Retirement planning Mid and Final

Defined benefit pension plans increase the funding costs associated with the plan if the following actuarial assumptions are adjusted as follows: I- Turnover rate is reduced. II- Retirement age is reduced. III- Rate of Return is Increased. IV- Wages Increase. A- I and III only. B- I, II and IV only. C- II and III only. D- II, III and IV only.

Solution: The correct answer is B. If turnover is reduced, then funding will increase. If the retirement age is reduced, funding will increase as more years will need to be funded. If the rate of return increases, then funding will decrease. If wages increase, then funding will increase.

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- $15,500 B- $22,500 C- $30,000 D- $66,000

Solution: The correct answer is B. Note the legal limit for 2023 is $22,500 for employee deferrals to a 401K account. The $66,000 is the total limit for an employee under 50 from all sources including employee deferral, employer match, forfeitures, and profit sharing contributions by the employer.

Seema owns a landscaping company with 10 employees in Phoenix and wants a low-cost retirement plan that permits her employees to make pre-tax contributions. She is planning on contributing 3% of eligible employee's pay each year. Which of the following plans would be most appropriate plan for Seema to establish? A- 401(k) plan. B- Profit sharing plan. C- SIMPLE IRA. D- SIMPLE 401(k) plan.

Solution: The correct answer is C. A SIMPLE IRA would permit employees to make pre-tax contributions. Also, the plan is low cost, and the 3% contribution Seema is planning to make would satisfy the employer matching contribution requirements of a SIMPLE plan. As qualified plans, A, B & D will all have higher cost structures than a SIMPLE IRA and therefore do not meet Seema's requirement of a low-cost 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

Solution: 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 × 61.54% = 3,076.92

The maximum retirement benefit a participant in a target-benefit plan will 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 additional amounts. D- Value of the participant's account at retirement.

Solution: The correct answer is D. While Answers "A", "B" and "C" help to increase the final account value, the retirement benefit is determined solely by the account value.

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.

Solution: 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.

All of the following steps are taken in a retirement planning engagement, EXCEPT: A- Find out client's current asset position. B- Prepare a balance sheet for the client. C- Install or implement the plan. D- Calculate estate taxes.

Solution: The correct answer is D. While retirement planning is interdisciplinary in nature, calculating estate taxes is not a vital step in the retirement planning process.

George, age 60, is a member of We Work, LLC. We Work sponsors a profit sharing plan. George's portion of the net income was $200,000 and one-half of his self employment taxes were $10,025 for this year. If We Work makes a 25% of salary contribution on behalf of all of its employees to the profit sharing plan, how much is the contribution to the profit sharing plan on behalf of George? A: $37,995 B: $42,000 C: $47,494 D: $50,000

Solution: The correct answer is A. $200,000 Net Income (10,025) Less ½ SE Tax 189,975 Net SE Income × 0.20 0.25/1.25 $37,995 RPCH5

In addition to covering long-term care costs, which of the following would also cover the cost of a hospital stay in excess of 100 days? A- Medicare. B- Medicaid. C- Indemnity insurance policy. D- Medicare supplement.

Solution: The correct answer is B. Individuals have three methods to pay for stays after the 100th day: 1. Long-term care insurance 2. Individual savings 3. Medicaid

2022 Profit sharing plans must be established by the entity tax filing deadline (plus extensions) for the year for which the employer wants to make contributions, and contributions must be made by the due date of the return including extensions. A: True B: False

Solution: The correct answer is A.

Profit sharing plans may permit in-service withdrawals after a participant has attained two years of service in the plan. A: True B: False

Solution: The correct answer is A.

In 2023, the Section 415 limit for defined contribution plans is: A- $22,500 B- $66,000 C- $265,000 D- $330,000

Solution: The correct answer is B. Answer "A" is employee contribution . Answer "C" is top-heavy key-employee maximum and Answer "D" is the annual compensation limit.

Funds in an HSA can be used for which of the following: I- Qualified medical expenses II- Deductibles III- Vision care IV- Dental expenses A- I and II only. B- II and III only. C- I, III and IV only. D- I, II, III and IV.

Solution: The correct answer is D. All of these expenses are eligible under health savings plans.

Pat established his business one year ago. He has hired two assistants. He would like to set up a retirement benefit plan for himself and his two assistants, who want to make voluntary contributions. He is concerned about cash flows for unforeseen business obstacles and future expansion. Of the following types of retirement plans, which would be the most appropriate for Pat's business: A- 401(k) plan. B- Money purchase pension plan. C- Defined benefit plan. D- Profit-sharing plan.

Solution: The correct answer is A. A 401(k) plan is the only option which allows voluntary employee elective deferral contributions, as desired by the two assistants.

Celeste has AGI of $50,000 (which is all comprised of earned income). She is single and age 25. She was an active participant in her employer's defined benefit plan for 15 days during the year. Which of the following statements best describes her options for additional contributions to an IRA? A- She can contribute to a Traditional IRA and deduct her contribution. B- She can contribute to a Traditional IRA, but not deduct her contribution. C- She can contribute to a Roth IRA. D- She can contribute to a Traditional IRA and deduct that contribution or she can contribute to a Roth IRA.

Solution: The correct answer is D. You are looking for the best statement to describe her options. She can contribute and deduct her contribution to a Traditional IRA since she is below the AGI limitation for a single active participant ($73,000 - $83,000) (2023). She can also contribute to a Roth IRA because she is below the AGI limitation of $138,000 - $153,000 (2023). Remember that coverage for any day during the year will constitute being an active participant. Keep in mind on the exam you may have two plausible answers, but one will fit the question better.

Traditional retirement includes all of the following descriptions except: A- Extreme savings or sacrifice to achieve financial independence. B- An individual leaving the workforce in their 60's. C- Exiting the workforce with an average retirement life expectancy of 20-25 years. D- Working until one qualifies for a company pension and or Social Security Retirement Benefits.

Solution: the correct answer is A. Choice A is not typical of a traditional retirement but rather describes the FIRE (Financial Independence, Retire Early) concept. Choices B, C, and D all describe traditional retirement.

Mikal is striving to reach financial independence by age 45. She is struggling to come up with a plan to meet her goal of early retirement. She currently has expenses of $60,000 a year. Based on using 4% as a sustainable withdrawal rate, what amount will allow her to have financial independence to retire early? A- $2,500,000 B- $2,000,000 C- $1,500,000 D- $1,000,000

Solution: the correct answer is C. The primary tool of this early retirement is extreme savings, which is used to accumulate sufficient assets to generate investment income that covers living expenses. Financial independence is defined by accumulating 25 times one's estimated annual expenses. Mikal has expenses totaling $60,000 multiplied by 25 equals $1,500,000. You can double check your math by dividing $60,000 into $1,500,000 to arrive at 4%, to match the agreed upon the sustainable withdrawal rate.

Emily, age 58, has been a participant in the Icon, Inc. ESOP for fifteen years. She plans to retire at 65. At the end of this year, Emily's entire account balance is comprised of Icon stock valued at $1,000,000. Emily believes that Icon has a bumpy future ahead and would like to diversify some of her ESOP investments. (She has not diversified any interest in ICON prior to this time.) How much must Icon allow Emily to diversify this year? A: $250,000 B: $500,000 C: $750,000 D: $1,000,000

Solution: The correct answer is A. After Emily attained the age of 55 (since she had already attained ten years of participation), the ESOP must allow her to diversify 25% of her investments in the 5 years following qualification. In the 6th year, Emily must be allowed to diversify up to 50%. In this case, Emily is not in her 6th year so she must be able to diversify up to 25% reduced by the percentage diversified in prior years. Since Emily has not diversified any amounts in the past she must be allowed to diversify the full 25% in the current year.

Which of the following plans is subject to PBGC coverage? A- A cash balance plan for a local store selling nutrition supplements and drinks. B- A target benefit plan for a publicly traded company. C- An integrated defined benefit plan for an architect's office that employees two owners, who are architects, three junior architects and one administrative assistant. D- A new comparability plan with three groups for a firm with 26 employees.

Solution: The correct answer is A. All DB plans (DB and cash balance) must be covered by PBGC except for professional firms with 25 or fewer employees. Choice b is not correct because it is defined contribution plan and is not subject to PBGC. Choice c is not correct because although it is defined benefit plan, it is not subject to PBGC because it is a professional firm with fewer than 25 employees. Choice d is not correct because it is defined contribution plan and is not subject to PBGC.

Karl is a 45-year old employee of Jaxon Industries, a closely-held corporation. Karl's adjusted gross income for the current year is $154,000, and Karl is unmarried. Jaxon Industries does not sponsor a retirement plan for its employees. Which of the following is the most appropriate retirement planning strategy for Karl for 2023? A- Make a $6,500 deductible contribution to a Traditional IRA. B- Make a $6,500 after-tax contribution to a Roth IRA. C- Contribute 20% of his salary to a SEP on a pre-tax basis. D- Contribute $15,500 pre-tax to a SIMPLE IRA.

Solution: The correct answer is A. Karl is not part of an employer sponsored plan. No deductibility limits will apply to his contribution. B is incorrect. Based on his adjusted gross income, Karl will be ineligible to make a Roth IRA contribution. C is incorrect. An employee cannot establish their own SEP and make contributions. The plan would have to be created by the employer. D is incorrect. An employee cannot establish their own SIMPLE IRA and make contributions. The plan would have to be created by the employer.

Loans from a qualified plan are considered prohibited transactions unless the following requirements are met: I- There must be a reasonable rate of interest. II- There is a dollar limitation of the lesser of 50% of the account balance or $12,000. III- The term of the loan is 10 years unless for primary residence. IV- There is sufficient security. A- I and IV only. B- I, III and IV only. C- II, III and IV only. D- I, II and IV only.

Solution: The correct answer is A. Limit on loans is the lesser of 50% of the account value or $50,000 for a period of five years, unless for a primary residence.

Personal use of an employer-provided vacation lodging as a fringe benefit is: A- Includable in taxable income of all covered employees. B- Includable in the taxable income of key employees only. C- Excludable from the taxable income of all covered employees. D- Excludable from the taxable income of non-highly compensated employees only.

Solution: The correct answer is A. Lodging is only excluded if (1) it is furnished on the business premises (the place of work), (2) it is furnished for the employER's convenience, and (3) the employee accepts it as a condition of employment. A vacation stay does not meet any of the these criteria so it is fully taxable.

Which of the following is/are elements of an effective waiver for a preretirement survivor annuity? I- The waiver must be signed within six months of death. II- The waiver must be signed only by a plan participant. III- The waiver must be notarized or signed by a plan official. A- III only B- I and II only C- II and III only D- I, II and III

Solution: The correct answer is A. On the initial beneficiary selection form, both the plan participant and the nonparticipant spouse must sign the waiver. If the waiver is a separate document, the non-participant spouse must sign. Statement "III" is correct. Statement "I" is unfounded.

Your client has asked about making a contribution to an IRA. The following are sources of income he listed on his data form: $5,000 from a Limited Partnership interest. $1,500 from home-based business. $20,000 municipal bond interest. $3,000 stock dividends. $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.

Solution: 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 statements concerning rabbi trusts is/are correct? A-A rabbi trust is a trust established and sometimes funded by the employer that is subject to the claims of the employer's creditors, but any funds in the trust cannot generally be used by or revert back to the employer. B- A rabbi trust calls for an irrevocable contribution from the employer to finance promises under a nonqualified plan, and funds held within the trust cannot be reached by the employer's creditors. C- A rabbi trust can only be established by a religious organization. D- All of the above are correct.

Solution: The correct answer is A. Only option "A" is correct as it describes a rabbi trust. Option "B" describes a secular trust. Option "C" is a false statement.

Which of the following statements concerning rabbi trusts is (are) correct? A: A rabbi trust is a trust established and sometimes funded by the employer that is subject to the claims of the employer's creditors, but any funds in the trust cannot generally be used by or revert back to the employer. B: A rabbi trust calls for an irrevocable contribution from the employer to finance promises under a nonqualified plan, and funds held within the trust cannot be reached by the employer's creditors. C: A rabbi trust can only be established by a religious organization. D:All of the above are correct.

Solution: The correct answer is A. Only option a is correct as it describes a rabbi trust. Option B describes a secular trust. Option C is a false statement.

Mary Anne has AGI of $1,000,000 (which is all comprised of earned income). She is single and age 55. She is not an active participant in her employer's qualified plan. Which of the following statements best describes her options? A- She can contribute to a Traditional IRA and deduct her contribution. B- She can contribute to a Traditional IRA but not deduct her contribution. C- She can contribute to a Roth IRA. D- She cannot contribute to a Traditional IRA or Roth IRA.

Solution: The correct answer is A. She can contribute and deduct her contribution to a Traditional IRA since she is not an active participant and therefore not subject to an AGI limitation. She is unable to contribute to a Roth IRA because she is above the AGI limitation of $138,000 - $153,000 (2023).

Bertha, who is 54 years old, spent most of her career in the corporate world and now provides consulting services and serves as a director for several public companies. Her total self-employment income is $500,000. She is not a participant in any other retirement plan today. She would like to shelter as much of her self-employment earnings as possible by contributing it to a retirement plan. Which plan would you recommend? A- Establish a 401(k) plan. B- Establish a target benefit plan. C- Establish a Deferred Comp program for herself. D- Establish a SEP.

Solution: The correct answer is A. She will be able to defer $66,000 plus the catch up of $7,500 to the 401(k) plan, where she can only contribute $66,000 to the target benefit plan and the SEP. With a 401(k) she can contribute as employee and employer. She cannot set up a deferred compensation plan and defer tax. The catch up contribution can only be made by the employee, therefore it cannot be added to the employer funded plans.

Which of the following capital needs analysis methods mitigates the risk of outliving retirement funds? A- Capital Preservation Model B- Present Value of an Annuity Due Model C- Purchasing Power Preservation Model D- Serial Accumulation Model

Solution: The correct answer is A. The Capital Preservation Model assumes at life expectancy, as estimated in the annuity method, the client has exactly the same account balance as he/she started with at retirement. So if life expectancy is exceeded there is still capital available.

Which of the following is not a requirement for the owner of corporate stock who sells to an ESOP to qualify for the nonrecognition of gain treatment? A- The ESOP must own at least 55% of the corporation's stock immediately after the sale. B- The owner must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale. C-The ESOP may not sell the stock within three years of the transaction unless the corporation is sold. D- The owner must not receive any allocation of the stock through the ESOP.

Solution: The correct answer is A. The ESOP must own at least 30% of the corporation's stock immediately after the sale. All of the other statements are true.

Outliving retirement assets is the primary risk with which of the following retirement capital needs analysis methods? I: Annuity Method. II: Capital Preservation Method. III: Purchasing Power Preservation Method. A: 1 only B: 1 and 2 only C: 1, 2 and 3 D: None of the above

Solution: The correct answer is A. The annuity method assumes that the person spends all money as of the expected life expectancy. The other two methods are more conservative and presume there will be funds at the point of life expectancy, thus mitigating the risk of superannuation.

Which of the following is an example of a qualified retirement plan? A- Rabbi trust B- 401(k) plan C- Nonqualified stock option plan D- ESPP

Solution: The correct answer is B. A 401(k) plan is a qualified plan. All of the others are not qualified retirement plans.

Which of the following qualified plan distributions will be subjected to a 10% early withdrawal penalty? A: Lonnie, age 35, takes a $400,000 distribution from his profit sharing plan to pay for his son's college tuition. B: Carolyn, age 56, was terminated from UBEIT Corporation. Carolyn takes a $125,000 distribution from the UBEIT retirement plan to pay for living expenses. C: Brad, age 47, takes a $1,000,000 distribution from his employer's profit sharing plan. Six weeks after receiving the $800,000 check (reduced for 20% withholding), Brad deposited $1,000,000 into a new IRA account. D: Tara, age 22, begins taking equal distributions over her life expectancy from her qualified plan. The annual distribution is $2,000.

Solution: The correct answer is A. The distribution described in answer A will be subjected to the 10% penalty. Education expenses are only an exception to the 10% penalty for IRAs, not qualified plans. All of the other options are exceptions to the 10% early withdrawal penalty. Option B describes the exception for separation from service after age 55. Option C describes the exception for the rollover of qualified plan assets. Option D describes the exception for substantially equal periodic payments.

This year, Bo and Martha received $14,000 of Social Security income and had $6,000 of interest income. What portion of the Social Security benefits will be taxable on their married filing jointly income tax return? A: $0 B: $3,000 C: $7,000 D: $14,000

Solution: The correct answer is A. The lesser of: 50% of $14,000 = $7,000 or 0.5 [$6,000 + 0.5 ($14,000) - $32,000] <0 Since the answer calculated is less than $0, none of the Social Security benefits received by Bo and Martha are taxable.

Vance has a vested account balance in his employer-sponsored qualified profit sharing plan of $40,000. He has two years of service with his employer and the plan follows the least generous graduated vesting schedule permitted for a profit sharing plan under PPA 2006. If Vance has an outstanding loan balance within the prior 12 months of $15,000, what is the maximum loan Vance could take from this qualified plan, assuming the plan permitted loans? A: $5,000 B: $20,000 C: $40,000 D: $50,000

Solution: The correct answer is A. The maximum loan an individual can take is the lesser of $50,000 or 50% of their vested account balance. In this case, Vance has a vested account balance of 20% (2 years of service with 2 to 6 year vesting schedule) of $200,000, or $40,000, so the maximum loan would be 50% of $40,000, or $20,000. However, since Vance had an outstanding loan balance of $15,000 within 12 months, the maximum loan available must be reduced by $15,000. In this case, the maximum loan Vance could take from the qualified plan is $5,000 ($20,000-$15,000).

Robin, a senior at State University, receives free room and board as full compensation for working as a resident advisor at the university dormitory. A resident advisor is a peer leader who supervises those living in her residence hall.The regular housing contract is $1,400 a year total, $800 for lodging and $600 for meals in the dormitory. What is Robin's gross income from this employment? A: $0, the entire value of the contract is excluded, assuming the meals are provided for the convenience of the employer. B: $600, the meal contract must be included in gross income. C: $800, the lodging contract must be included in gross income. D: $1,400, the entire value of the contract is compensation.

Solution: The correct answer is A. The meals and lodging are provided for the convenience of the employer.

Which of the following statements accurately reflect the characteristics of a Section 457 plan? I- Benefits taken as periodic payments are treated as ordinary income for taxation. II- Lump-sum distributions are eligible for 5-year and/or 10-year averaging. III- Deferred amounts are subject to Social Security and Medicare taxes at the later of: performance of services or employee becomes vested in the benefits. IV- Income tax withholding is not required until funds are actually received as opposed to constructively received. V- Cannot exceed the smaller of $22,500 or 100% includible compensation in 2023. A- I, III and V only. B- II, IV and V only. C- I, II, IV and V only. D- I, II, III, IV and V.

Solution: The correct answer is A. There are no special tax advantages provided for 457 plans distributed in a lump-sum. Income tax withholding is required once the benefits are constructively received, even if not actually received.

Which of the following vesting schedules may a top-heavy qualified profit sharing plan use under PPA 2006? A: 1-5 year graduated B: 5-year cliff C: 3-7 year graduated D: 4-8 year graduated

Solution: The correct answer is A. Under PPA 2006, a profit sharing plan must utilize a vesting schedule which provides a participant with vested benefits at least as rapidly as either a 2-6 year graduated vesting schedule or a 3 year cliff vesting schedule, without regard to its top heavy status. Option A is the only vesting schedule that meets this requirement. Employers can always be more generous than the standard vesting schedule, meaning they can vest faster.

Generally, younger entrants are favored in which of the following plans? I- Defined benefit pension plans. II- Cash balance pension plans. III- Target benefit pension plans. IV- Money purchase pension plans. A- IV only. B- II and IV only. C- I and III only. D- II, III and IV only.

Solution: The correct answer is B. Cash Balance and Money Purchase Pension Plans favor younger entrants. Defined Benefit and Target Benefit Pension Plans favor older age entrants with less time to accumulate, and therefore, require higher funding levels.

Calculating the amount which must be saved each year in order to meet a retirement income goal would be decreased by which of the following: I- Assumption of capital utilization after retirement. II- Increased longevity due to improved medical technology. III- Increased rates of return (in excess of assumed rates in the plan). IV- Increased inflation. A- I and III only. B- I, III and IV only. C- II and IV only. D- II and III only.

Solution: The correct answer is A. Using up retirement capital and receiving a higher-than-expected rate of return would reduce the amount needed to be put aside each year. Statements "II" and "IV" would increase the funding required. For example: If I want 40,000 in retirement and believe I can earn 8%, let's say for 20 years. Capital preservation - I need $500,000 at the beginning of retirement (40,000 / .08) Capital utilization - I need $424,143 at the beginning of retirement (use a TVM calculation to arrive at this number)

On January 1, last year, Randy was awarded 15,000 ISOs at an exercise price of $3 per share when the fair market value of the stock was equal to $3. On April 17, of the current year, Randy exercised all of his ISOs when the fair market value of the stock was $5 per share. At the date of exercise, what are the tax consequences to Randy? A: $0 W-2 income, $30,000 AMT adjustment B: $0 W-2 income, $75,000 AMT adjustment C: $30,000 ordinary income, $30,000 AMT adjustment D: $75,000 ordinary income, $0 AMT adjustment

Solution: The correct answer is A. When an ISO is exercised, the appreciation in excess of the exercise price is an AMT adjustment. In this case, Randy would have an AMT adjustment equal to $30,000 (15,000 × $2 appreciation).

A business valued at $4,000,000 has 4 partners. The partnership purchases a life insurance policy on each partner's interest. This is an example of: A: A buy-sell entity insurance plan. B: A partnership buy/sell plan. C: A buy-sell cross-purchase insurance plan. D: A key person plan.

Solution: The correct answer is A. When the entity purchases a life insurance policy on each partner, it is known as a buy-sell entity insurance plan.

Prince, age 60, is the sole member of Symbols, LLC. Symbols sponsors a 401(k) / profit sharing plan. Prince's self-employment income (after expenses) was $123,000 and his self-employment taxes were $17,400 for the year. What is the maximum that could be contributed by the employer and Prince for the benefit of Prince for 2023? A- $45,360 B- $52,860 C- $44,100 D- $54,600

Solution: The correct answer is B.

Perry operates In-N-Out Pharmacy, a sole proprietorship. In-N-Out sponsors a profit sharing plan. Perry had net income of $205,000 and paid self employment taxes of $23,197 (assumed) during the year. If Perry makes a 15% of salary contribution on behalf of all of his employees to the profit sharing plan, how much is the contribution to the profit sharing plan on behalf of Perry? A: $24,100 B: $25,220 C: $29,010 D: $30,750

Solution: The correct answer is B. $205,000 Net Income ($11,598.50) Less 1/2 SE Tax $193,401.50 Net SE Income × 0.1304 (SE Contribution rate: 0.15/1.15) $25,219.55 (round up to 25,220)

Your client, Sue, age 35, is covered by a pension plan at work. Her spouse, Harry (also 35), is not. Her salary is $45,000 and his salary is $50,000. How much can he deduct based on current year limits, if he contributes 2% of his salary through payroll deduction to an IRA? A- $500 B- $1,000 C- $3,000 D- $6,500

Solution: The correct answer is B. 2% of $50,000 is $1,000. And that is all the question asks for. He is not an active participant but his spouse is so he is subject to the higher deductibility phase-outs $218,000-$228,000. Harry could contribute up to $6,500 (2023) in the current year. The entire contribution (at any level) would be tax-deductible since their joint AGI is below the threshold.

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.

Solution: 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.

Donald and Daisy are married and file jointly. They are both age 42, both work, and their combined AGI is $127,000. This year Donald's profit sharing account earned over $5,000. Neither he nor the company made any contributions and there were no forfeitures. Daisy declined to participate in her company's defined benefit plan because she wants to contribute to and manage her own retirement money. (Her benefit at age 65 under the plan is $240 a month.) How much of their $13,000 IRA contribution can they deduct? Assume that $6,500 is contributed to each account. A- $6,500 B- $9,425 C- $10,075 D- $13,000

Solution: The correct answer is B. Daisy is an active participant. She cannot opt out of a defined benefit plan. Reduction = 6,500 × [(127,000-116,000) ÷ 20,000] Reduction = 3,575 $6,500 - $3,575 = $2,925 deductible contribution. Donald is not active in the current year so he is eligible for a spousal IRA of $6,500 Their total deductible contribution would be: $6,500 + $2,925= $9,425 Formula: Contribution × [(your AGI - the bottom of the phase out range) divided by the amount of the range (136,000-116,000 is where the 20k comes from)]

Match the following statement with the type of retirement plan which it most completely describes: "A plan which requires annual employer contributions equal to a formula determined by each participant's salary" is a... A- Profit sharing plan. B- Money purchase plan. C- SIMPLE IRA. D- Defined benefit plan.

Solution: The correct answer is B. Defined benefit plan and cash balance plan (Answer "D") contributions are determined by age, as well as salary. Answer "A" doesn't require annual contributions. Answer "C" has employer contributions determined by the amount of employee deferrals.

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 $265,000 (2023) per year.

Solution: 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.

Of the following expenditures, which is most likely to increase during retirement? A- Automobile expenses. B- Medical expenses. C- Travel expenses. D- Mortgage expense.

Solution: The correct answer is B. Each of these expenses may increase or decrease during an individual's retirement, but the most likely expense to increase during retirement is an individual's medical expenses.

Which of the following accurately describes the benefits of a Section 125 Cafeteria Plan? A- Cafeteria plans provide family benefits which are homogenous. B- Under a cafeteria plan, a family can effectively create its own benefit plan by the rational selecting of options available. C- The law requires the employer to offer at least three options that provide cash benefits. D- The law requires that at least two statutory non-taxable benefits be available.

Solution: The correct answer is B. Family benefit needs are rarely homogenous, but vary from family to family. These unique family needs are met though a cafeteria plan because each family can tailor their benefit package to best meet those needs. Cafeteria plans, by law, must offer at least one taxable "cash" benefit, and one "pre-tax" benefit. The only tax deferral option allowed under Section 125 cafeteria plan is a 401(k). This is a statutory restriction.

Your client, Jill, age 49 in the current year, has earned income of $3,500. Her spouse, James, is retired. They also receive $30,000 per year from his pension and $100,000 in installment income from the sale of a business. Jill put $1,000 into a traditional IRA. They each decide to invest in a Roth IRA. What is the most Jill can put into her personal Roth IRA? A- $500 B- $2,500 C- $3,500 D- $5,500

Solution: The correct answer is B. Jill is limited to a maximum IRA contribution of $6,500 (2023) or 100% of earned income ($3,500) since their joint AGI is below the Roth IRA phase-out threshold. She has already contributed $1,000 to traditional IRA, so maximum available for the Roth is $2,500 ($3,500 earned less $1,000).

Judy is covered by a $200,000 group-term life insurance policy of which her daughter is the sole beneficiary. Judy's employer pays the entire premium for the policy, for which the uniform annual premium is $0.75 per $1,000 per month of coverage. How much, if any, of the cost of the group-term life insurance is excluded from Judy's gross income on an annual basis? A: $0 B: $450 C: $1,350 D: $1,800

Solution: The correct answer is B. Judy can exclude the cost of up to $50,000 of group term life insurance coverage. In this case, the cost of $50,000 of coverage is $450 (50 ($50,000/$1,000) × 0.75 × 12 months).

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

Solution: 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 × .2 = $20,000 maximum contribution for the business owner.

Maxine, age 35, earns $200,000 annually from ABC Incorporated. ABC sponsors a SIMPLE, and matches all employee deferrals 100% up to a 3% contribution. What is the maximum employee deferral contribution to Maxine's SIMPLE account for this year, 2022? A: $6,000 B: $14,000 C: $17,000 D: $20,000

Solution: The correct answer is B. Maxine can defer up to $14,000, the maximum SIMPLE deferral for 2022. ABC can match Maxine up to 3% of her compensation, or $6,000 (3% × $200,000). The maximum contribution to Maxine's SIMPLE is $20,000 ($14,000 + $6,000), but the question asked for the maximum employee deferral - thus $14,000.

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.

Solution: 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.

Carleen has a vested 401(k) plan balance with her employer in the amount of $420,000. Eight months ago, Carleen borrowed $30,000 from the plan. She paid back the outstanding loan balance last month. What is the maximum loan Carleen can take from the plan today? A- $0. B- $20,000. C- $50,000. D- $160,000.

Solution: The correct answer is B. Participants are generally eligible to borrow up to $50,000 or half of the vested balance in a 401(k) plan, whichever is less. However, the $50,000 limit is reduced by the difference between the highest outstanding balance of all of the participant's loans during the 12-month period ending on the day before the new loan and the outstanding balance of the participant's loans from the plan on the date of the new loan. Therefore, Carleen may borrow $20,000 from the 401(k) plan today ($50,000 less $30,000 previous loan).

Shawnte has AGI of $1,000,000 (which is all comprised of earned income). She is single and age 55. She participates in her employer's 457 plan. Which of the following statements is true? A- She can contribute $6,500 to a Traditional IRA and deduct all $6,500. B- She can contribute $7,500 to a Traditional IRA and deduct all $7,500. C- She can contribute $6,500 to a Traditional IRA and deduct $0. D- She can contribute $7,500 to a Traditional IRA and deduct $0.

Solution: The correct answer is B. Participating in a 457 plan is not considered being an "Active Participant." She can contribute and deduct her contribution to a Traditional IRA $6,500 (2023) since she is not an active participant and therefore not subject to an AGI limitation. She is unable to contribute to a Roth IRA because she is above the AGI limitation of $138,000 - $153,000 (2023). Because she is 50 or older she is allowed to make the $1,000 (2023) catch up contribution.

Which of the following qualified retirement plans are subject to mandatory minimum funding requirements? I- Defined benefit pension plans. II- Profit sharing plans. III- Money purchase pension plans. IV- Target benefit plans. V- Section 401(k) plans. VI- SIMPLE IRA. A- I, II, III and IV only. B- I, III and IV only. C- II, V, and VI only. D- I and IV only.

Solution: The correct answer is B. Profit sharing plans (including 401(k) plans) are exempt from minimum funding requirements, as are SIMPLE IRA plans. All pension plans are subject to minimum funding requirements.

All of the following are acceptable reasons for an employer to terminate a qualified retirement plan except: A- The employer is no longer in a financial position to make further plan contributions. B- The employer no longer wants to maintain the plan because it must cover other employees other than just himself. C- The plan benefits are not meaningful amounts, and participants are limited in their ability to make deductible IRA contributions. D- To lower plan costs and ease administrative complexity, the employer wants to switch plan designs.

Solution: The correct answer is B. Retirement plans must not be created as a tax shelter for the owner. If they have been, plan termination can result in retroactive disqualification. All other statements are acceptable reasons to terminate a qualified retirement plan.

All of the following are acceptable reasons for an employer to terminate a qualified retirement plan except: A: The employer is no longer in a financial position to make further plan contributions. B: The employer no longer wants to maintain the plan because it must cover other employees other than just himself. C: The plan benefits are not meaningful amounts, and participants are limited in their ability to make deductible IRA contributions. D: To lower plan costs and ease administrative complexity, the employer wants to switch plan designs.

Solution: The correct answer is B. Retirement plans must not be created as a tax shelter for the owner. If they have been, plan termination can result in retroactive disqualification. All other statements are acceptable reasons to terminate a qualified retirement plan.

Sean, age 75 and Jaclyn, age 45, are married filing joint and have AGI of $200,000 (which is all comprised of earned income). Neither are active participants in a qualified plan. If they contributed the maximum allowed by law to their Traditional IRAs what is their available Above the Line Deduction for these contributions? A- $15,000 B- $14,000 C- $13,000 D- $6,500

Solution: The correct answer is B. Since they are not active participants there is no AGI limitation. Both Sean and Jaclyn are able to make a $6,500 (2023) deductible contribution. Sean can make a catch up contribution of an additional $1,000. Jaclyn does not qualify for the catch up because she is not 50 or older. SECURE Act removed the age limitations on IRA contributions. An individual only needs earned income to contribute.

An actuary establishes the required funding for a defined benefit pension plan by determining: A- The lump sum equivalent of the normal retirement life annuity benefit of each participant. B- The amount of annual contributions needed to fund single life annuities for the participants at retirement. C- The future value of annual employer contributions until the participant's normal retirement date, taking an assumed interest rate, the number of compounding periods, and employee attrition into account. D- The amount needed for the investment pool to fund period certain annuities for each participant upon retirement.

Solution: The correct answer is B. The actuary makes assumptions about future inflation, expected wage increases, life expectancy of the assumed retirees, expected investment returns on plan assets, expected mortality rates for retirees, and expected forfeitures resulting from termination. Statement "A" is incorrect because it states a lump sum, NOT annual contributions. Statement "C" is incorrect because DB plans deal with present value calculations, not future values. Statement "D" is incorrect because DB plans deal with life annuities, NOT period certain annuities.

You have been hired to analyze the retirement prospects of Tom and Jerri Ruhn. It has been determined they need a retirement capital account of $2,750,000 at retirement which will occur in 30 years. They expect to live in retirement for 35 years. They are anxious to start a savings program to meet this goal. They anticipate an average after-tax rate of return equal to 7%. They are planning on 5% annual inflation. What level of savings put away at the end of each year will provide the Ruhn family with their desired retirement fund? A- $27,208 B- $29,113 C- $67,787 D- $68,884

Solution: The correct answer is B. The client has given us the capital account they want at retirement in 30 years. If it said in today's dollars or the equivalent, then you would account for inflation. That information was a distractor in this question. N = 30 I = 7 PV = 0 PMT = 29,113 FV = 2,750,000

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.

Solution: 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 statement concerning a loan provision for loan to consolidate debt, taken from a qualified retirement plan 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.

Solution: 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. SECURE 2.0 only changed loans provisions for qualified individuals in qualified federally declared disaster zones.

Dr. Dylan James is a 55-year-old Doctor who just started his gastroenterologist practice and hired Nurse Nancy, who is age 25. Dr. DJ is expected to earn annual income of $350,000 that will increase at least at the rate of inflation. Inflation is expected to be 3 percent. Which of the following defined benefit plan formulas would you recommend if Dr. DJ wants to maximize his benefits in retirement, which is expected to occur at age 65? I- Unit benefit (a.k.a. percentage-of-earnings-per-year-of-service) formula. B- Flat-percentage formula. C- Flat-amount formula. D- New comparability formula.

