Retirement Planning

ISOs

on distribution: a qualified sale requires waiting until 2 years from the date stock was granted and 1 year from the date the stock was exercised. taxation for qualified sale -At grant: no tax -at exercise: no income (positive AMT: FMV-exercise price) -Sale: LTCG (negative AMT -Employer deduction? NO! Non qualified sale -At grant: no tax -AT exercise: no income (Positive AMT) -Sale: W2 income (FMV@ exercise-strike price) CG (LT/ST depending on holding since exercise) -Employer deduction? YES

Key Employee

one or more of the following: - A greater than 5% Owner - A greater than 1% owner with compensation in excess of $150,000 - An Officer with compensation in excess of $175,000 for 2018 Notice that a key employee must be an owner or an officer. Compensation by itself will not make an employee a key employee.

definition of Highly compensated employees

-Either an owner of greater than 5% for current or prior plan year or -Compensation in excess of $120,000 for 2018 for prior plan year *If special employer election is made, add "and top 20% of employees ranked by salary)

Defined contribution plan vesting schedules

- 2 to 6 year graduated - 3 year cliff - 2 year eligibility election

Defined Benefit Plan Vesting schedules

- 3 to 7 year graduated - 5 year cliff - 2 year eligibility Top Heavy Plan - 2 to 6 year graduated - 3 year cliff Cash Balance - 3 year cliff

Entities which may establish a 401k Plan

- Corporations - Partnerships - LLCs - Proprietorships - Tax-exempt Entities

Catch up contribution rules

- Employees who are at least 50 years old during the plan year may increase their elective deferral limit by up to $6,000 for 2018. There must be sufficient earned income to make the catch-up contribution. - Catch-up contributions are not limited by plan limits, limits on annual accumulations, or by the ADP/ADC testing

Prohibited Transactions

- Transfer of plan income or assets to, use of them by, or for the benefit of a disqualified person - self dealing by a fiduciary - Receipt of consideration by a fiduciary for his own account when working with a party dealing with the plan (eg. attorney, accountant) -Selling, exchanging, leasing, buying as well as lending or borrowing between a disqualified person and the plan

SEP IRAs

-Contributions are limited to the lesser of 25% of compensation or $55,000 - Eligibility: attainment of age 21 or older -performance of services for 3 of the last 5 years received compensation of at least $600 during the year

Defined Benefit Plan Terminations -Standard Termination - Distress Termination - Involuntary Termination

-Standard: is voluntary and may occur when the employer has sufficient assets to pay all benefits (liabilities) at the time of final distribution - Distress: Occurs when the employer is in financial difficulty and is unable to continue with the plan financially - Involuntary: May be initiated by the PBGC for a plan that is unable to pay benefits from the plan in order to limit the amount of exposure to the PBGC

Simple Plans

-small employers 100 or fewer employees -max contribution: 12,500 catch up: 3,000 eligibility of employee: any EE who earned at least $5,000 of compensation from the employer during any two preceding years. or EEs who are expected to earn 5K during the current calendar years. -Other plans are not allowed!!! -All contributions and earnings are 100% vested immediately -required employer matching or nonelective contributions. -matching contributions: up to 3% of compensation without regard to the covered comp limit. -non elective: 2% up to the covered comp limit -Simple 401k: Unlike SIMPLE IRAs there is no flexibility on the contribution formula! ALSO, the ADP test, ACP test, and top heavy rules DO NOT apply to SIMPLE 401ks because they are essentially safe-harbor plans Withdrawals/distributions 2 year rule: if a distribution is subject to an early withdrawal penalty within the first 2 years of set up the penalty increases to 25%. after 2 years it would go down to 10%

ADP Schedule

0% to 2% = 2 times ADP for NHCs 2% to 8% = 2% plus ADP of NHCs 8% and over = 1.25% times ADP for NHCs

Qualifed Nonelective contributions (QNECs)

100% vested when contributed because it is treated as an employee elective deferral. It is made to all eligible NHC employees covered by the plan. No consideration is given to the employees election to participate by electively deferring.

Juliet is married to Jack and they have one child Angela, age 14, who is in the 6th grade. Angela is a difficult child and she is cared for in the afternoon by the Sisters of Reformation, a group of Catholic nuns. Juliet pays $6000 per year for the child care. Juliets company has a dependent care assistance program. if Juliet makes the maximum us the dependent care assistance program, how much can she exclude from her income if she files a joint return with Jack? A. $0 B. $2,500 C. $5,000 D. $6,000

A. Angela is over 13 years old, and therefore, does not qualify for the dependent care assistance program.

Which of the following statements is (are) true? 1. A SEP requires the plan sponsor to provide at least 100% match up to 3% of all employee deferrals. 2. A SEP plan can be established by employers who employ more than 100 employees who earn $5,000 or more during the preceding calendar year. 3. SIMPLEs can either be contributory or noncontributory plans, whereas SEP plans are always noncontributory 4. An employer who wants to share the responsibility of retirement plan funding should establish a SIMPLE rather than a SEP A. 4 only B. 2 and 3 C. 1,2, and 3 D. 2,3, and 4

A. Statements 1,2, and 3 are incorrect 1. is incorrect because a SEP is a noncontributory plan which does not receive employee deferral contributions 2. the 100 employee limit applies to SIMPLEs 3. SIMPLEs are predominately contributory plans and SEPs are noncontributory plans. 4. correct because a SIMPLE is predominately a contributory plan with a fairly low employer contribution, thus sharing the burden of funding the employer and the employee.

