Quiz 4

Which of the following are permitted investments in tax-sheltered annuity (TSA) plans? Individual stocks Group or individual annuity contracts Custodial accounts invested in mutual funds A) II and III B) I only C) I and II D) I, II, and III

A) Investments in TSAs are limited to annuity contracts, either group or individual, and custodial accounts invested in mutual funds. Individual stocks and bonds are not permitted.

Which of the following describes a basic provision of a SIMPLE IRA? A) One contribution formula an employer can use under a SIMPLE IRA is to make a 2% nonelective contribution on behalf of each eligible employee with at least $5,000 in current compensation. B) SIMPLE IRA plans can be arranged to allow for in-service loans for up to 50% of the account balance, but not to exceed $50,000. C) An employer may add a SIMPLE IRA plan to an existing defined benefit plan to allow employees to make elective deferrals. D) A SIMPLE IRA must satisfy both the ADP and ACP nondiscrimination tests. E) Only employers that average fewer than 20 employees can establish a SIMPLE IRA.

A) SIMPLE IRA plans are available to employers with 100 or fewer employees and with no other qualified retirement plan. The employer contribution requirement may be satisfied by either a 3% matching contribution formula or a 2% nonelective contribution for each employee with current-year compensation of $5,000 or more. IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions. These plans do not require ADP or ACP nondiscrimination tests.

For tax-exempt employers that do not want to implement a Section 457 plan and desire a plan funded strictly by employee elective deferrals, a good alternative would be A) a Section 403(b) plan. B) a SARSEP plan. C) a SEP plan. D) a profit-sharing plan.

A) The Section 403(b) plan, like the Section 457 plan, can be used as an employee-deferred contribution plan. Certain tax-exempt employers can implement Section 403(b) plans. With a SEP plan or a profit-sharing plan, there are also employer contribution considerations. New SARSEP plans can no longer be established.

All of these statements regarding simplified employee pension (SEP) plans are correct except A) the major advantage is the simplicity of the plan. B) all part-time employees can be excluded. C) employer contributions are discretionary. D) SEP plans can be established by any form of business entity.

B) A SEP plan must cover any employee who is at least 21 years old and who worked for the employer, even on a part-time basis, for three of the preceding five years. In addition, contributions must be made on behalf of any eligible employee whose compensation for the year is at least $750 (2023). These provisions make most part-time employees eligible to participate.

Which of the following types of plans is typically used by religious, charitable, educational, and other Section 501(c)(3) entities or public school systems? A) SEP plan B) Section 403(b) plan/TSA C) SIMPLE D) Section 457 plan

B) A Section 403(b) plan/TSA (tax-sheltered annuity) is a tax-deferred employee retirement plan that is adopted only by certain tax-exempt organizations and certain public schools and colleges. Employees have individual accounts to which employers contribute (or employees contribute through salary reductions).

Which of the following are reasons a small business might choose a SIMPLE IRA over a Section 401(k) plan? A) The employer expects that it could not satisfy the Section 401(k) nondiscrimination test. B) All of these are reasons. C) A Section 401(k) plan would be top heavy (benefits for key employees will exceed 60% of total benefits), and the employer wants to minimize employer contributions. D) Because a SIMPLE IRA is less costly to operate, it is generally the better choice if the employer is not concerned about the design constraints of the plan.

B) All of these statements are reasons a small business might choose a SIMPLE IRA over a Section 401(k) plan.

Which of these statements with respect to simplified employee pension (SEP) contributions made by an employer is CORRECT? A) Contributions are capped at $22,500 for 2023. B) Contributions are currently excludible from the employee's gross income. C) Contributions are subject to FICA and FUTA. D) Contributions are subject to income tax withholding.

B) Contributions are currently excludible from the employee's gross income. Employer contributions to a SEP are not subject to FICA, FUTA, or income tax withholding. The SEP contribution limit for 2023 is the lesser of 25% of covered compensation or $66,000.

