What is the maximum contribution (combined employee and employer) that can be made to Jean's SIMPLE IRA plan in 2021? A. $8,700 B. $13,500 C. $22,200 D. $22,500

D. $22,500 The maximum contribution that may be made on Jean's behalf is $22,500 ($13,500 EE elective deferrals and $9,000 ER contributions). Junk Trash, Inc., has chosen to make a matching contribution up to 3% of compensation (the SIMPLE maximum). Therefore, the covered compensation limit of $290,000 does not apply, and it can match Jean's entire salary ($290,000 × .03 = $8,700).

Celine, age 38, earns $350,000 annually as an employee for Rotolo Enterprises, Inc. Her employer sponsors a SIMPLE IRA plan and matches employee contributions to the plan 100% up to 3% of compensation. What is the maximum contribution (combined employee and employer) that can be made to Celine's SIMPLE IRA plan in 2022? A. $10,500 B. $14,000 C. $22,200 D. $24,500

D. $24,500 The maximum contribution that may be made on Celine's behalf is $24,500 ($14,000 of employee elective deferrals and $10,500 of employer contributions). Rotolo Enterprises, Inc., has chosen to make a matching contribution up to 3% of compensation (the SIMPLE maximum). Thus, the includible compensation limit of $305,000 does not apply, and it can be matched based on Celine's total salary ($350,000 × 0.03 = $10,500).

For 2021, what is the maximum amount possible that may be contributed to a SEP plan on behalf of an individual employee? A. $13,500 B. $19,500 C. $26,000 D. $58,000

D. $58,000 For 2021, the maximum contribution to a SEP plan is the lesser of 25% of employee covered compensation or $58,000.

For 2022, what is the maximum amount possible that may be contributed to a SEP plan on behalf of an individual participant? A. $14,000 B. $20,500 C. $27,000 D. $61,000

D. $61,000 For 2022, the maximum contribution to a SEP plan is the lesser of 25% of employee covered compensation or $61,000

Considering all possible contributions to the following tax-advantaged plans, which of the following statements is(are) correct regarding the highest possible contribution in 2021 on behalf of a non-owner participant who otherwise meets all respective requirements? I. The maximum possible contribution to a TSA/Section 403(b) plan is $29,000. II. The maximum possible contribution to a SIMPLE IRA is $30,000. III. The maximum possible contribution to a SEP is $58,000. IV. The maximum possible contribution to an eligible Section 457 plan is $39,000. A. None of these B. I only C. I, II, and III D. II, III, and IV

D. II, III, and IV Statement 1 is incorrect because if an employer contributes to a TSA/Section 403(b) plan, the maximum limit for 2021 is $58,000. The maximum possible employee deferral is $29,000, but the employer can also contribute. Statement 2 is correct. The maximum possible contribution to a SIMPLE IRA is $27,000. The maximum employee deferral without the catch-up is $13,500 in 2021. The maximum employer contribution is 3%. If someone under 50 made $450,000 then the employer 3% match would be another $13,500. Statement 3 is correct. The maximum possible contribution to a SEP is $58,000. Statement 4 is correct. The maximum possible contribution to an eligible Section 457 plan is $39,000. The maximum possible employee deferral is $19,500, but an eligible employee within three years of plan retirement date may defer an additional $19,500.

Nadia, age 51, has been working with Rebecca, a CFP® professional, in developing a plan for optimizing how she is saving for her retirement. Rebecca developed a plan she feels will accomplish Nadia's goals and gave it to her in a written document. Nadia reviewed it and has returned to Rebecca's office to tell her she has accepted all of the recommendations. The plan has several parts, including changing her contributions to the Section 403(b) plan at her place of employment and taking better advantage of the Section 457 plan that is also available to her. What is Rebecca's next step in assisting Nadia in her retirement planning? A. Rebecca should tell Nadia how much she should defer each pay period in both the Section 403(b) and Section 457 plans. B. Rebecca should call the plan administrator for the plans at Nadia's employer and get the forms for Nadia to fill out. C. It is up to Nadia to put Rebecca's recommendations in place now that she has a good plan from a financial planning professional. D. Rebecca should create a prioritized timeline for implementation of the recommendations and explain how monitoring the implemented recommendations will be accomplished and by whom.

D. Rebecca should create a prioritized timeline for implementation of the recommendations and explain how monitoring the implemented recommendations will be accomplished and by whom. Nadia and Rebecca are in the implementation phase of the financial planning process.

In the first two years, a SIMPLE IRA may be rolled over into which one of the following? a. another SIMPLE IRA b. a qualified plan c. an IRA d. a SEP

a. another SIMPLE IRA In the first two years, a SIMPLE IRA may only be rolled over into another SIMPLE IRA.

Kayla just found a new job. Her employer has a SAR-SEP. She asks you what that means to her. What would you tell her? a. "A SAR-SEP mean the employer must contribute to your retirement plan every year." b. "A SAR-SEP is a type of retirement plan. It allows you to save money for your retirement." c. "A SAR-SEP is an old type of retirement plan. New employees have not been able to contribute to them since the 1990's." d. "A SAR-SEP is a type of retirement plan. However, you usually must work there for a least two years to have any vesting."

b. "A SAR-SEP is a type of retirement plan. It allows you to save money for your retirement." A SAR-SEP allows a worker to defer money into their retirement account. All SAR-SEPs have 100% immediate vesting.