Solution: The correct answer is B. The unit credit formula rewards many years of service. The flat percentage formula will work well, as long as the Doctor has ten years of service. The maximum benefits under IRC 415(b) are reduced for participation less than 10 years. The flat amount would provide higher benefits for Nurse Nancy compared to Dr. DJ on comparative basis. A new comparability plan is a profit sharing plan.

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.

Solution: The correct answer is B. When she made the 83b election she would have recognized W-2 income of $2,000 (1,000 × $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 × ($15 - $2)). If she sold the stock for $28 then she would have long term capital gain of $26,000 (1,000 × ($28 - $2)). If she sold the stock for $38 then she would have long term capital gain of $36,000 (1,000 × ($38 - $2)).

A correct statement regarding a defined benefit plan is that it: A- Requires 100% immediate vesting of employer contributions. B- Can be fully invested in employer stock. C- Must offer a qualified joint and survivor annuity distribution option. D- Is prohibited from having life insurance as an investment.

Solution: The correct answer is C. A is incorrect. A defined benefit plan is permitted to implement vesting schedules. B is incorrect. A defined benefit plan can only have up to 10% of the plan assets invested in employer stock. D is incorrect. Defined benefit plans may be funded with life insurance and annuities.

Which of the following clauses in a 401(k) 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.

Solution: The correct answer is C. A negative election clause can assist a 401(k) 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. Options "A" and "D" do not exist and Option "B" is a clause commonly found in a will.

In order to be qualified, money purchase plans must contain which of the following? I- A definite and non-discretionary employer contribution formula. II- Forfeitures can be reallocated to the remaining participants' accounts in a non-discriminatory manner or used to reduce employer contributions. III- An individual account must be maintained for each employee of employer contributions. D- The normal retirement age must be specified. A- I and II only. B- II and IV only. C- I, II and III only. D- II, III and IV only.

Solution: The correct answer is C. A normal retirement age must be stated in a defined benefit plan, so Statement "IV" is incorrect. Defined contributions plans (such as a money purchase plan) have retirement benefits which are determined by the value of the individual account whenever the participant retires. Forfeitures may be allocated to employees' individual accounts or used to reduce employer required contributions.

Which of the following persons would be considered a fiduciary of a qualified plan? I- Person who determines plan benefits of participants. II- Anyone who provides services to the plan. III- Person with discretionary authority over disposition of plan assets. IV- Person who provides investment advice for a fee. A- I and II only. B- II and III only. C- III and IV only. D- I, II and III only.

Solution: The correct answer is C. Accountants, printers or anyone providing services wherein they do not have actual control of the funds would not be considered a fiduciary of a qualified plan. An investment advisor, of course, would be considered a fiduciary of the plan.

Alison earned $100,000 during the year. She elected to defer $4,000 of her earnings into her employer's 401(k) plan and her employer matched this deferral dollar-for-dollar. In this year, what amount of Alison's earnings were subject to payroll taxes? A: $92,000 B: $96,000 C: $100,000 D: $104,000

Solution: The correct answer is C. Alison's earnings of $96,000 that were not deferred to the 401(k) plan would be subject to payroll taxes plus her deferrals of $4,000 to the 401(k) plan would be subject to payroll taxes. The employer's matching contributions are not subject to payroll taxes. The amount subject to payroll taxes would be $100,000 ($96,000 + $4,000).

Marilyn Hayward is the sole proprietor and only employee of unincorporated Graphics for Green Promotions. In 2023, Marilyn established a profit sharing Keogh plan with a 25% contribution formula. As of December 31, 2023, Marilyn has $140,000 of Schedule C net earnings. The deduction for one-half of the self-employment tax is, therefore, $9,891. What is the maximum allowable Keogh contribution that Marilyn can make (rounded to the nearest dollar)? A- $22,500 B- $23,716 C- $26,022 D- $28,000

Solution: The correct answer is C. Half of the self-employment tax is given, you can skip the 1st step in the self-employment contribution formula (multiplying by 92.35%) 140,000 - $9,891 = 130,109 x 20%*= 26,022*The 20% is from the contribution rate formula: contribution rate / (1 + contribution rate) = self-employment contribution rate.25/ (1+.25) = .20. Note that if the employer has employees and contributes 15% for them, that is the contribution rate to use in this formula.

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- $22,500 B- $19,000 C- $17,000 D- $15,500

Solution: The correct answer is C. He can contribute $15,500 (2023) and his employer will match $1 for $1 up to 3% of salary ($50,000 × .03 = $1,500). Therefore, maximum contribution is $15,500 + $1,500 = $17,000.

Your client wishes to make a $5,000 contribution to a Roth IRA. The following are sources of income listed on her data form. Which types of income will be used to calculate the maximum allowable contribution? I- $5,000 from a Limited Partnership interest. II- $1,500 from a home-based business. III- $20,000 in municipal bond interest. IV- $3,000 from child support payments. V- $250 capital gains distributed from a mutual fund. A- I, II and V B- II, IV and V C- II only D- II and V

Solution: The correct answer is C. Only earned income qualifies for contributions into an IRA. All of the other sources of income are forms of unearned income.

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.

Solution: 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 one of the following is a possible disadvantage of a Simplified Employee Pension plan (SEP) for an employer? A- The SEP's trustee is subject to ERISA's prohibited transaction excise tax penalties. B- A SEP must have a fixed contribution formula that is non-discriminatory. C- SEPs prohibit forfeitures. D- Employer contributions to a SEP are subject to payroll taxes.

Solution: The correct answer is C. Options "A" and "D" are false. Option "B" is a mandatory characteristic of all qualified defined contribution pension plans but not profit sharing plans.

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. A- I and III only. B- II and IV only. C- I, II and IV only. D- I, II, III and IV.

Solution: 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.

Tara is a participant in Kean Co.'s defined benefit plan and standard 401(k) plan. Tara, who is a mid-level manager, is 44 years old and earns $100,000. She has five years of service for purposes of the plans and has worked at Kean for five years. The plan provides a benefit of 2% for each year of service. Both plans have the least generous graduated vesting schedule possible. Almost eighty percent of the accrued benefits in the defined benefit plan are attributable to the rank and file employees, and not the owners. According to the actuary, Tara's accrued benefit in the defined benefit plan is $10,000. Over the last five years, Tara has deferred a total of $30,000 from her salary, which has grown to $40,000. In addition, Kean has matched these contributions with $15,000, which is now worth $20,000. If Tara were to leave today, how much could she rollover into a new employer's plan? A- $70,000 B- $64,000 C- $62,000 D- $57,000

Solution: The correct answer is C. The DB plan is not top heavy. Therefore, the vesting for the DB plan is a 7 year graded schedule and he is 60% vested in the $10,000. She is 100% vested in the $40,000, but only 80% vested in the employer matching contribution. This question requires you to know the vesting schedules, which are not provided on the exam. For DB either 5 year cliff or 7 year graded, for DC 3 year cliff or 6 year graded. DB DC Yr 1 0% 0% Yr 2 0% 20% Yr 3 20% 40% Yr 4 40% 60% Yr 5 60% 80% Yr 6 80% 100% Yr 7 100% -- DB plan has 10,000 and is 60% vested = 6,000 DC Employee contribution is $40,000 (100% vested) DC Employer match is 20,000 and is 80% vested = 16,000 Total vested is $62,000

Which one of the following statements is NOT correct? A- Profit-sharing plans fall under the broad category of defined contribution plans. B- Profit-sharing plans are best suited for companies which have unstable cash flows. C- A company which adopts a profit-sharing plan is required to make annual contributions to the plan. D- The maximum tax-deductible employer contribution to a profit-sharing plan is 25% of covered compensation.

Solution: The correct answer is C. The employer is not required to make any particular percentage of profits. Though contributions must be substantial and recurring, the plan concerns itself more with allocation requirements rather than with contributions. As long as contributions are recurring, they need not be made in a year where the employer has not made a profit.

Match the following statement with the type of retirement plan which it most completely describes: "The plan permits the employer match to deviate below the required percentage in two of the last five years" is a... A- Profit sharing plan. B- Money purchase plan. C- SIMPLE IRA. D- Defined benefit plan.

Solution: The correct answer is C. The match for a profit sharing plan with 401(k) provisions can vary every year and there is no required percentage. However, a SIMPLE can vary the match in only 2 of 5 years.

Corey, age 54 and single, has compensation this year of $85,000. His employer does not sponsor a qualified plan, so Corey would like to contribute to a Roth IRA. What is Corey's maximum contribution for this year to the Roth IRA? A: $0 B: $6,000 C: $7,000 D: $13,500

Solution: The correct answer is C. The maximum Roth IRA contribution is $6,000 plus $1,000 (2022) for those individuals 50 and over. Corey can make a $7,000 contribution to his Roth IRA. Corey is not phased-out (Single Roth IRA phase-out for 2022 is $129,000 to $144,000).

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 $230,000 for 2023? Assume Will is 58 years old. A- $46,000 B- $53,500 C- $66,000 D- $73,500

Solution: The correct answer is C. The most that could be contributed is the annual 415(c) limit of $66,000 for 2023. Choice A is incorrect. There is no indication that if the company contributes 20% that everyone will receive exactly 20%. Choice B is incorrect. It assumes a 20% contribution and catch up contribution, Choice D is incorrect. It assumes a catch up contribution, the catch up contribution can only be made by the employee and not the employer. The question asks for the employer's maximum contribution.

Calculate the maximum contribution that could be contributed 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- $16,800 B- $22,500 C- $39,300 D- $66,000

Solution: The correct answer is C. The question is looking for the maximum contribution for this employee. The wording is key, not "by the employee" or "on behalf of the employee". "For the employee" would consider both the employee and employer contribution. The maximum 401(k) plan employee contribution for an individual under age 50, is $22,500 (2023). The 12% money-purchase plan will add $16,800 ($140,000 × .12). Total contribution is $39,300; $22,500 from the employee and $16,800 from the employer.

Maximum Performance, Inc.'s defined contribution plan has been determined to be top heavy. Which one of the following statements is NOT a requirement that applies to the plan? A- The employer must contribute a minimum of 3% of compensation or the contribution rate of the key employees (whichever is lower) per year to non-excludable, non-key employees for each year that the plan is top heavy. B- If the employer contribution to key employees is 2%, then the employer contribution to non-excludable, non-key employees must be 2%. C- The plan must use a vesting schedule that does not exceed either a 2-year cliff or 6-year graded vesting schedule. D- The plan must fully vest after three years of service if the vesting at two years is zero.

Solution: The correct answer is C. The vesting rules are a 3-year cliff or 2-6 year graded vesting schedule. (Hint: Answer "C" and "D" contradict each other, so it has to be one of these. If you picked up on that, you can easily narrow the questions down to 50/50.)

In order for a pension plan to maintain its qualified status, it must maintain certain characteristics. Which of the following is not a qualifying characteristic? A- Benefits must be definitely determinable under a formula for employer contribution or a formula for retirement benefits. B- Benefits may not be withdrawn prior to termination of employment or retirement. C- Contributions and benefits are determined in the long run by the profits of the employer. D- Generally pays retirement benefits over a period of years.

Solution: The correct answer is C. This is an except question, you are looking for the false statement. Employer contributions may be made without regard to company profits or retained earnings. Answers "A", "B" and "D" are requirements for all qualified plans. In service distributions are allowed, but starting benefits before retirement or separation of services is not.

When calculating the Wage Replacement Ratio (WRR), what percentage of income is subtracted for a self-employed individual for Social Security and Medicare Taxes? A- 7.65% B- 6.20% C- 15.30% D- 13.3%

Solution: The correct answer is C. This is an important point to stress as many clients are self-employed and pay both employer and employee portions of the tax.

Kevin, a 55-year-old corporate executive, wants advice as to when he can retire. His current salary is $240,000 and he receives an annual bonus of $300,000; he also has annual stock options and restricted stock awards valued at $100,000. His employer contributes to a cash balance pension plan and matches his contributions to a 401(k). Kevin owns a whole life insurance policy with a $500,000 death benefit and is considering the purchase of a term policy with a $2,000,000 death benefit. He and his wife, Anne, also age 55, believe they can live on an after-tax income of $180,000. Assume a federal income tax rate of 35%. Kevin's non-qualified stock options are as follows: 2,000 shares, strike price $34 5,000 shares, strike price $30 Current stock price: $65 Kevin's tax bracket: 42% (federal and state) Kevin has decided to exercise the above stock option awards which will expire in the next 2 years. Assuming he exercises them today, what is his tax liability (CFP® Certification Examination, released 8/2012)? A- $35,550 B- $68,250 C- $91,660 D- $99,540

Solution: The correct answer is D Read all the facts carefully. It does state "Kevin's tax bracket: 42% (federal and state)". Non-qualified stock options are taxed on the "bargain element" (difference between the market price and the strike price) as ordinary income when exercised. (Market Price - strike price) × Number of Shares × Tax Rate = Tax Therefore, on the first NQ grant of 2,000 shares the tax is: ($65-34) × 2,000 shares = $62,000 in ordinary income. At 42% tax rate the tax is $62,000 × .42 = $26,040.00 And On the second NQ grant of 5,000 shares the tax is: ($65-30) × 5,000 = $175,000 in ordinary income. At 42% tax rate the tax is $175,000 × .42 = $73,500.00 Total tax therefore is $26,040.00 + $73,500.00 = $99,540.00

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%

Solution: 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.

A non-qualified plan which is subject to the claims of creditors yet is irrevocable and not accessible by the employer is called: A- A Supplemental Executive Retirement Plan (SERP). B- A funded deferred compensation plan. C- An excess benefit plan. D- A Rabbi trust.

Solution: The correct answer is D. A rabbi trust is a irrevocable trust but, unlike a funded deferred compensation plan, the assets are subject to the claims of the employer's creditors. This avoids constructive receipt by the employee and delays income taxation until distribution.

Company A has been capitalized by MJBJ Vulture Capital, a venture capital company. Company A's cash flows are expected to fluctuate significantly from year to year, due to phenomenal growth. They expect to go public within three years. Which of the following would be the best qualified plan for them to consider adopting? A: A profit sharing plan. B: A new comparability plan. C: A 401(k) plan with a match. D: A stock bonus plan.

Solution: The correct answer is D. A stock bonus plan will allow equity participation without the use of cash flows and the public offering will eventually provide liquidity.

Which one of the following unmarried individuals would be eligible to contribute either pre-tax or after tax dollars to a traditional IRA? A- Ralph, age 47, who has been disabled for the last 18 months, and received $2,000 of taxable monthly disability benefits from his employer's group long-term disability insurance plan. B- Stacy, age 71, who received $20,000 of dividend income. C- Mary, age 35, who received $125,000 of net rental income from several rental properties she owns, as well as $5,000 of child support payments from her ex-husband. D- John, age 40, who had a $30,000 net loss from his self-employed plumbing business, as well as W-2 wages of $29,000 from a part-time job.

Solution: The correct answer is D. A taxpayer must have earned income (or their spouse must have earned income) to be eligible to contribute to a traditional IRA. If a taxpayer has a net loss from self-employment, this does not affect their ability to contribute to a traditional IRA if the individual has wages reportable on Form W-2. Since John has $29,000 of W-2 income, he is eligible to contribute to a traditional IRA. A is incorrect. Disability payments are considered annuity payments, rather than compensation, when determining if an individual has earned income for purposes of determining eligibility to contribute to a traditional IRA. B is incorrect. Stacy does not have earned income. C is incorrect. Rental income is not considered earned income for purposes of determining if an individual is eligible to contribute to a traditional IRA. Although taxable alimony received is considered earned income, child support payments received are not considered earned income for IRA contribution purposes.

Which of the following is pertinent when an employee is faced with the decision to stay with the old pension formula or to switch to the new cash balance plan formula? I- Retirement expectations. II- Intent to begin receiving benefits. III- Current value of accrued benefits. IV- Possibility that needs may change. A- II and III only. B- I, III and IV only. C- I, II and IV only. D- I, II, III and IV.

Solution: The correct answer is D. All are reasons one should consider when contemplating a plan change.

Ellie's Toy Store provides group health insurance to its 17 employees. After two employees are recruited away by a national chain, Tot Town, Ellie was upset and didn't offer them the opportunity to purchase continuation coverage under COBRA. Which one of the statements below is accurate? A- Ellie must pay a penalty of $100 per day for each day that continuation coverage wasn't offered. B- Ellie is required to pay any claims incurred by the ex-employees until they are offered continuation coverage. C- Ellie is no longer able to deduct health insurance premiums. D- Ellie does not have to offer COBRA coverage.

Solution: The correct answer is D. Ellie only has 17 employees. The mandated COBRA requirement does not take effect until the employer has 20 or more employees.

A non-qualified deferred compensation plan that provides the targeted key employees with only a promise to pay benefits at a future time is known as: A- A Supplemental Executive Retirement Plan (SERP). B- A funded deferred compensation plan. C- An excess benefit plan. D- An unfunded deferred compensation plan.

Solution: The correct answer is D. In the unfunded defined compensation plan, no assets are segregated (as in a rabbi trust or taxable trust), so the plan is considered unfunded even though the employer may establish a pool of assets to meet the obligation. Those assets are still owned by the employer and subject to the creditors of the employer.

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

Solution: 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.

To calculate a retirement shortfall, which of the following steps can be useful: I- Convert all post-retirement cash flows into a present value at retirement age. II- Establish the income replacement ratio needed at retirement. III- Determine the projected future value of present assets to date of retirement. IV- Inflate present living expenses to date of retirement. V- Determine the exact rate of inflation until retirement. A- I and III only. B- II and IV only. C- I, III and V only. D- I, II, III and IV only.

Solution: The correct answer is D. It is impossible to calculate an exact inflation rate for the future. Only assumptions concerning inflation can be made.

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- $50,000 B- $66,000 C- $265,000 D- Cannot be determined by the information given.

Solution: 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 $66,000 (2023) or covered compensation however, the actual retirement benefit will be whatever is in the account balance at the time of retirement.

James is employed by a large corporation with 400 employees. The corporation provides its employees with a no-cost gym membership at the local public YMCAs. The cost of the membership is $60/month which is completely paid for by James' employer for all employees. How much, if any, must James include in his yearly gross income related to this fringe benefit? A: $0 B: $60 C: $600 D: $720

Solution: The correct answer is D. James must include the full cost paid by his employer in his adjusted gross income. The exclusion for payment of health club facility dues is only provided when the facilities are on the employer's business premises, and are solely for the use of the employees and the employee's family. In this example, James' employer provides a membership at a public YMCA so the fringe benefit is taxable.

Which of the following would be considered an "incidental benefit" if offered through a defined contribution plan? A- Term life insurance coverage with premiums equal to 30% of the total cost of benefits. B- Universal life insurance coverage with premiums equal to 34% of the total cost of plan benefits. C- Ordinary life insurance coverage with premiums equal to 57% of the total cost of plan benefits. D- Term life insurance coverage with premiums equal to 25% of the total contributions to the participants account.

Solution: The correct answer is D. Life insurance in a qualified plan is limited, under the incidental benefit rule, to 25% of aggregate contributions to the participant's account for Term and Universal life plans. Whole life plans may constitute 50% of the contribution.

Which of the following plans must meet the requirement for a qualified joint and survivor annuity? I- Defined benefit plans. II- Profit sharing plans. III- Target benefit plans. IV- Money purchase plans. A- I only. B- I and III only. C- I, II and III only. D- I, III and IV only.

Solution: The correct answer is D. Only pension plans are required to have a joint and survivor annuity option. Profit sharing plans (including ESOPS) are NOT required to have a joint and survivor annuity option.

Brisco, age 51, is the Executive VP of sales at Doggie Daycare (DD). His base salary is $340,000 with a potential bonus of 50%. Brisco is a participant in his employer's 401(k) plan and always defers the maximum amount. The DD 401(k) plan has the following features and characteristics: Includes a Roth account that is not a safe harbor plan, but has a 50% match up to 4%. The ADP for the NHC is 4.5%. The plan has $3 million in assets that are managed by two asset management firms. DD also sponsors a defined benefit plan that provides a benefit based on years of service and final salary. The DD DB plan provides for 1.5 percent per year of service for the first 20 years and 2 percent for years above 20, up to a max of 35 years. On the weekends, Brisco paints murals. His entity, Wall Works LLC (WW), is a single owned LLC taxed as a disregarded entity. Brisco would like to establish a retirement plan for the income that he earns in WW. He expects to earn $60,000 every year in WW and wants to know what the best retirement plan is for his business. Which plan would you recommend for him? A- SIMPLE B- Defined Benefit Plan C- 401(k) plan D- SEP

Solution: The correct answer is D. Neither a SIMPLE nor a 401(k) plan will work because he is already deferring $21,450 (6.5% (4.5% + 2%)) times $330,000) to his 401(k) plan. Therefore, the choices are a defined benefit plan (expensive to set up and fund) or a SEP, which is extremely easy to set up and one that he can contribute around $11,000 to annually. He is currently contributing 6.5% of salary capped at $330,000 for 2023, which is $21,450 The most he can contribute is $22,500. A 401k is rather expensive with ongoing filing for him to contribute $1,050. The most he can do is a match as the employer, the 401k did not state it had a Profit sharing component (nor did it state it was a solo 401k). A SEP is much cheaper to set up and has no annual report requirements like the 401k. He was be able to contribute as an employer to the SEP, which will be based on 20% of net income, around the $11,000 amount (without doing the full self-employment calculation).

Each of the following is a characteristic of a defined benefit retirement plan EXCEPT: A: The plan specifies the benefit an employee receives at retirement. B: The law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of salary or $245,000 (2022) per year currently. C: The plan has less predictable costs as compared to defined contribution plans. D: The plan assigns the risk of pre-retirement inflation, investment performance, and adequacy of retirement income to the employee.

Solution: The correct answer is D. Option D describes characteristics of a defined contribution plan. Defined benefit plans assign the risk of pre-retirement inflation, investment performance, and adequacy of retirement income to the employer, not the employee. DB plans have three benefit calculations covered in your textbook; unit benefit, flat dollar and flat percent. Only unit benefit uses 100% of average final compensation (or average highest 3 years). All use the max benefit of $245,000 (2022).

Which of the following statements concerning rabbi trusts is correct? A- A rabbi trust generally makes distributions to the executive to pay for income tax attributable to the earnings within the trust. B- A rabbi trust calls for an irrevocable contribution from the employer to finance promises under a nonqualified plan, and funds held within the trust cannot be reached by the employer's creditors. C- A rabbi trust can only be established by a religious organization exempt from tax under IRC 501(c)(3). D- A rabbi trust is established to avoid constructive receipt.

Solution: The correct answer is D. Option a is not correct and more common in a secular trust. Option b describes a secular trust. Option c is a false statement.

Which plans listed below are subject to the Qualified Joint and Survivor Annuity requirement? I- Cash balance plan. II- Target benefit plan. III- Defined benefit plan. IV- Money purchase plan. A- I only. B- I, II and III only. C- II, III and IV only. D- I, II, III and IV.

Solution: The correct answer is D. Pension plans are required to offer a QJSA to participants. All of these plans are pension plans. A profit sharing plan is not subject to QJSA requirements.

Which of the following is not true of a short-term disability plan? A- Has a more generous definition of disability than long-term plans. B- Premiums paid under an insured plan are deductible by the employer. C- Payments made by an employee are generally not tax deductible. D- Benefit payments under an employer-paid plan are tax exempt to the employee.

Solution: The correct answer is D. Premiums under an employer-paid plan are deductible to the employer when paid to the insurance company. The employee must claim the benefits from the employer-paid policy as taxable income. If employees pay for the premium on an after-tax basis, benefits are tax exempt. Premiums paid by the employee are deductible only though a Section 125 cafeteria plan, then benefits are taxable. Definitions of disability are much more liberal under short-term disability than under long-term disability.

Copies-R-Us (CRU) is a small printing company. Chad A. Ream is the owner of the company and earns $100,000. CRU has three employees, all who have worked at least two years. The company establishes a 10% money purchase plan this year. Chad wants to maximize the time it takes for employees to become fully vested in the plan. Total covered payroll is $165,000. Which of the following vesting schedule is most appropriate for this plan? A- 2-year cliff vesting. B- 3-year cliff vesting. C- 5-year cliff vesting. D- 2-6 year graded vesting.

Solution: The correct answer is D. Ream is receiving 61% of the covered payroll. Therefore, he will be receiving 61% of the contribution into the plan. This means the plan is top-heavy. The only vesting schedules which will be allowed are Answers "A", "B" or "D." While Answers "A" and "B" would be allowed, the current participation could put all employees in a position of being fully vested immediately or in one year. Therefore, Answer "D" is the most appropriate answer.

Which of the following tasks are the primary responsibilities of a plan trustee? I- Determining which employees are eligible for participation in the plan, vesting schedule, and plan benefits. II- Preparing, distributing, and filing reports and records as required by ERISA. III Investing the plan assets in a "prudent" manner. IV- Monitoring and reviewing the performance of plan assets. A- I and III only. B- I and II only. C- II and IV only. D- III and IV only.

Solution: The correct answer is D. The duties explained in Statements "I" and "II" are responsibilities of the plan administrator.

Which of the following is NOT true concerning eligibility or "waiting periods"? A- A qualified plan can require a waiting period of up to two years. B- In order to have graded vesting, the eligibility period must be no longer than 12 months. C- Any plan which has an eligibility period exceeding 12 months must have immediate vesting. D- The eligibility period can vary between classes of employees.

Solution: The correct answer is D. The eligibility requirements must be the same for all employees. All other statements are accurate.

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.

Solution: 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.

Elaine, age 28, wants to put the maximum contribution into her TSA offered through her school in the current year. Her annual salary is $42,000 per year. There are no make-up provisions available to her. How much can Elaine put into her TSA for this year? A- $42,000 B- 33,000 C- $30,000 D- $22,500

Solution: The correct answer is D. The maximum deferral is $22,500 (2023).

If a stock option is vested when it is received, and has a readily ascertainable value it is: A- Assigned that value for taxation purposes. B- Taxable when the stock is sold. C- Taxable as soon as it is exercised. D- Immediately taxable.

Solution: The correct answer is D. Vested options are taxable based on the value of the option to the extent the Fair Market Value exceeds the option price.

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.

Solution: 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.

Which transactions between a disqualified person and a qualified plan would be considered prohibited transactions under ERISA? I-The employer purchases a mortgage note which is currently in default for more than the fair market value. II- The employer sells a piece of raw (undeveloped) land to the qualified plan for a price substantially below fair market value. III- Loan to a 100% owner/participant on the same basis as every other participant as set forth in the plan documents. IV- The purchase of employer stock for full and adequate consideration by a 401(k) plan. A- I and II only. B- II and III only. C- I, II and III only. D- I, II and IV only.

Solution: The correct answer is A. Any transaction between a disqualified person and the trust is considered a prohibited transaction. In Statement "I," the employer could purchase the mortgage note at a markup to future market value, thus giving the pension (and consequently his own individual retirement account) a big boost in value, then sell the note to someone else and take a loss on their personal income tax. Thus, in essence making additional contributions to the plan. Statement "II" would accomplish the same purpose. Employer's individual taxes would be reduced (lower profit on sale to the plan) but would have a dramatic increase in retirement plan assets.

Which of the following vesting schedules may a top-heavy qualified profit sharing plan use? A- 1 to 5 year graduated. B- 5-year cliff. C- 3 to 7 year graduated. D- 4 to 8 year graduated.

Solution: The correct answer is A. As a result of the PPA 2006, qualified profit sharing plans must use a vesting schedule that provides participants with vested benefits at least as rapidly as either a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule. This requirement applies without regard to whether the profit sharing plan is a top-heavy plan. Options b, c, and d all vest less rapidly than the required schedule.

An advantage of having employer stock in a qualified plan is that: A- The net unrealized appreciation is not taxed at the time of distribution if a lump sum distribution is taken. B- Only the stock can be rolled over tax-free to an IRA after the participant separates from service. C- Dividends received by the participant are tax-free as long as the stock remains inside the qualified plan. D- The stock receives a step-up in basis to fair market value at the time of distribution.

Solution: The correct answer is A. B is incorrect. The entire qualified plan, not just the stock, can be rolled over to an IRA tax-free. C is incorrect. Dividends paid in cash to qualified plan (such as ESOPs) participants and beneficiaries constitute ordinary income to the participants and beneficiaries, and they are subject to income tax. There is no early withdrawal penalty on these distributions, however. D is incorrect. The stock does not receive a step-up in basis when it is distributed from the qualified plan.

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 $220,000 at Gamma and $60,000 at Epsilon what is the maximum employer contribution that can be made to both plans? A- $66,000 B- $70,000 C- $74,000 D- $77,500

Solution: 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 $66,000. (25% of $280,000 is $70,000 but the single employer limit applies and is $66,000 (2023). The employer does not contribute the catch-up amount, the taxpayer would contribute that in a contributory plan, which a Money Purchase Plan is not.

Target benefit plans and defined benefit plans have which of the following characteristics in common? I- Minimum funding standards apply. II- Qualified joint and survivor annuity requirements apply. III- High investment earnings increase participant retirement benefits. IV- The employer is obligated to provide a specified benefit in retirement. A- I and II only. B- I and III only. C- II and IV only. D- III and IV only.

Solution: The correct answer is A. Both plans are pension plans, therefore Statements "I" and "II" apply. Statement "III" applies only to the target benefit plan (because it is a DC plan) NOT the DB plan. Statement "IV" applies only to the DB plan NOT the target benefit plan.

Which of the following is NOT included as one of the provisions for the continuation benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985? A- All employers offering group health insurance must provide COBRA continuation benefits. B- COBRA benefit durations vary from 18, 29, or 36 months depending upon the qualifying event. C- COBRA eligible coverages do include: dental plans, vision plans, Medical FSAs, prescription drug plans and mental health plans. D- COBRA eligibility ceases when a covered participant becomes eligible to participate in another group health plan or Medicare.

Solution: The correct answer is A. COBRA benefits are required of employers who have 20 or more employees. Employers with fewer employees are not required to provide COBRA continuation, even if they offer a group a health insurance plan to employees.

Many employers are now making flexible spending accounts (FSAs) available to employees. Which of the following statements concerning the nature of these accounts is incorrect? A- The balance in an employee's FSA can be carried forward or exchanged for cash if unused for eligible expenses incurred during the plan year. B- An FSA is technically a cafeteria plan benefit that can be used by itself or as part of a broader cafeteria plan. C- A separate FSA salary reduction must be made for each type of eligible benefit. D- A salary reduction for an FSA will lower an employee's income for social security tax purposes if the employee earns less than the social security wage base.

Solution: The correct answer is A. Cafeteria plans have a "use-it-or-lose-it" provision which requires any funds not used to pay qualified claims during the plan year be forfeited back to the plan sponsor. Forfeited funds cannot be rebated back to the individual employee who forfeited the funds. Answer "B" is correct because a cafeteria plan must have only two benefits, one taxable (salary) and one pre-tax (FSA). Answers "C" and "D" are also true.

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.

Solution: 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 $66,000 (2023) 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.

Which of the following correctly describes "eligible individual accounts"? I- May not invest plan assets in qualifying employer securities. II- Include defined contribution plans. III- Are subject to Pension Benefit Guaranty Corporation (PBGC) coverage and insurance premiums. IV- Are subject to minimum funding requirements. A- II only. B- II and IV only. C- I only. D- I and III only.

Solution: The correct answer is A. Eligible individual accounts (usually associated with profit sharing, 401(k) and ESOP) are defined contribution plans, and are not subject to PBGC, nor minimum funding requirements.

Which statement(s) is/are true regarding qualified profit sharing plans? I- A company must show a profit in order to make a contribution for a given year. II- A profit sharing plan is a type of retirement plan and thus is subject to minimum funding standards. III- Forfeitures in profit sharing plans must be credited against future years' contributions. IV- Profit sharing plans should make contributions that are "substantial and recurring." A- IV only. B- I and III only. C- I, II and IV only. D- I, II, III and IV.

Solution: The correct answer is A. Even though not mandatory, regulations require a profit sharing plan to make substantial and recurring contributions. No profits or retained earnings are required to make a profit sharing contribution. Minimum funding requirements apply to pension plans, not profit sharing plans. Forfeitures in profit sharing plans are usually allocated to the remaining participants' individual accounts.

Larry and Terry, who are married and are ages 35 and 36, both contribute the maximum to a TSA at their schools where they teach. They also want to make contributions to their IRAs. Their salaries are $50,000 each, after their TSA contributions are subtracted. How much can they each contribute to their respective IRAs in the current year? A- $6,500 each B- $7,500 each C- $13,000 each D- None of the above.

Solution: The correct answer is A. Everyone (with earned income) can make a $6,500 contribution to an IRA in 2023 without respect to income or "active participation" status. In some cases, however, phaseouts may directly impact the deductibility of these contributions depending on income levels.

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.

Solution: 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. Keep in mind, the question is looking for the false answer.

George, age 35, works for XZY Brothers, Inc., which is installing a new SIMPLE IRA plan in the current year with the maximum match for this year. George makes $30,000 per year and is eligible to participate in the plan. Which of the following is true? A- George can have a maximum of $16,400 placed into his account this year. B- George may have a maximum of $900 placed into his account this year. C- George may have a maximum of $15,500 placed in his account this year. D- George may have a maximum of $7,500 placed in his account this year.

Solution: The correct answer is A. George can put in 100% of salary up to $15,500 (2023). XZY will match dollar for dollar up to 3% of salary ($30,000 × .03 = $900). So a total of $16,400 will be placed into the account. All other statements are false.

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.

Solution: 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. They may qualify for a penalty waiver in the case of disability, medical expenses in excess of 7.5% of AGI or payment of health insurance premiums while unemployed. Taking a hardship withdrawal to pay a mortgage payment, back taxes or college tuition will not qualify for a waiver. Please click on this IRS link to see what the IRS allows for early withdrawal exceptions.

