Retirement

General Safe Harbor Test

% of NHC EE covered > or = 70%

Ratio Percentage Test

(% of NHC EE covered / % of HC EE Covered ) > or = 70%

Average Benefits Test

(AB% of NHC / AB% of HC EE) > or = 70%

Key Employee

A 5% owner of the employer A 1% owner of the employer having an annual compensation from the employer of more than $150,000 or, An officer of the employer having an annual compensation greater than $175,000 * must be a officer of owner, compensation is not enough and only the top 50 officers count

Top heavy plan

A retirement plan in which more than 60% of the plan assets are in accounts attributed to key employees * if you heavy it must use top heavy vesting which is 2-6 year graduated or 3 year cliff. DC plans already use this

Vesting Schedule

A time-table for determining at what point the employers contributions become the property of the employee in a pension plan. must be at lear a 3 year cliff or a 2-6 year vesting schedule

Contribution amounts Covered compensation = Defined benefit maximum limit = Defined contribution maximum limit = 401K, SARSEP, 457, 403b employee deferral limit = Highly compensated employee = Key employee officer = Social security wage base =

Covered compensation = 275,000 Defined benefit maximum limit = 220,000 Defined contribution maximum limit = 55,000 (6,000 catch up provision) 401K, SARSEP, 457, 403b EE deferral limit = 18,500 Highly compensated employee = 120,000 Key employee officer = 175,000 Social security wage base = 128,400

pension plans (4 types)

Deferred benefits pension plan Cash balance pension plan Money purchase pension plan Target benefit pension plan

advantages of qualified plans

ER Contributions are currently tax deductible contributions are not subject to payroll taxes EE availability of pretax contribution for EEs tax deferral of earrings on contributions ERISA protection lump-sum distribution options (10 year averaging, NUA, pre 1974 capital gains treatment)

Which of the following characteristics apply to paired plans (also known as "tandem plans")? I. Generally combines a money purchase pension and a profit-sharing plan. II. Actuarial assumptions required. III. Total contributions to the paired plans limited to 15% of payroll by IRC Section 404. IV. Employer bears investment risk. A) I only. B) II and IV only. C) I, III and IV only. D) IV only.

Rationale The correct answer is "A." Defined contribution plans do not require actuarial assumptions. Total contributions to both plans is limited to lesser of 100% or $55,000 (2018) by IRC Section 415. The profit sharing plan is limited by IRC Section 404 to 25% of covered payroll. Employees bear the investment risk in DC plans.

Corey is covered under his employer's Profit Sharing Plan. He currently earns $500,000 per year. The plan is top heavy. The employer made a 5% contribution on behalf of all employees. What is the company's contribution for him? A) $13,750 B) $24,000 C) $55,000 D) $220,000

Rationale The correct answer is "A." For a profit sharing plan the contribution is limited to the lesser of $55,000 (2018) or covered compensation. In this case the contribution will be limited by the covered compensation limit of $275,000. $275,000 x 5% = 13,750. The fact that the plan is top heavy is irrelevant since all employees are receiving a contribution greater than 3%.

Which of the following statements does not describe the concept of constructive receipt as it applies to employee benefits and qualified and non-qualified retirement plans? A) Funded non-qualified retirement plans do not incur constructive receipt if the agreement was executed prior to the performance of services. B) Constructive receipt may occur when the funds or benefits are available or accessible to the employee, regardless of whether the funds are actually received. C) Unfunded benefit plans generally avoid constructive receipt because there is a substantial risk of forfeiture. D) Salary reduction benefit plans generally avoid constructive receipt if the agreement was executed prior to the performance of services.

Rationale The correct answer is "A." Generally, funded plans result in constructive receipt because the employee has control of the assets and there is no substantial risk of forfeiture.

Which of the following are legal requirements for 401(k) plans? I. Employer contributions do not have to be made from profits. II. Employee elective deferral elections must be made before the compensation is earned. III. Hardship rules allow in-service withdrawals which are not subject to the 10% early withdrawal penalty. IV. ADP tests can be avoided using special safe harbor provisions. A) I, II and IV only. B) I, III and IV only. C) II, III and IV only. D) I, II, III and IV.

Rationale The correct answer is "A." Hardship withdrawals are considered premature withdrawals and are subject to income tax and the 10% early withdrawal penalty if the employee is under age 59 1/2.

Your client has asked about making a contribution to an IRA. The following are sources of income he listed on his data form: I. $5,000 from a Limited Partnership interest. II. $1,500 from home-based business. III. $20,000 municipal bond interest. IV. $3,000 stock dividends. V. $250 sales commission from part-time work. How much can your client contribute to an IRA? A) $1,750 B) $1,500 C) $2,000 D) None of the above.

Rationale The correct answer is "A." Only earned income is qualified to be contributed to an IRA. Statements "I" and "III" are unearned portfolio income. Statement "IV" is not considered income.

Which of the following accurately describe the results of "golden parachute" payments made to a "disqualified" person? I. They are includible in W-2 income. II. They are subject to a 10% excise tax. III. They qualify for 10-year forward averaging if paid out as a lump sum. IV. They are not subject to payroll taxes. A) I only. B) II only. C) II and III only. D) I and IV only.

Rationale The correct answer is "A." Payments under a "golden parachute" are considered ordinary income. Additionally, any amounts under the Social Security cap will be subject to the OASDI tax. All amounts will be subject to Medicare tax. "Golden parachute" payments are also subject to an additional 20% excise tax. Because these are non-qualified plans, no lump sum treatment or IRA rollover options apply.

Which of the following statements concerning tax considerations of nonqualified retirement plans is/are correct? I. Under IRS regulations an amount becomes currently taxable to an executive even before it is actually received if it has been "constructively received." II. Distributions from nonqualified retirement plans are generally subject to payroll taxes. A) I only. B) II only. C) I and II. D) Neither I or II.

Rationale The correct answer is "A." Statement "II" is incorrect because payroll taxes are due on deferred compensation at the time the compensation is earned and deferred, not at the date of distribution. Statement "I" is a correct statement.