Priscilla works for Acme Motors, which offers a SIMPLE IRA plan with a 3% employer match. Priscilla is expected to earn $40,000 this year, and is trying to pay down debt that she has so she is only going to contribute $500 to the SIMPLE plan this year. What is the contribution total that will be deposited into her SIMPLE plan this year? a. $500 b. $1,000 c. $1,300 d. $1,700

b. $1,000 The employer will match dollar-for-dollar the first $1,200 that Priscilla contributes (3% of $40,000). Since she is only contributing $500, then the company will only contribute $500 for a total of $1,000. In effect Priscilla is "leaving money on the table."

Rachel, age 54, is trying to maximize her retirement savings. In the first half of 2022 she worked for the ABC Corporation and contributed $12,000 to their 401(k). She just took a new job with the XYZ Corporation. What is the maximum she would be allowed to contribute to the 401(k) of the XYZ Corporation in 2022? a. $14,000 b. $15,000 c. $20,500 d. $27,000

b. $15,000 In 2022, the maximum 401(k) employee contribution for someone age 50 and older is $27,000 ($20,500 + $6,500 age 50 catch-up). Since she has already contributed $12,000 for this year at her former employer, she is limited to $15,000 for the XYZ 401(k).

Which one of the following is CORRECT regarding a savings incentive match plan for employees (SIMPLE)? a. In a SIMPLE IRA, employees can defer the lesser of 25% of compensation of $20,500 in 2022. b. Employers can provide either a non-elective or matching contribution. c. To be eligible to offer a SIMPLE plan, employers cannot have more than 50 employees earning $5,000 or more. d. State and local governments are not allowed to establish a SIMPLE IRA.

b. Employers can provide either a non-elective or matching contribution. SIMPLE plans can have either a 2% non-elective contribution or a 3% match.

Which of the following rules apply to a SEP instead of a SIMPLE? I. A SEP may require three years of employment over the last five years. II. A SIMPLE may require three years of employment over the last five years. III. A SEP can only receive employer contributions but a SIMPLE can receive employer and/or worker contributions. IV. A SEP may disregard the normal includible compensation limit of $305,000 in 2022 if it offers a 3% match. a. I and II only b. I and III only c. II and III only d. II and IV

b. I and III only A SEP may require three years of employment over the last five years. An employee is eligible for a SIMPLE if they have earned $5,000 or more during any two preceding years and reasonably expect to make at least $5,000 this year. A SEP can only receive employer contributions. For example, Joe is a self-employed owner. In fact he is the only employee of his business. When he decides to contribute to the SEP, he is officially making this decision as the owner of the business, not as a worker. A SIMPLE IRA with a 3% match can disregard the normal includible compensation limit of $305,000 in 2022 - not a SEP.

Which of the following rules apply to a SIMPLE IRA but not to a SEP? I. A worker is allowed to salary defer into the account. II. An employee must be allowed into the account if they are at least age 21; have served for at least three of the previous five years; and makes at least $650 in 2022. III. An employee is eligible if they have earned $5,000 or more during any two preceding years and reasonably expect to make at least $5,000 this year. IV. Only the employer is allowed to contribute. a. I and II only b. I and III only c. II and IV only d. III and IV only

b. I and III only With a SIMPLE IRA, the workers are allowed to defer into the account. Workers are eligible for a SIMPLE plan if they have earned $5,000 or more during any two preceding years and they reasonably expect to make at least $5,000 in the current year. The other two possibilities are true for a SEP.

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

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

Mr. Chips, age 60, has been teaching at a public school with a 457(b) for many years, but his contributions have been very minimal. The plan has a normal retirement age of 62. He recently inherited $150,000. You work for the 457(b), and he comes to you for help. He wants to know how much he can contribute to his 457(b) in 2022. What would you tell him? a. "You can contribute $20,500 this year." b. "You can contribute $27,000 this year." c. "You can contribute $41,000 this year." d. "You can contribute $47,500 this year."

c. "You can contribute $41,000 this year." A 457(b) allows participants to double the basic contribution limit in the final three years before the plan's normal retirement date. Thus, a plan participant can contribution $20,500 times two in 2022. This three year catch-up plan cannot be combined with the 50 or over catch-up.

Aretha, age 55, has taught at the local elementary school for 20 years. She has recently married a local business owner. He does not offer a retirement plan at his business, but they are both eager to make substantial contributions to prepare them for retirement. Aretha's school offers a 403(b). How much can she contribute for 2022? a. $20,500 b. $27,000 c. $30,000 d. $41,000

c. $30,000 Aretha works for a "HER" organization (not-for-profit organization in the field of healthcare, education, or religion). She has at least 15 years of service and is age 50 or older. Thus, she can combine the basic contribution limit, the age 50 catch and the special catch-up of $3,000/per year for a lifetime limit of $15,000. That means she can contribute $30,000 in 2022 ($20,500 + $3,000 + $6,500).