Kent Reeder, age 52, works as the administrator and curator at the Museum of Antique Manuscripts, a not-for-profit organization in Metropolitan Center. He has worked there 18 years and began contributing to the 403(b) plan 12 years ago but skipped contributing last year. He earns $85,000 a year. He has asked you to maximize his contribution. Which of the following is/are TRUE? I- He may contribute $22,500 plus $7,500 for age 50+ catch-up, plus $3,000 long service catch-up. II- He may not contribute to the long-service catch-up this year due to omitting a contribution last year. III- He may contribute $22,500 plus $7,500 age 50+ catch-up. IV- He may not participate in both the long service catch-up and the age 50+ catchup the same year. V- He is not eligible for the long service catch-up. A- III and V only. B- II only. C- I, III and IV only. D- I and III only.

Solution: The correct answer is A. He is not eligible for the long service catch-up because the museum is not a Health, Education, Religious (HER) organization. The maximum contribution limits for 2023 are $22,500 plus the age 50+ catch-up of $7,500.

Matt is a participant in a profit sharing plan which is integrated with Social Security. The base benefit percentage is 6%. Which of the following statements is/are true? I- The maximum permitted disparity is 100% of the base benefit level or 5.7%, whichever is lower. II- The excess benefit percentage can range between 0% and 11.7%. III- Elective deferrals may be increased in excess of the base income amount. IV- The plan is considered discriminatory because it gives greater contributions to the HCEs. A- I and II only. B- I, II and IV only. C- II only. D- I, II, III and IV.

Solution: The correct answer is A. His base rate is 6% and the social security maximum disparity is 5.7% for 11.7% as the top of his range. Statement "III" is incorrect because integration does not affect voluntary deferrals by employees. Statement "IV" is incorrect because, done properly, integration is NOT considered discriminatory.

Which of the following benefits, paid for by an employer, would be both deductible by the employer and not taxable to the employee? I- Group term life insurance of $25,000. II- Death benefit of $10,000. III- Non-qualified deferred compensation. IV- Pension plan. A- I and IV. B- II and III. C- I, II, and IV. D- I, III, and IV.

Solution: The correct answer is A. II is incorrect. If a death benefit is paid to a survivor upon the death of an employee, the death benefit is taxable to the employee (and deductible by the employer). Note: this option does not indicate that life insurance is being used. If life insurance was used, it would still be an incorrect answer because it would not be deductible by the employer AND tax-free to the recipient. III is incorrect. Non-qualified deferred compensation is not taxed to the employee currently but is also NOT deductible by the employer currently.

The required reduction to the Section 415 limits for top-heavy defined contributions plans can be avoided by providing a minimum employer contribution to all non-highly compensated employees equal to what percentage of each non-key employee's compensation? A- 3% B- 4% C- 5% D- 6%

Solution: The correct answer is A. If an employer with a top heavy plan wants to avoid the required reduction based on Section 415 limits, he or she must contribute at least 3% of each non-key employee's compensation to the plan.

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%.

Solution: 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.

David is awarded an immediately vested, non-qualified stock option for 1,000 shares of company stock with an exercise price of $35 per share while the stock price is currently $33 per share. What are the tax ramifications, if any at the date of the grant? A- $0 B- The gain between exercise and actual price of $2,000 is immediately taxable. C- The awarded option price value of $33,000 will be immediately taxable. D- Because these are unrealized gains, neither the option value nor the gain are taxable until the stock is finally sold.

Solution: The correct answer is A. In the case of NQS Options, the option is not taxed at the grant if the exercise price is equal to or greater than the fair market value of the stock.

Which of the following is/are true regarding negative elections? I- A negative election is a provision whereby the employee is deemed to have elected a specific deferral unless the employee specifically elects out of such election in writing. II- Negative elections are no longer approved by the IRS. III- When an employer includes a negative election in its qualified plan, the employer must also provide 100% immediate vesting. A- I only B- I and III only C- II and III only D- I, II, and III

Solution: The correct answer is A. Negative elections are approved by the IRS and they are available for both current and new employees. Negative elections do not require 100% immediate vesting.

In determining the allowable annual additions per participant to a defined contribution pension plan account for the current year, the maximum contribution is: A- Contribution up to $66,000 (indexed). B- Compensation up to $330,000. 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.

Solution: 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 $66,000, making Option "A" the correct response.

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.

Solution: 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 would be eligible to receive Social Security retirement benefits this year (assume each has worked at least a minimum of 20 years in their current position)? I- A 61-year old teacher at a public school. II- A 60-year old 25% owner of an S corporation. III- A 65-year old physician/owner of a professional corporation. IV- A 70-year old sole proprietor who is an outside consultant to the federal government. A- III and IV only. B-I, III and IV only. C- IV only. D- I, II, III, and IV.

Solution: The correct answer is A. Persons I and II are too young and do not qualify. The earliest age for social security retirement benefits is 62.

Which statement(s) is/are true regarding qualified profit-sharing plans? I- A company must show a profit in order to make a contribution for a given year. II- A profit-sharing plan is a type of retirement plan and thus is subject to minimum funding standards. III- Forfeitures in profit-sharing plans must be credited against future years' contributions. IV- Profit-sharing plans should make contributions that are "substantial and recurring." A- IV only. B- I and III only. C- I, II and IV only. D- I, II, III, and IV.

Solution: The correct answer is A. Profits are not required to make contributions to a profit-sharing plan. Minimum funding is required only in pension plans. Forfeitures may be reallocated to remaining employee accounts.

Hiroko, age 54, works for Alpha Corporation and Delta Corporation. Alpha and Delta are both part of the same parent-subsidiary control group. Alpha and Delta both sponsor a 401(K) plan. If Hiroko earns $75,000 at Alpha and $30,000 at Delta what is the maximum employee elective deferral he can make to both plans in total? A- $22,500 B- $30,000 C- $52,500 D- $66,000

Solution: The correct answer is B. An individual can defer up to $22,500 (2023) plus an additional $7,500 (2023) catch up for all of their 401(k) and 403(b) plans combined. In this case he can defer the entire $30,000 between the two plans.

Ernest converted his Traditional IRA to a Roth IRA on Dec 15, 2019. He was 35 years of age at the time and had never made a contribution to a Roth IRA. The conversion was in the amount of $60,000 ($10,000 of contributions and $50,000 of earnings). Over the years he has also made $15,000 in contributions. On May 15, 2023 he withdrew the entire account balance of $100,000 to pay for a 1 year trip around the world. Which of the following statements is true? A- $25,000 of the distribution will be subject to income tax and $85,000 of the distribution will be subject to the 10% early withdrawal penalty. B- $25,000 of the distribution will be subject to income tax and the 10% early withdrawal penalty. C- Some of the distribution will be taxable but the entire distribution will be subject to the 10% early withdrawal penalty. D- None of the distribution will be taxable nor will it be subject to the 10% early withdrawal penalty.

Solution: The correct answer is A. Roth distributions are tax free if they are made after 5 years and because of 1)Death, 2)Disability, 3) 59.5 years of age, and 4)First time home purchase. He does not meet the five year holding period or one of the exceptions. His distribution does not received tax free treatment. The treatment for a non-qualifying distribution allows the distributions to be made from basis first, then conversions, then earnings. His basis will be tax free. The conversion is also tax free since we paid tax at the time of the conversion on those earnings. The remaining earnings since establishment of the Roth are $25,000 (100,000 - $15,000 in basis - $60,000 in conversions) and will be taxed. The 10% penalty does apply to this distribution since he does not qualify for any of the exceptions to the penalty. The contributions escapes penalty but the conversions and earnings of $85,000 are subject to the 10% early withdrawal penalty. Remember that in order for the conversions to escape the 10% early withdrawal penalty the distribution must occur after a 5 year holding period beginning Jan 1 in the year of conversion or meet one of the 10% early withdrawal exceptions. This may help break it down better than the rationale. $60,000 paid tax at conversion. Subject to penalty $15,000 in contributions no tax, no penalty $25,000 earnings. Taxable and subject to penalty Of the $100,000 withdrawn, 25,000 is taxable 60,000 + 25,000 = 85,000 is subject to penalty. Answer choice b does not take the penalty into account, the account owner is under 59 ½.

A supplemental deferred compensation plan providing retirement benefits above the company's qualified plan AND without regard to Section 415 limits 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.

Solution: The correct answer is A. SERP supplements the pension plan without regard to limits imposed upon salary levels (i.e., maximum salary of $330,000 in 2023) or the maximum funding levels of Section 415. Do not confuse with an excess benefit plan which extends the benefits of a company's qualified plan above the Section 415 limits but still adheres to maximum salary limitations.

Cody is considering establishing a 401(k) for his company. He runs a successful video recording and editing company that employs both younger and older employees. He was told that he should set up a safe harbor type plan, but has read on the Internet that there is the safe harbor 401(k) plan and a 401(k) plan with a qualified automatic contribution arrangement. Which of the following statements accurately describes the similarities or differences between these types of plans? A- The safe harbor 401(k) plan has more liberal (better for employees) vesting for employer matching contributions as compared to 401(k) plans with a qualified automatic contribution arrangement. B- Both plans provide the same match percentage and the same non-elective contribution percentage. C- Employees are required to participate in a 401(k) plan with a qualified automatic contribution arrangement. D- Both types of plans eliminate the need for qualified matching contributions, but may require corrective distributions.

Solution: The correct answer is A. Safe harbor plans require 100% vesting, while 401(k) plans with QACAs require two year 100% vesting. The matching contributions are different for the plans. Employees are not required to participate in either plan. Both plans eliminate the need for ADP testing, which means that they eliminate the need for qualified matching contributions and corrective distributions.

Shane's Rib Shack has a Target Benefit Plan. They have 10 employees with the following compensations: Employee Compensation $340,000 $100,000 $75,000 $50,000 $50,000 $50,000 $50,000 $25,000 $25,000 $20,000 Based on the actuarial table that was established at the inception of the plan they should fund the plan with $210,000. What is the maximum deductible contribution that can be made to the plan? A- $193,750 B- $195,000 C- $196,250 D- $210,000

Solution: The correct answer is A. Since the plan is a defined contribution plan the maximum deductible contribution is 25% of the total covered compensation. The max covered compensation of all employees is $775,000. Thus the maximum deductible limit is $193,750 ($775,000 × 25%). Remember to limit employee 1 to the $330,000 (2023) covered compensation limit. The actuarial table amount is irrelevant because this a defined contribution plan.

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.

Solution: 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.

Which of the following accurately describes some attributes of non-qualified retirement plans? I- The employee will pay Table 1 costs each year on an "employer pay all" split dollar life insurance arrangement. II- The employer can deduct the premiums paid for a split-dollar life insurance arrangement in the year the premiums are paid. III- Death benefits from a split-dollar arrangement, both the employer and the employee's beneficiary's share, are generally tax free. IV- If the employee's portion of the life insurance premium is greater than the P.S. 58 cost, the excess premiums "rolls forward" to a future year to accurately reflect the employee's cost basis. A- I and III only. B- II and IV only. C- I and IV only. D- I and II only.

Solution: The correct answer is A. Statement "II" is incorrect because the employer is unable to deduct any contributions to a non-qualified plan until the employee actually takes constructive receipt. In the traditional split-dollar arrangement, the employer has an interest in the cash values of the split-dollar policy equal to the amount of premiums paid, and therefore, there is never a deduction for premiums paid. Statement "III" - Because no tax deductions are taken for any premiums paid on the policy, the death benefits are tax-free. Statement "IV" - The employee is required to pay the Table 1 cost each year, without regard to premiums paid in previous years.

Increasing units of whole life (employee paid) combined with decreasing units of group term insurance (employer paid), best describes: A- Group term life insurance. B- Group paid-up life insurance. C- Dependents' group life insurance. D- Group survivors' income insurance.

Solution: The correct answer is B. The "whole life" aspect of the question calls our attention to paid up life. Increasing whole life and decreasing term are describing group paid-up life benefits.

Which of the following statements accurately reflects the overall limits and deductions for employer contributions to qualified plans? I- An employer's deduction for contributions to a money purchase pension plan and profit sharing plan is limited to the lesser of 25% of covered payroll or the maximum Section 415 limits permitted for individual account plans. II- An employer's deduction for contributions to a defined benefit pension plan and profit sharing plan cannot exceed the lesser of the amount necessary to satisfy the minimum funding standards or 25% of covered payroll. III- Profit sharing minimum funding standard is the lesser of 25% or the Section 415 limits permitted for individual account plans. A- I only. B- I and II only. C- II and III only. D- I, II and III.

Solution: The correct answer is A. Statement "II" is incorrect because there is no 25% of covered payroll limitation in a DB plan. Statement "III" is incorrect because there is no minimum funding standard for profit sharing plans.

Match the following statement with the type of retirement plan which it most completely describes: "A qualified plan that is not a pension plan" is... A- A Profit sharing plan. B- A Money purchase plan. C- A SIMPLE IRA. D- A Defined benefit plan.

Solution: The correct answer is A. Statements "B" and "D" are all pension plans. Statement "C" requires an employer match and is not a qualified plan.

Myron has a life insurance policy in his qualified plan at work. He has come to you for advice about retirement and other financial planning needs. Which of the following is not correct about the life insurance in a qualified plan? A- He will be subject to income only if the policy in his qualified plan is a cash value type policy. B- The policy will be included in his gross estate if he were to die while still working. C- Part of the proceeds could be taxable to his beneficiary if it is a cash value policy. D- When he distributes the policy from his plan at retirement, he can convert it to an annuity within 60 days to avoid taxation.

Solution: The correct answer is A. Statements b, c, and d are correct. Statement a is false because all life insurance in qualified plans is subject to income when purchased, regardless of the type.

A low-cost, tax-advantaged policy that may be either contributory or non-contributory and usually does not require a medical examination best describes: A- Group term life insurance. B- Group paid-up life insurance. C- Group ordinary life insurance. D- Group survivor's income insurance.

Solution: The correct answer is A. The "low cost" would point immediately to term. Tax-advantaged would point to group, and these plans can be written as either contributory or non-contributory.

A 56-year-old client becomes unemployed due to a disability. The client tells a CFP® professional that he hopes to go back to work eventually, but is not sure when that might be. Until then, he needs to generate replacement income. His only available asset is his traditional 401(k) plan. What is the best way for the client to replace his income (CFP® Certification Examination, released 8/2012)? A- Directly from the 401(k) plan B- From a rollover IRA, using Rule 72(t) C- From a rollover annuity, using substantially equal payments D- From a brokerage account, using net unrealized appreciation (NUA)

Solution: The correct answer is A. The 401(k) plan is penalty-free and will not require continued payments if the client goes back to work.

Which of the following statements concerning the OASDHI earnings test for the current year is correct? A- Some part-time work is allowed without the loss of retirement benefits for those under normal age retirement. B- The earnings test does not apply after the age of 62. C- Interest and dividends are included in the earnings test. D- The annual exempt amount for a person at normal age retirement is $56,520.

Solution: The correct answer is A. The earnings test does not apply at, or after, normal age retirement. The monthly exempt amount is $4,710 ($56,520 in 2023 for those months in the year of normal retirement age BEFORE you actually reach normal retirement age. The test uses only earned income. No passive or portfolio income is used in calculating the earnings.

Jane P. Lane is a clerical worker who has been with her employer for the last 20 years. Last year, she got married in the Swiss Alps, which was quite out of character for her. She participates in an employer-paid group term life plan and selected term insurance in the amount of $200,000, which is three times her salary. She has named her spouse as the beneficiary of the policy. What is the tax consequence of this policy? A- Her employer is permitted to deduct the premiums paid on the entire amount of coverage. B- Her employer is permitted to deduct the premiums paid on the first $50,000 of coverage. C- Jane is subject to tax on the entire benefit. D- Jane is subject to tax on the amount which exceeds three times her annual salary or $50,000, whichever is less.

Solution: The correct answer is A. The employer is permitted to deduct 100% of the premiums, but Jane is subject to taxation on the amount in excess of $50,000.

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 2023 if the ADP of the non-highly employees is 2%? A- $7,000 B- $22,500 C- $26,000 D- $31,000

Solution: The correct answer is A. The maximum annual addition to qualified plan accounts is $66,000. If Reviews Are Us contributes $35,000 ($175,000 × 20%) to the profit sharing plan and Lisa receives $5,000 of forfeitures, she may only defer $26,000 ($66,000 - $35,000 - $5,000) before reaching the $66,000 limit (2023). However, she will also be limited by the ADP of the non-highly employees because she is highly compensated (compensation greater than $150,000). If the non-highly employees are deferring 2% then the highly compensated employees can defer 4% (2×2=4). Therefore, she is limited to a deferral of $7,000 ($175,000 × 4%).

Which of the following are common actuarial assumptions used in determining the plan contributions needed to fund the benefits of a defined benefit plan? I-Investment performance. II- Employee turnover rate. III- Salary levels. IV- Ratio of single to married participants. A- I, II and III only. B- I and III only. C- II and IV only. D- IV only.

Solution: The correct answer is A. The number of married employees is irrelevant because the benefits paid to a single employee are actuarially equivalent to benefits paid to a married couple. Investment performance has an inverse relationship to contribution levels (higher investment returns = lower contribution requirement.) Employee turnover rate affects contributions due to forfeitures. Salary scale affects funding levels because increases in the salary scale of an employee increases the required funding.

Which of the following are common actuarial assumptions used in determining the plan contributions needed to fund the benefits of a defined benefit plan? I- Investment performance. II- Employee turnover rate. III- Salary scales. IV- Number of married employees. A- I, II and III only. B- I and III only. C- II and IV only. D- IV only.

Solution: The correct answer is A. The number of married employees is irrelevant because the benefits paid to a single employee are actuarially equivalent to benefits paid to married couple. Investment performance has an inverse relationship to contribution levels (higher investment returns = lower contribution requirement). Employee turnover rate affects contributions due to forfeitures. Salary scale affects funding levels because increases in the salary scale of an employee increases the required funding.

Bank Corp has a defined benefit plan with 60 employees. What is the minimum number of employees the defined benefit plan must cover to conform with the requirements set forth by the IRC? A- 24 B- 30 C- 42 D- 50

Solution: The correct answer is A. The plan must cover the lesser of 50 people or 40% of all employees. In this case, the lesser would be 40% of 60, or 24 people.

Carol and Jim Springer are married with three children. Jim works for ABC, Inc. as a phonetic spell-checker and is a participant in the ABC, Inc. profit sharing plan. In the current year, he earned $50,000 in salary and had some apartments he inherited a few years back which generated $29,000 in net income. They had $1,000 in interest and dividends from their mutual funds. Carol is a stay-at-home mom. Jim put $6,500 into his IRA in December of the current year. Carol will put $300 in her IRA on April 10 next year. How much were Jim and Carol able to deduct from their income for these IRA contributions this year? A- $6,800 B- $5,525 C- $2,275 D- $0

Solution: The correct answer is A. Their adjusted gross income is below the MFJ phaseout, so they are entitled to 100% deduction for both contributions.

Which of the following statements is correct regarding a Section 457(b) plan? A- It is a type of qualified plan. B- It features a catch-up adjustment for individuals age 50 or older. C- Participants in the plan are considered active participants for purposes of determining deductibility of contributions to a traditional IRA. D- Employer contributions to the plan are deductible by the employer, if made by the extended due date of the employer's tax return

Solution: The correct answer is B. A is incorrect. A Section 457(b) plan is a type of nonqualified plan. C is incorrect. Since the Section 457(b) plan is a type of nonqualified plan, individuals participating in the plan are not considered active participants. D is incorrect. Section 457(b) plans are sponsored by tax-exempt organizations. Tax-exempt organizations do not have income tax deductions.

Angela is a sole proprietor with no employees. In the current year, she expects to earn over $300,000 after expenses. She would like to set up a retirement plan for the business and contribute up to $30,000 in December of the current year. Assuming Angela would like to minimize administrative complexity and expenses, the best retirement plan for her business would be a: A- Safe harbor 401(k) plan. B- Simplified employee pension (SEP). C- New comparability plan. D- SIMPLE IRA.

Solution: The correct answer is B. A is incorrect. A safe harbor 401(k) plan is a type of profit- sharing plan. This plan would be more administratively complex and expensive than an SEP C is incorrect. A new comparability plan is a type of profit- sharing plan. This plan would be more administratively complex and expensive than an SEP D is incorrect. A SIMPLE IRA would not permit a $30,000 contribution and also cannot not be established after October 1.

Which of the following individuals are "key employees" as defined by the Internal Revenue Code? I- A more-than-5% owner of the employer business. II- An employee who received compensation of more than $152,000 from the employer. III- An officer of the employer who received compensation of more than $215,000. IV- A 2% owner of the employer business having annual compensation from the employer of more than $55,000. A- I and II only. B- I and III only. C- II and IV only. D- I, II and IV only.

Solution: The correct answer is B. A key employee is an individual who (1) owns more than 5% of the business, (2) is an officer with compensation greater than $215,000 (2023), or (3) owns greater than 1% of the business and has compensation greater than $150,000. I. and III. are defined key employees. II. meets the definition of a highly compensated employee, not a key employee. IV. should state that compensation was more than $150,000.

Which of the following would be considered "key employees" for qualified plan testing purposes for 2023? I- A more-than-5% owner of the employer. II- An employee receiving compensation greater than $150,000 from employer. III- An officer of the employer who received compensation of more than $215,000. IV- A 2% owner of the employer having an annual salary of $140,000 from the employer. A- I and II only. B- I and III only. C- II and IV only. D- II, III and IV only.

Solution: The correct answer is B. A key employee is an individual who (1) owns more than 5% of the business, (2) is an officer with compensation greater than $215,000, or (3) owns greater than 1% of the business and has compensation greater than $150,000. I. and III. are defined key employees. II. defines a highly compensated employee, not a key employee. IV. should state that compensation was at least $150,000.

Meg has AGI of $1,000,000 (which is all comprised of earned income). She is single and age 50. Her employer offers a 401(k) plan and, although she is eligible to defer, she does not make any deferrals into the plan. The employer made a Qualified Matching Contribution during the current year in order to meet the ADP test. Which of the following statements is true? A- She can contribute $6,500 to Traditional IRA and deduct all $6,500. B- She can contribute $7,500 to Traditional IRA and deduct all $7,500. C- She can contribute $6,500 to Traditional IRA and deduct $0. D- She can contribute $7,500 to Traditional IRA and deduct $0.

Solution: The correct answer is B. A qualified matching contribution would only be made to those employees that actually deferred into the 401(k) plan. Therefore, she would not have received a contribution since she did not defer. Therefore, she is not an active participant. If the problem had said that she received a qualified nonelective contribution then the contributions would have been made to all employees and therefore, she would have received a contribution and would have been an active participant. She can contribute and deduct her contribution to a Traditional IRA since she is not an active participant and therefore not subject to an AGI limitation. She is unable to contribute to a Roth IRA because she is above the AGI limitation of $138,000 - $153,000 (2023). Because she is 50 or older she is allowed to make the $1,000 (2023) catch up contribution.

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.

Solution: 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.

Which of the following apply to distributions from an IRA? I- Distribution of after-tax contributions is subject to the 10% premature distribution penalty tax. II- Amounts in excess of $150,000 are included in the decedent's gross estate. III- Section 72 annuity rules govern an IRA distribution that includes non-deductible and deductible contributions. IV- Distributions made due to the death of the owner are exempt from the premature distribution penalty tax. A- I and II only. B- III and IV only. C- I, III and IV only. D- II and IV only.

Solution: The correct answer is B. After-tax contributions are not subject to taxation or premature distribution taxation. Distributions from IRAs which contain after-tax contributions are governed by the annuity rules in IRC 72. All amounts in an IRA are included in gross estate.

Which of the following characteristics do not apply to a profit sharing plan? I- Individual accounts. II- Qualified Joint and Survivor Annuity (QJSA) always required. III- Minimum funding requirement. IV- Definite contribution allocation formula. A- I and III only. B- II and III only. C- I and IV only. D- I, II and III only.

Solution: The correct answer is B. All defined contribution plans require individual accounts and a definite contribution allocation formula. Pension plans (not profit sharing plans) require a QJSA and have a minimum funding requirement.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) impacts an employee and employer in which of the following ways: I- An employee without creditable coverage can generally only be excluded by the group health insurance plan (if offered) for up to twelve months. II- The waiting period is reduced by the amount of "creditable coverage" at a previous employer. III- If the employee does not enroll in the group health insurance plan at the first opportunity, an 18-month exclusion period may apply. A- I and II only. B- I, II and III only. C- II and III only. D- II only.

Solution: The correct answer is B. All three statements are true. If you have a pre-existing condition that can be excluded from your plan coverage, then there is a limit to the pre-existing condition exclusion period that can be applied. HIPAA limits the pre-existing condition exclusion period for most people to 12 months (18 months if you enroll late), although some plans may have a shorter time period or none at all. In addition, some people with a history of prior health coverage will be able to reduce the exclusion period even further using "creditable coverage." People with a history of prior health coverage will be able to reduce the exclusion period even further using "creditable coverage."

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

Solution: 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

All of the following are advantages of profit sharing plans to businesses and business owners EXCEPT: A- Allows discretionary contributions. B- Must limit withdrawal flexibility. C- Controls benefit costs. D- May provide legal discrimination in favor of older owner-employees.

Solution: The correct answer is B. An advantage of profit sharing plans is that they PERMIT withdrawal flexibility. Options "A," "C" and "D" are also advantages of a profit sharing plan to the business and business owner.

How do cash balance plans differ from traditional defined benefit pension plans? A- Traditional defined benefit plans are required to offer payment of an employee's benefit in the form of a series of payments for life while cash balance plans are not. B- Traditional defined benefit plans define an employee's benefit as a series of monthly payments for life to begin at retirement, but the cash balance plan defines the benefit in terms of a stated account balance. C- In Cash Benefit Plans, these accounts are often referred to as hypothetical accounts because they do not reflect actual contributions to an account or actual gains and losses allocable to the account, whereas in a Defined Benefit D- Pension Plan they do. Pension Plans are available to retirees in a lump sum payment, whereas Cash Balance Plans are not.

Solution: The correct answer is B. Answer "A" is incorrect because Cash Benefit Plans are required to offer payment of an employee's benefit in the form of a series of payments for life. Answer "C" is incorrect, because neither plan shows actual gains or losses allocable to the account. Answer "D" is incorrect and stated exactly opposite of how it is in fact.

Mike's Mega Muffelettas (MMM) is a fairly large company based in Louisiana, with over 300 employees. MMM sponsors a defined benefit plan. George has worked at the company for the last 30 years and is looking forward to his retirement in another ten years. However, he just received a letter from the company that informs him that his defined benefit plan is being converted to a cash balance plan. What advice can you give George? A- His benefit could freeze as a result of the conversion; a situation known as "wearaway." B- The present value of the accrued benefit from the defined benefit should be preserved in the conversion and you should earn additional benefits under the cash balance plan. C- The cash balance plan provides a guaranteed rate of return and benefits that are fully insured by the PBGC. D- The cash balance plan acts like a defined contribution plan and will permit George to self-direct his retirement assets.

Solution: The correct answer is B. Answer b is correct because his benefits under the defined benefit plan must be preserved. Answer a is not correct as "wearaway" was done away with as it negatively effected employees who were near retirement and resulting in employees not accruing additional benefits after a conversion from a defined benefit plan to a cash balance plan. Answer c is not correct as the PBGC does not fully guarantee benefits. Answer d is not correct as a cash balance plan will have a guaranteed rate of return. Employees do not self-direct their assets in a cash balance plan.

Bob Jones is a senior executive at Sys, a global outsourcing firm based in New York. The company has recently rolled out a new compensation program that includes non-qualified stock options. Bob has approached you, as his planner, with several questions about the tax impact involved in his nonqualified (non-statutory) stock options. His circumstance is as follows: -February 1st: he was granted an option when the company stock price was $30. His option exercise price was $30, but option value was not readily ascertainable. -August 1st: he exercised the option when the stock price was $50. -September 1st: with the price at $50 per share and seeming to have peaked, Bob is wondering if he should sell the stock. Which of the following applies? A- Bob will have ordinary income of $50 if he sells at a stock price of $50. B- Bob will have ordinary income at exercise, based on the spread between the stock price and the exercise price of the option. C- Bob will have long-term capital gain income of $20 if he sells the stock on September 1st at a price of $50. D- Bob will have ordinary income of $30 when the option is awarded.

Solution: The correct answer is B. Bob will not be taxed for gain upon the award of the option because of the lack of readily ascertainable value. He will be taxed at exercise on the spread between the stock price of $50 and exercise price of $30, and finally, upon sale of the stock for any additional amounts of gain. You can review the infographic on NQSO for additional information. Click on Lessons, Getting Started, then Infographics.

Qualified retirement plans have which of the following characteristics? I- Employees with one year of service and attained age 21 must be participants in the plan. II- Fund earnings are usually not taxed until distributions are received by the employee. III- All lump-sum distributions are eligible for five-year forward averaging tax treatment. Iv- Employer contributions to the plan are deductible in the year they are made (or deemed made), subject to IRC Section 415 limits. A- I and III only. B- II and IV only. C- I and II only. D- III and IV only.

Solution: The correct answer is B. Maximum waiting period for qualified plans is two years (except for SEPs [employer sponsored tax advantaged plan] which can have a 3-year waiting period). No lump sum distributions are eligible for 5-year averaging after December 31, 1999.

Which of the following are not exhibiting an example of FIRE (Financial Independence, Retire Early) lifestyle? A- Jai, age 32, leaves his job to travel to 3 countries over a 3 month time frame and will apply for a job once he returns and continue saving 40% of his salary. B- Kray, age 45, leaves her job to start a new career to pursue a career of less stress, and saves 15% towards retirement savings. C- Casen, leave the workplace at age 50, after saving 25 times her spending need. D- Zion, age 40, leaves the workplace, estimated spending needs at $80k, and is able to spends approx. $100k per year through life expectancy from savings and investments.

Solution: The correct answer is B. Choice B is not an example of FIRE, which is described with extreme saving, sacrificing, and reaching financial independence before typical retirement age. Choices, A, C, and D are all examples of the FIRE lifestyle of extreme savings and or sacrifice to reach financial independence.

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.

Solution: The correct answer is B. Choice B would allow John to defer an additional $22,500 (2023) in salary without counting against the 404 test for profit-sharing plans. He is currently making a profit sharing plan contribution (as the employer) of 100,000 x 25% = 25,000. Choice A is not tax deductible. Choice C increases contributions of the employer not for John as the employee. Choice D would increase costs without increasing deductions.

Randal was just hired by Chastain, Inc., which sponsors a defined benefit plan. After speaking with the benefits coordinator, Randal is still confused regarding eligibility and coverage for the plan. Which of the following is correct? A- The plan could provide that employees be age 26 and have 1 year of service before becoming eligible if upon entering the plan, the employee is fully (100%) vested. B- The plan may not cover Randal due to his position in the company, even if Randal meets the eligibility requirements. C- Part-time employees, those that work less than 1,000 hours within a twelve-month period, are always excluded from defined benefit plans. D- Generally, employees begin accruing benefits as soon as they meet the eligibility requirements.

Solution: The correct answer is B. Choice a is not correct because the general eligibility is age 21, not 26. Choice c is not correct because a plan could cover part time employees, but will generally not. Choice d is not correct because employees become part of a plan only as early as at the next available entrance date after meeting the eligibility requirements. Employees covered under a collective bargaining agreement will not be covered under the company plan

Kipton is an executive with BigRock. As part of his compensation, he receives 10,000 shares of restricted stock today worth $20 per share. The shares vest two years from today, at which point the stock is worth $30 per share. The vesting schedule is a 2-year cliff schedule. Kipton holds the stock for an additional 18 months and sells at $45 per share. Which of the following is correct? A- The grant of stock is taxable to Kipton today. B- The value of the shares is taxable to Kipton when the stock vests. C- If Kipton were to make an 83(b) election, he would have converted $30 of the gain from ordinary to capital. D- When Kipton sells the stock for $45 per share, his basis is $30 regardless of whether he files an 83(b) election.

Solution: The correct answer is B. Choice a is not correct because the stock is forfeitable. Choice c is not correct because it would have converted $10, not $30. Choice d is not correct, because the basis would be different.

Which of the following statements are true in regards to Section 457 plans? I- Eligible plan sponsors include non-profit organizations, churches, and governmental entities. II- In-service distributions after age 59 1/2 are allowed in a 457 plan. III- Salary deferrals are subject to Social Security, Medicare, and Federal unemployment tax in the year of the deferral. IV- Assets of the plans for non-government entities are subject to the claims of the sponsor's general creditors. A- I and III only. B- II, III and IV only. C- I, II and IV only. D- III and IV only.

Solution: The correct answer is B. Churches are not qualifying sponsors of 457 plans

Byron is 46 years old and works for two employers, earning salaries of $52,000 and $48,000 respectively. One of his employers sponsors a 401(k) plan, and the other employer sponsors a 457(b) plan. For 2023, what is the maximum pre-tax elective deferral Byron can make in total to the two plans? A- $22,500. B- $45,000. C- $52,500. D- $66,000.

Solution: The correct answer is B. Contributions to a Section 457(b) plan do not count against the 401(k) plan limit. Therefore, Byron can contribute the maximum to each plan in the same year. For 2023, the contribution limit to each plan is $22,500, therefore, Byron can contribute at total of $45,000 ($22,500 + $22,500).

SEP-IRA plans are unique from defined contribution plans in which of the following areas: I- Length of permissible exclusion from coverage based upon service. II- Establishment date of the plan. III- Income requirements for participation. IV- Can be paired with another plan. A- I, II and IV only. B- I and III only. C- I, II, III and IV. D- None of the above.

Solution: The correct answer is B. Employees can be excluded up to 3 years or age 21, whichever is longer. Employee needs to earn only $750 (2023) to be included in the plan. For all qualified plans, they can be established and funded up to the date of filing the entity tax return, including extensions. SECURE Act 2019.

Flexible Spending Accounts (FSAs) as an employee benefit have which characteristics? I- The accounts are funded with after-tax employee contributions. II- An FSA can be incorporated into a cafeteria plan. III- Unused funds in the account at the end of the year cannot be refunded to the participant. IV- Dependent care FSAs are limited to $2,400 for 1 dependent and $4,800 for 2 dependents. V- Funds in the Medical FSA can pay qualified child care expenses. A- I and II only. B- II and III only. C- IV and V only. D- I, III and V only.