Generally, which of the following are noncontributory plans? 1. 401k and money purchase pension plans 2. 401k and thrift plans 3. thrift plan and ESOPs 4. Money purchase pension plans and profit sharing plans A. 4 only B. 1 and 2 C. 3 and 4 D. 1,2,3, and 4

A. Employers generally contribute to -Money purchase pension plans -ESOPs -Profit sharing plans. Employees contribute (Thus contributory plans) to -401k -Thrift plans

Jerome is covered under his employer's money purchase pension plan. Several things happened in the current year. Which of the following would increase the company contributions for the current year? A) The company gave all key employees a 5% raise and all non-key employees a 3% raise. B) One of the key employees retired. C) The company had two employees terminate who forfeited a total of $10,000. The forfeitures were allocated to the remaining participants. D) The equity market declined and all account balances declined by at least 2%.

A. Rationale The correct answer is "A." If the company gave everyone a raise then that would increase the company's contributions. If a key employee retired and two employees left that would decrease the company's contributions. Since the forfeiture allocations were allocated to the participants they would have no effect of the company's contributions. In a money-purchase pension plan the investment risk is on the employees and thus an increase or decrease in the investments has no impact on contributions.

In determining the allowable annual additions per participant to a defined contribution pension plan account for the current year, the maximum contribution is: A) Compensation up to $55,000 (indexed). B) Compensation up to $270,000. C) Compensation not exceeding the defined benefit Section 404 plan limitations in effect for that year. D) 100% of all salary and bonuses at all income levels.

A. Rationale The correct answer is "A." Option "B" addresses maximum includable compensation, which is not what the question asks. Option "C" is incorrect in mentioning Section 404. The DC plan regulations are addressed in Section 415. Finally, Option "D" is incorrect because not "ALL" salary is included in allowable contributions. There is an annual additions cap of $55,000, making Option "A" the correct response.

Non discrimination testing for CODA plans

All qualified plans are required to meet certain nondiscrimination tests, but qualified plans with CODA provisions MUST meet two additional nondiscrimination tests. These special tests are known as the ADP test and the ACP test. you can avoid ADP or ACP with a "safe habor"

Social Security Integration

Allows a higher contribution or allocation of benefits to employees whose compensation exceeds the Social Security wage base for the plan year. DB: Offset or excess DC: Excess only

Active participant status

An employee who has benefited through a CONTRIBUTION or ACCRUED BENEFIT

Which of the following statements are reasons to delay eligibility of employees to participate in a retirement plan? 1. Employees don't start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service.) 2. Since turnover is generally highest for employees in their first few years of employment and for younger employees, it makes sense from an administrative standpoint to delay their eligibility. A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 and 2

Answer: C

Hard Rock Construction sponsors a 401k profit sharing plan. in the current year, hard rock construction contributed 25% of each employees compensation to the profit sharing plan. the ADP of the 401k plan for the NHC was 3.5%. If Jeff age 57, earns $100,000 and is a six percent owner, what is the maximum amount that he may defer into the 401k plan for this year? A. $5,500 B. $11,500 C. $18,500 D. $24,500

B. Jeff is HC because he is more than a 5% owner, so the Maximum that he can defer to satisfy the ADP test is 5.5% (3.5% + 2%) and because he is over 50, he can defer the additional $6,000 as a catch up provision.

Which of the following accurately describes a qualified group life insurance plan? I. The plan must benefit 70% of all employees, or a group consisting of 85% non-key employees, or a non-discriminatory class, or meet the non-discrimination rules of Section 125. II. Employees who can be excluded are: those with fewer than 3 years service, part-time / seasonal, non-resident aliens, or those covered under a collective bargaining unit. III. A non-discriminatory classification is one which has a bottom tier with benefits no less than 10% of the top tier and no more than 200% increase between tiers. IV. The minimum group size is 10. A) I, II and III only. B) I, II and IV only. C) I and III only. D) I and II only.

B. Rationale The correct answer is "B." A qualified group life insurance plan, if using a non-discriminatory classification, will have a bottom tier with benefits no less than 10% of the top tier and no more than 250% increase between tiers.

Spenser is covered under his employer's top heavy New Comparability Plan. The plan classifies employees into one of three categories: 1) Owners, 2) Full-time employees, 3) Part-time employees. Assume the IRS has approved the plan and does not consider it to be discriminatory. The employer made a 4% contribution on behalf of all owners, 2% contribution on behalf of all Full-time employees and 1% contribution on behalf of all part time employees. If Spenser currently earns $50,000 per year and is a full-time employee, what is the contribution that should be made for him? A) $1,000 B) $1,500 C) $18,000 D) $54,000

B. Rationale The correct answer is "B." For a profit sharing plan the contribution is limited to the lesser of $54,000 (2017) or covered compensation. Since the plan is top heavy, the plan must provide a benefit to all non-key employees of at least 3%, therefore; 50,000 x 3% = $1,500.