Lisa, age 35, earns $175,000 per year. Her employer, Reviews Are Us, sponsors a qualified profit sharing 401(k) plan, which is not a Safe Harbor Plan, and allocates all plan forfeitures to remaining participants. If in the current year, Reviews Are Us makes a 20% contribution to all employees and allocates $5,000 of forfeitures to Lisa's profit sharing plan account, what is the maximum Lisa can defer to the 401(k) plan in 2018 if the ADP of the nonhighly employees is 2%? A) $7,000 B) $12,500 C) $15,000 D) $18,500

Rationale The correct answer is "A." The maximum annual addition to qualified plan accounts is $55,000. If Reviews Are Us contributes $35,000 ($175,000 x 20%) to the profit sharing plan and Lisa receives $5,000 of forfeitures, she may only defer $15,000 ($55,000 - $35,000 - $5,000) before reaching the $55,000 limit (2018). However, she will also be limited by the ADP of the nonhighly employees because she is highly compensated (compensation greater than $120,000). If the nonhighly employees are deferring 2% then the highlys can defer 4% (2x2=4). Therefore, she is limited to a deferral of $7,000 ($175,000 x 4%).

Jacinth is an executive at Papers Unlimited. As part of her compensation she has a restricted stock plan that allows her to receive 2,000 shares of stock after she completes of 5 years of service. At the time of grant the stock was trading at $4 per share. She did not make the 83b election. She met the vesting requirement 8 months ago when the stock was trading at $28. She has decided to sell her stock. All of the following are true, except: A) If she sells the stock today for $3 per share she would have an ordinary loss of $50,000. B) If she sells the stock today for $15 per share she will recognize a capital loss of $26,000. C) If she sells the stock today for $28 per share then she will not recognize any gain or loss. D) If she sells the stock today for $38 per share then she will recognize $20,000 in short term capital gains.

Rationale The correct answer is "A." When she met the vesting period she would have recognized W-2 income of $56,000 (2,000 x $28). If she sold the stock at $3 then she would recognize a capital loss of $50,000 ($56,000 basis - $6,000 sale price). If she sold the stock at $15 then she would recognize a capital loss of $26,000 ($56,000 basis - $30,000 sale price). If she sold the stock at $28 then she would not recognize any gain or loss ($56,000 sale price - $56,000 basis). If she sold the stock at $38 then she would recognize a short term gain of $20,000 ($76,000 sale price - $56,000 basis).

An employer has made a contribution equal to 5% of each plan participants income into a profit sharing plan. The plan with a one-year service requirement is found to be top heavy. Which of the following statements is true? A) The top-heavy condition must be corrected before the end of the plan year or the plan will be disqualified. B) The plan must use a 2-6 or shorter vesting schedule. C) An additional contribution of 3% to Non-Highly Compensated Employee (NHCE) accounts is mandated. D) Highly compensated employees must have their contributions reduced so the plan is no longer top-heavy.

Rationale The correct answer is "B." A top heavy plan mandates a 3-year cliff vesting or 2-6 graded vesting schedule (or faster if elected by sponsor.) Top heavy plans must make a minimum contribution of 3% to non-key employees. This PSP had already made a 5% contribution so no additional contribution is required. Top heavy plans are still qualified as long as minimum vesting and contribution requirements are met.

Your client, John Smith, a sole-employee of a corporation with $100,000 income, has a maximum contribution profit-sharing plan. John has asked you to suggest a method for increasing his tax-deductible retirement plan contributions. The best option is: A) Contribute to an IRA in addition to his profit sharing plan. B) Adopt a 401(k) plan in addition to his profit-sharing plan. C) Increase his salary. D) Establish a money purchase pension plan in addition to his profit-sharing plan.

Rationale The correct answer is "B." Answer "A" is not tax deductible. Answer "B" would allow John to defer an additional $18,500 (2018) in salary without counting against the 404 test for profit-sharing plans. Answer "D" would increase costs without increasing deductions.

Which one of the following statements is NOT true for a defined benefit plan? A) Favors older participants. B) Arbitrary annual contributions. C) Requires an actuary on an annual basis. D) Maximum retirement benefit is $220,000 (2018) per year.

Rationale The correct answer is "B." Defined benefit plans favor older participants. It also requires PBGC coverage as mandated by law and needs to be actuarially calculated. The maximum benefit listed is correct, but annual contributions cannot be made on an arbitrary basis.

A qualified money purchase pension plan contribution (by the employer) is influenced by which of the following factors: I. Total return on portfolio assets. II. Forfeitures from non-vested amounts of terminated employee accounts. III. Increases in participants' compensation due to inflation or performance-based bonuses. IV. Minimum funding as determined by an actuary. A) I and II only. B) II and III only. C) III and IV only. D) II, III and IV only.

Rationale The correct answer is "B." Forfeitures may reduce employer contributions due to contribution offsets or Section 415 limitation on annual additions. Increased compensation will result in increased contributions by the employer, subject to Section 415 limitations. Returns on portfolio assets and actuary funding are a concern in defined benefit plans. A money purchase plan is defined contribution plan.

Bob Thornton received his NonQualified Stock Option (NQSO) from his company (publicly traded on the NYSE), one year ago last week, with an option exercise price and stock price of $30. He told you recently, as his trusted financial adviser, that he desperately needed cash, and so he exercised the options last week on the one year anniversary with the stock price at $40 per share, and he sold the stock as it climbed to $45 per share. What will the tax ramifications of these transactions be? A) Bob will be taxed at capital gain rates only when the option is exercised and again for the difference when the stock is sold. B) Bob will be taxed as W-2 income for the fair market value of the option less the exercised price when it is exercised, and then he will be taxed at capital gain rates for the balance when the stock then subsequently sold (long or short term). C) Bob will be taxed at ordinary income rates on the difference between the exercise price and the fair market value of the stock when the option is granted and then on capital gain rates when the stock is sold for the fair market value. D) There are no consequences to this circumstance until Bob sells the stock with all proceeds being taxed at capital gains rates.

Rationale The correct answer is "B." He will be required to report the gain as W-2 income of $10 per share when the option is exercised and then another $5 capital gain (long or short) when sold as the question indicates.

A non-qualified deferred compensation plan providing the key employee with a vested beneficial interest in an account is known as: A) A Supplemental Executive Retirement Plan (SERP). B) A funded deferred compensation plan. C) An excess benefit plan. D) A Rabbi trust.

Rationale The correct answer is "B." If the employee has a non-forfeitable beneficial interest in a deferred compensation account, the IRS considers the plan "funded" and subject to current income tax due because the employee has constructive receipt of the assets.