Solution: The correct answer is B. FSAs are funded with pre-tax dollars as part of a cafeteria plan. Unused funds at the end of the year revert to the employer who is prohibited from returning the funds directly to the forfeiting employee. Dependent care FSAs are limited to $5,000 per year. Medical FSA funds can only pay for medical expenses. Payment of child care expenses would be non-qualified expenses.

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- $22,500 D- $66,000

Solution: The correct answer is B. For a profit sharing plan the contribution is limited to the lesser of $66,000 (2023) 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 × 3% = $1,500.

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 2. A- I, II and III only. B- I, II and IV only. C- I and III only. D- I and II only.

Solution: The correct answer is B. For statement III to be a correct choice, it should state: 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.

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.

Solution: 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. Minimum funding is not determined by an actuary in a money purchase plan, but as a percent of covered compensation.

Maria, age 28, has just expressed an interest in retiring at age 55 and having an income of the equivalent of $40,000 per year in retirement income in today's dollars. She assumes that she can make 8% interest after tax and expects inflation to average about 4% per year. Her life expectancy is 85 years old and she wants to know how much she should be saving each year in her savings plan to reach her goal between now and her retirement. A- $7,625 B- $24,159 C- $8,068 D- $15,311

Solution: The correct answer is B. HP12C: Step #1 - NPV at time period zero: 0 g CFo, 0 g CFj, 26 g Nj, 40,000 g CFj, 30 g Nj, [(1.08/1.04) - 1] × 100 i, f NPV gives $264,184.34; Step #2 Annual savings required: N = 27, i = 8, PV = $264,184.34, PMT = ?, FV = 0, Answer: $24,159. HP10BII and HP 10BII+: Step #1 - NPV at time period zero: 0 CFj, 0 CFj, 26 shift Nj, 40,000 CFj, 30 shift Nj, 1.08/1.04 = -1 = × 100 = i/yr, Shift NPV gives $264,184.34; Step #2 - Annual savings required: N = 27, I = 8, PV = $264,184.34, PMT = ?, FV = 0, Answer: $24,159.

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 stock 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.

Solution: 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.

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 × Average of Three Highest Years of Compensation × 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- $66,000 B- $150,000 C- $265,000 D- $330,000

Solution: The correct answer is B. The maximum defined benefit is the lesser of $265,000 (2023) or his compensation. However, the funding formula will limit his defined benefit to $150,000 (25 years of service × 200,000 salary × 3%). The question facts state he makes 200,000 a year. It does not state any other year is different.

Jean Edge retired last year from Speedy Plumbing at age 66. She is eligible for normal Social Security retirement benefits. She was asked to provide consulting services to the company. This year, she will earn approximately $14,000 in consulting income. Which of the following appropriately describes her situation? A- Her Social Security benefits will be delayed until her earned income ceases. B- Her Social Security retirement benefits will not be reduced because of her earned income. C- 85% of her Social Security will be taxable due to her earned income. D- Her Medicare benefits will terminate until her consulting income stops.

Solution: The correct answer is B. Her benefits would have been reduced $1 for every $3 she earned in excess $56,520 (2023) in the year in which she attained full retirement and there is no penalty after normal age retirement. Answer "C" is incorrect because if her Social Security benefits are 85% taxable, it would be because of her AGI, not just her earned income. Answers "A" and "D" are incorrect due to the fact that Social Security benefits are reduced due to earned income, but not stopped because of earned income. Medicare doesn't have an earnings test for benefits, only an eligibility test.

Which of the following statements is correct regarding a qualified domestic relations order (QDRO)? I- It may require payments from a qualified plan at the plan's earliest retirement date, even if the plan participant is not retired. II- It deals with alimony, child support, or marital property rights. III- It directs distributions under either qualified or nonqualified plans. IV- Funds from the qualified plan can only be distributed at the later of the participant's full retirement age for Social Security benefits or death. A- I only. B- I and II only. C- II and IV only. D- I, II, III and IV.

Solution: The correct answer is B. I is correct. Under a QDRO, plan benefits may be paid to a plan participant's former spouse before the plan participant has retired. II is correct. QDROs involve divorce settlements, and payments to former spouses and dependent children. III is incorrect. QDROs are used only for qualified plans, not nonqualified plans.IV is incorrect. Under a QDRO, plan benefits may be paid to a plan participant's former spouse before the plan participant has retired.

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.

Solution: 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.

In order to deduct a contribution to an IRA, which of the following requirements must be met? I- An individual must have earned income, either personally or jointly from a spouse. II- Must not be an active participant in an employer-sponsored qualified plan. III- Must be under the age of 70 1/2. IV- Must make contributions during the tax year or up to the date of filing the federal tax return for the tax year, including extensions. A- I and II only. B- I only. C- II and III only. D- IV only.

Solution: The correct answer is B. In 2023, contributions are limited to the lesser of 100% of earned income or $6,500 or $7,500 if age 50 or over. Deductions may be taken even if an active participant, so being a non-participant is not a requirement. There are no age restrictions to make contributions to an IRA; the taxpayer must have earned income (SECURE Act 2019). Contributions must be made prior to April 15 (or the mandated filing date for the year.) No extension to make the contribution is allowed after that date, even though an extension to file the return is granted.

Which of the following is true regarding qualified incentive stock options? I- No taxable income will be recognized by the employee when the qualified option is granted or exercised. II- The income from sale of the qualified option will always be taxed as capital gains when the stock is sold. III- The income from sale of the qualified option will be taxed as ordinary income regardless of when the stock is sold. IV- The employer will not be able to deduct the bargain element of the option as an expense under any circumstance. V- For favorable tax treatment the option must be held two years and the stock for one year after exercise. A- II and IV only. B- I and V only. C- III only. D- I, II and V only.

Solution: The correct answer is B. In Statement "II," be careful of "always"! In Statement "III," if held longer than one year, they receive capital gains treatment. In Statement "IV," under most circumstances, the bargain element is deductible. There are exceptions when certain qualifications have not been met for deductibility, such as time employed, time to exercise in excess of rules, etc. For favorable treatment for an ISO, it must be held two years from grant (grant of the option) and 1 year from exercise (you hold the stock once you exercise).

Andrew, age 62, has been married 4 times during his life to the following women: Jennifer - they were married for 2 years after Andrew graduated from college. Jennifer has never remarried. She is 65 years old. Katie - they were married for 15 years. Katie is remarried and is 65 years old. Linda - they were married for 12 years. Linda has never remarried and she is currently 65 years old. Deirdre - they are still married and have been for 6 years. She is age 65. Andrew is fully insured but does not plan to begin taking benefits until age 66. Which of the above individuals are currently entitled to retirement benefits based on Andrew's account? A- Deirdre only. B- Linda only. C- Jennifer and Linda. D- All of them are entitled to benefits based on his account.

Solution: The correct answer is B. Linda is eligible because she was married at least 10 years and has not remarried. She can take benefits regardless of whether Andrew has begun benefits. Jennifer is not eligible because she was not married to Andrew for at least 10 years. Katie is not eligible because she remarried. Deirdre is not eligible. Even though she is currently married to Andrew and is old enough to receive benefits, she cannot begin benefits on Andrew's account until he actually starts taking benefits.

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.

Solution: 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. Additional detail: There are two distributions, and each has slightly different rules. Roth 401k Balance: 100,000 of which: Contributions: 60,000 Earnings: 40,000 Distribution after 4 years, and separation of service: 50,000 Roth 401k is a pro-rata tax on distributions. 60% is return of contributions 40% is earnings The distribution of 50,000 has 40% of it subject to tax, which is 20,000. No early withdrawal penalty due to separation of service after age 55. Roth IRA Balance 80,000 of which: Conversion: 50,000 Contributions: 20,000 Earnings: 10,000 The Roth has an order to distributions, contributions (tax and penalty free), conversions, and then earnings. The $40,000 distributions breaks down as: 20,000 of contributions tax and penalty free 20,000 from conversion which is tax free (paid tax at conversion) and is subject to 10% early withdrawal penalty (under age 59 ½) In summary: 20,000 is taxed from Roth 401k, and 20,000 from the Roth IRA is subject to the 10% penalty

Which of the following is false regarding incentive stock options? I- No regular taxable income will be recognized by the employee when the qualified option is granted or exercised. II- The income from sale of the qualified option will always be taxed as capital gains when the stock is sold. III- The income from sale of the qualified option will be taxed as ordinary income regardless of when the stock is sold. IV- The employer will not be able to deduct the bargain element of the option as an expense under any circumstance. V- For favorable tax treatment the stock must be held two years from grant and one year after exercise. A- II and IV only. B- II, III and IV only. C- III only. D- I, II and V only.

Solution: The correct answer is B. Only Statements "I" and "V" are true. The rest are all false. In Statement "II", be careful of "always"! In Statement "III," if held longer than one year, they receive capital gains treatment. In Statement "IV," the bargain element will be deductible if the sale is a disqualifying disposition.

Jeremy is the 401(k) plan fiduciary for ABC Company. Which of the following would most likely be considered a breach of Jeremy's fiduciary duty? A- The plan administrator only offers three core investment alternatives for the plan - a money market alternative, a fixed income alternative, and an equity alternative. B- The plan administrator last conducted a review of plan expenses five years ago. C- The plan administrator only allows participants to change investments in the plan quarterly. D- The plan administrator offers participants a choice of paper or electronic versions of the summary plan description and 401(k) plan balance statements.

Solution: The correct answer is B. Only reviewing the plan expenses every five years may be considered a breach of fiduciary duty. A is incorrect. Under ERISA Section 404(c), a fiduciary can be relieved of liability for losses by offering three or more investment alternatives (and satisfying other requirements). C is incorrect. Under ERISA Section 404(c), a fiduciary can be relieved of liability for losses by allowing participants to change investment options at least quarterly (and satisfying other requirements). D is incorrect. Electronic and/or paper delivery of appropriate statements is permitted.

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- The lesser of 100% of income or $66,000 (indexed). B- Compensation exceeding $330,000. C- Compensation exceeding the defined-benefit limitation in effect for that year. D- Bonuses

Solution: The correct answer is B. Option "A" - $66,000 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 is true concerning 401(k) plans regarding Highly Compensated (HC) employees and Non-Highly Compensated (NHC) employees? A- Non-discriminatory rules state at least 80% of all NHCs must be covered by the plan, or the ratio of NHCs covered by the plan must be at least 80% of the HCs, or the average benefit percentage for NHCs is at least 80% of the benefit percentage of the HCs. B- The Actual Deferral Percentage (ADP) Test limits employee voluntary contributions to the plan for the HCs. To accurately calculate the ADP, the administrator needs to know the percentage of income the NHCs contribute to the plan and how much the HCs defer to the plan. C- The Actual Deferral (ADP) Test takes all employees into account when calculating the test. D- The average ratio of HCs may not exceed 125% of the ADP of the NHC group if the ADP of the NHC group is 6% or more.

Solution: The correct answer is B. Option "A" would be correct if the percentages referenced were "70%" rather than "80%." Option "C" is incorrect because only employees who are eligible to participate are included in the ADP test. Option "D" - At a NHC ADP level of 6%, the HC may not exceed 8% (6% + 2%). The 125% category does not start until NHC ADP level equals 8% or higher.

Your 22-year-old client is a participant in a qualified plan which has a one-year service requirement. In order to maintain its qualified status which of the following two events accurately describe the longest your client can be kept from entering the plan: I- The first day of the plan year beginning after the date on which the employee satisfies the entrance requirement. II- The last day of the plan year during which the employee satisfies such requirements. III- The date six months after the date by which the employee satisfies such requirements. IV- The first day of the plan year in which the employee satisfies such requirements. A- I and II only. B- I and III only. C- I and IV only. D- II and III only.

Solution: The correct answer is B. Options "I" and "III" describe the maximum exclusions available to a plan. Each plan must have at least two entry dates each year.

Defined benefit pension plans will have to increase the funding costs associated with the plan if which of the following actuarial assumptions are made: I- Low turnover rate. II- Early retirement. III- High interest rate. IV- Late retirement. V- Salary scale assumption. A- I and III only. B- I, II and V only. C- I and V only. D- II, III and V.

Solution: The correct answer is B. Options I, II and V increase funding costs of a DB plan.

Mayu made a contribution to his Roth IRA on April 15, 2017 for 2016. This was his first contribution to a Roth IRA. Over the years he has made $20,000 in contributions. On May 15, 2023 he withdrew the entire account balance of $45,000 to pay for his daughter's college education expense. He is 55 years of age. Which of the following statements is true? A- He will not include anything in income and will not be subject to the 10% early withdrawal penalty. B- He will include $25,000 in income but will not be subject to the 10% early withdrawal penalty. C- He will include $25,000 in income and will be subject to the 10% early withdrawal penalty on $25,000. D- He will include $45,000 in income and will be subject to the 10% early withdrawal penalty on $45,000.

Solution: The correct answer is B. Roth distributions are tax free if they are made after 5 years and because of 1) Death, 2) Disability, 3) 59.5 years of age, or 4) First time home purchase. Although he met the 5 year rule, he did not meet one of the four qualifying reasons. His distribution does not received tax free treatment. The treatment for a non-qualifying distribution allows the distributions to be made from contributions first, then conversions, then earnings. In this case the distinction in distribution order is irrelevant since he withdrew the entire account balance. However, his contribution will be tax free, leaving only the $25,000 in earnings as taxable income. The 10% penalty does not apply to this distribution since he qualifies for the higher education exception to the penalty. Typically tax-free withdrawals are available after 5 years and a qualifying event, if both are met. Higher education expenses are an exception for the early withdrawal penalty. In this case, the contributions would be tax-free distributions, but the amount above would be subject to tax since he did not meet the time and qualifying event. $20,000 is returned tax free, penalty free. $25,000 is earnings. He must have the account open for 5 years and have a triggering event. He does not have a triggering event. Education is a 10% penalty exception. The earnings will be taxable.

Satish has AGI of $74,000 (which is all comprised of earned income). She is single and age 51. Her employer made a $6,300 contribution to her SEP for the current year. What is her available deduction allowed for a Traditional IRA contribution? A- $750 B- $6,750 C- $6,850 D- $7,500

Solution: The correct answer is B. She can contribute to a Traditional IRA since she has earned income. She is considered an active participant because her employer made a contribution to the SEP on her behalf. Her deduction will be limited because she is within the AGI limitation for a single active participant ($73,000 - $83,000) (2023). She is also entitled to the catch up contribution of $1,000 because she is 50 or older. Therefore, her deductible contribution is: 7,500 × ((74,000 - 73,000)/10,000) = $750 is not allowed so $7,500 - $750 = $6,750 is permitted. Although the question didn't ask - alternatively, she could contribute to a Roth IRA because she is below the AGI limitation of $138,000 - $153,000 (2023).

Tammy, age 62, received $32,000 of rental income from various rental properties she owns. This was her only source of income for the year. What is the best investment strategy for her retirement? A- SEP. B- Brokerage account. C- Traditional IRA. D- Safe-harbor 401(k) plan

Solution: The correct answer is B. Since rental income is not considered earned income, Tammy is not eligible to contribute to a traditional or Roth IRA. She also cannot contribute to a 401(k) plan.

Loans from qualified plans help participants have access to funds without paying the 10% premature distribution penalty. Which of the following does not reflect the accurate character of loans from qualified plans? A- Loans must be made available to all participants and beneficiaries on a reasonably equivalent basis. B- Owner-employees (unincorporated business / 5% S-Corporation) are not able to obtain loans regardless of whether they are made on the same basis as non-key employees or not. C- Loans must bear a reasonable interest rate. D- Loans can't exceed $50,000, reduced by the excess of the highest outstanding loan balance during the preceding one-year period over the outstanding balance on the date the loan is made, or 50% of the present value of the participant's vested account balance.

Solution: The correct answer is B. Sole proprietors, partners, LLC members, and S corporation owners are allowed to take loans from their qualified plan after 2001. Options "A," "C" and "D" are accurate characteristics of qualifying loans from a retirement plan. Section 72(p) indicates that a participant or their beneficiary can utilize the loan provision.

Which of the legal requirements apply to defined benefit pension plans? I- Each participant must have a separate account to hold assets. II- An actuary is needed to calculate the minimum funding level. III- Retirement benefits can be adjusted based on sponsor profits. IV- The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC). A- I and III only. B- II and IV only. C- I, II and IV only. D- II, III and IV only.

Solution: The correct answer is B. Statement "I" applies only to defined contribution plans. Statement "III" describes a profit-sharing plan.

Which of the following correctly describes characteristics of group universal life insurance? I- The contract has a master group policy. II- The employer usually pays all of the policy premiums. III- Expenses are often lower than for individual universal life policies. IV- These policies offer the potential for higher returns than whole life policies. V- The coverage is based on a combination of decreasing units of group term and accumulating units of single premium whole life. A- I and II only. B- III and IV only. C- IV and V only. D- I, II and III only.

Solution: The correct answer is B. Statement "I" applies to group term life. Statement "II" is false. Usually the employee is required to pay part or all of the premium cost of group universal life insurance. Statement "V" applies to a group whole life program.

Which statement(s) accurately reflect(s) the Tax-Sheltered Annuity (TSA) provisions: I- Salary reductions into a TSA are exempt from all payroll taxes. II- The annual elective deferral limit may be increased by up to $3,000 for employees of certain organizations who have completed 15 years of service and meet certain other requirements. III- Tax sheltered annuities must allow participants to invest in mutual fund, annuities and/or fixed income securities. IV- To calculate the maximum exclusion allowance for make-up calculation purposes, the participant's years of service and the amount of total excludable contributions made in the prior three years are needed. A- I and II only. B- II only. C- I, III and IV only. D- IV only.

Solution: The correct answer is B. Statement "I" is incorrect because deferrals are still subject to Social Security and Medicare taxes. Statement "III" is incorrect because TSAs can only invest in mutual funds or annuities and not any direct investments. Statement "IV" is incorrect because the total excludable contributions must be for all prior years, not just the past three.

Which of the following is/are accurate of a Section 125 cafeteria plan? I- 30% of the total benefits can accrue to key employees. II- There must be at least one cash benefit. III- Deferral of income is not allowed except through a 403(b). IV- Salary reductions can be changed at any time during the year. A- I only. B- II only. C- II and III only. D- I and IV only.

Solution: The correct answer is B. Statement "I" is incorrect because only 25% of the total benefits can accrue to key employees. Statement "III" is incorrect because deferrals are allowed only through a 401(k) plan. Statement "IV" is incorrect because mid-year changes in reductions are allowed only for qualified changes in status.

James and Cheryl Hansen, both age 42, are married with 9-year-old triplets. James is an attorney and makes $65,000 per year; he is not a partner. Cheryl earns an annual salary of $15,000 as a teacher's aide at the private, for-profit school the triplets attend. James' firm provides group permanent whole life and group survivor income benefit insurance. The school provides Cheryl with group term insurance coverage. James' Group Permanent Whole Life - This is a non-discriminatory plan designed to provide supplemental income to James during retirement. The law firm pays the entire premium for the plan. Cheryl is the designated beneficiary on the policy. The policy indicates that James has full vesting in the ownership of the policy. James' Group Survivor Income Benefit Insurance - This is a payroll deduction plan with James paying the entire premium. The plan is not a discriminatory plan. James has elected the survivor benefit that will pay benefits to his spouse and to any children under the age of 21. If James were to die today, the following benefits would be paid annually to the beneficiaries: If spouse is sole beneficiary - 30% of salary. If children are sole beneficiaries - 40% of salary. If spouse and children are beneficiaries - 50% of salary. Cheryl's Basic Life Insurance Plan - This is a non-discriminatory, non-contributory plan. The death benefit equals five times annual salary for employees age 55 or younger, three times the salary for those employees over age 55. James is the designated beneficiary on the policy. Given the above information, which of the following statements are correct about James and Cheryl's group insurance coverage? I- At James' death, the group survivor income benefit would total $26,000 per year. II- Assuming James dies, the group survivor income benefits received by his beneficiaries would be taxed as an annuity. III- Cheryl would be taxed on a portion of the cost of the $75,000 of group term life insurance coverage over $50,000. IV- At Cheryl's death, James would be required to include in gross income the proceeds from the group term policy. A- I and II only. B- II and III only. C- II and IV only. D- II, III and IV only.

Solution: The correct answer is B. Statement "I" is incorrect. The benefit would actually be $32,500 ($65,000 × 50%). Statement "IV" is incorrect because the death benefits are generally free from income tax. (For exceptions review the transfer for value rules.) Statements "II" and "III" are correct. The survivor income would be allocated between cost basis (cumulative premiums paid on an after-tax basis divided by the projected number of payments).

Which of the following statements concerning rabbi trusts is (are) CORRECT? I- A rabbi trust is a trust established and sometimes funded by the employer that is subject to the claims of the employer's creditors, but any funds in the trust cannot generally be used by or revert back to the employer. II- A rabbi trust calls for an irrevocable contribution from the employer to finance benefits promised under a nonqualified plan, and funds held within the trust cannot be reached by the employer's creditors. III- A rabbi trust may not be held off-shore as a result of the American Jobs Creation Act of 2004. IV- The American Jobs Creation Act of 2004 prohibits "springing irrevocability" for a rabbi trust if there is a change of control or ownership. A- I and IV only. B- I and III only. C- II and III only. D- I only.

Solution: The correct answer is B. Statement "II" describes a secular trust. Statement "IV" is incorrect because AJCA 2004 does allow springing irrevocability in these circumstances, but not for bankruptcy.

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 (if by 12/31/2019) or age 72 (if 70 1/2 after 12/31/2019). 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.

Solution: 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.

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.

Solution: 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.

A 10% penalty is assessed on non-exempted withdrawals from a qualified plan prior to age 59 1/2. Which of the following are exempt from the penalty? I- Distributions made to an active employee age 55 or older. II- Substantially equal periodic payments made to a terminated employee, based upon participant's remaining life expectancy. III- Pay-outs to a current employee due to immediate and heavy financial need. IV= Distributions to beneficiaries of a deceased employee. A- I and III only. B- II and IV only. C- II, III and IV only. D- I, II and IV only.

Solution: The correct answer is B. Statement I is incorrect as written. Distributions made to an employee that terminates service at 55 or older would be exempt. Statement II is a correct statement. Substantially equal periodic payments made to a terminated employee, based upon participant's remaining life expectancy would be exempt from the 10% penalty. Statement III is incorrect. Pay-outs to a current employee due to immediate and heavy financial need would not be exempt from the 10% penalty. Hardship withdrawals provide access to Qualified funds while still employed and are not a penalty exception. Statement IV is a correct statement. Distributions to beneficiaries of a deceased employee would be exempt from the 10% early withdrawal penalty.

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.

Solution: 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.

Solution: 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.

Financial Training Team (FTT) develops training materials for finance professionals across the country. Chad, who just turned age 48, 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 2023? A- $14,000 B- $20,000 C- $22,500 D- $26,000

Solution: 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 non-elective contribution on a QACA is 3% as a standard part of the plan. 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 2023 limit is $66,000, Chad can only contribute $20,000.

Ace Company has a defined benefit plan with 500 employees, of which 300 are nonexcludable employees (100 HC and 200 NHC). It is unsure if it is meeting all of the coverage testing requirements. What is the minimum number of total employees that must be covered by the defined benefit plan on a daily basis to comply with the coverage rules? A- 40 B- 50 C- 80 D- 120

Solution: The correct answer is B. The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. Here 40% of the nonexcludable employees equals 120 (300 × 0.40), so 50 is less than 120. This would be the absolute minimum number of covered employees. IRC 401(a)(26)

The investment portfolio for a defined-benefit retirement plan has declined in value during a year in which most financial market instruments have also incurred losses. Which one of the following entities would be impacted most by this decline in portfolio value? A-Individual participants in the plan. B- Company sponsoring the plan. C- Investment advisory handling the plan assets. D- Plan underwriters.

Solution: The correct answer is B. The company may be required to make increased contributions to fully fund the plan.

Which one of the following is usually a factor that affects a participant's retirement benefit in a defined benefit plan? A- The plan's mortality assumptions. B- A participant's years of participation in the plan. C- Inflationary trends during the plan year. D- A participant's projected years of service at retirement.

Solution: The correct answer is B. The current retirement benefit in a defined benefit plan is most affected by the current number of years at employment because minimum funding is based upon current accrued benefits, not projected retirement benefits.

Evaluate the following statements: I- De minimis fringe benefits are those that are so immaterial that . . . II- De minimis fringe benefits are subject to strict anti-discrimination . . . A- I and II are true. B- I is true, but II is false. C- I and II are false. D- I is false, but II is true.

Solution: The correct answer is B. The de minimis exemption is not subject to a non-discrimination requirement because the amounts are too small to make it worthwhile to account for the items.

Jacque Roy, age 54, earns $40,000 per year from Shirt Company and is a participant in its employer's 401(k) plan. The plan is a qualified automatic contribution arrangement. Ignoring any top-heavy test requirements, what is the maximum amount that Jacque can defer in the 401(k) plan in 2023? A- $22,500 B- $30,000 C- $66,000 D- $73,500

Solution: The correct answer is B. The deferral limitation for 2023 is $22,500 and Jacque can defer an additional $7,500 (2023) as a catch-up contribution because he is 50 or older.

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 × Average of Three Highest Years of Compensation × 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- $66,000 D- $120,000

Solution: The correct answer is B. The maximum defined benefit is the lesser of $265,000 (2023) or his compensation. However, the funding formula will limit his defined benefit to $12,000 (5 × 120,000 × .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 $215,000 (2023). Therefore the plan must use a defined benefit limit of 2% instead of 1.5%.

Jordan company, CP, sponsors a cash balance plan. It allows employees that meet the standard eligibility rules to enter the plan on the next available entrance date. The plan has four entrance dates: January 1st, April 1st, July 1st, and October 1st. Colin started working for CP on August 22nd last year. Colin turned 21 on February 13th this year. When will Colin enter the plan? A- August 22nd this year. B- October 1st this year. C- January 1st next year. D- February 13th next year.

Solution: The correct answer is B. The standard eligibility rules are age 21 and one year of service, defined as 1,000 hours of service within a 12-month period. Although he meets eligibility on August 22nd of this year, he does not enter the plan until the next available entrance date - October 1st this year.

CJ (age 24) makes $264,462 at his superhero store. His store is an LLC treated as a disregarded entity. He does not employ anyone else in his business. Which of the following plans would you recommend he establish for his business if he wants to maximize his contributions and minimize his administration? A- SIMPLE B- SEP C- 401K Plan D- Profit Sharing Plan

Solution: The correct answer is B. The two easiest plans to set up are the SIMPLE and the SEP. He should be able to contribute about the same amount to the SEP, 401(k) plan and the Profit Sharing plan since his income so high. Therefore the best answer is SEP.

If an employee receiving incentive stock options does not meet the employment time requirement, but receives options as a nonqualifying and exercises them, what will the consequences be? A- The employee will be required to recognize income immediately upon receipt of the options. B- The employee will be required to recognize compensation income in the year the option is exercised. C- If an employee meets the holding period requirement, it does not matter whether he or she meets the employment requirement and the option is qualified. D- There are no consequences to this circumstance.

Solution: The correct answer is B. This illustrates the difference between the treatment of 'qualified' versus 'nonqualified' stock options. The tax implications are immediate and the income is recognized as soon as the option is exercised rather than when the stock is subsequently sold.

As the fiduciary for a company defined benefit plan, you were recently approached by the employer, a sole proprietor. She requested a loan to the company from the assets of the pension plan to purchase equipment needed by the company. You respond that the loan request is: I- Acceptable if made to the employer as a participant in the plan. II- Acceptable if it bears a reasonable rate of interest in respect to current market rates. III- Acceptable since the money will be invested in the company and is NOT intended to directly benefit the employer. IV- NOT acceptable, since the employer is considered a party-in-interest. A- II only. B- IV only. C- I and II only. D- I, II and III only.

Solution: The correct answer is B. This is an example of a prohibited transaction.

June and Bud, both 40 years old, are not covered by a qualified retirement plan. Bud, trying to maximize their IRA deduction, put $13,000 into an IRA with June as the beneficiary on December 15 of the current year. What best describes the result of this transaction? A- June and Bud receive a tax deduction for the entire $13,000 because both spouses are eligible to contribute $6,500 to the IRA. B- Bud receives a tax deduction for $6,500 and a 6% penalty for over-contribution on the other $6,500. C- Next year Bud will receive a $6,500 deduction, in addition to the $6,500 deduction for this year. D- Bud receives a tax deduction for $6,500 and is considered to have made a non-deductible contribution of the other $6,500.

Solution: The correct answer is B. This question indicates an IRA in only Bud's name. Maximum contribution is $6,500 plus any applicable catch-up provisions. Amounts contributed over that level are considered excess contributions and subject to a 6% penalty until taken out. The 6% penalty could have been avoided if the excess contribution was withdrawn prior to the original filing deadline without extension.

Safe harbor requirements to exclude leased employees from an employer's retirement plan include all but the following: A- The leasing company must maintain a money-purchase plan with a contribution rate of 10%. B- The retirement plan of the leasing company may be integrated. C- The leasing company's plan must provide immediate vesting. D- Safe harbor can be used until leased employees constitute 20% of the non-highly compensated work force.

Solution: The correct answer is B. Under the safe-harbor leasing rules the plan must provide a 10%, non-integrated money purchase plan with immediate vesting. No more than 20% of the employer's non-highly compensated employees may be leased to qualify for the safe harbor rules.

Which of the following are true concerning a personal residence in retirement planning? I- Inflation will increase the nominal value of the property. II- A mortgage on the home is necessary for tax deduction purposes after retirement. III- Compounding current home equity will yield an accurate future value. IV- Housing may be one of the largest expenses for which to plan during retirement. A- II and III only. B- I and IV only. C- I, II, and III only. D- I, II, III and IV.

Solution: The correct answer is B. While a mortgage is tax deductible, the payment of a mortgage takes more cash flow from retirement income than the deduction saves in taxes. Simply compounding the current equity in a home will yield an incorrect future value due to the reduction in indebtedness from the paydown of the mortgage. To get an accurate future value projection, not only the current equity must be inflated, but the increased equity generated each year from the mortgage paydown must also be inflated.

Geoffrey Gifford has a traditional IRA that he has contributed to for the last 20 years. He made $1,000 tax-deductible contributions per year while working. Geoffrey entered retirement this year and withdrew $5,000 when the account balance was $52,000. What are the tax consequences of the withdrawal taken? A- The withdrawal is tax-free since made in retirement. B- The withdrawal is a tax-free return of capital. C- The entire withdrawal is included in gross income. D- A portion of the withdrawal is a tax-free return of capital and remainder is taxable.

Solution: The correct answer is C. (A) Just because the taxpayer is in retirement doesn't make the distributions tax free. (B) and (D) The contributions were tax-deductible and therefore the taxpayer does not have basis in the IRA.

Which of the following statement(s) regarding 403(b) plans is true? I- Assets within a 403(b) plan may be invested in individual securities. II- A 403(b) plan usually provides a 3 to 7 year graduated vesting schedule. III- A 403(b) plan must pass the ACP test if it is an ERISA plan. IV- In certain situations, a participant of a 403(b) plan can defer an additional $10,500 as a catch up to the 403(b) plan. A- IV only. B- I and II only. C- III and IV only. D- II, III, and IV only.

Solution: The correct answer is C. 403(b) plan assets cannot be invested in individual securities, and employee contributions to 403(b) accounts are always 100% vested. Statements "III" and "IV" are true. Remember, if an employee qualifies for the 15 year rule, the maximum elective deferral for 2023 may be as high as $33,000 ($22,500 deferral, plus $3,000 from the 15 year rule, plus $7,500 for the 50 and over catch-up).

Which of the following is not a qualified retirement plan? A- ESOP. B- 401(k) plan. C- 403(b) plan. D- Target benefit plan.

Solution: The correct answer is C. A 403(b) plan is a tax-advantaged plan (tax qualified), not a qualified retirement plan. All of the others are qualified plans subject to ERISA rules.

All of the following statements concerning cash balance pension plans are correct EXCEPT: A- The cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand, and as a cost saving measure. B- The cash balance plan is a defined benefit plan. C- The cash balance plan has no guaranteed annual investment return to participants. D- The cash balance plan is subject to minimum funding requirements.

Solution: The correct answer is C. A basic component of a cash balance plan is the guaranteed minimum investment return.

In order for a group term life insurance plan to be non-discriminatory, which of the following is true? A- At least 80% of all employees must benefit from the plan. B- At least 85% of the participants must be non-highly compensated employees. C- If the plan is part of a cafeteria plan, the plan must comply with the non-discrimination rules of Section 125. D- The bottom band of benefits must be no less than 10% of the top band with no more than a 2 times differential between bands.

Solution: The correct answer is C. A plan must benefit 70% of all employees or a group of which at least 85% are not key employees. If the plan is part of a cafeteria plan, it must comply with Section 125 rules. The difference between the bands in "D" must be no greater than 2.5 times the next smaller band with the bottom band being equal to no less than 10% of the top band.

Hot Dog Moving Company (HDM) sponsors a 401(k) profit sharing plan. In the current year, HDM contributed 20% of each employee's compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC is 2.5%. Alex, who is age 57, earns $177,778 and owns 7.5% of the company stock. What is the maximum amount that he may defer into the 401(k) plan for this year? A- $4,444 B- $11,000 C- $15,500 D- $22,500

Solution: The correct answer is C. Alex is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 4.5% (2.5% + 2%) and because he is over 50, he can defer the additional $7,500 (2023) as a catch-up contribution. Alex can defer $8,000 (4.5% × $177,778) and $7,500 (the catch-up) for a total of $15,500.

Which of the following statements regarding the Health Savings Account (HSA) is NOT true? A- The HSA, unlike the MSA, is available to most people. B- The HSA is like an IRA with money intended for qualified health care costs. C- If the money in the HSA is not used any given year it is forfeited. D- To enroll in an HSA plan, one must first be a participant in an HSA-qualified health insurance plan.

Solution: The correct answer is C. All statements except Option "C" are true. The money remains in the HSA (like an IRA) until distributed.

Which of the following statements regarding an age-based profit sharing plan is correct? A- An age-based profit sharing plan provides a greater benefit to those plan participants whose earnings exceed the Social Security wage base and who are over fifty years old. B- An age-based profit sharing plan only provides a benefit to those plan participants whose age is within 10 years of the age of the owner of the plan sponsor. C- An age-based profit sharing plan provides greater benefits to the older plan participants. D- Younger plan participants in an age-based profit sharing plan usually receive the majority of the profit sharing plan allocation.