A client's employer has recently implemented a Cash Or Deferred Arrangement (CODA) as part of his profit-sharing plan to provide incentive to his employees. For which of the following reasons is the client advised NOT to elect to receive the bonuses in cash but to defer receipt of them until retirement? I. The client will not pay current federal income taxes on amounts paid into the CODA. II. The client will not pay Social Security (FICA) taxes on amounts paid into the CODA. III. The accrued benefits derived from elective employee deferral contributions are non-forfeitable. IV. The accrued benefits from non-elective employer contributions are non-forfeitable. A) I, II and III only. B) I and III only. C) II and IV only. D) III only.

B. Rationale The correct answer is "B." Statement II - Deferred comp arrangement contributions are subject to FICA taxes. Statement IV - Contributions made by the company (non-elective) are forfeitable based on a vesting schedule.

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.

B. 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.

Richard is covered under his employer's Defined Benefit Pension Plan. He earns $200,000 per year. The Defined Benefit Plan uses a funding formula of Years of Service x Average of Three Highest Years of Compensation x 3%. He has been with the employer for 25 years. What is the maximum defined benefit that can currently be used to determine contributions? A) $54,000 B) $150,000 C) $215,000 D) $270,000

B. Rationale The correct answer is "B." The maximum defined benefit is the lesser of $215,000 (2017) or his compensation. However, the funding formula will limit his defined benefit to $150,000 (25 x 200,000 x .03).

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.

B. 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)).

Talent in Training (TIT) develops training materials for finance professionals across the country. Chad, who just turned age 62, owns 15% of TIT 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. TIT 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 2017? A) $24,000 B) $14,000 C) $12,500 D) $18,000

B. 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 2017 limit is $54,000, Chad can only contribute $8,000 plus the catch-up contribution of $6,000.

Each of the following are requirements imposed by law on qualified tax advantaged retirement plans EXCEPT: A. Plan documentation B. Employee vesting C. Selective employee participation D. Employee communications

C Broad employee participation, as opposed to selective participation, is a requirement of a tax advantaged retirement plan. all of the others are requirements for qualified plans

Maria Ortiz is the manager of downtown Motel. Maria lives in unit 12. She was given the OPTION to live at the motel if she would also look after the night auditing ( the value of her reviews is $400 per month) responsibilities. The value of the motel unit on a monthly basis is $800, but Unit 12 rents on a daily basis for $100 per day. How much, if any, does Maria have to include in her gross income for living on the premises of her employer? A. $0 lodging for the convenience of the employer B. $400 per month C. $800 per month D. $3,000 per month

C Maria is not required by the employer to live on the premises and, therefore, must include the value of the lodging in her gross income

Your client, Sue, age 35, is covered by a pension plan at work, but her spouse, age 37, is not covered by a pension plan. Her salary is $45,000 and his salary is $50,000. How much will go into his account if he contributes the maximum amount to a maximum funded, matching SIMPLE IRA? A) $12,500 B) $18,000 C) $14,000

C Rationale The correct answer is "C." He can contribute $12,500 (2017) and his employer will match $1 for $1 up to 3% of salary ($50,000 x .03 = $1,500). Therefore, maximum contribution is $12,500 + $1,500 = $14,000. D) $19,500

Which of the following are characteristics of a phantom stock plan? 1. Benefits are paid in cash 2. there is no equity dilution from additional shares being issued. A. 1 only B. 2 only C. 1 and 2 D. Neither 1 nor 2

C The employee does not actually receive stock in a phantom plan. Instead, the employee receives credits for the stock and the benefits are later paid in cash

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.

C 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.

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

C 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. 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. MPPP - $600 X 20% = $120 The amount he can take is $6,320 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.

Coldstone company allows a 25% discount to all nonofficer employees. Officers are allowed 30% discount on company products. Coldstone's gross profit percentage us 35%. which of the following is true? A. An officer who takes a 30% discount must include the extra 5% in his gross income B. Any discounts taken by any employee is includable in the employees gross income because the plan is discriminatory C. All discounts taken by officers (30%) are includable in their gross income because the plan is discrimnatory D. None of the discounts taken by any employee are includable in their gross income because the discount, in all cases, is less than the company's gross profit percentage.

C. The plan is discriminatory to non-highly compensated employees, therefore, all discounts actually taken by officers are includable in the officers income, not just the excess of what is available to the nonofficers. Any discount taken by a nonofficer would be exculded from the employees gross income.

Cafeteria plans have which of the following characteristics? I. Must offer a choice between at least one qualified "pre-tax" benefit and one non-qualified "cash" benefit. II. Medical Flexible Spending Accounts (FSAs) can reimburse medical expenses not covered by insurance for the participant and all dependents. III. Changes in election amount during the plan year can only occur with a "qualifying change in family status." IV. Salary reductions are not subject to income taxes but payroll taxes apply. A) I, II and IV only. B) II, III and IV only. C) I, II and III only.. D) I, II, III and IV.

C. Rationale The correct answer is "C." Cafeteria Plans (Section 125) allow salary reductions which are taken from an employee's salary before Federal and State withholding tax as well as Social Security and Medicare taxes (FICA). At least one taxable and non-taxable benefit must be offered under a plan. Medical FSAs allow reimbursement for eligible medical expenses for the employee and any dependents. A qualifying change in status is required to make a mid-year change in elections

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.

C. 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.

To retain its qualified status, a retirement plan must: I. Have pre-death and post-death distributions. II. Stipulate rules under what circumstances employee contributions are forfeited. III. Be intended to be permanent. IV. Be established by the employer. A) I and II only. B) II, III and IV only. C) I, III and IV only. D) I, II, III and IV.