A small business owner in a very specialized field, establishes a SEP for his proprietorship after 2008. He has two employees of 2 1/2 years making $80,000 per year. He uses the statutory maximum exclusions for all employees. He earns $100,000 in modified earned income. What is the maximum allowable plan contribution to the owner's account? A) $16,000 B) $20,000 C) $25,000 D) $40,000

Rationale The correct answer is "B." Maximum contribution into a SEP is 25% or $20,000 per employee. The modification for the owner, a self-employed person is, would be: EE contribution % / 1 + EE contribution %. In this case the calculation would be .25 / 1.25 = .2; $100,000 x .2 = $20,000 maximum contribution for the business owner.

One of your clients is 47 years old and wants to know the maximum amount which might be allocated to her 401(k) account in the current year. She expects to earn $60,000. You explain the possible sources of annual additions to her account, including allocation of forfeitures from departing non-vested employees, and the limitation on that addition. The largest salary deferral which could be made to her 401(k) account in the current year is: A) $12,500 B) $18,500 C) $24,500 D) $55,000

Rationale The correct answer is "B." Note the legal limit for 2018 is $18,500 for employee deferrals to a 401K account. The $55,000 is the total limit for an under 50 employee from all sources including employee deferral, employer match, forfeitures, and profit sharing contributions by the employer.

A financial planner's client has an IRA with a balance of $140,000 as of January 1. On April 15 of the same year, the client withdraws the entire amount from the IRA and places it in a non-IRA CD for 60 days, earning 9% interest. On the 60th day, the client promptly and timely reinvests the principal of the CD in an IRA containing an aggressive growth fund. On September 15 of the same year, the client becomes dissatisfied with the return and the variability of the investment. The client wants a less risky investment and wants assurance that any IRA distribution will NOT be taxed at the time of the change. Which of the following is/are acceptable alternatives for the client? I. Withdraw the funds and reinvest them within 60 days in an IRA which invests exclusively in Treasury instruments. II. Direct the trustee of the IRA to transfer the funds to another IRA which invests exclusively in Treasury instruments. III. Withdraw the funds and reinvest within 60 days in an IRA which is an index mutual fund holding common stocks with portfolio risk equal to the S&P 500. A) I only. B) II only. C) II and III only. D) I, II and III.

Rationale The correct answer is "B." Once an individual has participated in a rollover where funds have been withdrawn and held and then reinvested, he or she is ineligible for such a transaction again for one year from the date of receipt of the amount withdrawn. In this question, Statement "II" is the only choice which prevents penalty to the client.

In determining the allowable annual additions per participant to a defined-contribution pension plan account in the current year, the employer may NOT include: A) Compensation exceeding $55,000 (indexed). B) Compensation exceeding $275,000. C) Compensation exceeding the defined-benefit limitation in effect for that year. D) Bonuses.

Rationale The correct answer is "B." Option "A" - $55,000 is the maximum contribution. Option "C" - Defined contribution plans do not have defined benefits. Option "D" - Bonuses are includible as compensation if the plan so provides.

Which of the following transactions by a qualified plan's trust are subject to Unrelated Business Taxable Income (UBTI)? I. A trust obtains a low interest loan from an insurance policy it owns and reinvests the proceeds in a CD paying a higher rate of interest. II. A trust buys an apartment complex and receives rent from the tenants. III. The trust buys vending machines and locates them on the employer's premises. IV. The trust rents raw land it owns to an oil & gas developer. A) I and II only. B) I and III only. C) II and IV only. D) I, II and IV only.

Rationale The correct answer is "B." Statements "I" and "III" are subject to UBTI because income from any type of leverage or borrowing within a plan is subject to UBTI. Additionally, any business enterprise run by a qualified plan is subject to UBTI. Statement "II" is not subject to UBTI (assuming it is not subject to leverage) due to a statutory exemption for rental income. Statement "IV" - The rental of raw land is also exempt. If the plan actually participated in the development of the oil & gas reserves, there would be UBTI.

Which of the following penalties are assessed when prohibited transactions occur? I. 10% of the amount involved unless shown that ERISA fiduciary standards were satisfied. II. Penalties can continue when ongoing transactions carry over to subsequent years. III. The plan must be restored to a financial position no worse than if the transaction had never occurred. IV. Income tax will be assessed against those plan participants who were party to the transaction by the courts. A) I and III only. B) II and III only. C) III and IV only. D) I and II only.

Rationale The correct answer is "B." The first tier excise tax for prohibited transactions is 15% of the amount involved and is automatic even if the violation was inadvertent. The second tier excise tax is 100% of the amount involved and is assessed if the prohibited transaction is not remedied. There are no income taxes applied; all remedies are made through restitution and excise taxes.

Which of the following statements concerning loan provisions in qualified retirement plans is correct? A) Loans must be available to plan participants only after three years of plan participation. B) No loan can exceed $50,000. C) The term of a loan usually cannot exceed three years. D) Because employees are borrowing their own money, no interest need be charged.

Rationale The correct answer is "B." The loan can be up to 50% of the employer's accrued balance or $50,000, whichever is less. There are mandatory repayments which must occur at least quarterly. The term of the loan can be for a maximum of five years, unless the proceeds are used to purchase a residence, then the loan can be for a longer period of time. Most plans have a minimum participation requirement of two years before loans are available. A reasonable interest rate must be charged. Many plans have a minimum loan amount of $10,000.

James is covered under his employer's top heavy Defined Benefit Pension Plan. He currently earns $120,000 per year. The Defined Benefit Plan uses a funding formula of Years of Service x Average of Three Highest Years of Compensation x 1.5%. He has been with the employer for 5 years. What is the maximum defined benefit that can be used for him for funding purposes? A) $9,000 B) $12,000 C) $54,000 D) $120,000

Rationale The correct answer is "B." The maximum defined benefit is the lesser of $220,000 (2018) or his compensation. However, the funding formula will limit his defined benefit to $12,000 (5 x 120,000 x .02). Note that you would use 2% instead of the 1.5% because the plan is top heavy. He is not a key employee because he is not a 1) greater than 5% owner, 2) greater than 1% owner with compensation greater than $150,000 or 2) an officer with compensation greater than $175,000 (2018). Therefore the plan must use a defined benefit limit of 2% instead of 1.5%.