Solution: The correct answer is C. An age-based profit sharing plan provides a greater benefit to older plan participants as the allocation of the plan contribution is based upon the age of the participants. Options "A" and "B" are false statements without any merit. Option "D" is incorrect because OLDER plan participants in an age-based profit sharing plan usually receive the majority of the profit sharing plan allocation.

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.

Solution: 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 $330,000 yet receives $66,000 contribution instead of the $82,500 contribution due to Section 415 limitation on a 25% money purchase plan). An excess benefit plan would put additional $16,500 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., $330,000 in 2023) applied to qualified plans.

Space available air travel for an airline employee provided as a fringe benefit is: A- Includable in taxable income of all covered expenses. B- Includable in the taxable income of key employees only. C- Excludable from the taxable income of all covered employees. D- Excludable from the taxable income of non-highly compensated employees only.

Solution: The correct answer is C. An exclusion applies to a service provided by an employer for an employee if it does not cause substantial additional costs. Generally this applies to excess capacity services such as airlines, buses, or trains.

How do cash balance plans differ from 401(k) plans? A- Cash balance plans are defined contribution plans. In contrast, 401(k) plans are a type of defined benefit plan. B- Participation in a typical 401(k) plan generally does not depend on the workers contributing part of their compensation to the plan, however, participation in a Cash Balance Plan does depend on a worker's contributions. C- The employer bears the risks and rewards of the investments in a Cash Balance Plan, while under 401(k) plans, participant bear the risks and rewards of investment choices. D- Plans, including 401(k) plans, are insured by the Pension Benefit Guaranty Corporation (PBGC), while the responsibility for the Cash Balance plans are not so insured.

Solution: The correct answer is C. Answer "A" is incorrect because Cash Benefit Plans are DB and 401(k) is a DC plan. Answer "B" is incorrect because it is workers' contributions that make up the basis for most 401(k) plans, while CB plans do not. Answer "D" is incorrect because while PBGC insures CB Plans, it does not insure 401(k) plans.

Robin just started at Financial University Network (FUN) and has been encouraged by several of the "old timers" to save part of her salary into the 401(k) plan. She is not yet convinced as she likes to shop. Which of the following statements is accurate regarding 401(k) plans? A- A 401(k) plan must allow participants to direct their investments. B- Deferrals into the 401(k) plan must be contributed by the end of the following calendar quarter into the plan. C- Employees that join the plan must be provided with a summary plan description. D- A 401(k) plan is financially safe because it must have an annual audit.

Solution: The correct answer is C. Answer c is correct as employees must be given a summary plan description, which provides basic information about the operation of the plan. Answer a is not correct as some 401(k) plans may have the asset managed by an investment manager. However, most 401(k) plans will provide for employee self directing of their 401(k) balances. Answer d is not correct as there is no requirement for an annual audit of a 401(k) plan.

Match the following statement with the type of retirement plan which it most completely describes: "This plan can provide for voluntary participant contributions which must be matched by the employer." A- Profit sharing plan with a 401(k) component. B- Money purchase plan. C- SIMPLE IRA. D- Defined benefit plan.

Solution: The correct answer is C. Answers "B" and "D" do not permit employee elective deferrals. The profit sharing plan "A" with 401(k) provisions do not require an employer match.The SIMPLE plan has a mandatory match.

Which of the following vesting schedules may a non-top-heavy profit sharing plan use? I- 2 to 6 year graduated. II- 3-year cliff. III- 1 to 4 year graduated. IV- 3 to 7 year cliff. A- I only B- II and III only C- I, II and III only D- I, II, III and IV

Solution: The correct answer is C. As a result of the PPA 2006, a profit sharing plan must vest at least as rapidly as a 3-year cliff or 2 to 6 year graduated schedule without regard to the plan's top-heavy status. The profit sharing plan can follow any vesting schedule that provides a more generous vesting schedule.

John and Connie, both age 35, are a married couple. Based on their retirement goal, a CFP® professional has determined that they need to save $10,000 per year in order to retire at their desired age of 65. John works for a pharmaceutical company, where he earns a $200,000 annual salary. The company sponsors a 401(k) plan, but does not offer a matching contribution. Connie works for an advertising company, drawing a $62,500 annual salary. She is currently contributing 8% of her salary to the company's 401(k) plan, which offers a dollar-for-dollar match up to 8%. What would be the best option for the CFP®professional to suggest to the couple with respect to their retirement savings goal? A- Suggest John make a 5% contribution to his 401(k) plan, in addition to Connie's contribution to her 401(k) plan. B- Suggest only John contribute 5% to his 401(k) plan. C- Suggest Connie continue to contribute 8% to her 401(k) plan, with John making no contribution. D- Suggest John make a 2.5% contribution to his 40

Solution: The correct answer is C. Based on her current salary, and company match, Connie's current 401(k) contribution is sufficient to fund their annual retirement savings goal. They are meeting their target for retirement. John is not currently contributing. With respect to the goal, they need no change. Therefore, no additional contribution is necessary. Connie's contribution = $62,500 x 8% = $5,000 Matching contribution = $5,000 Total contribution = $10,000 John could contribute 5% of his salary to his 401(k) plan to achieve their $10,000 goal, but since he receives no match, it would be more efficient to have Connie make the contribution, since she would only have to contribute $5,000 instead of $10,000.

Your clients, Nick and Betty Jo Byoloski, have come to you with some questions. She has been an employee of April Corporation for several years and received some stock options as compensation at times. He has worked with April Corporation as a consultant on several jobs over the last few years and was paid in part with stock options. Nick and Betty Jo want to know more about their situation regarding the options. What can you tell them? A- Betty Jo's options are qualified and Nick's options are non-qualified. B- Nick's options are non-qualified and Betty Jo's options are non-qualified. C- Nick's options are non-qualified and Betty Jo's are either qualified or non-qualified. D- Betty Jo's options are non-qualified and Nick's options are qualified.

Solution: The correct answer is C. Because Nick is not an employee, we know that his options are non-qualified. We cannot be sure about Betty's without more information.

To determine available retirement assets, all of the following should be included, EXCEPT: A- IRA accounts. B- Vested retirement plans. C- Mutual funds. D- Three month's cash in savings for emergencies.

Solution: The correct answer is D. Emergency funds should not be used to calculate retirement assets. There is a distinct possibility the funds may be used for the purpose set aside - an emergency. This would make these funds unavailable for use as a retirement income source.

Which of the following statements concerning choosing the most appropriate type of vesting schedule for a qualified plan --restrictive vs. generous--is (are) correct? I-Two advantages of choosing a restrictive vesting schedule are (1) to reduce costs attributable to employee turnover and (2) to help retain employees. II- Three advantages of choosing a liberal vesting schedule in which there is immediate and full vesting are (1) to foster employee morale (2) keep the plan competitive in attracting employees, and (3) to meet the designs of the small employer who desires few encumbrances to participation for the "employee family." A- I only. B- II only. C- I and II. D- Neither I or II.

Solution: The correct answer is C. Both Statements "I" and "II" are correct.

A non-safe harbor 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following statements are rules that apply to 401(k) salary deferrals? I-Salary deferrals into the 401(k) plan are limited to $22,500 for individuals younger than 50 for 2023. II- A non-discrimination test called the actual deferral percentage test applies to salary deferral amounts. A- I only B- II only C- I and II D- Neither I or II

Solution: The correct answer is C. Both Statements "I" and "II" are correct. ADP test applies in a non-safe harbor plan.

Which of the following statements are reasons to delay eligibility of employees to participate in a retirement plan? I- Employees don't start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service). II- 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- I only. B- II only. C- I and II. D- Neither I or II.

Solution: The correct answer is C. Both Statements "I" and "II" are correct. The statements speak for themselves. Costs are less with the delay.

One of the disadvantages of an ESOP is that the stock is in an undiversified investment portfolio. Which of the following statements is correct about ESOPs? I - An employee, age 55 or older, who has completed 10 years of participation in an ESOP may require that 25 percent of the account balance be diversified. II- An employee who receives corporate stock as a distribution from an ESOP may enjoy net unrealized appreciation treatment at the time of distribution. A- I only. B- II only. C- I and II. D- Neither I or II.

Solution: The correct answer is C. Both statements are correct. ESOP distribution in stocks are NUA (Net Unrealized Appreciation). Employees in an ESOP may demand 25% of the current balance be diversified.

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.

Solution: The correct answer is 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.

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 payroll taxes but federal and state income 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.

Solution: 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 (typically cash) 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. The eligible non-taxable cafeteria plan benefits are: adoption assistance, dependent care assistance, group term life, disability coverage. Generally can not include any plan that offers a benefit that defers an employee's compensation, like a contribution to a retirement plan. However, a cafeteria plan can include a qualified 401(k) plan (CODA) as an available non-taxable benefit (still subject to FICA).

Retirement plans qualified under IRC Section 401(a) have many benefits for employers and employees. Which of the following is correct regarding qualified plans? A- All employer contributions to a qualified plan are fully deductible in the year of contribution. B- Payroll taxes are avoided for all contributions to a qualified plan. C- All qualified plan assets are held in a tax exempt trust and all earnings within the trust are deferred from taxation until distributed from the plan. D- The non-alienation of benefits rule under ERISA provides complete protection from all creditors, including the IRS, unless the funds are distributed from the plan.

Solution: The correct answer is C. Choice a is incorrect because there are limits to the deductibility of contributions to a qualified plan. Generally, only contributions up to 25% of covered compensation can be deducted for a year. Choice b is incorrect as employee contributions are subject to payroll tax. Choice d is incorrect as the IRS can get to assets in a qualified plan as well as spouses via a QDRO

Which of the following statements concerning stock bonus plans and ESOPs is(are) true? I- They both give employees a stake in the company through stock ownership and allow taxes to be delayed on stock appreciation gains. II- They both limit availability of retirement funds to employees if an employer's stock falls drastically in value and create an administrative and cash-flow problem for employers by requiring them to offer a repurchase option (a.k.a. put option) if their stock is not readily tradable on an established market. A- I only. B- II only. C- I and II. D- Neither I or II.

Solution: The correct answer is C. Statement "I" lists advantages of choosing stock ownership plans and ESOPs. Statement "II" lists the disadvantages.

Wilber receives incentive stock options (ISOs) with an exercise price equal to the FMV at the date of the grant of $15. Wilber exercises these options 3 years from the date of the grant when the FMV of the stock is $35. Wilber then sells the stock 3 years after exercising for $45. Which of the following statements is (are) true? A- At the date of grant, Wilber will have ordinary income equal to $15. B- At the date of exercise, Wilber will have W-2 income of $20. C- At the date of sale, Wilber will have long-term capital gain of $30. D- Wilber's employer will have an income tax deduction related to the exercise of the option by Wilber.

Solution: The correct answer is C. Choice a is not correct as there is no income at the date of grant because the strike price equals the FMV. Choice b is not correct as there is no regular tax for ISOs. Choice d is not correct because the employer will not have an income tax deduction. Grant 15 Exercise @35 (AMT adjustment of $20) Sale $45 $10 LTCG from gain (exercise to sale) $20 LTCG from exercise Total $30 LTCG More information can be found in the infographics, Getting Started>Additional Resources>Infographics.

Qualified discounts on services provided by an employer (not to exceed 20%) offered as a fringe benefit, is: A- Includable in taxable income of all covered employees. B- Includable in the taxable income of key employees only. C- Excludable from the taxable income of all covered employees. D- Excludable from the taxable income of non-highly compensated employees only.

Solution: The correct answer is C. Covered employees are: Current employees, former retired or disabled employees, widow(er)s of those who died while employed, widow(er)s of former retired or disabled employees, partners performing services for the partnership, or leased employees providing services to a employer on a full-time basis for at least a year where the services are performed under the employer's primary control. Nondiscrimination rules apply to the exclusion for qualified employee discounts. The discount must be made available to all employees or to a group of employees defined under a reasonable classification designated by the employer that does not favor highly compensated employees. The exclusion for an employee is limited to the lesser of: 20% of the price offered to non-employee customers, or the employer's gross profit percentage multiplied by the price the employer charges non-employee customers for the property.

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.

Solution: 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 SEP-IRA is a form of defined contribution plan (although not a qualified plan). Which of the following apply to BOTH the SEP-IRA and a traditional defined contribution plan? I- Employer deductions limited to 15% of covered payroll. II- Requires a definite, written, non-discriminatory contribution allocation formula. III- Contributions cannot discriminate in favor of highly compensated employees. IV- Employer contributions subject to Medicare and Social Security taxes. V- Affiliated service group rules apply. VI- Top-heavy rules do NOT apply. VII- Permissible disparity or integration is NOT allowed. A- I, II, VI, and VII only. B- II, III, IV and VI only. C- II, III and V only. D- I, II, III, V and VII only.

Solution: The correct answer is C. Defined contribution plans have an employer deductibility limit of 25% of covered payroll. All defined contribution plans must have a written allocation formula so assets can be distributed in the mandated individual accounts. Employer contributions must bear uniform resemblance to compensation and cannot discriminate in favor of highly compensated. Employer contributions are not subject to any payroll related taxes. Top-heavy rules do apply to both. Both plans can integrate with Social Security (sometimes called permissible disparity). (Note: 5305-SEP does not allow permissible disparity.)

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.

Solution: 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.

Dr. Woods, age 29, is a new professor at Public University (PU) where he has a salary of $111,000. PU sponsors a 403(b) plan and a 457 plan. Dr. Woods also has a consulting practice called Damage Estimate Claims (DEC). He generates $200,000 of revenue and has $50,000 of expenses for DEC. Assume his self-employment tax is $20,000. What is the most that he could contribute to all of the retirement plans this year assuming he establishes a Keogh plan for DEC? A- $50,500 B- $60,500 C- $73,000 D- $85,000

Solution: The correct answer is C. Dr. Woods can contribute $22,500 to each of the 403(b) plan and the 457 plan. In addition, he can establish a Keogh plan and contribute 20% of his net self-employment income after deducting ½ self,-employment taxes. The 403(b) and 457 can both receive $22,500 (qualified and deferred comp plans). The Keogh needs to follow self-employment contribution rules (see the retirement pre-study book) $200,000 of income for DEC -$50,000 of expenses for DEC 150,000 Net income -10,000 (Assume his self-employment tax is $20,000, use ½) 140,000 × 20% (contribution rate / (1+contribution rate) = self-employed contribution rate) 28,000 In total $22,500 + $22,500 + 28,000 = 73,000 Only the 403(b) and Keogh would be limited to the section 415 limit. The 457 plan does not count towards the limit. 403(b) and Keogh contribution equal 50,500.

Dues to business-related organizations provided as a fringe benefit are: A- Includable in taxable income of all covered employees. B- Includable in the taxable income of key employees only. C- Excludable from the taxable income of all covered employees. D- Excludable from the taxable income of non-highly compensated employees only.

Solution: The correct answer is C. Dues and licenses are excluded from taxable income if directly related to the employee's job.

According to ERISA, which of the following is/are required to be distributed automatically to defined benefit plan participants or beneficiaries? I- Annual accrued benefit as of the end of the previous year. 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 III only. B- I and II only. C- II and IV only. D- IV only.

Solution: The correct answer is C. Employee accrued benefits are established by the pension formula, therefore are not required to be provided each year. (Defined contribution plans must provide an annual statement of account.) Because the participant has no individual account in a DB plan, a detailed list of investments is not required. The participant in a DB plan generally has no input in the investment choices within the plan.

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.

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

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.

Solution: 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.

Jessie and Carl have been married for 12 years and Jessie gave birth to triplets four years ago. Jessie is a Regional Director for a distribution company that offers a 401(k) plan with no match, and Carl is a stay-at-home dad. They are currently in the 24% tax bracket and expect to be in a lower tax bracket in retirement. Today they are meeting with Stephen, their CFP® professional to review their retirement plan. The best funding vehicle for Jessie and Carl to contribute to would be: A- Non-deductible traditional IRAs for each of them. B- A flexible premium deferred annuity. C- Jessie's 401(k). D- A Roth IRA.

Solution: The correct answer is C. Even though the 401(k) plan does not offer a match, it would provide a current income tax deduction (which is not available with any of the other options chosen). The Roth IRA would be less appropriate than the 401(k) plan because they expect to be in a lower income tax bracket during retirement.

Which of the following statements concerning the use of life insurance as an incidental benefit provided by a qualified retirement plan is (are) correct? I- The premiums paid for the life insurance policy within the qualified plan will trigger a taxable event for the participant at the time of payment. II- Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer's aggregate contributions to the participant's account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer's aggregate contributions to the participant's account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income at or before retirement. A- I. B- II. C- I and II. D- Neither I or II.

Solution: The correct answer is C. Every year the plan participant pays income tax on the dollar value of the actual insurance protection -- approximately equal to the term insurance cost. This is commonly called the PS58 cost. The sum of all those costs is the participant's basis.

Which of the following information is required before an effective retirement funding plan can be formulated: I- Age of client and spouse. II- Post-retirement income sources. III- An assumption about future inflation. IV- An assumption about returns on various asset classes. A- I, II, and IV only. B- II, III and IV only. C- I, II, III and IV. D- I and II only.

Solution: The correct answer is C. Financial planners do not make predictions on inflation or future returns but they do make assumptions. Assumptions are used for planning purposes, but these are not predictions. All of the information is relevant.

Calculate the maximum contribution (both employer and employee elective deferrals) for an employee (age 39) earning $350,000 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- $66,000 B- $64,500 C- $62,100 D- $22,500

Solution: The correct answer is C. For the purposes of this calculation, the compensation exceeding $330,000 is not recognized. The employer is contributing 12% of $330,000 (or $39,600) for the money purchase plan and the employee may contribute up to $22,500 in 2023 to the 401(k) plan. This totals $62,100.

Raymond, age 73, is preparing to take his annual required minimum distribution from his retirement plans. He has two 401(k) plans from previous employers with a combined value of $700,000, three traditional IRAs, each with a balance exceeding $100,000, and a Roth IRA with a value of $62,000. A CFP® professional calculated the amount of the required minimum distribution for Raymond for the year. Which of the following statements is correct regarding the choices Raymond has in satisfying the required minimum distribution? A- Raymond must take a separate distribution from each of the six retirement plans. B- Raymond can take one aggregate distribution from one of the 401(k) plans, and one aggregate distributions from one of the four IRAs. C- Raymond must take a separate distribution from each of the two 401(k) plans, and he can take an aggregate distribution from one of the three traditional IRAs, and no distribution from the Roth IRA. D- Raymond can take an aggregate distribution from any one of the six retirement plans as long as he includes the total value of all six plans in the calculation.

Solution: The correct answer is C. If an individual has multiple traditional IRAs, the required minimum distribution must be calculated separately for each traditional IRA annually. However, the required minimum distributions can be aggregated and the aggregate amount can be distributed from one of the traditional IRAs if the individual so desires. A separate minimum distribution must be taken from each qualified plan annually. Roth IRAs do not require minimum distributions.

Which of the following accurately describes the characteristics of a "Rabbi trust"? I- It is an irrevocable trust but assets are still subject to the employer's creditor demands. II- The employee is taxed immediately on assets placed into the trust because the trust is irrevocable and the employer doesn't have access to those assets. III- Retirement payments out of the trust are subject to ordinary income taxes. IV- The survivor's benefit, payable under the trust provisions, will not be included in the survivor's gross estate because it is considered a payment of life insurance. A- I only. B- I and II only. C- I and III only. D- II, III and IV only.

Solution: The correct answer is C. In an informally funded plan (Rabbi trust), the employee has the segregated assets as security of the agreement, assuming the employer remains solvent and the assets are not taken by the employer's creditors. This risk of having creditors take the assets inside a "Rabbi trust" is what constitutes a substantial risk of loss or forfeiture and keeps the employee from being considered in "constructive receipt" of the informally funded assets.

Which of the following would reduce the amount needed to be saved on an annual basis in order to accumulate sufficient retirement assets? A- Accelerated inflation. B- Expansion of current lifestyle. C- Excess returns on investments over projections. D- Increased life expectancy due to medical advances.

Solution: The correct answer is C. Increasing inflation, expanded lifestyle, and increased life expectancy all increase the amount needed to fund retirement needs.

According to ERISA, which of the following is/are required to be distributed annually 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.

Solution: 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 requirement 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.

Which of the following types of funding vehicles is eligible (approved) for TSAs? I- Fixed Annuity Contracts. II- Life Insurance policy which develops large cash values. III- Mutual funds. IV- Variable annuity contracts. V- Custodial accounts holding individual stocks and bonds. VI- Credit union share account. A- I, II, III, IV, V and VI. B- I, III, IV, V and VI. C- I, III and IV only. D- I and VI only.

Solution: The correct answer is C. Life insurance can only be incidental in the plan. Bank and credit union accounts are not eligible investments. Custodial accounts can only hold mutual funds. TSA can be invested in annuities and mutual funds.

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 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: $22,500 $15,600 $14,500 $13,400

Solution: 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.

Which one of the following statements is NOT correct? A- Profit sharing plans fall under the broad category of defined contribution plans. B- Profit sharing plans are best suited for companies that have unstable earnings. C- A company that adopts a profit sharing plan is required to make contributions each year. D- The maximum tax deductible employer contribution to a profit sharing plan is 25% of covered compensation.

Solution: The correct answer is C. Minimum funding (mandatory annual contributions) are a characteristic of pension plans, not profit sharing plans.

Beth works for MG Inc. and was hired right out of school after graduating with a double major in marketing and advertising four years ago. Beth receives a $12,000 distribution from her designated Roth account in her employer's 401(k) plan as a result of her being disabled. Immediately prior to the distribution, the account consisted of $15,000 of investment in the contract (designated Roth contributions) and $5,000 of income. What are the tax consequences of this distribution? A- She will have $12,000 of income. B- She will have $5,000 of income. C- She will have $3,000 of income. D- She will have no income tax consequences resulting from the distribution.

Solution: The correct answer is C. Non qualified distributions from a designated Roth account associated with a 401k are subject to tax on a pro-rata basis. Her total account is the 15,000 invested and the 5,000 of income for a balance of $20,000. Since 75% (15,000/20,000) of the value in the account consists of basis and the remaining 25% consists of earnings (5,000/20,000), that same ratio of basis to income will apply to the $12,000 distribution. It is not a qualified distribution because she has not held the account for at least five years. The 10% early withdrawal penalty does not apply to distributions due to disability.

Jayco established a 401(k) plan for the employees of their Chicago office. Of the 90 eligible employees the company employs in the United States, 40 of them are covered under the 401(k) plan. The plan benefits non-highly compensated employees only, and provides them with 10 investment options. Does the 401(k) plan satisfy the qualified plan requirements? A- No, because 401(k) plans must cover at least 50 employees. B- No, because the plan will automatically fail the ADP test. C- Yes, because no highly compensated employees are covered. D- Yes, because the plan offers more than three investment options.

Solution: The correct answer is C. Only defined benefit plans must satisfy the "50/40" test. The ADP test only serves to limit the contributions of the highly compensated employees.

Martha has AGI of $1,000,000 (which is all comprised of earned income). She is single and age 45. She participates in her employer's SIMPLE plan. Which of the following statements is true? A- She can contribute $6,500 to a Traditional IRA and deduct all $6,500. B- She can contribute $7,500 to a Traditional IRA and deduct all $7,500. C- She can contribute $6,500 to a Traditional IRA and deduct $0. D- She can contribute $7,500 to a Traditional IRA and deduct $0.

Solution: The correct answer is C. Participating in a SIMPLE plan is considered being an "Active Participant." She can contribute $6,500 (2023) to a Traditional IRA but cannot deduct any since she is above the AGI limitation for a single active participant ($73,000 - $83,000) (2023). She is unable to contribute to a Roth IRA because she is above the AGI limitation of $138,000 - $153,000 (2023). Because she is not 50 or older she is not allowed to make the $1,000 (2023) catch up contribution.

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.

Solution: 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).

Match the following statement with the type of retirement plan which it most completely describes: "A qualified plan which allows employee elective deferrals of 100% of includible salary and has a mandatory employer match" is... A- A Profit sharing plan. B- A Money purchase plan. C- A SIMPLE 401(k). D- A Defined benefit plan.

Solution: The correct answer is C. Profit sharing plans "A" are not contributory. Answers "B" and "D" do not permit employee elective deferrals.

Which of the following statements are accurate for a profit sharing plan? 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.

Solution: 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.

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.

Solution: 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 explain the tax ramifications of a non-qualified deferred compensation plan? I- A participant in an unfunded plan will not be currently taxed if the promise of benefits is unsecured and the agreement is executed prior to the first day of service under the agreement. II- If a funded plan is established by a general partnership and the benefits for general partners are fully vested, then contributions are deductible to the partnership and each partner receives a pro-rata share of the reduced partnership income. III- A funded plan with a "Rabbi Trust" will not be currently taxable to the participant, even though vested in the benefits, due to the "substantial risk of forfeiture." IV- Payments to be made to a participant's beneficiary are not included in the decedent's gross estate if the payments are guaranteed. A- I only. B- I, II and III only. C- I and III only. D- II, III and IV only.

Solution: The correct answer is C. Statement "II" is incorrect because any funded plan is taxable unless a Rabbi trust is utilized. Statement "IV" in incorrect because the NPV of the guaranteed future income will be included in the gross estate of the deceased participant.

Joe Liner works at a company that is considering options regarding its future legacy payments and it needs to find current tax deductions. One option the company is considering is funding a VEBA this year. Joe is uneasy but open to the idea because he has heard that more benefits may be funded in the VEBA. Which of the following are permitted under a VEBA? I- Life, sickness and accident benefits II- Retirement benefits III- Severance and supplemental unemployment IV- Job training V- Commuter benefits A- I, II and III only. B- II and IV only. C- I, III and IV only. D- II, III and V only.

Solution: The correct answer is C. Retirement benefits and commuter benefits cannot be included in a VEBA.

Which of the following apply to qualified retirement plans in the U.S.? I- Relatively small portion of the economy. II- Tax exempt. III- Tax deductible to employer. IV- Exempt from federal regulation. A- I and IV only. B- II and IV only. C- II and III only. D- I, II and III only.

Solution: The correct answer is C. Retirement plans constitute over 10% of the GNP in the U.S. economy. The plans themselves are exempt from taxation (except in the case of UBTI), and employers do receive a tax deduction for qualifying contributions. Qualified plans are highly regulated.

Deepak opened a Roth IRA on April 15, 2021 and made a contribution for 2020. He was 58 years of age at the time he made the contribution to his Roth IRA. Over the years he has made $30,000 in both contributions and a small conversion. On May 15, 2023 the entire account balance was $50,000 and he took out $45,000 to pay for his wedding and honeymoon. Which of the following statements is true? A- He will not include anything in income and will not be subject to the 10% early withdrawal penalty. B- He will include $15,000 in income and will be subject to the 10% early withdrawal penalty on $15,000. C- He will include $15,000 in income but will not be subject to the 10% early withdrawal penalty. D- He will include $20,000 in income but will not be subject to the 10% early withdrawal penalty.

Solution: The correct answer is C. Roth distributions are tax free if they are made after 5 years and because of 1) Death, 2) Disability, 3) 59.5 years of age, and 4) First time home purchase. He does meet a qualifying reason because he is over 59.5 in 2022 if he was 58 in 2021. However, he did not meet the 5 year holding period. He only has about 4.5 years. His distribution does not receive tax free treatment. The treatment for a non-qualifying distribution allows the distributions to be made from basis first, then conversions, then earnings. His basis will be tax free, leaving only the earnings as taxable income. Since he did not take the entire account balance he will only be subject to tax on the $15,000 of earning withdrawn. The 10% penalty does not apply to this distribution since he qualifies for the 59.5 exception to the penalty. Opened 2021 (age 58), but funded for 2020 (we use Jan 1 regardless of contribution date). Contributions 30,000 (he is over age 50 and can include catch up contributions) Earnings 20,000 Withdrew 45,000. 30,000 (contribution) no tax, no penalty 15,000 (earnings) no penalty for early withdrawal since he is over age 59 1/2. The 15k will be taxable since he did not have the account open and funded for 5 years. If it had been, it would be a tax free distribution. 2020 opened - year 1 2021 age 58 - year 2 2022 age 59 - year 3 2023 age 60 - year 4 2024 age 61 - year 5 2025 age 62 - cleared 5 years, no tax would be assessed on earnings.

Which of the following is a correct statement about the income tax implications of employer premium payments for group health insurance? A- An S Corporation can only deduct 70% of the premiums for all employees. B- In a sole proprietorship, the premiums for both the owner and the non-owner are fully deductible. C- If stockholder/employees of a closely held C corporation are covered as employees, the premiums are fully deductible. D- Premium costs paid by a partnership are passed through to the partner, who can deduct 70% of the costs on their individual tax returns.

Solution: The correct answer is C. S Corporations and proprietorships cannot deduct any premiums for group health insurance for owners. Non-owner employee health premiums are fully deductible to both entities. Answer "D" is incorrect because partners are able to deduct 100% of the health insurance premium on their individual tax returns.

Which statement(s) is/are true for a target benefit plan in 2023? I- It favors older participants. II- It requires an actuarial assumption. III- The employer's maximum deductible contribution is 25% of employee's salary. IV- The maximum individual annual additions is the lesser of 100% of pay or $66,000. A- I and IV only. B- II and III only. C- I, II and IV only. D- IV only.

Solution: The correct answer is C. Statement "III" is incorrect. The employer limit is 25% of covered compensation.

Which of the following correctly describes the tax implications of a self-funded accident or medical plan where the employer reimburses the employee directly? I- In a discriminatory plan, the employer cannot deduct the reimbursements paid to the employee. II- In a discriminatory plan, a highly-compensated employee must include the excess benefit in his or her income. III- In a non-discriminatory plan, the benefits received by employees are generally tax free without limitation. IV- In a non-discriminatory plan, the employer can deduct reimbursements to the employee if they are paid to the employee or the employee's beneficiary and are considered reasonable compensation. V- In a discriminatory plan, benefits received by non-highly compensated employees are generally tax free without limit. A- I, II and IV only. B- II, III and IV only. C- III, IV and V only. D- I, III, IV and V only.

Solution: The correct answer is C. Self-Insured plans are ones in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, Self-Insured employers pay for claims out-of-pocket as they are presented instead of paying a pre-determined premium to an insurance carrier for a Fully Insured plan. Statement "I" is a false statement, because the employer can always deduct the premiums. Reimbursements to employees in a self-funded plan are considered the premiums as traditional premiums are not paid to an insurance company, the employer funds the cost. Statement "II" - The highly compensated employees may be required to pay taxes on all or part of the reimbursements.

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.

Solution: 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.

Complex Corporation is ready to adopt a profit sharing plan for eligible employees. Which of the following groups would have to be considered in meeting the statutory coverage and participation tests? I- Employees of Simple Corporation, in which Complex owns 85% of the stock. II- Employees of Universal Corporation, in which Complex owns 55% of the stock. III- Rank and file workers at Complex who are union members with a contract that provides retirement benefits as a result of good-faith collective bargaining. IV- Employees who are leased and covered by the leasing corporation's profit sharing plan. A- I only B- I and II C- I and IV D- II and III

Solution: The correct answer is C. Simple must be considered because Complex owns more than 80% and the leased employees must be considered because their leasing company's plan is not a pension plan. Universal would not be considered a subsidiary because it is only 55% not more than 80%. The union employees are excluded from testing by the IRC.

Sarah is age 43 and teaches at Noah Webster, a public school. She has taught at Noah Webster for 15 years and will earn $35,000 this year. She has made total deferrals of $47,000 into a 403(b) plan over the years. She wants to contribute the maximum this year into her TSA through the school. Assuming none of the catch-up provisions are applicable to her this year, what is the maximum elective salary deferral for the current year? A- $6,500 B- $7,500 C- $22,500 D- $30,000

Solution: The correct answer is C. Statement "A" ($6,500) is the IRA maximum, NOT 403(b) (TSA) maximum. Statement "B" ($7,500) is the catchup provision amount for IRAs in 2023.

Chris Barry, 59-years old, has been offered early retirement with an option of a two-year consulting contract. He has been a participant for the past 20 years in both the company defined benefit plan and defined contribution plan. His account balance is $120,000 in the profit-sharing plan and the present value of accrued benefit of the defined benefit plan is $240,000. Both provide for a lump sum distribution. Which of the following option(s) is/are available under the lump sum distribution rules? I- Elect ten-year averaging on both plans. II- Roll over the taxable portions of both plans to an IRA. III- Elect long-term capital gains treatment on the DB plan. IV- Elect five-year averaging on both plans. A- I, II and III only. B- I and II only. C- II only. D- IV only.

Solution: The correct answer is C. Statement "I" is incorrect because he is not old enough for ten-year averaging. Statement "II" is correct because the taxable portion of any lump sum distribution may be rolled over into an IRA. Statement "III" is incorrect because he is not old enough to qualify for pre-74 capital gain treatment nor does he even have any actual pre-74 capital gain in the plan as he has only been in the plan for the last 20 years. Statement "IV" is incorrect because five-year averaging was repealed in 1999.

Which of the following statements are accurate concerning integration ("permissible disparity") rules for qualified plans? I- The integration base level for a defined contribution plan can exceed the current year's Social Security taxable wage base. II- Permitted disparity levels reduce benefits in a defined benefit plan if employee retires early. III- It isn't possible to have a defined benefit plan formula which eliminates benefits for lower paid employees. A- I only. B- I and II only. C- II and III only. D- I and III only.

Solution: The correct answer is C. Statement "I" is incorrect because the integration levels cannot be higher than the Social Security wage taxable wage base. It may be lower, but cannot be higher. All other statements are accurate.

Which statement(s) is/are true for a target benefit plan in 2023? I. It favors older participants. II. It requires an actuarial assumption. III. The employer's maximum deductible contribution is 25% of employee's salary. IV. The maximum individual annual additions is the lesser of 100% of pay or $66,000. A- I and IV only. B- II and III only. C- I, II and IV only. D- IV only.

Solution: The correct answer is C. Statement "III" is incorrect. The employer limit is 25% of covered compensation.