C. Rationale The correct answer is "C." Employee contributions must be vested and cannot be required to be forfeited.

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) $18,000 B) $16,800 C) $34,800 D) $54,000

C. Rationale The correct answer is "C." The maximum 401(k) plan contribution is $18,000 (2017). The 12% money-purchase plan will add $16,800 ($140,000 x .12). So, adding the $18,000 and the $16,800 gives the correct answer of $34,800.

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.

C. 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 2017? Assume Will is 58 years old. A) $36,000 B) $42,000 C) $54,000 D) $60,000

C. Rationale The correct answer is c. The most that could be contributed is the annual 415(c) limit of $54,000 for 2017. 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.

which of the following clauses in a 401k plan can assist the plan in meeting the requirements of the ADP test? A. attestation clause B. No-contest clause C. Negative election clause D. Deferral plan clause

C. Negative election clause A negative election clause can assist a 401k plan in meeting the ADP test because it automatically deems that an employee defers a specific amount unless he elects out of the automatic deferral amount. -negative elections do not require 100% immediate vesting.

IRA exemption from Bankruptcy

Cannot exceed 1 million for an individual debtor. Includes the aggregate value the 1 million dollar cap do not, however, include amounts attributed to rollover contributions or earnings on these account.

Self-employed contribution rate

Contribution rate divided (1 + contribution rate)

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.

D 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 statement(s) concerning Unrelated Business Taxable Income (UBTI) is/are accurate? I. Dividends, interest, and other types of income derived from investments in a business are not subject to UBTI. II. A partnership interest in an investment enterprise, whether active or passive, is subject to UBTI. III. A direct business activity carried on for the production of income is considered a trade or business for UBTI purposes. IV. Securities of the employer purchased with loan proceeds by an Employee Stock Ownership Plan (ESOP) are not subject to UBTI. A) I only. B) I, II and III only. C) II, III and IV only. D) I, III and IV only.

D Rationale The correct answer is "D." Direct investment in a business generates income which is UBTI. Any investment which is purchased with "leverage" or borrowed funds generate UBTI except for a qualifying ESOP or LESOP.

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 $215,000 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.

D 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 statements regarding determination letters for qualified plans is true? A. When a qualified plan is created, the plan sponsor must request a determination letter from the IRS. B. An employer who adopts a prototype plan must request a determination letter from the IRS C. If a qualified plan is amended, the plan sponsor must request a determination letter from the Department of Labor D. A qualified plan which receives a favorable determination letter from the IRS may still be disqualified at a later date.

D. Determination letters are issued by the IRS at the request of the plan sponsor. The plan sponsor is not required to request a determination letter. even if the determination letter is requested and approved, the IRS may still disqualify the plan.

Medical Trials Inc. has a cafeteria plan. Full time employees are permitted to select any combination of the benefits listed below, but the total value received by each employee must be $6,500 year or less. 1. Group medical and hospitalization insurance for employee only, $3,600 a year 2. Group medical and hospitalization insurance for employees spouse and dependents, $1,200 additional a year 3. Child care payments, actual cost not to exceed $5,000 4. Cash require to bring the total of benefits and cash to $6,500 5. Universal variable life insurance $1,000 Which of the following statements is true? (All employees are full-time) A. James chooses to receive $6,500 cash because his wifes employer provides medical benefits for him. James has $2,900 of taxable income (6,500-3,600) B. Matt chooses 1,2,5 and $700 cash. he must include $700 in taxable income C. Randy chooses 1 and 2 and $1,700 in child care. he must include the $1,700 in gross income D. Robin chooses 1 and 2 and 1,700 cash. Robin must include 1,700 in taxable income.

D. Option D is correct because cash must be included in income. Option A is incorrect because the entire cash distribution will be taxable. Option B is incorrect because the universal variable life insurance premiums of $1,000 cannot be excluded from Matt;s gross income. Option C is incorrect because child care payments are excluded benefits.

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.

D. 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%

D. 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.

In a money purchase pension 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.

D. Rationale The correct answer is "D." Forfeitures which are not allocated to individual accounts are not considered annual additions. Earnings are never considered annual additions for Section 415 limits. Rollovers are previous contributions and earnings, therefore are not calculated as "annual additions."

When would you advise a person not to wait to exercise a nonqualified stock option? A) When long-term price appreciation is anticipated, but uncertainty regarding future stock price remains. B) When the individual has had an excellent year resulting in much higher than expected income. C) When the price of the stock in the market is out-of-the-money and not expected to enter or change any time soon. D) When the stock price seems to have peaked and sale will immediately follow exercise.

D. Rationale The correct answer is "D." If all gain has been apparently made in a security, rather than lose the profit, and since there are no special advantages to holding non-qualifieds, it may be the time to exercise and to follow with an immediate sale. The rest of the options are actually reasons for holding the option without exercising it.

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

D. 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.

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.

D. 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.

Your client, a small business owner, wants to increase employee satisfaction and loyalty. The best thing a planner can do is: A) Recommend qualified employee benefits. B) Bring in a pension specialists. C) Leave existing plans in place. D) Gather information from the client and employees. Rationale

D. The correct answer is "D." Financial planners always gather data before making recommendations.

Which of the following statements accurately describes a situation where the use of a Flexible Spending Account (FSA) would be advisable? I. The employer's medical plan has large deductibles or large coinsurance or copayment provisions. II. There is a need for benefits that are sometimes difficult to provide on a group basis, such as dependent care. III. The employees are primarily non-union and operating outside of a collective bargaining agreement. IV. There are a great many employees who have an employed spouse with duplicate medical coverage. A) I and II only. B) I, III and IV only. C) I, II, and III only. D) I, II, III and IV.