Which of these regarding a SIMPLE is CORRECT? A) A SIMPLE requires ADP testing of employee elective deferral contributions. B) A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in the SIMPLE IRA plan. C) The maximum annual elective deferral contribution to a SIMPLE is $22,500 (2023) for an employee who has not attained age 50. D) SIMPLE IRAs are subject to top-heavy rules.

B) Neither a SIMPLE IRA nor a SIMPLE 401(k) requires ADP testing. A SIMPLE is not subject to top-heavy rules. The early withdrawal penalty is 25% for distributions taken within the first two years of participation in a SIMPLE IRA. The maximum elective deferral to a SIMPLE is $15,500 (2023). Employees who have attained age 50 by the end of the tax year will also be eligible for a catch-up contribution of $3,500.

Max, age 47, has been participating in his employer's SIMPLE IRA for one year. If he withdraws $1,000 from this plan this year and the withdrawal is not covered by an exception to the penalty tax on premature withdrawals, he will owe a penalty tax of A) $400. B) $250. C) $100. D) $0.

B) Premature withdrawals made from a SIMPLE IRA within two years of initial participation are subject to a penalty tax of 25%. Max's penalty would be $250.

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 2023, what is the maximum amount he may defer into the Section 457 plan? A) $15,500 B) $22,500 C) $12,500 D) $56,000

B) Ronald can separately defer the maximum of $22,500 (2023) into the Section 457 plan because Section 457 plan limits are not aggregated with the Section 403(b) plan limits.

George is a plumbing contractor and has implemented a retirement plan for his employees. The plan must cover all employees who are at least age 21 and have worked for George for three of the last five years (including part-time employees). Contributions must be made for employees who earned at least $750 in 2023. The plan can exclude union members if they have their own retirement plan. Which type of plan has George selected? A) Section 403(b) plan B) Simplified employee pension (SEP) plan C) SIMPLE IRA D) SARSEP plan

B) The requirement that contributions must be made for employees who earned at least $750 (2023) in the prior years identifies the plan as a SEP plan.

A savings incentive match plan for employees (SIMPLE) A) cannot be established as an IRA. B) cannot be established as a Section 403(b) plan. C) cannot be established as a Section 401(k) plan. D) can be offered by employers who have 100 or more employees.

B) There is no such thing as a SIMPLE 403(b). Employers with more than 100 employees (who earn more than $5,000) may not offer a SIMPLE. In addition, the employer may not usually offer any other type of qualified retirement plan in conjunction with a SIMPLE. Union plans and governmental 457 plans are the exceptions to the employer having a second active plan. However, this is not to be applied to a test question unless specifically mentioned in the question. Basically, can a SIMPLE have a second active plan for its workers? No, because that is as far as the test is going. What about a union plan or a 457 for qualified state and local government employers? Well, okay, for those rare exceptions, but the question would have to bring up one of these rare exceptions. The point is that SIMPLEs were intended to be the only active plan for the small employer. Congress was afraid the employer would try to be discriminatory with the other retirement plan, so the rules was made that there could not be another retirement plan. Then governmental 457 plans and union plans snuck in, but these rare exceptions are not a part of the question unless specifically mentioned.

Which of these statements regarding Section 403(b) plans are CORRECT? Section 403(b) plans must comply with many of the same reporting and auditing requirements that apply to Section 401(k) plans. Certain eligible participants in a Section 403(b) plan may defer as much as much as $33,000 into the plan in 2023. Section 403(b) plans may provide for plan loans to participants. Funding for Section 403(b) plans is limited to mutual funds and annuities. A) III and IV B) I, II, and III C) I, II, III, and IV D) I and II

C) All of the statements are correct. The $33,000 maximum elective deferral for 2023 includes the $22,500 basic limit; the extra $3,000 per year for up to $15,000 lifetime for employees of not-for-profit health care, education, and church employers; and the $7,500 catch-up for those age 50 and older.