Meredith is an executive at Papers Unlimited. As part of her compensation she has a restricted stock plan that allows her to receive 1,000 shares of stock after she completes of 5 years of service. At the time of grant the stock was trading at $2 per share. She made a proper 83b election. She met the vesting requirement 6 months ago when the stock was trading at $35. She has decided to sell her stock. Which of the following is true? A) If she sells the stock today for $1 per share she is not entitled to a loss. B) If she sells the stock today for $15 per share she will recognize $13,000 in long term capital gain. C) If she sells the stock today for $28 per share then she will recognize $26,000 in short term capital gains. D) If she sells the stock today for $38 per share then she will recognize $3,000 in short term capital gains.

Rationale The correct answer is "B." When she made the 83b election she would have recognized W-2 income of $2,000 (1,000 x $2). Her holding period would have started at the date of grant. When she met the vesting period she would not have recognized anything since she made the 83b election. If she sold the stock at $1 then she would have had a loss of $1,000 ($2,000 basis - $1,000 sale price). If she sold the stock for $15 then she would have long term capital gain of $13,000 (1,000 x ($15 - $2)). If she sold the stock for $28 then she would have long term capital gain of $26,000 (1,000 x ($28 - $2)). If she sold the stock for $38 then she would have long term capital gain of $36,000 (1,000 x ($38 - $2)).

Which statement(s) is/are true for a target benefit plan? I. It favors older participants. II. It requires annual actuarial assumptions. III. The maximum deductible employer contribution is 25% of covered compensation. IV. The maximum individual allocation is the lesser of 100% of pay or $55,000 (2018). A) I and IV only. B) II and III only. C) I, III and IV only. D) I, II, III and IV only.

Rationale The correct answer is "C." Actuarial assumptions are needed at the inception of the plan to provide the target formula.

A supplemental deferred compensation plan that pays retirement benefits on salary, above the Section 415 limits, at the same level as the underlying retirement plan is known as: A) A Supplemental Executive Retirement Plan (SERP). B) A funded deferred compensation plan. C) An excess benefit plan. D) A Rabbi trust.

Rationale The correct answer is "C." An excess benefit plan extends the same benefits to employees whose contributions to the plan are limited by Section 415 (e.g., employee earns $275,000 yet receives $55,000 contribution instead of $68,750 contribution due to Section 415 limitation on a 25% money purchase plan). An excess benefit plan would put additional $13,750 into non-qualified retirement plan. Do not confuse with a SERP which provides benefits in excess of the Section 415 limits AND ignores the covered compensation limits (i.e., $275,000 in 2018) applied to qualified plans.

Select those statements which accurately reflect characteristics of defined contribution pension plans? I. Allocation formula which is indefinite. II. Account value based benefits. III. Employer contributions from business earnings. IV. Fixed employer contributions based upon terms of plan. A) I and II only. B) II and III only. C) II and IV only. D) I, II and III only.

Rationale The correct answer is "C." Defined contribution pension plans must have a definite allocation formula based upon salary and/or age or any other qualifying factor. Contributions may be made without regard to company profits and, because it is a pension plan, are fixed by the funding formula and must be made annually.

A premature distribution from a qualified retirement plan is allowed at age 52 without a 10% penalty tax when a participant: I. Becomes obligated for payment of plan benefits to an alternate payer under a qualified domestic relations order (QDRO). II. Separates from service and takes an accepted form of systematic payment. III. Remains with current employer but elects to take systematic payments over the life of the participant and spouse. A) I only. B) III only. C) I and II only. D) I, II and III.

Rationale The correct answer is "C." Distributions under a QDRO are not taxable to the taxpayer actually making the disbursement from his/her account. IRC 72(t) allows Substantially Equal Payment Plans (SEPP) to escape the 10% penalty as long as the payments continue for the longer of 5 years or until age 59 1/2. No in-service withdrawals are exempted from the 10% early withdrawal penalty.

Which of the following statements concerning COBRA is correct? A) An employer's plan is exempt from COBRA provisions if the employer averages 25 or fewer employees. B) Continuation coverage must be available to terminating employees, but not to full-time employees shifting to part-time status. C) After 36 months, the maximum period for continuation of coverage terminates. D) The government imposes a non-compliance fine on the employer equal to $10 per day per participant.

Rationale The correct answer is "C." Employers must provide COBRA if they have 20 or more employees. A change in benefit status will trigger COBRA eligibility. COBRA non-compliance carries a penalty of $100 per day per participant.

Calculate the maximum contribution (both employer and employee elective deferrals) for an employee (age 39) earning $280,000 annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary. A) $18,500 B) $33,000 C) $51,500 D) $55,000

Rationale The correct answer is "C." For the purposes of this calculation, the compensation exceeding $275,000 is not recognized. The employer is contributing 12% of $275,000 (or $33,000) for the money purchase plan and the employee may contribute up to $18,500 in 2018 to the 401(k) plan. This totals $51,500.

According to ERISA, which of the following is/are required to be distributed automatically to defined benefit plan participants or beneficiaries? I. Individual Benefit Statement. II. The plan's summary annual report. III. A detailed descriptive list of investments in the plan's fund. IV. Terminating employee's benefit statement. A) I, II and IV only. B) I and II only. C) II and IV only. D) III and IV only.

Rationale The correct answer is "C." Individual Benefit Statements are not required annually for defined benefit plans. They are however, required at least once every three years. Alternatively, defined benefit plans can satisfy this requierment if at least once each year the administrator provides notice of the availability of the pension benefit statement and the ways to obtain such statement. In addition, the plan administrator of a defined benefit plan must furnish a benefit statement to a participant or beneficiary upon written request, limited to one request during any 12-month period. There are no individual accounts in a defined benefit plan, so a specific listing of invested assets is not required.

Your client has been a business owner for six years. He recently established a SEP for his business. He has two employees of 24 months making $22,000 per year. He asked you to use the statutory maximum exclusions for all employees, including himself. He has net self-employment earnings of $78,000. Assume he has self-employment tax of $11,000. The maximum plan contribution to the owner's account will be: A) $19,500 B) $54,000 C) $14,500 D) $13,600

Rationale The correct answer is "C." Maximum contribution is 25%. Because he is self-employed, the "S/E haircut" is required. The haircut is calculated at $78,000 less 1/2 of 11,000 ($5,500) = 72,500; then multiply by 20% (.25/1.25). Therefore, the maximum contribution is $14,500.