D. Rationale The correct answer is "D." All of the choices listed here are reasons why an employer may want to offer an FSA.

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 of 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.

D. 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.

As a fiduciary of a plan, you are required to evaluate the appropriateness of assets for the qualified plan. Which of these statements accurately characterize the suitability of particular assets for qualified retirement plans? I. Large positions in real estate are NOT appropriate due to their illiquidity. II. Each asset class should be evaluated for volatility, risk of loss, opportunity for gain, and viability in the portfolio. III. Long-term treasury bonds are suitable for meeting a plan's liquidity needs and marketability requirements. IV. ERISA requires plan fiduciaries to emphasize investment stability ahead of other considerations (i.e., inflation, duration, etc.) A) I and IV only. B) II and III only. C) III and IV only. D) I and II only.

D. Rationale The correct answer is "D." Long-term treasury bonds are not suitable for short-term liquidity needs due to volatility from interest rate risk. ERISA requires fiduciaries to consider all pertinent factors in asset allocation decisions.

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.

D. 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.

Vijai, age 40, recently left his employer, GoGoRoller, a roller blade manufacturer. He left after 10 years because the working conditions became unbearable. GoGoRoller sponsored a SIMPLE IRA. Vijai deferred $30,000 into the plan during his time there and the employer contributed $15,000. When he terminated he requested the entire account balance of $55,000. How much would his check have been for? A) $41,250 B) $44,000 C) $45,000 D) $55,000

D. Rationale The correct answer is "D." Simple IRAs do not require the 20% withholding because they are not qualified plans. Therefore, the entire account balance would have been distributed to him.

The maximum retirement benefit a participant in a target-benefit plan can actually receive depends on the: A) Initial actuarial computation according to the plan's formula. B) Amount of contributions determined in reference to the targeted benefit. C) Maximum annual addition amounts. D) Value of the participant's account at retirement.

D. Rationale The correct answer is "D." While Options "A," "B" and "C" may have a relationship to "D," the only thing which actually determines the final retirement benefit in a target benefit plan is the account value at retirement.

RMDs

Do not apply to Roth IRAs. Do APPLY to Inherited Roth IRAS and 401k Roths exceptions to taking RMD: If participant is still employed by the plan sponsor exception is NOT AVAILABLE for a participant that owns more than 5% of ownership of the plan sponsor in the year he reaches the age of 70 1/2

When is a plan Top-Heavy?

If >60 percent of the benefits or contribution are going to key employees

Qualifed Matching contributions

Made only to NHC employees who participate in the plan during the plan year. Immediate vesting

How to calculate Self-Employed individuals contribution

Net Self-Employment Income - 1/2 Self-Employment tax = Adjusted Net Self-Employment tax x Self employment contribution rate = Self-Employed Individuals Plan Contribution

How to calculate Self employment tax

Net self employment income x 92.35% = Net earnings subject to Self employment tax x 15.3% up to 128,400 + 2.9% over 128,400 = Self-Employment Tax

Profit sharing plans that can establish a CODA

Profit sharing plans: - 401k plans -stock bonus plans

A hybrid plan that uses a discretionary contribution but adjusts for age is a form of a: A) Profit sharing plan. B) Money purchase plan. C) Cash balance plan. D) Defined benefit plan.

Rationale The correct answer is "A." Answers "B," "C" and "D" all require minimum contribution levels. Answer "A" - Profit sharing plan only requires that contributions be "substantial and recurring." More specifically, an age-based profit sharing plan would be correct.

Jeb, age 54, works for Gamma Corporation and Epsilon Corporation. Gamma and Epsilon are both part of the same parent-subsidiary control group. Gamma and Epsilon both sponsor a 25% money purchase plan. If Jeb earns $200,000 at Gamma and $30,000 at Epsilon what is the maximum employer contribution that can be made to both plans? A) $54,000 B) $57,500 C) $61,500 D) $81,000

Rationale The correct answer is "A." Because the two companies are part of the same controlled group they will be required to aggregate both plans. Therefore, he will be limited to the defined contribution limit of $54,000. (25% of $230,000 is $57,500 but the single employer limit applies and is $54,000 (2017)).

Under what circumstances would property be subject to ancillary probate? A) If the decendent is a resident of one state and owns real property in another state. B) If the decendent is a tenant in common owning real estate with an unrelated person. C) If the decendent was a resident of a community property state. D) If the decendent owns a life estate in real property located in a state other than his state of residence.

Rationale The correct answer is "A." None of the other answers describe circumstances under which the decendent's property would be subject to ancillary probate.

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. 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). B) If she sells the stock today for $15 per share she will recognize a capital loss of $26,000.