Tom, age 54, is the sole proprietor of a small business. He is interested in adopting a retirement plan for the business. His primary goals are to make large contributions to his own retirement account and to minimize the expense and paperwork associated with the plan. Which of the following retirement plans would you recommend for Tom's business? (He makes $50,000 of self-employment income and has three part-time employees who earn $15,000 each.) A) SEP plan B) Section 401(k) plan funded by employee elective deferrals C) SIMPLE IRA D) Traditional defined benefit pension plan

C) Qualified plans require a significant amount of expense and paperwork. Because Tom's business is small, a SEP or SIMPLE IRA is preferred. Tom can, however, defer more in a SIMPLE than in a SEP. Based on 2023 plan contribution limits, in the SIMPLE, he can defer $19,000 ($15,500 salary deferral, plus $3,500 as a catch-up contribution) plus receive a 3% match. In a SEP, he would be limited to $9,293 as follows: $50,000 Schedule C income − 3,533 deductible half of self-employment tax (SECA) $46,467 net Schedule C SE income × 20% (the 20% is calculated by 0.25 ÷ 1.25 = 20%) $9,293

Which one of these requirements is a possible disadvantage of a simplified employee pension (SEP) for an employer? A) Employer contributions to a SEP are subject to payroll taxes. B) A SEP must have a fixed contribution formula that is nondiscriminatory. C) The vesting requirements for a SEP prohibit forfeitures. D) Roth tax treatment is not available for a SEP.

C) SEP contributions must be 100% vested (i.e., nonforfeitable). SEPs consist of individual IRAs; there is no trustee for a SEP plan. The contribution formula of a SEP is not required to be fixed. Employer contributions to a SEP are not subject to payroll taxes. SECURE 2.0 allows a worker to elect Roth tax treatment for SEPs and SIMPLEs (SIMPLE IRAs and SIMPLE 401[k]s) as of 2023.

Which one of the following types of employers can offer either a 403(b) plan or a 457(b) plan? A) Any employer with less than 1,000 employees can offer either or both a Section 403(b) and a Section 457(b) plan. B) Churches and qualified church-controlled organizations may offer either or both a Section 403(b) and a Section 457(b) plan. C) A state university or college could offer either or both a Section 403(b) and a Section 457(b) plan. D) Any employer that can offer a Section 403(b) plan could also sponsor a Section 457(b) plan.

C) State and local governments and organizations exempt from federal income tax are eligible to offer Section 457 deferred compensation plans, but churches and church-controlled organizations cannot. Not for-profit organizations can offer either of these plans.

Which of these statements regarding the disadvantages to the employer of SEP plans is CORRECT? Employees cannot rely on a SEP plan alone to provide an adequate retirement benefit, which may hinder appreciation of the plan by employees. The employer bears the investment risk under the plan. If an employer maintains a SEP plan and a qualified plan, contributions to the SEP plan can reduce the amount that may be deducted for contributions to the qualified plan. The special rule for calculating deductible contributions on behalf of a self-employed owner in a qualified plan also applies to a SEP plan. A) III only B) II only C) I, III, and IV D) I, II, III, and IV

C) Statements I, III, and IV are disadvantages of a SEP plan to an employer. Statement II is false. The employee bears the investment risk under the plan.

Which of these statements regarding TSAs/Section 403(b) plans is CORRECT? A) Lump-sum distributions may be eligible for special long-term capital gain treatment. B) In-service withdrawals are never allowed. C) The sponsor must be a tax-exempt organization that meets the requirements of Section 501(c)(3), a governmental organization, or public educational organization D) The plan can invest in individual stocks and bonds, but not options or futures.

C) The answer is the sponsor must be a tax-exempt organization that meets the requirements of Section 501(c)(3), a governmental organization, or public educational organization. Distributions from a TSA are treated as ordinary income. Only annuities and mutual funds are permitted investments in a TSA. Finally, 403(b) plans may permit in-service withdrawals.