How is life insurance utilized to finance the obligation of an employer under a non-qualified deferred compensation plan? A) A company can defer compensation that would otherwise be due an employee and allow the employee to use this money to purchase life insurance listing himself as the owner of the policy. B) A company can defer future compensation that will be due an employee and use the amount to purchase life insurance in the employee's name while the company pays premiums for the policy. C) A company can defer compensation that would otherwise be due an employee and use the amount to purchase life insurance on the employee in the company's own name while paying the premiums for the policy. D) A company can defer compensation that otherwise would not yet be due an employee and use this projected amount of money to purchase life insurance in the employee's name while the company pays premiums for the policy.

Rationale The correct answer is "C." Option "C" is the only answer which describes the workings of a deferred compensation package accurately. Option "A" is incorrect because the employee does NOT purchase the insurance. Option "B" is incorrect because it is compensation due NOW, not "future compensation." Option "D" is incorrect because the deferral is not "projected income."

Which of the following is/are reason(s) employers sponsor pension plans? I. Recruit quality employees. II. Show stability of the company to lenders. III. Fight/discourage collective bargaining. IV. Provide working capital for the company. A) I only. B) I and II only. C) I and III only. D) I, II and IV only.

Rationale The correct answer is "C." Pensions do not demonstrate stability to a lender. In fact, if there is a mandatory contribution to the plan, this may affect company cash flow and credit worthiness. The sponsoring company cannot use pension assets for working capital. This would be a prohibited transaction (self-dealing).

Which of the following statements concerning the characteristics of a profit-sharing plan that has been specifically amended to permit the trust to primarily invest in employer's securities is correct? A) Leveraging is permitted and the employer's contributions may be made in non-cash assets. B) Voting rights must be passed through to the participating employees. C) The plan may be integrated with Social Security. D) The plan must comply with the prudent investor diversification requirements.

Rationale The correct answer is "C." Profit sharing plans can be integrated with Social Security. Answer "A" is incorrect because only a LESOP is able to leverage employer securities within a qualified plan. Answer "B" is incorrect because the voting rights do not have to be passed through to the employees except in ESOPS. Answer "D" is incorrect because the typical 10% restriction on employer stock ownership under the "prudent investor" rule is not applied.

Calculate the maximum contribution for an employee, age 41, earning $140,000 annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary. A) $18,500 B) $16,800 C) $35,300 D) $55,000

Rationale The correct answer is "C." The maximum 401(k) plan contribution is $18,500 (2018). The 12% money-purchase plan will add $16,800 ($140,000 x .12). So, adding the $18,500 and the $16,800 gives the correct answer of $35,300.

Carol, age 55, earns $200,000 per year. Her employer, Reviews Are Us, sponsors a qualified profit sharing 401(k) plan, which is not a Safe Harbor Plan, and allocates all plan forfeitures to remaining participants. If in the current year, Reviews Are Us makes a 18% contribution to all employees and allocates $7,000 of forfeitures to Carol's profit sharing plan account, what is the maximum Carol can defer to the 401(k) plan in 2017 if the ADP of the nonhighly employees is 1%? A) $4,000 B) $18,500 C) $10,000 D) $24,500

Rationale The correct answer is "C." The maximum annual addition to qualified plan accounts is $55,000. If Reviews Are Us contributes $36,000 ($200,000 x 18%) to the profit sharing plan and Lisa receives $7,000 of forfeitures, she may only defer $12,000 ($55,000 - $36,000 - $7,000) before reaching the $55,000 limit. However, she will also be limited by the ADP of the nonhighly employees because she is highly compensated (compensation greater than $120,000). If the nonhighly employees are deferring 1% then the highlys can defer 2% (1x2=2). Therefore, she is limited to a deferral of $4,000. Since she is 50 or older she can also defer the catchup amount of $6,000 which is not subject to the ADP limitation. Therefore, her maximum deferral is $10,000.

Eric works for Carpets, Inc. Carpets, Inc issued him both ISOs and NQSOs during the current year. Which of the following would be the most compelling reason why they might issue both ISOs and NQSOs? A) They want to issue over $80,000 in options that are exercisable in the same year. B) The NQSOs and ISOs are exercisable in different years. C) The company wants to provide the NQSOs to assist the individual in purchasing the ISOs. D) Since they are virtually the same there is no compelling reason to issue both in the same year.

Rationale The correct answer is "C." When both ISOs and NQSOs are available in the same year the individual can exercise and sell the unfavored NQSOs to generate enough cash to purchase and hold the favored ISOs. It would also be valuable to have both if they issued over $100,000 in options exercisable in the same year because there is a $100,000 limit on ISOs.

Nicole has adjusted gross income for the year of $126,000, has just retired, and wants to roll-over her employer sponsored profit-sharing plan into a Roth IRA. The profit-sharing plan is currently worth $291,000 made up entirely of employer contributions. Which of the following is not true? A) Nicole may rollover the entire amount of her profit-sharing plan. B) Nicole must include the converted amount in taxable income upon conversion. C) Distributions of any converted amount will be tax free. D) Penalties will always be due on the converted amounts withdrawn for purposes other than the exceptions to 72(t).

Rationale The correct answer is "D" (A) Beginning in 2010 there is no AGI phase-out associated with conversions to Roth IRAs so she can rollover as little or as much as she wants. (B) The converted amount will be included in taxable income in the year of conversion. (C) Distributions of any of the converted amounts will always be tax-free; however penalties may be due under certain circumstances. (D) Penalties on converted amounts are applicable within the first 5 years from conversion only.

Your client's only employer has established a payroll deduction TSA. Your client is single, making more than $64,000 per year. Which of the following is false concerning the plan? A) TSA contributions are pre-tax. B) TSA contributions are subject to Social Security taxes. C) The employer usually does not control the asset allocations in the plan. D) Contributions are subject to Federal/State withholding tax.

Rationale The correct answer is "D" TSA contributions are subject to payroll taxes (Medicare + Social Security) but NOT income taxes. Note - TSAs are a tax sheltered annuity or 403(b) retirement plan. TSAs are a form of deferred compensation. Only employees of public education systems and nonprofits can participate. TSAs are funded through employee contributions.

What is the early withdrawal penalty for a SIMPLE IRA plan during the 2-year period beginning on the date the employee first participated in the SIMPLE plan? A) 10% B) 15% C) 20% D) 25%

Rationale The correct answer is "D." 25% is assessed only during the first 2-year period of participating in the plan. This does not require that each contribution stay in the plan for two years, only that the participant be in the plan for two years.