Lois and Ken Clark are age 32. They want to retire at age 62. They have calculated they will need a lump sum of $4,300,000 to provide the inflation-adjusted income stream they desire. Current investment assets are projected to grow to $3,100,000 by age 62. They project they will earn 6% after-tax on their investments and inflation will average 4% over the next 30 years. They would like to fund their retirement in level annual payments. They assume their retirement will last 26 years. Using the capitalization utilization method, what annual end-of-year savings will the Clarks need to deposit during their pre-retirement years? A) $15,786 B) $15,179 C) $9,600 D) $9,419

Rationale The correct answer is "B." Amount needed to fund retirement is $4,300,000 which is given in the question. The inflation adjustment has already been made. Current assets will comprise $3,100,000 of the amount needed. $4,300,000 less $3,100,000 leaves a shortfall of $1,200,000. To accumulate $1,200,000 at 6% after-tax over 30 years, they will need to deposit $15,179 at the end of each year. Ignore all the other information which is just "filler." N=30 (62-32) i=6 PV=0 PMT=? FV=1,200,000

Which of the following is true concerning IRA contributions? A) An employee who makes voluntary contributions to a 401(k) plan is not considered an active participant. B) An employee who receives no contributions or forfeiture allocations in their employer's profit sharing plan is not considered an active participant. C) An employee who makes no voluntary contributions to a thrift plan yet receives forfeiture allocations to a profit sharing plan is not considered an active participant. D) An employee participating in a Section 457 plan is considered an active participant if employee pretax deferrals are elected.

Rationale The correct answer is "B." Answers "A" and "C" are conditions of being considered an active participant. Answer "D" is incorrect because 457 plan participants are not considered active participants for IRA contribution purposes.

Widget, Inc., is installing a qualified defined benefit pension plan. Which of the following groups of employees will be considered in the mandatory coverage and participation tests? I. Members of a collective bargaining unit which has negotiated its own pension benefits. II. Leased employees who have worked at Widget for more than a year but are covered by the leasing company's profit sharing plan. III. Employees of Gadget, Inc. (Widget, Inc. owns 72% of the stock). IV. Employees of Gadget, Inc. (Widget, Inc. owns 82% of the stock). A) IV only. B) II and IV only. C) I and IV only. D) II, III and IV only.

Rationale The correct answer is "B." Any person who provides services to the employer and is not an employee will be considered a leased employee if the following criteria are met: 1. The services provided are pursuant to an agreement between the employer and a leasing organization; 2. Such person has performed services for the employer on a substantially full-time basis for a period of at least one year; and 3. Such services are provided under the primary control of employer. The significance of these rules is that leased employees must be considered a common law employee for purposes of meeting coverage rules, top-heavy rules, contribution and benefit rules, as well as a variety of other rules. In Statement "III", the information is not sufficient to determine whether a brother-sister controlled group exists, but a parent/subsidiary relationship does not exist, therefore they would not be considered as one firm for qualified plan purposes. Members of collective bargaining agreements may be excluded from qualified plans. In Statement "IV", there is a parent/subsidiary controlled group relationship, so both will be considered as one firm for purposes of the pension plan.

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.

Which of the following statements apply to distributions made from Individual Retirement Accounts (IRA)? I. Distributions to the IRA owner must begin by April 1 of the year following the year in which the owner reaches age 70 1/2. II. If funds in a rollover IRA (originated in an employer-sponsored qualified retirement plan) are not "tainted" with other contributions, the distribution may be eligible for 5-year forward averaging tax treatment. III. After the owner's death, the entire amount remaining in the IRA is included in the owner's gross estate for federal estate tax purposes. IV. Distributions taken prior to age 59 1/2 may be exempt from penalty only if the owner separated from service after age 55 and the original plan document allowed early retirement at age 55. A) I and II only. B) I and III only. C) II and IV only. D) I, III and IV only.

Rationale The correct answer is "B." Statement "II" is incorrect because funds distributed from an IRA are always treated as ordinary income, regardless of source and 5 year forward averaging is no longer available for any distribution. Statement "IV" is incorrect because all distributions from an IRA not meeting the statutory exemptions are subject to the premature distribution penalty, regardless of source.

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 $215,000 (2017) 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 (2017). Therefore the plan must use a defined benefit limit of 2% instead of 1.5%.

Which statements accurately reflect the provisions for a self-employed owner (partnerships and sole proprietorships) in a small business pension plan? I. Loans are available to owners and employees alike, if each has equal right and terms of the loans. II. Contributions for owners are based on net earnings rather than wages. III. Contributions for employees (as percentage of salary) is the same as for the self-employed owner (as a percentage of profit). IV. Lump-sum distribution tax treatment allowed for employees, but not for owners, except in the case of disability. A) I and III only. B) II and IV only. C) I, II and IV only. D) I, II, III and IV.

Rationale The correct answer is "C." Owners must do a conversion [EE contr rate ÷ (1+ EE contr rate)] e.g., .15 ÷ (1+.15) = .13043 so owner's contribution as a percentage of profits is lower than the employees' percentage of wages earned.

Jack and Debra file for divorce after 31 years of marriage. The court-ordered division of property included an award to Debra of 1/2 interest in Jack's defined benefit pension. This Qualified Domestic Relations Order (QDRO) would not include which one of the following: A) When Jack retires, Debra could be treated as his spouse for purposes of any joint and survivor annuity payments. B) If Jack died before retirement, Debra could be treated as the surviving spouse for purposes of any death benefits accrued under the defined benefit plan. C) Debra can force Jack to receive an immediate lump sum distribution from the plan and roll her one-half share over to an IRA even though the plan allows only monthly income benefits at normal retirement age. D) If Debra dies before Jack retires, the QDRO could also require Jack to substitute their physically impaired, dependent child to receive Debra's benefit.