Carolyn Smart wanted to volunteer full-time and decided to retire from Lotsa Cash Corporation at the age 57, after 15 years of service. She requested a total distribution of her account in the Lotsa Cash Corporation's profit sharing plan and received a check, made payable to her. Her account balance was $60,000 on her final day of employment. Which of the following statements describe the consequences of this distribution? I- Eligible for 10 year forward averaging II- Subject to 10% penalty III- Eligible for Rollover IV- Subject to mandatory 20% withholding V- Exempt from the 10% early withdrawal penalty A- I, II and III only B- II, III and IV only C- III, IV and V only D- III and IV only

Solution: The correct answer is C. Statements II and V cannot co-exist. She is not old enough for statement I. She is not subject to 10% penalty because this is a qualified plan and she is over 55 (10% early withdrawal is waived for separation of service after age 55). Distributions from qualified plans are subject to mandatory 20% withholding.

Frank Drebin is concerned about the impact that inflation will have on his retirement income. He currently earns $40,000 per year. Assuming that inflation averages 5.5% for the first five years, 4% for the next five years and 3.5% for the remaining time until retirement, what amount must Frank's first-year retirement income be when he retires thirteen years from now? Assume that Frank wants it to equal the purchasing power of his current earnings. A- $62,550 B- $68,841 C- $70,520 D- $80,231

Solution: The correct answer is C. Step 1: Assuming that inflation averages 5.5% for the first five years PV = 40,000 I = 5.5 N = 5 PMT = 0 FV = 52,278 Step 2: 4% Assuming that inflation averages for the next five years PV = 52,278 I = 4 N = 5 PMT = 0 FV = 63,605 Step 3: Assuming that inflation averages 3.5% for the remaining time until retirement PV = 63,605 I = 3.5 N = 3 PMT = 0 FV = 70,520 Frank's first year income adjusted for inflation

A client turned age 73 on October 1, 2023 and must receive a minimum distribution from his IRA account, which had a value (at the end of the prior year) of $48,000. His spouse, age 63, is the beneficiary of the IRA account. The life expectancy according to IRS tables for ages 72 and 73 use the factors of 27.4 and 26.5 respectively. If the client takes a $1,000 distribution by April 1, 2024 what will be the initial tax penalty, if any, on the first RMD? A- $406.00 B- $376.00 C- $203.00 D- $188.00

Solution: The correct answer is C. The $48,000 is subject to a 26.5-year life expectancy of the client, thus minimum distribution is $1,811 per year. If the client takes only $1,000, the balance ($811) is subject to a 25% excise tax or $203 penalty. Secure 2.0 revised the penalty from 50% to 25%. The penalty may be further reduced if taken within the designated distribution timeframe.

Balloon Lights Over the World company (BLOW) provides lighted hot air balloon rides all over the world. 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 vesting.

Solution: 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 is a permitted change and would not result in a reduction in current vesting.

Robert Sullivan, age 56, works for Dynex Corporation, and earns $360,000. Dynex Corp. provides a non-elective 2% contribution to its SIMPLE IRA plan. Which one of the following is the maximum amount that could go into Robert's account this year? A- $15,500 B- $19,000 C- $25,600 D- $26,200

Solution: The correct answer is C. The compensation limit of $330,000 applies to SIMPLE IRAs when non-elective contributions are made. Therefore the employer contribution is $6,600 (330,000 x 2%) and the employee can contribute up to $15,500 for 2023. In addition, Robert is 50 years old or older so he may make an additional catch-up contribution of $3,500. His total contribution is $6,600 + $15,500 + $3,500 = $25,600.

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 2023 if the ADP of the non-highly employees is 1%? A- $30,000 B- $23,000 C- $11,500 D- $4,000

Solution: The correct answer is C. The maximum annual addition to qualified plan accounts is $66,000. If Reviews Are Us contributes $36,000 ($200,000 × 18%) to the profit sharing plan and Carol receives $7,000 of forfeitures, she may only defer $23,000 ($66,000 - $36,000 - $7,000) before reaching the $66,000 limit. However, she will also be limited by the ADP of the non-highly employees because she is highly compensated (compensation greater than $150,000). If the non-highly employees are deferring 1% then the highly compensated employees can defer 2% (1×2=2). Therefore, she is limited to a deferral of $4,000 (200,000 x 2%). Since she is 50 or older she can also defer the catchup amount of $7,500 which is not subject to the ADP limitation. Therefore, her maximum deferral is $11,500.

Stewart, single and age 32, contributed $1,500 into a payroll deduction IRA sponsored by his employer. His annual earned income is $40,000. What is the maximum he can contribute to a Roth IRA for the current year? A- $0 B- $3,000 C- $5,000 D- $6,500

Solution: The correct answer is C. The maximum combined contribution for Roth and/or traditional IRAs is $6,500 (2023). $6,500 maximum - $1,500 payroll deduction IRA leaves $5,000 available for the Roth IRA. The Payroll Deduction IRA is probably the simplest retirement arrangement that a business can have. No plan document needs to be adopted under this arrangement. The employer has no filing requirements. Only employees make the contributions. Any size business can provide this. Under a Payroll Deduction IRA, an employee establishes an IRA (either a traditional or a Roth IRA) with a financial institution. The employee then authorizes a payroll deduction for the IRA. The employer's responsibility is simply to transmit the employee's authorized deduction to the financial institution. In general, if this arrangement is offered to any employee then it should be offered to all employees.

Abe's Apples has an integrated defined benefit pension plan. The plan currently funds the plan using a funding formula of Years of Service × Average of Three Highest Years of Compensation × 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%

Solution: The correct answer is C. The maximum disparity using the excess method is the lesser of the formula amount (40 years × 1.5%) or 26.25% (35 years × .75%). 35 years and .75% are the maximums that can be used under the excess method. 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%

Solution: The correct answer is C. The maximum excess rate is 2 times the contribution rate limited to a disparity of 5.7%. Therefore, 2 × 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.

XYZ has a noncontributory qualified profit sharing plan with 300 employees in total, 200 who are nonexcludable (50 HC and 150 NHC). The plan covers 75 NHC and 35 HC. The NHC receive an average of 4% benefit and the HC receive 5.8%. Which of the following statements is (are) correct? I- The XYZ company plan meets the ratio percentage test. II- The XYZ company plan fails the average benefits test. III- The plan must and does meet the ADP test. A- 1 only. B- 2 only. C- Both 1 and 2. D- 1, 2 and 3.

Solution: The correct answer is C. The plan does not have to meet the ADP test because it is a noncontributory plan. The ADP test would apply if there were a non safe harbor 401(k) plan. The plan meets the ratio percentage test and fails the average benefits test. Ratio percentage test (75/150) divided by (35/50) equals 71.4% PASSES Average benefits percentage test: 4% / 5.8% = 68.97% FAILS

Angelo's Bakery has 105 employees. 90 of the employees are nonexcludable and 15 of those are highly compensated (75 are nonhighly compensated). The company's qualified profit sharing plan benefits 8 of the highly compensated employees and 40 of the nonhighly compensated employees. Does the profit sharing plan sponsored by Angelo's Bakery meet the coverage test? A- Yes, the plan meets the average benefits percentage test. B- Yes, the plan meets the general safe harbor test. C- Yes, the plan meets the ratio percentage test. D- Yes, the plan meets ratio percentage test and the general safe harbor test.

Solution: The correct answer is C. The plan meets the ratio percentage test. The percentage of NHC employees covered by the plan is 53.33% and the percentage of HC employees covered by the plan is 53.33%. 8 of the 15 HCE are benefiting or 53.33% 40 of the 75 NHCE are benefiting of 53.33% The final step is to divide NHCE % into HCE %; 53.3% / 53.3% = 100%, which is greater than the ratio requirement of at least 70%.

An employer-subsidized van pool provided as a fringe benefit is: A- Includable in taxable income of all covered employees. B- Includable in the taxable income of key employees only. C- Excludable from the taxable income of all covered employees. D- Excludable from the taxable income of non-highly compensated employees only.

Solution: The correct answer is C. This is considered a statutorily exempt benefit.

A parent-subsidiary group exists if the parent company owns what percentage of voting stock in another corporation? A- At least 50%. B- More than 50%. C- At least 80%. D- More than 80%.

Solution: The correct answer is C. This is important because parent-subsidiary companies must have substantially equal benefits or cover employees of all subsidiary companies under the same plan.

Which statements below accurately reflect characteristics of the Tax Sheltered Annuity (TSA)? I- Annuity payments from a TSA are taxed using the three-year rule. II- Employers may make matching contributions or contribute a fixed percentage. III- An employee under age 50, who contributed $8,000 to a 401(k) plan is limited to contributing a maximum of $14,500 to a salary reduction TSA. IV- At the TSA owner's death, the full amount of proceeds paid to beneficiaries is included in the gross estate of the decedent. A- I, II and III only. B- I, II and IV only. C- II, III and IV only. D- I, III and IV only.

Solution: The correct answer is C. Total salary reductions for qualified 401(k) and TSA is limited to $22,500 per year in 2023. Contributions to 401(k)s and 403(b)s are aggregated such that they may not exceed the total annual limit. The TSA has make-up provisions that allow certain employees to make up contributions that could have been made in the past but were not. All assets in qualified plans are part of the gross estate of the account owner. Employers may make matching contributions or contribute a fixed percentage of an employee's compensation to a TSA.

Jake established a traditional IRA five years ago at a local financial institution. He is considering the purchase of a limited partnership interest with his IRA funds. A CFP® professional would inform him that some of the income earned by the limited partnership may be taxable to Jake because of which rules? A- Front-loading. B- Prohibited IRA investments. C- Unrelated business taxable income. D- At Risk Rule.

Solution: The correct answer is C. Unrelated business taxable income is often reported on limited partnership K-1s. This would potentially cause some of the partnership earnings to be taxable currently, even though the partnership interest is held inside an IRA.

Your client's employer has recently adopted a group universal life insurance plan. The advantages of such a plan for your client typically include all of the following EXCEPT that: A- It allows employees to borrow or withdraw cash. B- It provides an opportunity to continue coverage after retirement. C- The entire premium cost is paid by the employer. D- It provides flexibility in designing coverage to best meet individual needs.

Solution: The correct answer is C. Usually, the employee is required to pay part or all of the premium cost of group universal life insurance.

WestN, Inc. sponsors a 401(k) profit sharing plan with a 50% match. In the current year, the company contributed 20% of each employee's compensation to the profit sharing plan in addition to the match to the 401(k) plan. The company also allocated a forfeiture allocation of $7,000. The ADP of the 401(k) plan for the NHC is 4%. Wade, who is age 45, earns $210,000 and owns 19% of the company stock. If Wade wants to maximize the contributions to the plan, how much will he defer into the 401(k) plan? A- $22,500 B- $12,600 C- $11,333 D- $8,400

Solution: The correct answer is C. Wade is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 6% (4% + 2%). Wade is also limited by the 415(c) limit of $66,000. Since the company contributes $49,000 (20% of $210,000 + $7,000 of forfeiture allocations), he only has $17,000 to split between the deferral and the match. Thus, he contributes $11,333* and the match is $5,667, which when added to the $49,000 totals $66,000. 6% of his salary of $210,000 is $12,600. However, he cannot defer this amount due to the 415(c) limit. *When he contributes they match 50%, so for every dollar he contributes 1.5 × that amount goes into the plan. Take 17,000/1.5 = $11,333

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.

Solution: 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.

Daniel, age 55, just took a $12,000 withdrawal from his traditional IRA. Immediately before the distribution, the value of the traditional IRA was $210,000, and Daniel had a basis of $60,000. The amount of the early withdrawal penalty on this distribution is: A- $0. B- $343. C- $857. D- $1,200.

Solution: The correct answer is C. When there is basis in an IRA, it means there were contributions made that were not deductible. Those non-deductible contributions will come out tax free. When there is basis, the distributions will be a pro-rata amount of basis and taxable amounts. The early withdrawal penalty is based on the taxable portion of the distribution. The taxable portion of the IRA distribution is calculated as follows: Tax-free portion of distribution = (Basis / Fair Market Value) x Distribution Tax-free portion of distribution = ($60,000/$210,000) x $12,000 Tax-free portion of distribution = $3,429 Taxable portion of distribution = Total Distribution - Tax-Free Portion Taxable portion of distribution = $12,000 - $3,429 Taxable portion of distribution = $8,571 The penalty is 10% of the taxable distribution, or $857.

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).

Solution: 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.

An advantage of a cross-tested retirement plan is that it: A- Offers insolvency protection from the Pension Benefit Guarantee Corporation. B- Does not require the filing of Form 5500 even if the account assets are greater than $250,000. C- Allows the employer to implement a 5-year cliff vesting schedule. D- Permits a higher employer contribution on behalf of older employees without violating non-discrimination rules.

Solution: The correct answer is D. A is incorrect. The Pension Benefit Guarantee Corporation does not provide coverage for cross-tested plans. B is incorrect. A cross-tested plan is a type of qualified profit-sharing plan and therefore generally requires the filing of a Form 5500 each year. C is incorrect. Only defined benefit plans permit 5-year cliff vesting schedules.

Paul is considering establishing a defined benefit plan for his company, Viking. He has a blend of highly compensated employees and rank and file employees, who have varying income levels. After doing some research, he wants to know which of the following formulas he is not permitted to use. A- Base the benefit on the years of service and salary level of employees, while taking into consideration some of the benefits of Social Security. B- Base the benefit retirees receive on a fixed percentage of every employee's salary, limited to the annual compensation limit. C- Define the benefit for retirees as a fixed dollar amount, regardless of income level. D- He could use any of the above choices.

Solution: The correct answer is D. All of the above are benefit formulas used by defined benefit plans.

Which of the following is/are a defined benefit plan formula(s)? A- Unit benefit (a.k.a. percentage of earnings per year of service) formula. B- Flat-percentage formula. C- Flat-amount formula. D- All of the above.

Solution: The correct answer is D. All of the above are benefit formulas used by defined benefit plans.

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.

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

Which of the following qualified plans would allocate a higher percentage of the plan's current contributions to a certain class or group of eligible employees? I- A profit sharing plan that uses permitted disparity. II- An age-based profit sharing plan. III- A defined benefit pension plan. IV- A target benefit pension plan. A- I only. B- I and III only. C- II and IV only. D- I, II, III and IV.

Solution: The correct answer is D. All of the listed plans would allocate a higher percentage of a plans current cost to a certain class of eligible employees.

Which of the following factors may affect a retirement plan? I- Career earnings. II- Retirement life expectancy. III- Mortality. IV- Savings rate. A- I and II only. B- II and III only. C- I, III and IV only. D- All of the above.

Solution: The correct answer is D. All of the options may affect a retirement plan either positively or negatively. Reduced work life expectancy may provide an insufficient savings period while an increased retirement life expectancy increases capital needs for retirement. A low savings rate may create an inability to meet capital requirements. Increased inflation rates will reduce purchasing power. The career earnings will affect the retirement need and as mortality increases, less is needed at retirement.

Which of the following factors may affect a person's individual retirement planning? I- Work life expectancy. II- Retirement life expectancy. III- Inflation. IV- Savings rate. A- I and II only. B- II and III only. C- I, III, and IV only. D- All of the above.

Solution: The correct answer is D. All of the options may affect a retirement plan either positively or negatively. Reduced work life expectancy may provide an insufficient savings period, while an increased retirement life expectancy increases capital needs for retirement. A low savings rate may create an inability to meet capital requirements. Increased inflation rates will reduce purchasing power.

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.

Solution: The correct answer is D. All of the statements are accurate.

Factors which would affect a participant's retirement benefits in a target benefit plan include: I- The actuarial assumptions used to determine plan contributions. II- The total return on plan assets. III- The age of the participant. IV- The includible compensation for the plan year for the participant. A- I and II only. B- I and III only. C- I, II and III only. D- I, II, III and IV.

Solution: The correct answer is D. All of these apply.

Employers provide benefits to employees for which of the following reasons: I- Assist employees with needs which they otherwise may not be able to meet. II- Reduce tax burden on employees. III- Reduce tax burden on employers. IV- Attract and maintain quality employees. A- II and III only. B- I, II and III only. C- II, III and IV only. D- I, II, III and IV.

Solution: The correct answer is D. All of these are valid reasons.

Which of the following accurately describes the similarities between a traditional Individual Retirement Account and a SEP-IRA? I. Individual ownership of the account. II. All contributions into the account are fully owned by participant. III. Subject to early withdrawal penalties and minimum distribution regulations. IV. All distributions from plan taxed as ordinary income. A- I and III only. B- II and IV only. C- II, III and IV only. D- I, II, III and IV.

Solution: The correct answer is D. All of these characteristics are shared by traditional IRAs and SEP-IRAs. Any non-deductible contribution to an IRA are taxed as a pro-rata distribution.

Which of the following employee fringe benefits would be taxable to the employees? A- Business use of an employer-provided automobile. B- Employee of an airline flying standby from Los Angeles to San Francisco. C- Benefits of de minimis value. D-Monthly dues to a health club paid by the employer.

Solution: The correct answer is D. All of these fall under the "de minimum" rule of Section 132 fringe benefits except health club dues, which must be provided "on the employer premises."

You are in the process of advising your business client with regard to a non-qualified stock option plan that he is considering newly instituting as a program in his business for his employees. Before beginning, which of the following are questions that must be addressed as essential and pertinent to the stock option issue? I- What is the earliest date you can exercise the option? II- What do you need to do when you exercise the option? III- Can you exercise using stock you own? IV- When will the option terminate? V- Can you exercise after your employment terminates? A- I, III and V only. B- II and IV only. C- IV only. D- I, II, III, IV, V.

Solution: The correct answer is D. All of these questions must be addressed before one undertakes any type of Stock Option plan for employees.

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.

Solution: 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.

Solution: 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 that employee retirement benefits 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.

Solution: 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: qualified plan; annuity plan; tax sheltered annuity (403(b) plan); certain government plans (does not included 457 plans); SEPs; or 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.

All of the following are factors that can influence the amount of employer contribution to an individual's age-based profit sharing plan account EXCEPT: A- Salary. B- Age. C- Discount rate. D- Years of service.

Solution: The correct answer is D. An age-based profit-sharing plan skews the employer contributions to favor older employees. The contribution is based on the employee's salary and age, and a discount rate used to determine a present value. The employee's years of service are not considered in the formula. Years of service is used in Defined Benefit Plans.

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 total contribution that can be made to the solo plan, assuming his self-employment taxes are $6,000? A- $7,400 B- $25,000 C- $29,900 D- $32,400

Solution: The correct answer is D. An individual can defer up to $22,500 (2023) plus an additional $7,500 catch up for all of their 401(k) and 403(b) plans combined. Since he is 50 or older he can contribute the 22,500 + 7,500 = $30,000. Since he already contributed $5,000 into his employer plan he can still defer $25,000 ($30000 - $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: self-employment income $40,000 less 1/2 SE tax $3,000 Net $37,000 X 20% employer contribution $7,400 Total contribution to the solo plan = $22,000 (made up of: 22,500 - 5,000 to cupcake plan = 17,500 + 7,500 catch up) + $7,400 employer contribution = 32,400.

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.

Solution: 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.

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.

Solution: The correct answer is D. Annual additions are defined as new money contributed into the individual account of a participant. Because forfeitures reduced employer contributions and 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.

Which of the following employee fringe benefits would be taxable to the employee? A- Business use of an employer-provided automobile. B- Employee of an airline flying standby from Los Angeles to San Francisco. C- Benefits of de minimis value. D- Monthly dues to the local health club paid by the employer who also pays for all employees.

Solution: The correct answer is D. Answer "A" - For business use, the company automobile is not taxable. Answer "B" - Because it is standby, the value is considered to be no additional cost. Answer "C" - Such items are minor in value and allowed to pass without tax consideration.

The Third Party Administrator (TPA) of the Flying Trapeze Manufacturing Incorporated's Defined Contribution Plan has just informed you, its administrator, that the plan is top heavy. Which one of the following statements is NOT a requirement that applies to your plan? A- Employees must be 100% vested in the plan after three years of service if the vesting at two years is zero. B- If the employer contribution to key employees is 2%, then the employer contribution to non-excludable, non-key employees must be 2%. C- Flying Trapeze, Inc. must contribute a minimum of 3% of compensation or the contribution rate of the key employees, if it is lower, to non-excludable, non-key employees for each year that the plan is top heavy. D- The plan's vesting schedule must be 100% vested upon participation.

Solution: The correct answer is D. Answer "A" does apply because the plan must have no longer than a 3 year cliff or 2-6 year graded vesting. If year 2 is zero, it must be a cliff vesting and year 3 must be 100%.

Which of the following is a correct definition of qualified plan tests for eligibility? A- Ratio percentage test - Plan must cover a percentage of non-highly compensated employees that is at least 60% of the percentage of highly compensated employees covered. B- Average benefits test - Plan must benefit a non-discriminatory employee class with benefits of at least 70% of the benefit provided key employees. C- 50/40 test - 50% of all employees must participate, or a minimum of 40 employees, or 2 employees out of 3 if there are only 3 employees. Plans cannot require more than 1 year of service, and an age higher than 21. D- The plan can require a 2-year waiting period if there is immediate 100% vesting in the plan.

Solution: The correct answer is D. Answer "A" should read 70%. Answer "B" should read a 70% ratio of NHCE to HCE. Answer "C" is reversed with 50 employees or 40% of employees with a minimum of 2 out of 3 employees (unless there is only one employee in which case only 1 participant is required).

Eldrick, age 40, established a Roth IRA 3 years ago and was tragically struck and killed by an errant golf ball hit by a drunk spectator at a golf tournament. Eldrick had contributed a total of $10,000 to the account and had converted $20,000 from his traditional IRA. His 20 year old son, Charlie, inherited the Roth IRA, which now has a balance of $60,000. Which of the following statements is correct? A- Charlie can distribute the entire balance from the Roth IRA without it being subject to any income tax or penalty the month after Eldrick dies. B- Charlie must take minimum distributions from the Roth IRA the year Eldrick dies. C- If Charlie begins taking minimum distributions, then the first distribution will be partially taxable. D- Charlie could delay taking a distribution from the Roth IRA for several years and avoid all penalties and income tax on the distribution.

Solution: The correct answer is D. Answer A is incorrect because the distribution would not be a qualified distribution since the five year rule has not been met. Answer B is not correct as he could begin taking distribution the year following death or take a full distribution within five years. Answer C is not correct, because the first distribution would consist of previously taxed contributions and would therefore not be taxable. Answer d is correct as he could delay taking a distribution from the account for two years. At that point, the distribution would be qualified since it meets the five-year rule and is on account of death. The distribution would avoid all income tax and penalties. There is a pre-study lecture on Roth IRAs that students find helpful.

Jacque's wife just lost her job and they had a death in the family. Jacque is planning on taking a hardship withdrawal from his 401(k) plan to pay for living expenses and funeral costs. Which of the following is correct regarding hardship withdrawals? A- Hardship withdrawals can be taken even if there is another source of funds that the taxpayer could use to pay for the hardship. B- Hardship withdrawals are beneficial because although they are taxable, they are not subject to the early withdrawal penalty. C- Hardship withdrawals can only be taken from elective deferral amounts. D- Unless the employer has actual knowledge to the contrary, the employer may rely on the written representation of the employee to satisfy the need of heavy financial need.

Solution: The correct answer is D. Answer a is not correct as there must not be another source of funds. Answer b is not correct as they are generally subject to a penalty unless there is an exception under IRC 72(t). Answer c is not correct as a hardship distribution can be taken from employee deferrals and employer contributions.

A policy which must cover all eligible dependents if the employer pays the entire premium cost best describes: A- Group term life insurance. B- Group paid-up life insurance. C- Group ordinary life insurance. D- Dependents' group life insurance.

Solution: The correct answer is D. Answers "A," "B" and "C" are all benefits for eligible employees, not their dependents. Answer "D" applies to dependents and the employer cannot discriminate.

If qualified plan eligibility begins after an employee reaches age 21 and completes two years of service, which of the following vesting schedules would be most appropriate? A- 3-year cliff. B- 3-7 year graded. C- 4-40 vesting. D- Full and immediate

Solution: The correct answer is D. Because eligibility is greater than one year, only Answer "D" is allowed.

Beth, who is 45 years old, spent most of her career in the corporate world and now provides consulting services and serves as a director for several public companies. Her total self-employment income is $450,000. She is not a participant in any other retirement plan today. She would like to shelter some of her earnings by contributing it to a retirement plan. Which plan would you recommend? A- Establish a 401(k) plan. B- Establish a profit sharing plan. C- Establish a Deferred Comp program for her. D- Establish a SEP.

Solution: The correct answer is D. Because her income is so high, she can set up a SEP and max out her 415(c) limit. She cannot set up a deferred compensation arrangement and shelter tax. The SEP is better than the 401(k) because it can be set up in a minimal amount of time and there are no filing requirements. The SEP also has the same limit as a profit sharing plan in her case since she would be able to max out either at $66,000 in 2023. Her self-employment contribution would be roughly: 86,610, capped at 66,000. The employer contribution would be capped at 66,000 with either the SEP or 401(k). The SEP is more cost effective and easier to set up.

Match the following statement with the type of retirement plan that it most completely describes: " A defined benefit plan that has the appearance of a defined contribution plan" is a... A- Profit sharing plan. B- Money purchase plan. C- SIMPLE IRA. D- Cash balance plan.

Solution: The correct answer is D. Cash balance plan. Answers "A" and "C" are incorrect since they are not defined benefit plans. Answer "B" - Money purchase plan is a "pension plan" but it does not provide employees with a defined benefit, only a defined contribution. Answer "D" - Cash balance plan provides a defined benefit (returns are guaranteed by the employer) and the employee receives an "account" to see how much they have.

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.

Solution: 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 statements concerning cash balance pension plans is correct? A- The cash balance plan is a defined benefit plan because the annual contribution is defined by the plan as a percentage of employee compensation. B- The cash balance plan provides a guaranteed annual investment return to participant's account balances that can be fixed or variable and is 100% guaranteed by the Pension Benefit Guarantee Corporation. C- The cash balance plan uses the same vesting schedules as traditional defined benefit plans. D- The adoption of a cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand than a traditional defined benefit plan, and as a plan that has more predictable costs associated with its funding.

Solution: The correct answer is D. Cash balance plans are defined benefit plans due to the guaranteed investment returns and benefit formula, not simply a contribution amount. While cash balance plans provide guaranteed rates of return, they are not 100% guaranteed by the PBGC (PBGC has coverage limits). Cash balance plans use 3-year cliff vesting only. Choice d is correct.

Which of the following statements regarding ISOs and NQSOs is correct? A- The tax treatment of a cashless exercise of an ISO is the same as the cashless exercise of a NQSO. B- One of the disadvantages of an ISO is that the sale of the stock attributable to an ISO may result in the taxpayer paying alternative minimum tax. C- IRC 409A provides harsh penalties when a company grants an ISO or NQSO with a strike price that exceeds the current FMV of the employer's stock. D- To the extent that the aggregate fair market value of stock with respect to which incentive stock options are exercisable for the 1st time by any individual during any calendar year exceeds $100,000, such options shall be treated as options which are not incentive stock options.

Solution: The correct answer is D. Choice a is not correct as the tax treatment is not the same for a cashless exercise of an ISO and an NQSO. ISO is not subject to payroll tax, NQSO is subject to payroll tax. They will be the same for income tax; both ordinary income. Choice b is not correct. The sale of an ISO share of stock will generally have a negative adjustment for AMT, not positive, and therefore, it would not result in AMT. Choice c is not correct as 409A would apply if the strike price was less than the FMV on the date of grant.

Your client's only employer has established a payroll deduction TSA. Your client is single, making more than $75,000 per year. Which of the following is TRUE concerning the plan? A- The phase-out maximum AGI of $73,000 in the current year does apply. B- TSA contributions are not subject to Social Security taxes. C- The employer usually controls the investment selections. D- Contributions are not subject to Federal/State Withholding tax.

Solution: The correct answer is D. Contributions to a TSA are made before Federal/State withholding taxes are applied. Phase-outs apply to traditional IRAs, not TSA plans. Salary reductions into a TSA are subject to Social Security and Medicare taxes. Employers usually allow the employee to control the allocation of assets within their TSA.

Which of the following legal requirements apply to Employee Stock Ownership Plans (ESOPs)? I- ESOPs must permit participants, who are aged 55 or older and who have at least 10 years of participation, the opportunity to diversify their accounts. II- ESOPs can be integrated with Social Security. III- An employer's deduction for ESOP contributions and amounts made to repay interest on an ESOP's debt cannot exceed 25% of the participant's payroll. IV- The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP. A- I and II only B- II and IV only C- I, II and III only D- I and IV only

Solution: The correct answer is D. Deductions for interest payments are not limited for ESOP plans. Deductions for repayment of principal is limited to 25% of covered compensation.

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.

Solution: The correct answer is 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.

Which of the following statements concerning the basic characteristics of non-qualified deferred compensation plans is accurate? A- The employer immediately deducts contributions made into the informal funding arrangement in any given year. B- During their working years, employees have the same tax treatment under a non-qualified plan as under a qualified plan. C- Under both an unfunded plan and a formally funded plan, the only security or guarantee the employee has is the unsecured promise of the employer. D- Under both the funded plan and an informally funded plan, the IRS may likely rule that the employee is in constructive receipt of income unless there is a substantial risk of loss or forfeiture.

Solution: The correct answer is D. Employer contributions into a non-qualified plan are not tax deductible to the employer until the employee has constructive receipt and is taxed on the income. Most non-qualified plans are designed to avoid constructive receipt by the employee until retirement. In an informally funded plan (Rabbi trust), the employee has the segregated assets as security of the agreement, assuming the employer remains solvent and the assets are not taken by the employer's creditors. This risk of having creditors take the assets inside a "Rabbi trust" is what constitutes a substantial risk of loss or forfeiture and keeps the employee from being considered in "constructive receipt" of the formally funded assets.

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) mandates employers provide continuation coverage for former employees except under which of the following circumstances: I- Employer has fewer than 20 employees. II- Employee retires at the age of 65. III - Death of the employee. IV- Involuntary termination of employment due to gross misconduct. A- I only. B- III only. C- I, III and IV only. D- I, II and IV only.

Solution: The correct answer is D. Employers must continue medical coverage to pay for final medical expenses after the death of the employee. Statements I, II, and IV are statutory exemptions to the COBRA requirement. (Note: A 65-year-old retiree would be covered under Medicare.)

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.

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

In a Defined Contribution 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.

Solution: 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."

A policy offering no choice of beneficiary best describes: A- Group term life insurance. B- Group paid-up life insurance. C- Group ordinary life insurance. D- Group survivor's income insurance.

Solution: The correct answer is D. Group survivor's income insurance provides for the survivor of the employee. The beneficiary designation cannot be altered. Answers "A," "B" and "C" allow the poilicy owner to change the beneficiary.

Harry wants to retire at age 62 in the current year. To be eligible for reduced OASDHI retirement benefits, how many quarters of coverage must Harry have earned? A- 6 B- 13 C- 20 D- 40

Solution: The correct answer is D. Harry must have earned 40 quarters of coverage.

Bobby's Bar-b-que wants to establish a social security integrated plan using the offset method. Which of the following plans should he establish? A- SIMPLE B- ESOP C- Money Purchase Pension Plan D- Defined Benefit Pension Plan

Solution: The correct answer is D. He should establish the Defined Benefit Pension Plan. Only defined benefit plans can use the offset method. The Money Purchase Pension plan is a Defined Contribution Plan and must use the excess method. Simple's and ESOPs cannot be integrated.

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

Solution: 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.

Ralph (age 45) earns a salary of $138,000 working for a manufacturing company. His wife, Peggy (age 42),is currently not working and they have no other income. Which of the following statements is/are correct regarding allowable IRA contributions for Ralph and Peggy for 2023? I- If the manufacturing company sponsors (contributes to) a retirement plan, Ralph and Peggy could each contribute $6,500 to a traditional IRA and claim a full income tax deduction. II- If the manufacturing company sponsors (contributes to) a retirement plan, Ralph and Peggy could each contribute $6,500 to a traditional IRA and Peggy could claim a full income tax deduction for her contribution. III- If the manufacturing company does not sponsor a retirement plan, Ralph and Peggy could each contribute $6,500 to a traditional IRA and claim a full income tax deduction. IV- If the manufacturing company does not sponsor a retirement plan, Ralph can contribute to both a traditional IRA and a Roth IRA in the current year, provided his total contribution does not exceed $6,500. A- I only. B- II and III only. C- I and III only. D- II, III, and IV.

Solution: The correct answer is D. I is incorrect. If Ralph's employer sponsored a retirement plan, Ralph would be an active participant. Therefore, based on his income level, he would not be permitted to deduct a contribution to a traditional IRA. (Since Peggy is NOT an active participant, she is subject to Spouse participant AGI limits which are much higher, therefore with their current AGI, she is eligible to make a deductible IRA contribution.

Which of the following retirement plans would permit an employee (filing single status) making $100,000 a year to still make the fully deductible contribution to an IRA in the current year? A- 401(k) B- 403(b) C- SEP D- 457

Solution: The correct answer is D. IRC Section 457 plans are nonqualified deferred compensation plan, and therefore do not make the employee an "active" participant in a qualified retirement plan. The 401(k) is a qualified plan and the 403(b) and SEP are 'wannabe' be plans that would make the employee an "active" participant.

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.

Solution: 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.

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.

Solution: 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 × $5). If she later sold for $35 per share then she would recognize capital gain of $15,000 (500 × ($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.

If an employer sponsors a cash balance plan which guarantees an investment return that is lower than the actual investment results, what will be the effect to the employer? A- The employer will be required to make a non-elective contribution to the plan. B- The employer's required contribution to the plan will not be affected. C- The employer's required contribution to the plan will be increased. D- The employer's required contribution to the plan will be lowered.

Solution: The correct answer is D. In a cash balance plan, the employer will have a lower contribution requirement when actual investment results exceed the guaranteed rate of return in the plan.

Your client, XYZ Corporation, is considering implementing some form of retirement plan. The client states that the plan objectives are, in the order of importance: Rewarding long-term employees. Retention of employees. Providing a level of income at retirement equal to 50% of an employee's earnings. Tax-deductible funding. 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 XYZ Corporation that the most suitable retirement plan for the corporation would be: A- Money purchase plan. B- Non-qualified deferred compensation plan for long-term employees. C- Combination of defined benefit and 401(k) plan. D- Defined benefits plan.