Based upon the Internal Revenue Code, which of the following statement(s) is/are accurate? I. Medical expenses paid as a benefit to a surviving spouse are excludable from gross income only to the extent they would have been excluded if they had been paid to the employee. II. Highly-compensated employees may lose their tax-free status of medical benefits under a self-insured plan which is discriminatory. III. A highly-compensated employee may be taxed on part of his or her medical expenses for which he or she is reimbursed under a discriminatory self-insured plan, even if the same benefits are available to all workers. A) I only. B) II only. C) I and II only. D) I, II and III only.

Rationale The correct answer is "D." All of the statements are accurate.

In a money purchase plan that utilizes plan forfeitures to reduce future employer plan contributions, which of the following components must be factored into the calculation of the maximum annual addition limit? I. Forfeitures that otherwise would have been reallocated. II. Annual earnings on all employer and employee contributions. III. Rollover contributions for the year. IV. Employer and employee contributions to all defined contribution plans. A) I, II and III only. B) I and III only. C) II and IV only. D) IV only.

Rationale The correct answer is "D." Annual additions are defined as new money contributed into the individual account of a participant. Because forfeitures reduce employer contributions and are not added directly to employee's individual accounts, the forfeitures are not included in annual additions. Annual earnings and rollover contributions are not included in annual additions.

Elaine, age 45, owns Elaine's Sewing World. She currently earns about $100,000 per year. She has three employees that work for her part time and earn $15,000 each. She has one full time employee that earns $30,000. She wants to establish a retirement plan that encourages her employees to save for retirement. Although she doesn't mind allowing the employees to receive some benefit from the employer, she wants a majority of the benefit to be in her favor. She wants a plan that allows for loans. Which of the following plans is her best choice given all of her goals and objectives? A) SEP B) Profit Sharing Plan C) Simple IRA D) 401k

Rationale The correct answer is "D." Her goals indicate that she wants to "encourage her employees to save for retirement" which indicates that she wants an employee deferral plan. Thus the SEP and Profit Sharing Plan are not good choices. Since she wants a loan provision she needs to have a qualified plan and therefore the 401k is her best choice.

Jan is an executive at Papers Unlimited. As part of her compensation she has a restricted stock plan that allows her to receive 500 shares of stock after she completes 5 years of service. At the time of grant (three years ago) the stock was trading at $5 per share. The stock is currently trading at $25 per share and she has been with the company for 3 years. Which of the following is true? A) If she made the 83b election today she would recognize W-2 income of $12,500. B) If she made the 83b election at the time of grant and she left the company today she would recognize capital gain of $10,000. C) If she made the 83b election at the time of grant and she left the company today she would recognize a loss of $2,500. D) If she made the 83b election at the time of grant and 5 years later sold the stock for $35 per share her capital gain treatment would be $15,000.

Rationale The correct answer is "D." If she made the 83b election at the time of grant then she would have had W-2 income at the time of $2,500 (500 x $5). If she later sold for $35 per share then she would recognize capital gain of $15,000 (500 x ($35-$5)). Note that by saying she sold the stock the question implies that she met the vesting requirement. If she left the company today before meeting the vesting period she would not be allowed to take a loss on W-2 income that she included in income in the year of grant. The 83b election cannot be made today - it must have been made 30 days after the date the stock was initially transferred at grant.

All of the following accurately reflect the characteristics of a stock bonus plan, except: A) Useful in cash flow planning for plan sponsor due to cashless contributions. B) Provides motivation to employees because they become "owners." C) 20% withholding does not apply to distributions of employer securities and up to $200 in cash. D) May not allow "permissible disparity" or integration formulas.

Rationale The correct answer is "D." Integration formulas are not allowed under an ESOP plan but are allowed under a stock bonus plan. All other statements are accurate in their description of a stock bonus plan.

Which of the following employees can be excluded from participation in a qualified plan? A) Age 22 with three years of service. B) Employee (with 13 months service) of 401(k) plan sponsor. C) Previously eligible employee terminated from service with 501 hours during plan year. D) Collective bargain covered employee of 2 years.

Rationale The correct answer is "D." Maximum exclusions are: age 21, three years of service for a SEP, 2 years of service for all other plans except the 401(k) which has a maximum exclusion period of one year. Employees covered under a pension plan in a collective bargaining agreement can always be excluded from participation in the plan because they are already receiving pension contributions through the union plan.

Kyle had contributed $20,000 in nondeductible contributions to his traditional IRA over the years. This year the account balance was $52,000 and he made a withdrawal of $5,000. What amount is reported on Kyle's Form 1040? A) $5,000 only B) $1,923 only C) $3,077 only D) Both $5,000 and $3,077

Rationale The correct answer is "D." On Form 1040 Kyle will report the total distribution of $5,000 and the taxable amount of the distribution of $3,077 calculated as $32,000 ÷ $52,000 × $5,000. account balance = $52,000 non-deductible contributions = $20,000 (not taxed at distribution) $32,000 would be taxable. Because there is both taxable and non-taxable money, each distribution is a pro-rata distribution of both. 32k/52k = .6154 5,000 x 61.54% = 3,076.92

Which of the following is NOT a qualified employee fringe benefit? A) Medical expenses NOT covered by medical health plan are paid under a reimubursement plan. B) A major medical health insurance plan or HMO premiums. C) Long-term disability insurance. D) A $150,000 group term life insurance policy.

Rationale The correct answer is "D." Only $50,000 of group term life is a qualified benefit. Amounts of term life insurance in excess of $50,000 is taxable to employee using Section 79, Table 1.

Timothy is covered under his employer's Defined Benefit Pension Plan. He earns $500,000 per year. The Defined Benefit Plan uses a funding formula of Years of Service x Average of Three Highest Years of Compensation x 2%. He has been with the employer for 25 years. What is the maximum contribution that can be made to the plan on his behalf? A) $132,500 B) $215,000 C) $270,000 D) It is indeterminable from the information given.

Rationale The correct answer is "D." Read the question carefully. The question asks "what is the maximum contribution that can be made." Remember that for a defined pension plan the contribution must be whatever the actuary determines needs to be made to the plan.