Rationale The correct answer is "C." QDRO cannot force a plan to do anything which is not provided as a benefit in the plan document to all other employees. The QDRO may not mandate an increase in benefits under the plan.

Which of the following describe benefits usually available under an employer-provided short-term disability plan? I. Short-term disability coverage will start on the first day when disability is related to an illness. II. The definition of disability under short-term disability coverage is defined as the inability to perform the normal duties of one's position. III. Benefits under a short-term disability plan usually extend for one year. IV. Generally, short-term disability coverage will start after sick pay benefits have been provided to a covered employee. A) I and II only. B) III and IV only. C) II and IV only. D) I, II and III only.

Rationale The correct answer is "C." Short-term disability benefits usually start the eighth day of an illness (first day for an accident) and generally last no more than six months.

Abe's Apples has an integrated defined benefit pension plan. The plan currently funds the plan using a funding formula of Years of Service x Average of Three Highest Years of Compensation x 1.5%. If Geoffrey has been there for 40 years what is the maximum disparity allowed using the excess method? A) .75% B) 5.7% C) 26.25% D) 60%

Rationale The correct answer is "C." The maximum disparity using the excess method is the lesser of the formula amount (40 years x 1.5%) or 26.25% (35 years x .75%). Note: This level of knowledge is probably not tested on a regular basis, however, because it is part of the board's topic list this question was added to ensure that you could answer it if it came up on the test.

Abe's Apples has an integrated stock bonus plan. If the plan makes a 10% contribution for the current year what is the maximum excess rate? A) 5.7% B) 10% C) 15.7% D) 20%

Rationale The correct answer is "C." The maximum excess rate is 2 times the contribution rate limited to a disparity of 5.7%. Therefore, 2 x 10% would be 20%. However, since the disparity is limited to 5.7% the maximum excess rate is 15.7% (10% + 5.7%). Note: This level of knowledge is probably not tested on a regular basis, however, because it is part of the board's topic list this question was added to ensure that you could answer it if it came up on the test.

A new client comes in after his spouse's death. The spouse was an active participant in a qualified retirement plan. There was a cost basis associated with the spouse's retirement account. Which of the following accurately describes the income tax implications due to death payments from the qualified plan as either an income for life or fixed period installment payments? I. When the benefits are from life insurance, the cash value portion is taxed under the annuity rules. II. When benefits are from "pure insurance," the amount is excludable from gross income. III. If the benefits are from funds not related to life insurance, the includible amount is taxed as ordinary income. IV. If the benefits are not related to life insurance, the beneficiary's cost basis is equal to the participant's cost basis. A) II and IV only. B) I, III and IV only. C) I, II and IV only. D) I, II, III and IV.

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

Services provided on a discounted or free basis to employees are not includible in taxable income to the employee under which of the following circumstances? I. The employer must incur no substantial cost in providing the service. II. Services offered to the employees must be in the line of business in which they are working. III. Services cannot be discounted more than 25% of the price that is available to customers. IV. If there is a reciprocity agreement between two unrelated employers in the same line of business. A) I and II only. B) II and III only. C) III and IV only. D) I, II and IV only.

Rationale The correct answer is "D." All statements are correct except for Statement "III". This is because the percentage of discount that is stated is limited to 20%.

Your client, a single-filer, has an income of $80,000. Which of the following conditions would prevent a deductible IRA contribution from being made by your client? I. Participated in a Section 457 deferred compensation plan. No other retirement plans were available to the employee. II. Made contributions to a 403(b) plan. III. Received retirement payments from a pension plan at age 65 (no longer an employee at the sponsoring employer). IV. Has account in previous employer's profit sharing plan. Received no employer contributions. No forfeiture allocations were made. V. Eligible to participate in a defined benefit plan, but waived participation when it was calculated employees retirement benefit would be greater with the IRA. A) I, II and IV only. B) II, IV and V only. C) II, III, IV and V only. D) II and V only.

Rationale The correct answer is "D." An active participant is an employee who has benefited under one of the following plans through a contribution or an accrued benefit during the year: 1. qualified plan; 2. annuity plan; 3. tax sheltered annuity (403(b) plan); 4. certain government plans (does not included 457 plans); 5. SEPs; or 6. SIMPLEs. Statement I is a non-qualified deferred comp plan (not one of the plans listed above) and therefore not to be taken into consideration for active participation status. Statement II & V are on the list above. For a defined benefit plan, an individual who is eligible for the plan is automatically considered an active participant. Statement "III" is not active participation, rather it is retirement, and Statement "IV" as described without contributions or forfeitures is not "active participation," but a change in conditions regarding employer contributions or forfeitures could stem deductibility of IRA contributions.