Solution: The correct answer is D. Long-term employees are favored under a defined benefit plan. All of the plans will offer some degree of employee retention. With a specific benefit such as 50% of earnings, again the defined benefit plan seems a logical choice. Finally, because of PBGC, the defined benefits plan represents a "no-risk" level.

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

Solution: 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, age 25 (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.

Solution: 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. Previously terminated employees will still receive their final contribution with their final pay. They also have a specified amount of time to return to work with the same years of service. 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.

Joseph wants to take a loan from his 403(b) plan. Which of the following requirements will apply to his situation? A- The loan can exceed $50,000 only if the account is worth more than $100,000. B- The loan must be paid back with quarterly payments over three years, unless used to purchase a principal residence. C- The loan is exempt from interest charges since the participant is borrowing his own money. D- The plan document may provide for a maximum and minimum loan amount.

Solution: The correct answer is D. Maximum loan amount is lesser of 50% of vested amount or $50,000 paid in quarterly (or more frequent) payments over five years, unless used for home purchase. Loan must carry reasonable interest rate.

Mike and Lola are both 60 years old. They are married filing joint and have AGI of $150,000 (which is all comprised of earned income). Mike's employer offers a 401(k) plan and although he is eligible to defer he does not make any deferrals into the plan. The employer allocates forfeitures to plan participants. This year, $5 of forfeitures were allocated to Mike's account. Lola does not work outside the home and does not have any earned income. Which of the following is true? A- They can both make deductible contributions to a Traditional IRA. B- Neither of them can make deductible contributions to a Traditional IRA but they can both make a Roth IRA contribution. C- Mike can make a contribution to a Roth IRA but Lola can't. D- Lola can make a deductible contribution to a Traditional IRA but Mike cannot.

Solution: The correct answer is D. Mike is considered an active participant because a forfeiture allocation was made to the plan on his behalf. Therefore, he can contribute to a Traditional IRA but will be unable to deduct because he is above the AGI limitation for a MFJ active participant ($116,000 - $136,000) (2023). He could contribute to a Roth IRA because he is below the AGI limitation of $218,000 - $228,000 (2023). Incidentally, because he is 50 or older he is allowed to make the $1,000 (2023) catch up contribution. Lola is not an active participant because she is not covered by any plan. Although she doesn't have any earned income she can utilize her husband's earned income. Since she is not an active participant but her husband is, she will utilize the spousal phase out limitation of $218,000 - $228,000 (2023). Since their AGI is below this amount she can make a deductible contribution to a Traditional IRA. Alternatively, she could contribute to a Roth IRA because she is below the AGI limitation of $218,000 - $228,000 (2023). Incidentally, because she is 50 or older she is allowed to make the $1,000 (2023) catch up contribution.

David Lee, age 63, was a participant in a stock bonus plan sponsored by VH, Inc., a closely held corporation. David's account was credited with contributions in shares of VH stock to the stock bonus plan and VH Inc. deducted $80,000 over his career at VH. The value of the stock in the account today is worth $1 million. David takes a distribution (year 1) of one-half of the VH stock in his stock bonus plan account valued at a fair market value of $500,000. If David sells the stock for $600,000 nine months after receiving the distribution (year 2), then which of the following statements are true? A- David will have ordinary income of $80,000 in year 1 and capital gain of $520,000 in year 2. B- David will have ordinary income of $40,000 in year 1 and capital gain of $560,000 in year 2. C- David will have ordinary income of $460,000 in year 1 and capital gain of $100,000 in year 2. D- David will have ordinary income of $500,000 in year 1 and capital gain of $100,000 in year 2.

Solution: The correct answer is D. NUA treatment is not applicable because David did not take a lump sum distribution of stock from the plan. Therefore, the distribution is treated as ordinary income.

Rick is a sole proprietor in his first year of business. Net profit for the year is $257. Alice, his wife, earned $39,000 in the current year and is not an active participant in an employer-sponsored qualified plan. Alice contributed $6,500 for her IRA for the year. How much, if any, can be contributed on a deductible basis to an IRA for Rick? A- $0 B- $257 C- $6,243 D- $6,500

Solution: The correct answer is D. Neither Rick nor Alice are active participants, so the phase-outs do not apply. Rick can use his spouses earned income and therefore deduct $6,500 (2023). Therefore, the total maximum deductible IRA contribution for Rick is $6,500 (2023).

Which of the following statements concerning accrued benefits in qualified plans is (are) correct? I- In a defined benefit plan, the participant's accrued benefit at any point is the participant's present account balance. The accrual for the specific year is the amount contributed to the plan on the employee's behalf for that year. II- In a defined contribution plan, the accrued benefit is the benefit earned to date, using current salary and years of service. The accrued benefit earned for the year is the additional benefit that has been earned based upon the current year's salary and service. A- I only. B- II only. C- I and II. D- Neither I or II.

Solution: The correct answer is D. Neither Statement "I" nor Statement "II" are correct because the plan names have been switched. Statement "I" describes a defined CONTRIBUTION plan and Statement "II" describes a defined BENEFIT plan.

Your Uncle Ben (your father's twin) began receiving required minimum distributions from his IRA in 2008 and has died on December 27, 2023, leaving a balance in his IRA. He has named you as beneficiary. Uncle Ben was 20 years your senior. Which of the following identifies your minimum distribution rule? A- Distributions may be made over your life expectancy. B- Distributions may only be made over a five-year period. C- Distributions must be made over Uncle Ben's life expectancy (recalculated) with the first distribution made by December 31st of the year following death. D- Distributions must be made by the 10th anniversary of his death.

Solution: The correct answer is D. Note that for a designated non-eligible beneficiary, the account must be fully distributed by the 10th anniversary of the account holders death. Answer "A" is incorrect because that is the rule for a designated eligible beneficiary. Answer "B" is incorrect because the five-year rule is NOT the only choice. Answer "C" is incorrect because these are the old rules for a non-spouse beneficiary.

Which of the following is NOT a qualified employee fringe benefit? A- Medical expenses NOT covered by medical health plan are paid under a reimbursement 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.

Solution: 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. Medical benefits are a tax-free employee benefit. Cafeteria plans cover LT Disability (employee is taxed if they receive disability benefits). Group life is only provided up to $50,000 in a cafeteria plan.

Which one of the following incidental benefit rules apply to life insurance coverage provided by a profit sharing plan? A- Permanent life insurance, accident insurance, or severance benefits may be included as part of the coverage. B- The 25% incidental benefit cost rule is based on the portion of the premium allocated to the policy's cash value. C- An employee's costs associated with the purchase of life insurance represent a non-deductible expense. D- The cost of whole life insurance must be not more than 50% of the total employer contribution allocated to a participant's account.

Solution: The correct answer is D. Only life insurance may be included in a qualified retirement plan - no accident, severance, or health benefits may be offered under the incidental benefit rules. To qualify under the incidental benefit rules, the entire premium for universal life cannot exceed 25% of the employer's aggregate contributions, and 50% for whole life insurance. Any pension contributions used to purchase life insurance inside a qualified plan are deductible to the employer.

Which of the following accurately describes a 403(b) plan? A- A 403(b) plan is a noncontributory qualified profit sharing plan. B- Because of catch-up provisions, the investment risk of the assets within a 403(b) plan is borne by the plan sponsor not the participant. C- A participant's benefits within a 403(b) plan will generally vest according to a 3 to 7 year graduated vesting schedule, however, a 5-year cliff vesting schedule may be used. D- 403(b) plan assets can be invested indirectly in stocks and bonds through annuities or mutual funds.

Solution: The correct answer is D. Option "D" is a correct statement accurately describing a 403(b) plan. Option "A" is incorrect as a 403(b) plan is an employee deferral plan and is not a qualified plan. Option "B" is incorrect as the investment risk is borne by the employee in all cases. Option "C" is incorrect as an employee's benefit within a 403(b) plan is always 100% vested.

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 × Average of Three Highest Years of Compensation × 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- $165,000 B- $250,000 C- $330,000 D- It is indeterminable from the information given.

Solution: 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.

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.

Solution: 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.

Larry and Terry plan to contribute a total of $2,900 to their IRAs for the current year. Larry has contributed $2,000 to his IRA and Terry will contribute $900. They both work outside the home and file a joint income tax return. Larry is a teacher at the local high school. His employer makes contributions into a 403(b) plan for Larry. Terry's employer makes contributions into her stock bonus plan account. Their modified AGI for the current tax year is $118,000. What is the combined maximum amount, if any, they are allowed to deduct for their IRA contribution? A- $-0- B- $2,500 C- $2,000 D- $2,900

Solution: The correct answer is D. Reduction is (($118,000 - $116,000) / $20,000) × $6,500 = $650 (2023). Therefore, the maximum deduction is $6,500 - $650 = $5,850 each. Larry's contribution of $2,000 and Terry's contribution of $900 are both fully deductible. Formula: Contribution × [(your AGI - the bottom of the phase out range) divided by the amount of the range (136,000-116,000 is where the 20k comes from)]

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.

Solution: 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.

Lien, age 35, recently left his employer, GoGoRoller, a roller blade manufacturer. He left after 18 months because the working conditions were unbearable. GoGoRoller sponsored a SIMPLE IRA. Lien deferred $3,000 into the plan during his time there and the employer contributed $1,500. When he terminated he withdrew the entire account balance of $4,750. Assuming he is in the 12% tax bracket, what is the tax and penalty consequence for this distribution? A- $570.00 B- $775.00 C- $1,187.50 D- $1,757.50

Solution: The correct answer is D. SIMPLE IRAs require a 25% penalty for early withdraws in the first two years if the participant does not meet any of the early withdrawal exceptions. He does not meet any of the exceptions and the distribution is within the first two years. The breakdown of employee deferrals, employer contributions and earnings is irrelevant. Contributions on behalf of Lien were $4,500 plus $250 of growth for a total of $4,750 in the account. Therefore, his tax and penalty consequence is $1,757.50 = $4,750 × 37%. The 37% is represented by 12% tax plus 25% penalty.

One of your clients wants to know the maximum amount that might be allocated to her 401(k) account in the current year. She expects to earn $70,000. The following are possible sources of annual additions into her account, except: A- Qualified non-elective contributions from the employer (QNEC). B- Forfeitures from departing non-vesting employees. C- Employer matching contributions. D- Section 415 reversions.

Solution: The correct answer is D. Section 415 reversions would reduce the client's account value. All other statements accurately reflect sources of annual additions to individual accounts within a 401(k) plan, the maximum which cannot exceed $66,000 for 2023.

Sick pay plans are a highly visible benefit for employees. Which of the following is not true concerning these plans? A- Employers can discriminate based upon salary, job description, or any other criteria other than age and longevity of service. B- The plan must be written. C- Full-time employment is usually a requirement to participate. The employer can define the term "full time" in any reasonable manner as long as the 1,000 hour year of service requirements are met. D- The tax code prohibits carry-over due to the prohibition against deferred compensation in fringe benefit plans.

Solution: The correct answer is D. Sick pay plans can be discriminatory among clearly definable classes, must be in written form, and may require full-time employment to participate. There is no prohibition against carry-over in sick pay plans, therefore, a worker who is unable to work in December, may be paid in January according to the plan provisions.

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

Solution: 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 10% early withdrawal penalty is not assessed at the time of distribution from the plan, but on the 1040. The 25% penalty on a SIMPLE only applies in the first two years.

James and Cheryl Hansen, both age 42, are married with 9-year-old triplets. James is an attorney and makes $65,000 per year; he is not a partner. Cheryl earns an annual salary of $15,000 as a teacher's aide at the private, for-profit school the triplets attend. James' firm provides group permanent whole life and group survivor income benefit insurance. The school provides Cheryl with group term insurance coverage. James' Group Permanent Whole Life - This is a non-discriminatory plan designed to provide supplemental income to James during retirement. The firm picks up the entire premium for the plan. Cheryl is the designated beneficiary on the policy. The policy indicates that James has full vesting in the ownership of the policy. James' Group Survivor Income Benefit Insurance - This is a payroll deduction plan with James paying the entire premium. The plan is not considered a discriminatory plan. James has elected the survivor benefit that will pay benefits to his spouse and to any children under age 21. If James were to pass away, the following benefits would be paid to the beneficiaries: If spouse is sole beneficiary - 30% of salary. If children are sole beneficiaries - 40% of salary. If spouse and children are beneficiaries - 50% of salary. Cheryl's Basic Life Insurance Plan - This is a non-discriminatory, non-contributory plan. The death benefit equals five times annual salary for employees age 55 or younger, three times salary for those over age 55. James is the designated beneficiary on the policy. Given the above, which of the following statements accurately reflect the situation with James and Cheryl's group insurance coverages: I- If Cheryl died this year, James would receive death benefits of $45,000. II- James' employer can deduct the premiums for the permanent insurance in the year they are taxed to James. III- Cheryl's employer can deduct only the premiums for the basic group term life insurance related to coverage amounts over $50,000. IV- James must include premiums related to the permanent insurance in income, because he has vested ownership rights to the policy. A- I and II only. B- I and IV only. C- II and III only. D- II and IV only.

Solution: The correct answer is D. Statement "I" is incorrect because Cheryl's life insurance benefit is $75,000 [$15,000 × 5]. Statement "III" is incorrect because Cheryl's employer can deduct all costs of the insurance in the year the premiums are paid. But, Cheryl will have imputed income for premiums paid on death benefit is excess of $50,000. The imputed income will be calculated at Table 1 (PS58) rates.

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 a full-time 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.

Solution: 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. Note: Statement III is true. A 401k cannot require 2 years of service before participation. The 2 years of service rule is for Qualified plans other than 401k. A 401k can require 2 years service for employer matching, not employee participation. All employees age 21 with 1 year of service can participate. As of 2021, long-term part-time employees may participate after three years of services. No years of services prior to 2021 will be considered.

Your client has the following beliefs about the allocation of forfeitures of contributions to employees who terminate employment in Defined Contribution Plans. Which of the following statements is/are correct? I- Departing plan participants are entitled to their entire account balances regardless of the vesting schedule in effect. II- Forfeitures could be allocated to plan participants in exactly the same manner as the employer's contribution. III- Unless specific steps are taken to the contrary, the allocation of forfeitures in this company's plan over time would tend to discriminate in favor of the relatively few longer-hired and more highly paid employees. IV- The company could use forfeitures to offset amounts (reduce plan costs) it would otherwise contribute to the employee's accounts. A- II only. B- I and II only. C- I and IV only. D- II, III and IV only.

Solution: The correct answer is D. Statement "I" is incorrect because vesting is designed and implemented to penalize employees who terminate employment too soon (prior to full vesting.) Statements "II," "III" and "IV" are all accurate statements.

Which of the following statements accurately describes the requirements for a plan established under Section 457 to be qualified? I- Distributions are NOT permitted until age 70 1/2 or termination of employment if before 59 1/2. II- To avoid constructive receipt, the agreement must be signed during the same month the services are rendered and prior to receipt of the paycheck. III- Eligible participants include employees of agencies, instrumentalities, and subdivisions of a state, as well as Section 501 tax-exempt organizations. IV- The maximum employee elective deferral excluding catch-ups is limited to $22,500 (2023) (as indexed), or 100% of includible compensation. A- I and II only. B- I and III only. C- II and IV only. D- III and IV only.

Solution: The correct answer is D. Statement "II" is incorrect because the agreement must be signed PRIOR to the month the services are rendered. Statement "I" is incorrect because distributions are permitted at termination or normal retirement age as stated in plan document (not 70 1/2). The maximum elective deferral including the catch-up is $45,000 for 2023, excluding the catch-up is $22,500 for 2023.

Which of the following are characteristics of a non-qualified deferred compensation agreement for an individual? I- It may provide for benefits in excess of qualified plan limits. II- The contribution underlying the agreement may NOT be structured as additional compensation to the employee. III- It must be entered into prior to the rendering of services to achieve deferral of compensation. IV- The contribution underlying the agreement may be paid from the current compensation of the employee. A- I and II only. B- I and III only. C- II and III only. D- I, III and IV only.

Solution: The correct answer is D. Statement "II" is incorrect. The underlying contribution may be structured as additional compensation (a so-called salary continuation plan.) Statement "IV" represents a so-called pure deferred compensation plan.

Pat established his business one year ago. He has hired two assistants. He would like to establish a retirement benefit plan for himself and his two assistants, who want to make voluntary contributions. He is concerned about cash flows for unforeseen business obstacles and future expansion. Which of the following reasons is/are appropriate to recommend the establishment of a retirement plan. I- A retirement plan would allow Pat to save for his own retirement. II-Tax savings would help to offset the cost of employer contributions. III- A retirement plan would give the appearance of business stability and would be an asset in the securing of business loans to meet growth and cash flow needs. A- I only. B- II only. C- I and III only. D- I and II only.

Solution: The correct answer is D. Statement "III" is incorrect because a retirement plan cannot be used as collateral for a loan made to the plan sponsor. This would be a prohibited transaction.

IRC Section 415(c) applies an "annual addition" limited to certain qualified plans. Which of the following statements is correct? I- The limit is the lessor of 25% of compensation or $66,000 for the current year. B- The limit only applies to defined contribution plans. C- Includable additions include forfeiture reallocations, employer and employee contributions and investment earnings. IV- Salary deferrals are included as part of the annual additions limit. A- II only. B- I and II only. C- II and III only. D- II and IV only. E- II, III and IV only.

Solution: The correct answer is D. Statement "IV" is correct as salary deferral contributions by employees is counted against the IRC 415(c) limit. Statement "I" is incorrect as the limit is the lesser of 100% of compensation or the annual limit. Statement "III" is incorrect because investment earnings are never included in the Section 415(c) limit calculation.

Joyce is a party to a Qualified Domestic Relations Order (QDRO) relating to her previous spouse's retirement plan. Which of the following statement regarding restrictions related to a QDRO is/are true? I- Cannot assign a benefit that the plan does not provide. II- Cannot assign a benefit that is already assigned under a previous order. III- If the participant has no right to an immediate cash payment from the plan, a QDRO cannot require such a payment. IV- QDRO funds may not be rolled over into a rollover IRA. A- I and III only. B- II and IV only. C- II, III and IV only. D- I, II and III only.

Solution: The correct answer is D. Statement "IV" is not accurate in that a distribution as a result of a QDRO may be rolled over into an IRA as long as the rollover is accomplished within 60 days of the distribution.

Which of the following characteristics are found in both a defined contribution plan and a defined benefit plan? I- Individual accounts. II- Actuarial assumptions required. III- Retirement benefits based on account values. IV- Employer bears investment risk. A- I only. B- II and IV only. C- I, III and IV only. D- None of the above.

Solution: The correct answer is D. Statements "I" and "III" apply to defined contribution plans. Statements "II" and "IV" apply to defined benefit plans. None apply to both defined benefit and defined contribution plans.

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 $265,000 or 100% of income in 2023. 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.

Solution: 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 $66,000 in 2023. A- I and II only. B- II and III only. C- II and IV only. D- I, III and IV only.

Solution: 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.).

Your client has the following beliefs about the allocation of forfeitures of contributions to employees who leave the company. Which of the following statements is/are correct? I- Departing plan participants are entitled to their entire account balances regardless of the vesting schedule in effect. II- Forfeitures could be allocated to plan participants in exactly the same manner as the employer's contributions. III- Unless specific steps were taken to the contrary, the allocation of forfeitures in this company's plan over time would tend to discriminate in favor of the relatively few longer-hired and more highly-paid employees. IV- The company could use forfeiture to offset amounts it would otherwise contribute to employees' accounts. A- II only. B- I and II only. C- I and IV only. D- II, III and IV only.

Solution: The correct answer is D. Statements "II", "III" and "IV" are correct. However, Statement "I" is incorrect because vesting schedules determine the amount of the employer's contribution to the account to which the employee is entitled.

Farmer Fred wants to retire in 20 years when he turns 64. Fred wants to have enough money to replace 75% of his current income less what he expects to receive from Social Security at the beginning of each year. Fred's full benefit at age 67 is $25,000 in today's dollars. Fred is conservative and wants to assume a 7% annual investment rate of return and assumes that inflation will be 3% per year. Based on his family history, Fred expects that he will live 30 years in retirement. Fred just received his brokerage account statement, which he is using to fund his retirement, and it has a balance of $340,596.44. If Fred currently earns $100,000 per year, approximately how much does he need save at the end of each of the next 20 years to fund his retirement? A- $6,486 B- $10,350 C- $11,215 D- $12,000

Solution: The correct answer is D. Step 1: Determine amount to be funded $100,000 income today 75% WRR $75,000 needs ($20,000*) less social security & pension. $55,000 amount to be funded Step 2: inflate funds to retirement age PV ($55,000), N 20, i 3.00%, Pmt 0, = FV $99,336.12 Step 3: PV of retirement annuity due (BEG Mode) Pmt $99,336.12, N 30, i 3.8835%, FV 0, = PV ($1,809,946.67) Step 4: Annual funding amount FV $1,809,946.67, N 20, i 7.00%, PV ($340,596.44), = Pmt ($12,000) *For this problem you must account for the fact that he plans to retire at age 64, his benefit is stated at age 67. Thus, you will have a reduction in social security retirement benefits: Reduced by 5/9 for each month, for the first three years that a worker retires early. Reduced by 5/12 for each month beyond three years. In this case you are starting three years early so you will have a 20% reduction (5/9 × 36). 20% × $25,000 = $5,000. $25,0000-$5,000 = $20,000 Uneven Cash Flow Method: $100,000 × .75 WRR = 75,000 <20,000> SS = 55,000

Which of the following statements is/are characteristic(s) of Tax-Sheltered annuities (TSAs)? I- Salary reduction contributions are NOT reported as W-2 income and are subject to Social Security tax. II- The maximum salary deferral limit is $22,500 for a newly hired employee in 2023, under age 50. III- Employer contributions are deductible by the employer. Loans and "catch-up" contributions may be permitted. A- III only. B- I only. C- I and III only. D- I, II, and III

Solution: The correct answer is D. TSA salary deductions are subject to Social Security (payroll) taxes; much like 401K contributions. Remember, TSAs are also known as a 403(b) retirement plan. Instructor note: Notice it does not say tax deductible. Like all entities, a financial statement is produced and reports revenue and deductible expenses.

Bobby Dale, age 50 and single, chose early retirement and is receiving (from his previous employer's qualified pension plan) a monthly pension of $400. Bobby elects to work for a small company and will receive $30,000 in annual compensation. This company does NOT cover him under a qualified plan. Bobby wants to contribute the maximum deductible amount to his Individual Retirement Account (IRA). The amount of the 2023 IRA contribution that he can deduct from his gross income is: A- $0 B- $4,000 C- $6,500 D- $7,500

Solution: The correct answer is D. Taxpayers who have earned income may contribute the lesser of their earned income or $6,500 (2023) to an IRA. If the taxpayer is currently covered under an employer's qualified plan, they may still contribute to the plan, but depending on their earnings from the employer with whom they are covered may render the contributions non-deductible. Here, there is no plan under which the taxpayer is covered, and since the taxpayer earned in excess of $6,500 he may contribute the full $6,500, of which all is deductible. Because the client is age 50, he is able to contribute an additional $1,000 (2023) catch-up contribution.

A client, age 54 and single, chose early retirement and is receiving from his previous employer's qualified pension plan a monthly pension of $750. This year, the client elects to work for a small company and will receive $25,000 in annual compensation. This company does cover him under a qualified pension plan. The client wants to contribute the maximum deductible amount to an Individual Retirement Account (IRA). The amount of the IRA contribution that he can deduct from his gross income in 2023 is: A- $0 B- $4,000 C- $6,500 D- $7,500

Solution: The correct answer is D. Taxpayers who work and have earned income may contribute the lesser of their earned income or $6,500 to an IRA (2023). If the taxpayer is currently covered under an employer's qualified plan, they may still contribute to the plan but (depending on their earnings from the employer with whom they are covered) may render the contributions non-deductible. Since the taxpayer earned in excess of $6,500, he may contribute the full $6,500, and age 50 or over, he may add an additional $1,000, as a catch up for a total of $7,500. His total income is only $34,000, which is much lower than the phaseout limits. Therefore, he can also deduct the $7,500 contribution.

Which of the following are sources of statutory law concerning qualified retirement plans: I- Internal Revenue Code II- Labor Department III- U.S. Tax Court IV- Private Letter Rulings V- ERISA A- I, II and IV only. B- II, III and V only. C- I and II only. D- I and V only.

Solution: The correct answer is D. The IRC and ERISA are laws or statutes passed by Congress. The Labor Department and Private Letter rulings are sources of regulatory law. Of course, the U.S. Tax Court only interprets statutory and regulatory law (theoretically), and is not a source of laws.

A client must receive a minimum distribution from his IRA account. The value of the account at the beginning of the current year was $53,000. His spouse, age 63, is the beneficiary of the IRA account. The applicable divisor for his distribution is 25.6. If the client takes a $1,000 distribution for the year, what is the initial tax penalty, if any? A- $0 B- $,1070.00 C- $535.00 D-$267.58

Solution: The correct answer is D. The minimum distribution is calculated by taking the account value at the beginning of the year ($53,000 in this case) and dividing by the applicable divisor (life expectancy 25.6 years in this example). The resulting figure is the minimum distribution ($2,070). The client took $1,000, leaving a balance of $1,070. The penalty for the RMD not taken is 25%. $1,070 * 25% = $267.58 Secure 2.0 revised the penalty amount from 50% to 25%. The 25% penalty may be reduced to 10% if taken within the required correction period.

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: Retention of employees. Flexible funding Tax-deductible funding. Employer would like to offer company stock as an investment option. Employer would not like to retain any investment risk. The company indicates it is willing to contribute a maximum amount of 20% of payroll to such a plan in good years. 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- Profit Sharing Plan

Solution: The correct answer is D. The only plan which meets all the criteria is the profit sharing plan. Profit sharing plans allow for flexible contribution by the employer, and a tax deduction up to 25% of covered compensation.

Match the following statement with the type of retirement plan which it most completely describes: "A plan with mandatory annual contributions where the employer bears the risk of providing a predetermined retirement benefit" is a... A- Profit sharing plan. B- Money purchase plan. C- SIMPLE IRA. D- Defined benefit plan

Solution: The correct answer is D. The other plans are defined contribution plans, where the employees bear the investment risk.

Jack Jones, age 40, earns $100,000 per year and wants to establish a defined contribution plan to encourage employees to stay with his firm. He employs four people whose combined salaries are $60,000 and who range in age from 23 to 30. The average period of employment is 3.5 years. Which vesting schedule is best suited for Jack's plan? A- 3-year cliff vesting. B- 3-7 year graded vesting. C- 5-year cliff vesting. D- 2-6 year graded vesting.

Solution: The correct answer is D. The plan is a DC plan so the only vesting schedules allowed are Answers "A" and "D". The only graded vesting schedule is "D". Graded vesting encourages and rewards employee longevity. The graded vesting is probably better since all of his employees would already be 100% vested if they used the 3 year cliff.

RCM Incorporated sponsors a qualified plan that requires employees to meet one year of service and to be 21 years old before being considered eligible to enter the plan. Which of the following employees are not eligible? I- Donald, age 18, who has worked full-time with the company for 3 years. II- Rachel, age 22, who has worked full-time with the company for 6 months. III- Randy, age 62, who has worked 500 hours per year for the past 6 years. IV- Theodore, age 35, who has worked full-time with the company for 10 years. A- IV only. B- I and II only. C- III and IV only. D- I, II and III only.

Solution: The correct answer is D. The question is looking for who is NOT eligible. RCM cannot exclude anyone who has attained age 21 and has completed one year of service with the company with 1,000 hours during that year. Donald is not old enough. Rachel has not been employed long enough. Randy will be eligible in 3 years based on SECURE Act rules to include long-term part-time employees. Starting in 2021 he can accrued three years of service and begin contributing to the retirement plan. Theodore is eligible.

One of your clients wants to know the maximum amount that might be allocated to her 401(k) account in the current year. She expects to earn $80,000. What amount can you tell your client will be the maximum total annual additions which could be made to her account? A- $20,000, 25% of income B- $22,500, the employee elective deferral C- $27,000 D- $66,000

Solution: The correct answer is D. The section 415 limit is applied to all annual additions. The lesser of 100% of income or $66,000 (2023) is the restriction. This amount includes all company contributions and salary deferral maximums.

For tax determination purposes, the holding period of a nonqualified option is determined to begin by which of the following? A- On the date the transferee becomes eligible for the grant. B- On the date of sale. C- On the date of the grant. D- On the date of exercise.

Solution: The correct answer is D. The security holding period in the case of a non-qualified options begins on the date the option is exercised.

Which of the following are common actuarial assumptions used in determining the plan contributions needed to fund the benefits of a defined benefit plan? I- Investment performance. II- Employee turnover rate. III- Salary scale. IV- Ratio of single to married participants. A- I and II only. B- I and III only. C- II and IV only. D- I, II, and III only.

Solution: The correct answer is D. The single to married participant ratio has no bearing on the "defined benefit" plan contribution for funding requirements. Salary scale, turnover rate and investment performance will all require certain actuarial assumptions be made.

Qualified and non-qualified retirement plans differ in each of the following except: A- Rollover provisions. B- Permissible discrimination. C-Timing of employer deductibility. D- Timing of employee taxability.

Solution: The correct answer is D. The timing of employee taxation on properly executed non-qualified and qualified plans are the same. The employee is taxed when benefits are paid out from the plan. Non-qualified plans can be split dollar plans, executive bonus plans, etc.

Ginger is a 75 year old retired actress. Although she enjoyed a lucrative career, her decline in health has prevented her from working for the last few years. She is currently contemplating contributing to a Roth or Traditional IRA. Which of the following best describes her options? A- She can't contribute to a Traditional IRA because she is too old, but she can contribute to a Roth IRA. B- She can't contribute to a Roth IRA because she is too old, but she can contribute to a Traditional IRA. C- She can contribute to either a Traditional IRA or a ROTH IRA but is not entitled to a deduction. D- She can't contribute to either a Traditional or Roth IRA.

Solution: The correct answer is D. There is no mention of earned income and "her health has prevented her from working." Therefore, she can't contribute to either one. You cannot assume earned income, and in fact, this question indicates that she hasn't worked at all for several years. If she did have earned income then she would be able to contribute as there is no age limit for Roth IRAs and the age limit was removed for a traditional IRA under SECURE Act (2019).

Which of the following will be subject to a 10% early withdrawal penalty? A- Sylvia, age 56, retired from Marshall Corporation. She takes a $125,000 distribution from the Marshall Corporation Defined Contribution Retirement Plan to pay for living expenses until she is eligible for Social Security. B- Terry quits Shoe Shine Company at age 48. He begins taking equal distributions over his life expectancy from his qualified plan after separating from service. The annual distribution is $2,000. C- Kevin leaves Hedwig University at age 50. He takes a $1,000,000 distribution from his defined contribution pension plan. Six weeks after receiving the $800,000 check (net of 20% withholding), Kevin deposits $1,000,000 into a new IRA account. D- Edward, age 40, takes a $40,000 distribution from his profit-sharing plan to pay for his son's college tuition.

Solution: The correct answer is D. There is no provision for a distribution without penalty under this circumstance. Edward is only 40 and education withdrawals are allowed in IRAs, not from qualified plans. Option A: 10% penalty is waived for separation from services at age 55 or older. Option B: Rule 72(t), penalty is waived for equal and substantial distributions for the greater of 5 years or age 59 1/2. Option C: This is a an indirect rollover completed within 60 days.

Tom, a married 29 year old, deferred 10% of his salary, or $20,000, into a 401(k) plan Roth account sponsored by his employer this year. He also contributed 10% of his income to his church. Katie, his wife, 28 years of age, was unemployed all year and did not receive unemployment compensation. Assuming Tom has no other income, what is the maximum contribution Tom and Katie can make to their Roth IRAs for this year? A- $0 B- $6,500 into Tom's Roth IRA. C- $6,500 into Katie's Roth IRA. D- $6,500 into each of Tom and Katie's Roth IRAs for a total of $13,000.

Solution: The correct answer is D. They can both contribute the annual amount of $6,500 each because their income is below the phase-out limit of $218,000 in 2023. Even though she does not have any earned income of her own, she can use Tom's earnings to qualify for the contribution.

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 $66,000.

Solution: 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.

Your client, a 35% owner of a regular C corporation, wants to take out a loan from the company sponsored profit-sharing plan. In order for the loan not be a prohibited transaction, which of the following conditions must apply: I- Loans are available to all participant/beneficiaries on a reasonably equivalent basis. II- Have a reasonable rate of interest. III- Made in accordance with specific plan provisions. IV- Must be adequately secured. A- II only. B-I, II and IV only. C- None of the above. D- All of the above.

Solution: The correct answer is D. This is an owner of a regular corporation (C Corporation.) Owners of C Corporations are eligible for loans as long as the safe-harbor rules are maintained. The items listed in Statements "I," "II," "III," and "IV" are the safe-harbor rules.

Sam Davis, age 47, earning $100,000 per year, wants to establish a defined benefit plan. He employs 4 people whose combined salaries are $50,000 and range in age from 22-27. The average employment period is 3.5 years. Which vesting schedule is best suited for Sam's plan? A- 3-year cliff. B- 3-7 year graded. C- 100% immediate vesting. D- 2-6 year graded.

Solution: The correct answer is D. This plan will be top heavy, based upon the disparity between Sam's compensation and that of his employees. A is incorrect. Although a 3-year cliff vesting schedule would be permitted, it would allow his employees to be fully vested if they separated from service after the 3.5-year average employment period. B is incorrect. Since the plan will be top heavy, a 3-7-year graded vesting schedule would not be permitted. C is incorrect. Although a full and immediate vesting schedule would be permitted, it would allow his employees to be fully vested if they separated from service after the 3.5-year average employment period. Additional information: If 4 employees make a combined total of 50k, an educated guess says each cannot make over 20k (12,500 if we split evenly). It also states he wants to set up the plan and has 4 employees. This all indicates he owns the business and would be HCE and Key Employee based on ownership. To further illustrate (dropping ownership): 100k x 2% x 3.5 years of service = $7,000 12,500 x 2% x 3.5 = $875 He is getting 88.9% of the benefits using 3.5 years of service. I will guess the owner has more than 3.5 years of service, making his benefit even more disproportionate.