J.P. is covered under his employer's Profit Sharing Plan. He currently earns $500,000 per year. The plan is top heavy. The employer made a 10% contribution on behalf of all employees. What is the maximum retirement benefit that can be paid to him? A) $24,000 B) $50,000 C) $54,000 D) Cannot be determined by the information given.

Rationale The correct answer is "D." Read the question carefully. The question asks "what is the maximum retirement benefit that can be paid to him." Remember that for a profit sharing plan the contribution to an employer is limited to the lesser of $55,000 (2018) or covered compensation however, the actual retirement benefit will be whatever is in the account balance at the time of retirement.

During the 5-year holding period, for tax and penalty purposes, withdrawals from a Roth IRA are: A) Subject to a 10% penalty and taxed as ordinary income. B) Treated as a withdrawal on a LIFO basis. C) Not subject to any penalty, but are taxed as ordinary income. D) Treated as a withdrawal on a FIFO basis.

Rationale The correct answer is "D." Roth monies are contributed with 'already been taxed' dollars, and therefore no longer taxable. And all Roth distributions are handled as follows: Withdrawal from a Roth IRA is treated as made first from direct contributions to the Roth IRA, then from conversion contributions (first-in first-out, or FIFO, basis), and then from earnings in the Roth IRA.

Which of the following are basic provisions of an IRC Section 401(k) plan? I. Employee elective deferrals are exempt from income tax withholding and FICA / FUTA taxes. II. Employer's deduction for a cash or deferred contribution to a Section 401(k) plan cannot exceed 25% of covered payroll reduced by employees' elective deferrals. III. A 401(k) plan cannot require, as a condition of participation, that an employee complete a period of service greater than one year. IV. Employee elective deferrals may be made from salary or bonuses. A) I and III only. B) I and IV only. C) II and IV only. D) II, III and IV only.

Rationale The correct answer is "D." Statement "I" is incorrect because all CODA plans, including 401(k) plans, subject the income to Social Security and Medicare tax even though Federal and state income tax is deferred by placing the income into the plan. Statements "II", "III" and "IV" are accurate.

Which of the following are correct statements about self-employed retirement plans? I. Benefits provided by a self-employed defined benefit plan cannot exceed the lesser of $220,000 or 100% of income. II. May be established by an unincorporated business entity. III. Contributions to "owner-employees" are based upon their gross salary. IV. Such plans are permitted to make loans to common law employee participants. A) I and II only. B) I and III only. C) II and IV only. D) I, II and IV only.

Rationale The correct answer is "D." Statements "I", "II" and "IV" are correct. Loans are available to the common law employees of the firm. Statement "III" is incorrect because owner-employee contributions are based upon total earned income in the business, not just "salary." (Note: Remember S corporation owners are considered common law employees, so their contribution is based solely on salary and cannot include amounts for dividends or pass-through earnings shown on Schedule E of the 1040 form.)

Which of the following legal requirements apply to profit sharing plans? I. Forfeitures must be used to reduce employer contributions or be reallocated to the remaining participant's accounts. II. Employer contributions must be allocated through a compensation-based formula. III. Employer deductions for plan contributions are limited to 25% of the participants' covered compensation. IV. Allocations to a participant's account cannot exceed the lesser of 100% of compensation or $55,000 annually. A) I and II only. B) II and III only. C) II and IV only. D) I, III and IV only.

Rationale The correct answer is "D." Statements "I", "III" and "IV" are correct. Statement "II" is incorrect because there are other methods by which allocations can be made (i.e., age weighted, unit weighted, etc.).

Gia, age 45, is married and has two children. Her employer, Print, Inc sponsors a target benefit plan in which she is currently covered under. Which of the following statements is true regarding her plan? A) She can name anyone she wishes as her beneficiary. B) A target benefit plan favors younger employees. C) A target benefit plan is covered under PBGC. D) The investment risk is on the employee.

Rationale The correct answer is "D." The investment risk is on the employee because this is a defined contribution plan. She can only name someone other than her spouse if she has a valid waiver signed by the spouse. This applies to all pension plans. A target benefit plan favors older entrants. A target benefit is not covered under PBGC.

Your client, ABC Corporation, is considering adopting some form of retirement plan. The client states objectives for a plan to be, in the order of importance: I. Rewarding long-term employees. II. Retention of employees. III. Providing a level of income at retirement equal to 50% of an employee's earnings. IV. Tax-deductible funding. V. No risk to employees of benefits available. The company indicates it is willing to contribute an amount equal to 30% of payroll to such a plan. The company has been in business for 22 years, and during the past decade has consistently been profitable. They furnish you with an employee census. Based upon the stated objectives, you advise ABC Corporation that the most suitable retirement plan for the corporation would be: A) Money purchase pension plan. B) Non-qualified deferred compensation plan for long-term employees. C) Combination of defined benefit and 401(k) plan. D) Defined benefit plan.

Rationale The correct answer is "D." The only plan which meets all the criteria is the defined benefit plan. All other answers would not meet criteria "III" and/or "V".

Which of the following apply to legal requirements for a qualified thrift/savings plan? A) Participants must be allowed to direct the investments of their account balances. B) Employer contributions are deductible when contributed. C) In-service withdrawals are subject to financial need restrictions. D) After-tax employee contributions cannot exceed the lesser of 100% of compensation or $55,000.

Rationale The correct answer is "D." This correctly describes the Section 415(c) limits on maximum contributions permitted by law. Participants do not have to be given the right to direct their investments. Employees make after-tax contributions to a thrift; employers don't make contributions. Answer "C" is incorrect because only 401(k) plans have statutory hardship withdrawal requirements, not thrift/savings plans.

Financial Training Team (FTT) develops training materials for finance professionals across the country. Chad, who just turned age 62, owns 15% of FTT and earns $200,000 per year and is a participant in his employer's 401(k) plan, which includes a qualified automatic contribution arrangement and the associated mandatory non-elective contribution. The actual deferral percentage test for the non-highly compensated employees is 2.5 percent. FTT made a 20% profit sharing plan contribution during the year to Chad's account. What is the maximum amount that Chad can defer in the 401(k) plan during 2018? A) $24,500 B) $15,000 C) $12,500 D) $18,500

Rationale The correct answer is b. The 401(k) plan avoids ADP testing because it is a QACA. Therefore, the ADP for the NHCE is irrelevant. However, the max that can be contributed is limited by IRC 415(c). The employer is contributing $40,000 to the profit sharing plan plus $6,000 as a non-elective contribution (3% of $200,000). Since the 2018 limit is $55,000, Chad can only contribute $9,000 plus the catch-up contribution of $6,000.