Sherman, age 52, works as an employee for Cupcakes Etc, a local bakery. Cupcakes sponsors a 401(k) plan. Sherman earns $50,000 and makes a 10% deferral into his 401(k) plan. His employer matches the first 3% deferral at 100% and they also made a 5% profit sharing contribution to his plan. Sherman also owns his own landscaping business and has adopted a solo 401(k) plan. His landscaping business earned $40,000 for the current year. What is the most that Sherman can contribute in the solo plan, assuming his self-employment taxes are $6,000? A) $18,000 B) $19,000 C) $24,000 D) $26,400

Rationale The correct answer is "D." An individual can defer up to $18,000 (2017)plus an additional $6,000 catch up for all of their 401(k) and 403(b) plans combined. Since he is 50 or older he can contribute the 18,000 + 6,000 = $24,000. Since he already contributed $5,000 into his employer plan he can still defer $19,000 ($24,000 - $5,000) into the solo plan. The employer contributions in this question are in addition to the employee deferral limit. Employer contribution into the solo plan: i) self-employment income $40,000 ii) less 1/2 SE tax $3,000 iii) Net $37,000 iv) X 20% v) employer contribution $7,400 Total contribution to the solo plan = $19,000 + $7,400

Under which of the following circumstances would a decedent be considered to have died intestate? A) The decedent handwrote a will and signed it but did not date it. B) The decedent was not of "sound mind" when he signed his statutory will. C) The decedent prepared a proper will listing every asset that he owned at the time. He died 5 years later. D) Choices A and B. E) Choices A, B and C.

Rationale The correct answer is "E." Answer "A" describes an invalid holographic will. Answer "B" describes a situation in which the testator is not "of sound mind" and therefore cannot make a valid will. C describes a will with no residuary clause. If the decendent dies without a valid will or a will that only covers part of his assets, he is said to have died intestate.

Cher, who just turned 57 years old, took early retirement so she could spend more time with her three grandchildren and to work on her golf game. She has the following accounts: 401(k) Roth account - she has a balance of $100,000. She only worked for the company for four years and contributed $15,000 each year to the Roth account. The company never contributed anything to her account. Roth IRA - she has a balance of $80,000. She first established the account by converting her traditional IRA ($50,000 all pretax) to the Roth IRA 4 years ago and has contributed $5,000 each of the last 4 years. Cher decided that she would take a distribution of half of each account ($50,000 from the Roth 401(k) and $40,000 from the Roth IRA) for the purpose of purchasing a Porsche Cayenne, which of course would be used to carry her new Ping golf clubs. Which of the following is correct regarding the tax treatment of her distributions? A) No tax, no penalty on either distribution. B) Taxation on $20,000 from the 401(k) Roth and a penalty on $20,000 from the Roth IRA. C) No taxation on the distribution from the 401(k) Roth, but income and penalty on $20,000 from the Roth IRA. D) Penalty of $2,000 on the Roth distribution and taxation and penalty on $20,000 of the Roth 401(k) distribution.

Rationale The correct answer is b. Neither distribution is qualified. Non-qualified distributions from a Roth account consist of basis and earnings on a pro rata basis. Therefore, 60% of the Roth account distribution is return of basis. The remaining 40% or $20,000 is subject to income tax. Because the distribution is from a qualified plan and she has separated after the attainment of age 55, there is no penalty. Non-qualified distributions from a Roth IRA come out in the order of contributions, conversions and then earnings. The first $20,000 is not subject to income tax or penalty because it is from contributions. The second $20,000 is from conversions, which have been subject to taxation. However, because she rolled them over within the last five years, she will have a penalty and there is no exception

Defined Benefit 50/40 Test

Requires the defined benefit plan to benefit the lesser of 50 nonexcludable (eligible) employees or 40 percent of all eligible employees on each day of the plan year.

The Deductibility of an IRA contribution Scenarios

Taxpayer is not an active participant: No AGI Limits Taxpayer(s) is an active participant Single: AGI phaseout: 63K - 73K MFJ: AGI Phaseout: 101K - 121K One spouse is an active participant, the other is not. -The spouse who is not an active participant may have a deductible traditional IRA contribution as long as their joint AGI does not exceed $199,000. The deductible IRA contribution is phased out between 189k-199K

Calculation of IRA Deduction-Subject to Phaseout

The deduction limit ($5,500 for 2018) will be reduced based on a proportion equal to the amount by which the individuals AGI exceeds the lower limit of the phaseout range divided by $10,000 (or $20,000 in the case of a joint return)

The Excess Rate

The excess rate is limited to the LESSER of twice the base rate or a difference of 5.7% as a result, the excess rate is general 5.7% higher than the base rate. Base rate + permitted disparity=excess rate, so BP=Exxon" where permitted disparity equals the lesser of the base rate or 5.7

What is the maximum pension benefit that can be payable to a participant of a defined benefit pension plan?

The lesser of $220,000 or 100% of the average of the employees three highest consecutive years compensation

Financial Securities not traded on Valuation date

Trading price after decedents date of death X number of days between decedents date of death and the preceding trade + Trading price before decedents date of death X number of days between decedents date of death and the next subsequent trade DIVIDED BY The sum of the days before and after the date of death. Weekends and holidays are not included in the calculation

Calculating distribution ratio for Non deductible IRA

ratio of AB= AB before withdrawal / FMV of account at withdrawal

457 plans: Special "Final 3 year" additional catch-up provision

regular 50 plus catch up: allowed for Public 457 plans BUT NOT FOR PRIVATE 457 plans Special 3 year: available for both Public and Private. cannot simultaneously use the "50 catch up" The contribution limit of 18,500 includes both employee contributions and employer matching contributions. -Advantage of public 457 plan: 59 1/2 rule does not apply. there is generally no 10% early withdrawal penalty. except when distributions attributable to rollovers from another type of qualified plan or IRA.