David is age 47 and qualifies for a Section 457 plan through his job with the state. David's salary is $80,000. What is the maximum salary deferral that David can contribute to the Section 457 plan in 2023? A) $15,500 B) $7,500 C) $22,500 D) $9,375

C) The basic dollar limit for worker contributions when the worker is younger than 50 applicable to Section 403(b), 457, and 401(k) plans is $22,500 in 2023.

For which of the following plans does the employer bear the investment risk in the plan? A) SIMPLE 401(k) B) SEP IRA C) Defined benefit plan D) SIMPLE IRA

C) The employee bears the investment risk for defined benefit plans.

Which of these statements regarding the basic provisions of tax-sheltered annuities (TSAs)/Section 403(b) plans is FALSE? A) If an employee has at least 15 years of service with an eligible employer, an additional catch-up contribution may be permitted. B) TSAs are available to all eligible employees of Section 501(c)(3) organizations who adopt such a plan. C) A special catch-up provision for eligible Section 403(b) participants allows up to a $45,000 (2 × $22,500 in 2023) elective deferral in the last 3 years of employment before retirement. D) An eligible employee may be able to use both a special catch-up provision and an over-age-50 catch-up provision in the same year.

C) The special catch-up provision for eligible Section 403(b) participants allows a maximum additional $3,000 per year elective deferral until the $15,000 lifetime maximum catch-up is reached. The ability to double the worker contribution in the last three years before the retirement plan document's normal retirement age applies to governmental 457 plans.

Which of the following retirement plans, maintained by an employer, would also permit an eligible employer to establish a SIMPLE? A) SEP plan B) Section 401(k) plan C) Section 457 plan D) Section 403(b) plan

C) To establish a SIMPLE, an employer cannot maintain another plan. However, a Section 457 plan is a nonqualified deferred compensation plan; therefore, it does not constitute a plan for purposes of establishing a SIMPLE.

Which of the following statements describes a basic provision or use of a savings incentive match plan for a SIMPLE IRA? A) Only employers that average fewer than 200 employees can establish a SIMPLE IRA. B) A SIMPLE IRA is primarily suitable for large, corporate-type employers. C) A SIMPLE IRA must satisfy special nondiscrimination tests in addition to general rules. D) One contribution formula an employer can use in a SIMPLE IRA is to make a 2% nonelective contribution on behalf of eligible employees.

D) A 2% nonelective contribution formula on behalf of eligible employees is one of two formulas an employer may use in making contributions to a SIMPLE IRA. A 3% match is the other. For a SIMPLE IRA only, the 3% match can be lowered to 1% for two out of five years.

Margaret is a 29-year-old attorney with her own law practice. She has hired four part-time employees over the past five years to assist her. Each of these employees works approximately 200 hours per year, earning an average annual salary of $4,000. Margaret would like to establish a retirement plan that would allow her to begin saving for her own retirement, with little administrative costs. Which one of the following plans would be most appropriate for Margaret in 2023? A) Section 457 plan B) Traditional Section 401(k) plan C) SEP plan D) SIMPLE IRA

D) A SIMPLE IRA would be the most appropriate plan because it involves little administrative costs and would meet Margaret's retirement plan goals. Notice the workers are making more than $750 and less than $5,000. If a SEP would be chosen, she would have to contribute for employees who made more than $750; are at least age 21; and who have worked for her for three of the preceding five years. In other words, if a test question has part-time workers making more than the amount required to contribute to a SEP (which is indexed) but less than $5,000 (which is not indexed), then the SEP is eliminated and the answer will probably be a SIMPLE. Why? Because owners are unlikely to contribute to the retirement plan of a part-time worker. Choosing a SIMPLE always eliminates those making less than $5,000. However, a contribution must be made for part-time workers who are at least age 21, have worked there for at least three of the last five years, and make more than the very low SEP annual amount. Another separator between SEPs and SIMPLEs is that a SEP can only have an employer contribution, but SIMPLEs allow workers to save for their retirement through the plan.