Johle worked at PKMG consulting firm for the last several years. He started working at PKMG while in college as a paid intern and has now obtained a full time job there. His first year he was 19 and he worked 300 hours. His second year he worked 1500 hours and his third year he worked 2088 hours. Johle is now three quarters of the way through his fourth year. PKMG has three retirement plans with standard eligibility rules and the longest vesting permitted by the IRC. In addition, none of the plans permit in-service withdrawals. The funding of the plans for Johle is as follows: Johle is considering taking another job in Washington and wants to know how much he would forfeit if he were to resign and take another job with another firm today. Money Purchase Pension Plan Cash Balance Plan 401(k) plan PKMG match $500 $1,200 $300 PKMG profit sharing $0 $0 $600 Johle's contribution $0 $0 $5,000 Earnings - PGMG $ (match & profit sharing) $100 $600 $100 Earnings - Johle $ $0 $0 $500 PKMG QNEC $0 $0 $500 Total $600 $1,800 $7,000 A) $2,720 B) $2,760 C) $3,080 D) $3,480

Rationale The correct answer is c. The MPPP uses 2 to 6 graded as does the 401(k) plan. The cash balance plan is required to use 3 year cliff vesting. He has two years of service for purposes of vesting. The first year does not qualify since he did not work more than 1000 hours. Therefore, he can take 20% of the employer funds in the MPPP and the 401(k) plan, but nothing for the cash balance plan. Eligibility and vesting are two different things. Year 1 = 19 Year 2 = 20 - 1st year for vesting Year 3 = 21 - 2nd year for vesting, 1st year eligible Year 4 is ¾ over He has been earning vesting any year he had over 1,000 hours = 2 years. 2 to 6 graded 401(k) Plan: (ER) $1000 X 20% = $200 plus $5,000, plus $500 for earnings and $500 for the QNEC, which is 100% vested by definition. Balance is $7,000 - 6,200 vested = $800 forfeited MPPP - $600 X 20% = $120 Balance $600 - $120 vested = 480 forfeited CB is 3 year cliff. Forfeits all $1,800 The amount he can take is $6,320 (vested) and the amount that he forfeits is $3,080 ($9,400 - $6320). Choice a is wrong because it includes 20% of the cash balance plan. Choice b is wrong because it assumes 3 years of service or 40% vesting - does not include the cash balance amount. Choice d is wrong since it treats the QNEC like the other ER contributions.

Ballistic Laser Operated Weapons company (BLOW) is a defense contractor who develops innovative weapons involving laser-guided systems. The company has maintained a defined benefit plan and a money purchase pension plan for many years. The current benefit formula for the defined benefit plan equals 3% times years of service times the average of the last three years of salary, limited to a maximum benefit of 70%. The money purchase pension plan calls for a 6% contribution for all employees who are covered under the plan. BLOW has been experiencing financial difficulties due to changes in the industry and from competitors and alternative technologies. Based on these challenges, the company is considering changing the benefits under the plans. Which of the following changes would not be permitted under the anti-cutback rules? A) Changing the benefit accrual for the defined benefit plan from 3% per year to 2% per year for future years. B) Reducing the money purchase pension plan contribution from 6% to 3% for future years. C) Decreasing the maximum benefit under the defined benefit plan from 70% to 50% for all future retirees. D) Switching the vesting for the money purchase pension plan from 3 year cliff to 2 to 6 graduated vestsing.

Rationale The correct answer is c. The anti-cutback rules state that you cannot "cutback" benefits that have been accrued to date. Choice a and b affect future benefits. Choice c will more than likely impact current employees who may have accrued 70% benefits, but who have not yet retired. The change would result in a reduction in benefits and is not permitted. Choice d does is a permitted change and would not result in a reduciton in current vesting.

Fred's Po-boy shop sponsors an age based profit sharing plan and contributes 20 percent of total covered compensation to the plan. What is the most that could be contributed by the employer to Will's account if his annual compensation is $180,000 for 2018? Assume Will is 58 years old. A) $36,000 B) $42,000 C) $55,000 D) $61,000

Rationale The correct answer is c. The most that could be contributed is the annual 415(c) limit of $55,000 for 2018. There is no indication that if the company contributes 20% that everyone will receive exactly 20%. Answer d and answer b assume that the catch up contribution is made. However, the catch up contribution can only be made by the employee and not the employer. The question asks for the employer's maximum contribution.

Highly Compensated Employee

Someone who owns more than five percent of the company or earns over 120,000. (current or prior year) ERs can elect to limit highly compensated EEs to the top 20% of EEs who's comp is above the line Shares of EEs spouse, children, grandchildren, or parents are lumped into the 5%

Coverage tests for qualified plans

general safe harbor test ratio percentage test average benefits test 50/40 test for DB plans

disadvantages of qualified plans

limited contribution amounts contributions cannot be made after money is received plans usually have limited investment options no or limited access to money while an active ee distributions usually taxed as ordinary income early withdrawal penalties mandatory distribution at 70.5 only ownership permitted is by the account holder cannot assign or pledge as collateral cannot gift to charity before 70.5 without income tax consequences limited enrollment periods considered to be an inch of respect of a decedent asset, subjecting distributions to both income and estate taxes with no step-up in basis cost of operating the plan

Top heavy funding

minimum funding for defined contribution plans are 3 percent for nonkey EEs or equal to the key EE compensation

Profit Sharing plans (7 types)

profit sharing plan stock bonus plan employee stock ownership plans 401K plans thrift plans new comparability plans age-based profit sharing plans

Standard Eligibility Requirements

the later of age 21 or 1 year of service (1000) hours

Defined Benefit 50/40 Test

the lesser of 50 EE or 40% of EEs on any given day in the plan year

Which of the following requirements must be met for a distribution from a qualified plan to be considered a lump-sum distribution? I. The entire amount must be distributed during one tax year. II. The entire value of the employee's account must be distributed. III. Distributions can include pre-1974 accruals or post-1973 accruals, but not both. A) I only. B) I and II only. C) I and III only. D) II and III only.

xRationale The correct answer is "B." Statement "III" is incorrect because accruals from pre-1974 and post-1974 can be included in a lump-sum distribution.