Jed worked to the City of New Orleans and contributed to their 457(b) for years. When he was age 45, he took a new job as a pastry chef on Bourbon Street. He withdrew $45,000 from his 457(b) to pay for living expenses while he transitioned to his new job. He is in the 22% marginal tax bracket this year. What will he owe the federal government for his 457(b) withdrawal this year? a. $0 b. $4,500 c. $9,900 d. $14,400

c. $9,900 A 457(b) is ultimately income taxed like a nonqualified deferred compensation plan. That means withdrawals from a 457(b) are usually not subject to the 10% EWP. In his case, he would be income taxed on $45,000 x 0.22 = $9,900. If money from a retirement account that is subject to the 10% EWP is moved into the 457(b), this money must be accounted for separately and withdrawals of this money would be subject to the 10% EWP rules.

Marsha has questions concerning the Section 403(b) plan at State University. She is interested in increasing her overall retirement plan contributions. She is 52 and has worked for the university for 18 years. Which of the following contributions could she make if she participated in her employer's Section 403(b) plan? I. Elective deferral II. Age 50 and over catch-up contributions III. Special catch-up contributions a. I only b. I and II only c. I, II, and III d. II and III

c. I, II, and III An eligible Section 403(b) plan participant may contribute a regular elective deferral, a $6,500 age 50 and over catch-up contribution, and $3,000 under the special catch-up rules. To be eligible for the $3,000 special catch-up rule, the worker must have 15 years of service with a not-for-profit employer involved in health care, education, or a church plan.

Which of the following retirement plans, maintained by an employer, if any, would also permit the employer to establish a savings incentive match plan for employees (SIMPLE)? a. Cash balance plan b. Simplified employee pension (SEP) c. Section 457 plan d. Section 403(b) plan

c. Section 457 plan To establish a SIMPLE, and employer cannot maintain another qualified or tax-advantaged plan. However, a Section 457 plan is a nonqualified deferred compensation plan and, therefore, does not constitute a prohibited plan for purposes of also establishing a SIMPLE.

Don, age 40, plans to retire at 67. His retirement goal is $80,000 per year in today's dollars at the beginning of each year for 30 years. He assumes Social will pay an inflation-adjusted $30,000 year. He assumes inflation will average 3% per year for his lifetime. He believes his investments will average 7% before retirement and 6% in retirement. How much does he need in his retirement fund on the day he retires to accomplish his goal (+/-$25)? a. $1,528,777 b. $1,620,503 c. $2,201,704 d. $2,265,831

d. $2,265,831 Set your calculator to the END mode and 1 P/YRStep 1:N = 27I/YR = 3%PV = -$50,000FV = Answer $111,064Set your calculator to the BEG mode and 1 P/YRStep 2:N = 30I/YR = 2.9126 [(1.06/1.03) - 1] x 100PMT = $111,064FV: 0PVad = Answer $2,265,831

You are working with a SEP. The SEP has been determined to be top heavy. The owner wants to know how that will affect the plan. What would you say? a. "This will cause an acceleration of the vesting schedule." b. "The plan will have an over contribution penalty of 6%." c. "The plan is no longer a viable retirement plan according to the IRS. The plan must be dissolved and everyone will be taxed and subject to early withdrawal penalties on the money." d. Essentially, if anyone gets a contribution for the year, the non-key employees must receive at least a 3% contribution."

d. Essentially, if anyone gets a contribution for the year, the non-key employees must receive at least a 3% contribution." If a defined contribution plan like a SEP is top heavy, the non-key employees usually must get a minimum contribution of 3%. If the key employees are getting a less than 3% contribution, then the non-key employees must get the same contribution percentage as the key employees. SEP Are already 100% immediately vested, so they cannot be subject to a more accelerated vesting schedule. Being top-heavy does not disqualify the plan.

Which of the following features are unique to SIMPLE IRAs? I. SIMPLE IRAs with a 3% match are able to account for more compensation any other type of employer provided tax-advantaged plan or qualified plan. II. SIMPLE IRAs have a 25% early withdrawal penalty for the first two years. III. SIMPLE IRAs with a 3% match are able to lower the match to 2% or even down to 1% for two years out of five. IV. A SIMPLE IRA can only be rolled into another SIMPLE IRA for the first two years. a. I and II only b. II and IV only c. I, III, and IV only d. I, II, III, and IV

d. I, II, III, and IV All of these statement are true. A SIMPLE IRA with a 3% match is able to consider more than the usual $305,000 in 2022. For example, if an employee earned $400,000, the 3% match would be $12,000 for a SIMPLE IRA in 2022. For a 401(k), the same employee's match would be $9,150 (3% of $305,000).

For purposes of determining active participation status in testing for the deductibility of IRA contributions for a single individual, participation in which of the following is NOT considered? a. SEP b. ESOP c. Section 403(b) plan d. governmental Section 457 plan

d. governmental Section 457 plan A Section 457 deferred compensation plan (typically implemented by state and/or local governments) is not considered in determining active participation status for the deductibility of IRA contributions.