All of the following retirement plans permit employees to make elective deferrals except A) Section 401(k) plans. B) SIMPLE 401(k)s. C) profit-sharing plans with Section 401(k) provisions. D) SEP plans.

D) Employee elective deferrals are permitted in Section 401(k) plans, profit-sharing plans with Section 401(k) provisions, and SIMPLEs, but not in SEP plans.

Gary was just hired by an employer that maintains a SIMPLE IRA for its employees. Which of these statements regarding Gary's participation in the SIMPLE IRA is CORRECT? A) The annual employer match may be limited to 1% of employee compensation each year. B) Gary may only defer $6,500 into the SIMPLE IRA if he is younger than age 50. C) Covered compensation is limited to $330,000 for a SIMPLE IRA in 2023 if the employer elects a 3% match. D) When Gary participates in the plan, he will be 100% vested in his employer's contributions.

D) Gary will be 100% vested in his employer contributions to his account. He may defer up to $15,500 (2023) into the SIMPLE IRA if he is younger than age 50. An employer may only limit the matching contribution to 1% of employee compensation in no more than two out of every five years. Effective covered compensation for employees under age 50 is limited to $516,667 ($15,500 ÷ 0.03) for a SIMPLE IRA (2023) in which the employer elects to make 3% matching contributions. The covered compensation limit of $330,000 (2023) does not apply in this instance because there is a special rule for SIMPLE IRAs with a 3% match.

How does simplified employee pension (SEP) plan participation affect an employee's IRA contributions? The deductibility of an active participant's IRA contribution depends upon his MAGI. SEP plan participation does not reduce or eliminate an employee's ability to fund an IRA. Employees who participate in a SEP plan are considered active participants in an employer-sponsored retirement plan for the tax year in which an employer contribution is made. Employees who participate in a SEP plan are not considered active participants in an employer retirement plan for the tax year in which an employer contribution is made. A) II and III B) I and IV C) I, II, and IV D) I, II, and III

D) Statements I, II, and III are correct. Employees who participate in a SEP plan are considered active participants in an employer retirement plan for the tax year in which an employer contribution is made. The deductibility of an active participant's IRA contribution depends upon his MAGI and can be phased out or eliminated at certain income levels. SEP plan participation does not reduce or eliminate an employee's ability to fund an IRA. The IRA can be funded, but not necessarily deducted from gross income.

Which of these statements regarding the basic provisions of Section 403(b) plans is false? A) If an employee has at least 15 years of service with an eligible employer, an additional catch-up contribution may be permitted. B) An eligible employee may be able to use both a special catch-up provision and an over-age-50 catch-up provision in the same year. C) TSAs are available to all eligible employees of Section 501(c)(3) organizations who adopt such a plan. D) A special catch-up provision is available to employees of Section 501(c)(3) organization employers who have at least 10 years of service.

D) The special or additional catch-up provision requires at least 15 service years.

Which of the following retirement plans, maintained by an eligible employer, would also permit the employer to establish a SIMPLE IRA? A) Money purchase pension plan B) Section 403(b) plan C) Traditional Section 401(k) plan D) Union plan bargained in good faith

D) To establish a SIMPLE (IRA or Section 401(k)), an employer cannot generally maintain another retirement plan. However, a plan bargained in good faith with a union is allowed because Congress is more worried about powerful businessowners using a retirement plan in a discriminatory manner.

Which statements regarding TSAs and Section 457 plans are CORRECT? A) Participation in either a TSA or a Section 457 plan will cause an individual to be considered an active participant for purposes of phasing out the deductibility of traditional IRA contributions. B) Both plans allow net unrealized appreciation tax treatment for lump-sum distributions. C) Of these two plans, only the 403(b) must meet the minimum distributions requirements that apply to qualified plans. D) Both plans may be funded entirely by participant contributions.

D) While an employer is allowed to contribute to either plan, both plans may be funded entirely by participant contributions. A Section 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an active participant. Net unrealized appreciation (NUA) tax treatment is not permitted for distributions from either plan. Finally, both plans required RMDs.