The maximum service requirement that a profit sharing plan may impose as a condition of participation is: A- 1 year with semi-annual entry dates (1.5 years). B- 1 year with quarterly entry dates (1.25 years). C- 6 months. D- 2 years.

Solution: The correct answer is D. This requires "immediate vesting."

Which of the following types of plan design would be appropriate for a startup company with wide fluctuations in cash flow and key employees with an average age significantly higher than non-key employees? A- Cash balance plan. B- Service based profit sharing plan. C- Target benefit plan using age weighting. D- Age weighted profit sharing plan.

Solution: The correct answer is D. Wide fluctuation in cash flow call for a profit sharing plan. The older age of the key employees indicates age-weighting to skew benefits to the key employees.

Regina and Edward have taken 4 week vacations every year to different locations around the world for the last 5 years. They are both 38 and plan to retire at 62 but would like to enjoy as many extended trips as they can now. They work hard as a Trial Lawyer and Architect respectively. Which type of non-traditional retirement strategy do they seem to be utilizing? A- FIRE B- Lean FIRE C- Sabbaticals D- Socialization

Solution: the correct answer is C. Sabbaticals are defined by Merriam-Webster as a period of time during which someone does not work at his or her regular job and is able to rest, travel, do research, etc. Sabbaticals are as short as 4 - 6 weeks, or could be a year, depending on your employer. A is incorrect. FIRE is Financial Independence, Retire Early. This movement is summed up by high savings and low spending in your early working years to allow early retirement as young as your 40s. B is incorrect. Lean FIRE is characterized as minimalistic lifestyle where investment or supplemental income only covers basic necessities. D is incorrect. Socialization is the process of acquiring values, beliefs, and behaviors that are acceptable and or expected by society, and not part of the alternative views for retirement.

Which of the following does not describe aspects of FIRE movement? A- Extreme saving and working hard towards an early retirement. B- Target goal of 25 times spending and exiting the workforce at that point regardless of age. C- Being able to retire early and lavishly because of extreme savings and sacrifice. D- Disciplined savings throughout working years to achieve financial independence in your 60s.

Solution: the correct answer is D. Choice D does not describe aspects of the FIRE movement, it describes a traditional retirement of saving and retiring once one is in their 60s. Options A, B, and C all describe aspects of the FIRE movement.

Bobby owns Advertising Solutions, Inc. (ASI) and sells 100% of the company stock on July 1 of the current year to an ESOP for $3,000,000. Bobby had an adjusted basis in the ASI stock of $450,000. If Bobby reinvests in qualified replacement securities before the end of the current year, which of the following statements is true? A: Bobby will not recognize long term capital gain or ordinary income in the current year. B: Bobby must recognize $2,550,000 of long term capital gain in the current year. C: Bobby must recognize $450,000 of ordinary income in the current year. D: If Bobby dies before selling the qualified replacement securities, his heirs will have an adjusted taxable basis in the qualified replacement securities of $450,000, Bobby's carryover adjusted basis.

Solution: The correct answer is A. A major advantage for an ESOP is the ability of the owner to diversify his interest in a closely held corporation. In this case, if Bobby reinvests in qualified replacement securities within 12 months of the sale to the ESOP, he will not recognize capital gain or ordinary income on the sale to the ESOP. If Bobby dies the heirs will receive the securities with an adjusted taxable basis equal to the FMV at Bobby's date of death or the alternate valuation date.

Thomas, age 55 and the owner of a computer repair shop, has come to you to establish a qualified plan. The repair shop, which employs mostly young employees, has had steady cash flows over the past few years, but Thomas foresees shaky cash flows in the future as new computer prices decline. Thomas would like to allocate as much of the plan contributions to himself as possible. He is the only employee whose compensation is in excess of $100,000. Which of the following qualified plans would you advise Thomas to establish? A: Profit sharing plan B: Defined benefit pension plan C: Cash balance pension plan D: Money purchase pension plan (Integrated)

Solution: The correct answer is A. A profit sharing plan would be the best choice for Thomas' company. All of the other options described pension plans that require mandatory funding. A pension plan would not be an appropriate choice due to the company's unstable cash flows.

Which of the following statements is true? A: A conservative retirement planner may estimate an individual to have a longer life expectancy than truly expected. B: To ensure that an individual does not outlive their retirement funds, a retirement planner may use a higher estimated rate of return than realistically expected. C: A more conservative financial planner uses the annuity method to determine an individual's retirement needs rather than the capital preservation method. D: A more conservative financial planner uses the annuity method to determine an individual's retirement needs rather than the purchasing power preservation model.

Solution: The correct answer is A. Answer A is a true statement as it is a more conservative approach for a financial planner to consider a longer life expectancy than is truly expected based on family history, thus providing the retiree with more funds during a longer retirement. Answer b is incorrect as using a higher rate of return is a less conservative method of completing a retirement plan. It assumes greater earnings, thus less required savings. Answer c is incorrect as the capital preservation method is more conservative than the annuity method because the capital preservation method assumes the retiree does not use any of the principal retirement savings. Answer d is incorrect as the purchasing power preservation model is more conservative than the annuity method because the purchasing power preservation model assumes the retiree does not use any of the principal retirement savings and it also assumes that the principal retirement savings is adjusted for inflation.

Which of the following are characteristics of a SIMPLE? A: Contributions to a SIMPLE are 100% vested at all times. B: The maximum contribution to a SIMPLE is the lesser of 25% of compensation or $61,000 for 2022. C: A SIMPLE permits employer discretionary contributions. D: A SIMPLE imposes a 25% penalty on distributions prior to 59½.

Solution: The correct answer is A. Answer a is a correct statement. Answer b is the maximum contribution to a SEP. Answer c is incorrect; SIMPLEs require employer contributions for matching except for the first 2 years. Answer d is incorrect.

Robert, single and age 54, is a participant of his employer's qualified profit sharing plan. For the current year he received a forfeiture allocation of $25, but the employer did not make any other contribution for the year. Robert would like to make a deductible IRA contribution. If Robert's AGI is $80,000 (all comprised of W-2 earnings and portfolio income), what is the maximum deductible IRA contribution Robert may make to the plan? A: $0 B: $2,000 C: $6,000 D: $7,000

Solution: The correct answer is A. Because of the forfeiture allocation Robert received from his employer's plan, he would be considered an active participant of his employer's qualified plan. Accordingly, his maximum deductible contribution to the IRA may be limited based upon his AGI. The AGI phaseout for a single active participant in a qualified plan is $68,000 - $78,000 (2022). Since Robert's AGI exceeds the threshold, he cannot make a deductible IRA contribution.

On April 30, Janet, age 42, received a distribution from her qualified plan of $150,000. She had an adjusted basis in the plan of $500,000 and the fair market value of the account as of April 30 was $625,000. Calculate the taxable amount of the distribution and any applicable penalty. A: $30,000 taxable, $3,000 tax penalty B: $30,000 taxable, $0 tax penalty C: $120,000 taxable, $12,000 tax penalty D: $150,000 taxable, $15,000 tax penalty

Solution: The correct answer is A. Because the distribution to Janet does not qualify for the exception to the 10% penalty, the taxable amount of the distribution will be subjected a 10% penalty. To calculate the amount of the distribution that is return of adjusted basis, the adjusted basis in the plan is divided by the fair market value of the plan as of the day of the distribution. This ratio is then multiplied times the gross distribution amount. As such, $120,000 (($500,000/$625,000) × $150,000) of the $150,000 distribution is return of adjusted taxable basis. Accordingly, $30,000 ($150,000 - $120,000) will be subject to income tax, and there will be a $3,000 ($30,000 × 10%) tax penalty.

Carrie, age 55, is an employee of Rocket, Inc. (Rocket). Rocket sponsors a SEP IRA and would like to contribute the maximum amount to Carrie's account for the plan year. If Carrie earns $14,000 per year from Rocket, what is the maximum contribution Rocket can make on her behalf to the SEP IRA? A: $3,500 B: $14,000 C: $20,500 D: $61,000

Solution: The correct answer is A. Contributions to a SEP IRA are limited to the lesser of 25% of the employee's compensation or $61,000 (2022). In this case, Carrie's compensation is $14,000, so the contribution on her behalf would be limited to 25% of $14,000, or $3,500.

Generally, which of the following are noncontributory plans? I: 401(k) and money purchase pension plans II: 401(k) and thrift plans III: Thrift plans and ESOPs IV: 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

Solution: The correct answer is A. Employers generally contribute to Money Purchase Pension Plans, ESOPs, and Profit Sharing Plans. Employees contribute (thus contributory plans) to 401(k)s and Thrift 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-$16,500 B-$25,000 C-$66,000 D-$330,000

Solution: The correct answer is A. For a profit sharing plan the contribution is limited to the lesser of $66,000 (2023) or covered compensation. In this case the contribution will be limited by the covered compensation limit of $330,000. $330,000 × 5% = 16,500 (the calculation without the compensation cap would have been 500,000 x 5% = 25,000). The fact that the plan is top heavy is irrelevant since all employees are receiving a contribution greater than 3%.

Henry Hobbs, age 42, has compensation of $72,000. The normal retirement age for his 457(b) plan is age 62. Henry has unused deferrals totaling $21,000 as of January 1, 2022. How much can Henry defer into his 457(b) public plan for 2022? A: $20,500 B: $27,000 C: $41,000 D: $61,000

Solution: The correct answer is A. Henry is not within 3 years of the plan's normal retirement age and therefore can only defer the normal $20,500. The $6,500 catch up (2022) for those participant's age 50 and over is not available because he is only 42 years old.

Medicare Part A provides hospital coverage. Which of the following persons is not covered under Part A? A: A person 62 or older and receiving railroad retirement. B: Disabled beneficiaries regardless of age that have received Social Security for two years. C: Chronic kidney patients who require dialysis or a renal transplant. D: A person 65 or older entitled to a monthly Social Security check.

Solution: The correct answer is A. Medicare Part A requires a person to be age 65.

Jean works for A&R Law Firm. A&R pays (reimburses) Jean $280 per month for parking at work. How much does Jean need to include per month in her gross income related to the parking reimbursement? A: $0 B: $10 C: $100 D: $280

Solution: The correct answer is A. Parking at the employer's place of employment may be excluded up to $280 (2022) per month from the employee's pay. NOTE, the Employer is no longer entitled to the deduction for years after 12/31/17 (TCJA).

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: 1 only B: 2 only C: 1 and 2 D: Neither 1 nor 2

Solution: The correct answer is A. Statement 2 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 1 is a correct statement.

Which of the following is not a requirement for the owner of corporate stock who sells to an ESOP to qualify for the nonrecognition of gain treatment? A: The ESOP must own at least 55% of the corporation's stock immediately after the sale. B: The owner must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale. C: The ESOP may not sell the stock within three years of the transaction unless the corporation is sold. D: The owner must not receive any allocation of the stock through the ESOP.

Solution: The correct answer is A. The ESOP must own at least 30% of the corporation's stock immediately after the sale. All of the other statements are true.

Which of the followings statement(s) regarding 403(b) plans is true? I: Assets within a 403(b) plan may be invested in annuities. II: Assets within a 403(b) plan may be invested in mutual funds. III: All 403(b) plans must generally pass the ADP test. A: 1 only B: 1 and 2 C: 2 and 3 D: 1, 2, and 3

Solution: The correct answer is B. 403(b) plans are not required to meet the ADP test, but 403(b) plans with employer contributions are required to meet the ACP test.

All of the following are advantages of profit sharing plans to businesses and business owners EXCEPT: A: Allows discretionary contributions. B: Must limit withdrawal flexibility. C: Controls benefit costs. D: May provide legal discrimination in favor of older owner-employees.

Solution: The correct answer is B. An advantage of profit sharing plans is that they PERMIT withdrawal flexibility. Options a, c, and d are also advantages of a profit sharing plan to the business and business owner.

Marcus, age 61, is a participant in a stock bonus plan. The value of the employer stock contributions to the plan over the course of his participation totaled $165,000. On December 1, 20x1, Marcus takes a full distribution of the employer stock from the plan at a value of $550,000. Fourteen months later, Marcus sells all of the stock for $400,000. Which of the following statements is true? A: Marcus has a long-term capital gain of $385,000 for 20x1. B: Marcus has ordinary income of $165,000 in 20x1. C: Marcus has a long-term capital loss of $150,000 in 20x3. D: Marcus has ordinary income of $165,000 and long-term capital gain of $385,000 in 20x1.

Solution: The correct answer is B. Because Marcus is taking a lump sum distribution from a qualified plan of employer stock, he will not have to recognize the net unrealized appreciation until he disposes of the employer stock. However, at the time of the distribution, the value of the stock, as of the date of contribution to the plan, will be taxable as ordinary income. Any gain on the subsequent sale of the stock will be taxable as long-term capital gain. In this case, Marcus will recognize $165,000 of ordinary income at the date of the distribution and long-term capital gain of $235,000 ($400,000 - $165,000) at the date of sale.

Of the following employees, who is(are) a key employee(s)? Janice, age 52, a 5% owner who earns $45,000. She is not an officer. Wendy, age 45, a 6% owner who earns $92,000. She is also an officer. Pat, age 26, a 2% owner who earns $205,000. She is also an officer. A: Janice B: Pat and Wendy C: Janice and Wendy D: Wendy only

Solution: The correct answer is B. Both Pat and Wendy are key employees. The criteria for being a Key Employee in 2022 are: 1) greater than 5% owner, 2) greater than 1% owner and compensation in excess of $150,000, or 3) an officer with compensation in excess of $200,000 (2022). Wendy is a greater than 5% owner. Pat meets both the >1% and officer criteria with compensation over the limits. Janice does not meet any of the criteria.

Generally, younger entrants are favored in which of the following plans? I: Defined benefit pension plans. II: Cash balance pension plans. III: Target benefit pension plans. IV: Money purchase pension plans. A: 4 only B: 2 and 4 C: 1 and 3 D: 2, 3, and 4

Solution: The correct answer is B. Cash Balance and Money Purchase Pension Plans favor younger entrants. Defined Benefit and Target Benefit Pension Plans favor older age entrants with less time to accumulate, and therefore, require higher funding levels.

Which of the statements describing psychological considerations in dealing with money is TRUE? A: Workaholics generally fear not having enough money and therefore have learned a healthy balance between work and family. B: Financial infidelity can become problematic when purchases become significant and deter the financial goals. C: Hoarding is characterized by having views of money being abundant and accumulating possessions that people consider worthless. D: One's childhood, upbringing and economic period in which they were raised does not impact how a person relates to money.

Solution: The correct answer is B. Choice B is a true statement describing psychological considerations in dealing with money. Choice A is a false statement because workaholics have not learned a healthy balance between work and health. Choice C is a false statement because hoarding is characterized by having a fear of running out of money. Choice D is false because one's childhood, upbringing, and economic period in which they were raised impacts how a person relates to money.

Alpha partnership has 8 partners who have entered into a binding buy/sell agreement that requires the partnership to purchase the interest of any partner to die. How many policies are required to satisfy this arrangement? A: 1 B: 8 C: 16 D: 64

Solution: The correct answer is B. Eight policies, or one for each partner, are required at the entity level.

At the age of 57, James converted his traditional IRA, valued at $45,000, to a Roth IRA. At age 60, James took a distribution from this Roth IRA of $100,000 to buy a new car for his daughter for college. Which of the following statements is true with regards to the distribution from the Roth IRA? A: $100,000 will be subjected to ordinary income tax. B: $55,000 will be subjected to ordinary income tax. C: $55,000 will not be subjected to ordinary income tax or penalty. D: $55,000 will be subjected to ordinary income tax and penalty.

Solution: The correct answer is B. For a distribution from a Roth IRA to be a qualified distribution, the distribution must be on account of death, disability, the owner attaining the age of 59½, or the first time purchase of a home, AND the distribution must occur five years after the account was created. In this case, since the Roth was not created five or more years before the distribution, the distribution will be taxable to the extent it represents earnings in the account, $55,000. The $45,000 was taxed at conversion. Since the distribution was taken after James attained 59½, it will not be subjected to the 10% penalty. While doubling an account balance in 3 years may not be achievable, this question was to ensure you know the rules on qualified/non-qualified distributions from a Roth IRA.

Which of the following employees is highly compensated for 2022? I:Matt, an officer of the company, who earns $105,000 per year and owns 2% of the company. II:Missy, who earns $13,000 per year and owns 5% of the company. III: Tara, an officer of the company who earns $150,000. IV: Julie, a 10% owner of the company who earns $4,000 per year as a secretary. A: 4 only B: 3 and 4 C: 1 and 3 D: 2 and 4

Solution: The correct answer is B. Highly compensated is: An owner of greater than 5% this year or last year or Compensation in excess of $135,000 for 2022 (Last year, and if elected, add "and in top 20% of employees ranked by salary").

Justin, age 42, had the following items of income: -Earnings as a general partner in a partnership of $400 -Workers compensation of $600. -Gambling losses of $200. -Distribution from profit sharing plan of $1,500. -Wages from an S Corp of $2,000. -Income from Municipal Bond Portfolio of $100,000. Since he does not have a retirement plan available at work, Justin also contributed $1,000 to his Roth IRA during the year. What is the maximum deduction Justin can take for an IRA contribution for this year? A: $1,000 B: $1,400 C: $3,000 D: $5,000

Solution: The correct answer is B. Justin is limited to making aggregate IRA contributions (Roth or traditional) equal to the lesser of $6,000 (2022) or his earned income for the year. The following items are considered earned income. Earnings from General Partnership $400 Wages from S Corp $2,000 The other items are not considered earned income. Justin would be limited to IRA contributions of $2,400. Since Justin made a Roth IRA contribution of $1,000, he could only make a deductible IRA contribution of $1,400.

Michelle is a key employee participant in a top-heavy profit sharing plan which follows the least generous graduated vesting schedule permitted under PPA 2006. Each year of her five year employment with Silky Oaks Resort, she has received an employer contribution equal to $12,000 to her profit sharing plan account. Today the balance of her profit sharing plan is $65,000. If Michelle terminated employment with Silky Oaks Resort today what is the vested balance of her profit sharing plan? A: $39,000 B: $52,000 C: $55,000 D: $65,000

Solution: The correct answer is B. Michelle's vested balance in the profit sharing plan account is $52,000. Under PPA 2006, the least generous graduated vesting schedule permitted for a profit sharing plan is a 2 to 6 year graduated vesting schedule. The fact that the plan is top-heavy does not impact the vesting schedule under PPA 2006. Therefore, Michelle is 80% vested in the contributions to the account. There were no employee deferral contributions to the plan. Thus, 80% of $65,000 = $52,000.

Part B of Medicare is considered to be supplemental insurance and provides additional coverage to participants. Which of the following is true regarding Part B coverage? A: The election to participate must be made at the time the insured is eligible for Part A Medicare and at no time after. B: The premiums for Part B are paid monthly through withholding from Social Security benefits. C: Once a participant elects Part B, he must maintain the coverage until death. D: Coverage under Part B does not include deductibles or coinsurance.

Solution: The correct answer is B. Only option b is correct. Option a is incorrect because participation can occur after the initial eligibility. Participation is not required to be maintained for life, and Part B does have deductibles and/or coinsurance.

Jason turned 71 in November 2021 and is retired. He was a participant in his employer's profit sharing plan. His profit sharing plan had an account balance of $250,000 on December 31 of last year (2021), and $200,000 on December 31 of the prior year. According to the Uniform Lifetime Table the factors for ages 72 and 73 are 27.4 and 26.5 respectively. What is Jason's approximate required minimum distribution amount that must be taken by April 1, 2022? A: $7,300. B: $0. C: $7,547. D: $9,124.

Solution: The correct answer is B. SECURE Act changed the Required Begin Date for Required Minimum Distributions to age 72 for anyone turning 70 1/2 after 12/31/19. Jason will be required to take his first RMD for the tax year 2022, which may be delayed until April 1, 2023.

Computer Services, Inc. (CSI) sponsors a SIMPLE for its employees with a 100% match up to 3% of compensation. Mary, age 42, has been an CSI employee for 14 years. In the current year, Mary earns $35,000 and defers $10,000 to the SIMPLE plan. What is the maximum matching contribution to Mary's SIMPLE from CSI? A: $0 B: $1,050 C: $3,000 D: $13,500

Solution: The correct answer is B. Since CSI uses a 100% match up to 3% of compensation, the matching contribution from CSI to Mary's SIMPLE would be 3% of $35,000 (Mary's compensation) or $1,050.

Betty Sue, age 75, is a widow with no close relatives. She is very ill, unable to walk, and confined to a custodial nursing home. Which of the following programs is likely to pay benefits towards the cost of the nursing home? I: Medicare may pay for up to 100 days of care after a 20-day deductible. II: Medicaid may pay if the client has income and assets below state-mandated thresholds. A: 1 only B: 2 only C: 1 and 2 D: Neither 1 nor 2

Solution: The correct answer is B. Statement 1 is incorrect because Medicare covers all costs for the first 20 days of skilled nursing home care and cover the next 80 days with a deductible but pays nothing for custodial care.

Marguerite received nonqualified stock options (NQSOs) with an exercise price equal to the FMV at the date of the grant of $22. Marguerite exercises the options 3 years after the grant date when the FMV of the stock was $30. Marguerite then sells the stock 3 years after exercising for $35. Which of the following statements are true? I: At the date of the grant, Marguerite will have ordinary income of $22. II: At the date of exercise, Marguerite will have W-2 income of $8. III: At the date of sale, Marguerite will have long term capital gain of $5. IV: Marguerite's employer will have a deductible expense in relation to this option of $22. A: 3 only B: 2 and 3 C: 2, 3, and 4 D: 1, 2, 3, and 4

Solution: The correct answer is B. Statements 2 and 3 are correct. Marguerite would not have any taxable income at the date of grant provided the exercise price is equal to the fair market value of the stock. Marguerite's employer would receive a tax deduction equal to the amount of W-2 income Marguerite would be required to recognize, $8 of W-2 income, at the date of exercise. Marguerite's long term capital gain is $5, calculated as the sales price of $35, less the exercise price of $30.

Jackie receives incentive stock options (ISOs) with an exercise price equal to the FMV at the date of the grant of $22. Jackie exercises these options 3 years from the date of the grant when the FMV of the stock is $30. Jackie then sells the stock 3 years after exercising for $35. Which of the following statements is (are) true? A: I: At the date of grant, Jackie will have ordinary income equal to $22. B: II: At the date of exercise, Jackie will have W-2 income of $8. C: III: At the date of sale, Jackie will have long-term capital gain of $13. D: IV: Jackie's employer will not have a tax deduction related to the grant, exercise or sale of this ISO by Jackie. A: 3 only B: 3 and 4 C: 2, 3, and 4 D: 1, 2, and 4

Solution: The correct answer is B. Statements 3 and 4 are correct. Since Jackie held the underlying security 2 years from grant and one year from exercise before its sale, Jackie will receive long-term capital gain treatment for the appreciation, and her employer will not have a deductible expense related to the ISO.

Packlite company has a defined benefit plan with 200 nonexcludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the requirements set forth in the IRC? A: 40 B: 50 C: 80 D: 100

Solution: The correct answer is B. The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. Here 40% would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees.

The plan participant bears the investment risk of the assets within a defined benefit pension plan. A: True B: False

Solution: The correct answer is B. The employer takes on the risk in a defined benefit plan.

Jared, age 52, earns $350,000 per year and is a participant in his employer's 401(k) plan. What is the maximum total contribution amount that Jared will have under the 401(k) plan in 2022, assuming his company contributes using a non-elective deferral in a Safe Harbor Plan? A: $31,000 B: $36,150 C: $61,000 D: $67,500

Solution: The correct answer is B. The general employee elective deferral limitation for 2022 is $20,500, and Jared can defer an additional $6,500 (2022) as a catch-up contribution because he is over 50. The company match is 3% of 305,000, giving him an additional $9,150 for a total contribution of $20,500 + $6,500 + $9,150 = $36,150

Monarch Machines sponsors a 15% money purchase pension plan and 401(k) profit sharing plan in which the employees are permitted to defer up to 75% of their compensation. Monarch Machines matches employee deferral contributions 100% up to 6% of deferred compensation. If James, age 31, is a highly compensated employee who earns $235,000, what is the maximum he will receive as an employer match from Monarch in 2022 if the ADP of the NHC is 4%? A: $0 B: $12,875 C: $14,100 D: $25,750

Solution: The correct answer is B. The maximum amount that may be contributed to qualified plans on James' behalf is $61,000 (2022). If James receives an allocation from Monarch's money purchase pension plan of $35,250 ($235,000 × 15%), he can only receive an additional $25,750 from other sources. The ADP of the NHC is 4%, so James, as a HC employee could, based upon the ADP test, defer up to 6% of his compensation and Monarch will match him 100%. However, James cannot defer 6% of his compensation because this would cause him to exceed the annual additions limit, and he would not benefit from the 100% match from Monarch. If James deferred $14,100 (6% of $235,000) of his compensation then Monarch would match $14,100 but that would exceed the limit. In this case, James will have received total annual additions of $61,000 ($35,250 + $12,875 + $12,875).

Rachel has attained 2 years of service with her employer, Fiasco, Inc. (FI). FI sponsors a top-heavy qualified profit sharing plan and Rachel's account balance within the plan is $200,000. If the plan follows the least generous graduated vesting schedule permitted under PPA 2006, and considering Rachel has never taken a plan loan before, what is the maximum loan Rachel can take plan permitting? A: $0. Plan loans are not permissible from a top-heavy profit sharing plan. B: $20,000 C: $40,000 D: $50,000

Solution: The correct answer is B. The maximum loan permissible is the lesser of 50% of the participant's vested account balance or $50,000, reduced by the highest outstanding loan balance within the 12 months prior to taking the new plan loan. In this case, Rachel is 20% vested (the least generous graduated vesting schedule permitted under PPA 2006 for a top-heavy plan would be a 2 to 6 graduated vesting schedule) in her profit sharing plan account balance because she has only attained 2 years of service with the organization. 50% of her vested account balance would be $20,000 (50% of $40,000 ($200,000 × 20%)), which is less than $50,000. Since she has not taken any previous loans, her maximum loan would not be adjusted any further.

Which of the below people cannot make a deductible contribution to a traditional IRA for 2022? PersonAGIActive ParticipantMarital Status of Qualified Person 1. Dianne$76,000YesMarried 2. Joy$50,000YesSingle 3. Kim$280,000NoSingle 4. Loretta$79,000YesSingle A: None B: 4 only C: 2 and 4 D: 1, 2, 3, and 4

Solution: The correct answer is B. The question is looking for who canNOT make a deductible contribution for this year. All but Loretta may make a deductible contribution to a traditional IRA. Dianne and Joy are below the phaseout range and Kim is not covered by a qualified plan, therefore, there is no income limit. Loretta is single and is an active participant of a qualified plan and her AGI is above the phaseout for singles ($68,000-$78,000) 2022, MFJ phase out is $109,000 - $129,000.

Jane is covered by a $90,000 group-term life insurance policy, her daughter is the sole beneficiary. Jane's employer pays the entire premium for the policy; the uniform annual premium is $0.60 per $1,000 per month of coverage. How much, if any, is W-2 taxable income to Jane resulting from the insurance? A: $0 B: $24 C: $288 D: $648

Solution: The correct answer is C. $50,000 of group-term life insurance is nontaxable. ($90,000 - 50,000) = 40,000 × $0.60 per thousand × 12 = $288 taxable.

Which of the following statement(s) regarding 403(b) plans is true? I: Assets within a 403(b) plan may be invested in individual securities. II: A 403(b) plan vests all contributions under a 3 to 7 year graduated vesting schedule. III: A 403(b) plan must generally pass the ACP test if it is an ERISA plan. IV: In certain situations, a participant of a 403(b) plan can defer an additional $15,000 as a catch up to the 403(b) plan. A: 4 only B: 1 and 2 C: 3 and 4 D: 2, 3, and 4

Solution: The correct answer is C. 403(b) plan assets cannot be invested in individual securities, and employee contributions to 403(b) accounts are always 100% vested, only employer contributions are subject to vesting restrictions but they use a 2 to 6 year graded or 3 year cliff. Statements 3 and 4 are true.

A single individual has an adjusted gross income of $47,000, no tax-exempt interest, and Social Security benefits of $14,000. How much of this individual's Social Security benefits is subject to income tax? A: $7,000 B: $7,500 C: $11,900 D: $15,500

Solution: The correct answer is C. 85% of $14,000 = $11,900 because the income is over the top threshold amount of $34,000 for a single tax filer.

Which of the following is not a type of profit sharing plan? A: Stock Bonus. B: 401(k) plan. C: Target Benefit. D: Thrift Plan.

Solution: The correct answer is C. A Target Benefit plan is a defined contribution pension plan. There are 7 types of profit sharing plans; Profit Sharing, Stock Bonus Plans, ESOP, 401k, Thrift Plans, Age-based Profit Sharing Plans, and New Comparability Plans. Be careful not to think of the specific plan, but the category (type) of profit sharing plans.

All of the following statements concerning cash balance pension plans are correct EXCEPT: A: The cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand, and as a cost saving measure. B: The cash balance plan is a defined benefit plan. C: The cash balance plan has no guaranteed annual investment return to participants. D: The cash balance plan is subject to minimum funding requirements.

Solution: The correct answer is C. A basic component of a cash balance plan is the guaranteed minimum investment return.

What is the first year in which a single taxpayer, age 57 on February 1, 2021, could receive a qualified distribution from a Roth IRA, if he made a $4,000 contribution to the Roth IRA on April 1, 2019, for the tax year 2018? A: 2021 B: 2022 C: 2023 D: 2024

Solution: The correct answer is C. A qualified distribution can only occur after a five-year period has occurred and is made on or after the date on which the owner attains age 59½, made to a beneficiary or the estate of the owner on or after the date of the owner's death, attributable to the owner's being disabled, or for a first-time home purchase. The five-year period begins at the beginning of the taxable year of the initial contribution to a Roth IRA. The five-year period ends on the last day of the individual's fifth consecutive taxable year beginning with the taxable year described in the preceding sentence. Therefore, the first year in which a qualified distribution could occur is 2023. He hits the 5-year contribution mark in 2022 but is only age 58. The earliest he could withdraw tax-free is August 2023 when he obtains age 59 1/2. Roth establishedYearAgeYear 1201854Year 2201955Year 3202056Year 4202157Year 5202258Year 6202359

Which of the following statements is true? A: Social Security will provide most individuals with an equal wage replacement percentage during retirement. B: Because of the high cost, many small businesses are precluded from establishing a retirement plan. C: The U.S. Government offers many tax incentives to employers who establish and maintain qualified retirement plans. D: Large employers usually establish defined benefit plans because investment risk is shifted to employees.

Solution: The correct answer is C. Answer C is a true statement. Employers are permitted to deduct contributions to qualified retirement plans and the contributions are not subjected to payroll taxes. Answer A is incorrect as Social Security will only provide an adequate wage replacement ratio for those individuals with very low pre-retirement income. Answer B is incorrect as small business may establish inexpensive and easy-to-maintain retirement plans. Answer D is incorrect because DB plans require the employer to be responsible for investment risk.

Mike was awarded 1,000 shares of restricted stock of B Corp at a time when the stock price was $14. Assume Mike properly makes an 83(b) election at the date of the award. The stock vests 2 years later at a price of $12 and Mike sells it then. What are Mike's tax consequences in the year he makes the 83(b) election? A: Mike has W-2 income of $12,000. B: Mike has a long-term capital loss of $2,000. C: Mike has W-2 income of $14,000. D: Mike has a $12,000 long-term capital gain.

Solution: The correct answer is C. At the time Mike makes the 83(b) election, the value of the stock at that date will be included in his taxable income. Thus, Mike will have W-2 income of $14,000 ($14 × $1,000).

Bobby, age 54, has worked for Cairns Airlines for 15 years. He earns $450,000 per year and is covered by a qualified defined benefit pension plan with a funding formula of (1.5% × Years of Service × Last Year's Salary). What is Bobby's accrued benefit under this defined benefit plan given the funding formula, his earnings and his years of service? A: $55,125 B: $61,000 C: $68,625 D: $101,250

Solution: The correct answer is C. Because of the covered compensation limit of $305,000 (2022), Bobby's compensation in excess of $305,000 cannot be considered for purposes of calculating his accrued benefit. The answer of $68,625 is calculated as 1.5% × 15 × $305,000.

Which of the following regarding vesting is (are) true? I: Two advantages of choosing a restrictive vesting schedule are: (1) to reduce costs attributable to employee turnover and (2) to help retain employees. II: Three advantages of choosing a liberal vesting schedule, to have immediate and full vesting are: (1) to foster employee morale (2) keep the plan competitive in attracting employees, and (3) to meet the designs of the small employer who desires few encumbrances to participation for the "employee family." A: 1 only B: 2 only C: Both 1 and 2 D: Neither 1 nor 2

Solution: The correct answer is C. Both 1 and 2 are correct.

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.

Solution: The correct answer is 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.

All of the following statements describing retirement are true EXCEPT: A: Traditional retirement generally begins when an individual leaves the workforce in their 60s with a retirement life expectancy correlated to their health. B: The FIRE movement is an extreme version of saving and working hard towards an early retirement in an attempt to get the most out of life. C: People often sacrifice their youth and the prime of their life in an attempt to work hard and accumulate wealth through a mini retirement or sabbatical. D: Financial independence is the ability to live comfortably without working for income and can happen at any stage as an adult.

Solution: The correct answer is C. Choices A, B, and D are all true statements. Choice C is a false statement because a mini retirement or sabbatical is considered by individuals who value their youth and prime not those who sacrifice their youth and prime of life to work hard and accumulate wealth.

Jennifer, age 54, earns $125,000 annually from ABC Incorporated. ABC sponsors a SIMPLE IRA, and matches all employee deferrals 100% on the first 3% of employee contribution. Assuming Jennifer defers the maximum to her SIMPLE IRA, what is the total contribution to the account in 2022 including both employee and employer contributions? A: $14,000 B: $17,000 C: $20,750 D: $27,000

Solution: The correct answer is C. Jennifer can defer up to $17,0000 because she is over 50 ($14,000 deferral limit + $3,000 catch up for 2022). ABC's match for Jennifer is 3% of her compensation, or $3,750 (3% × $125,000). The maximum contribution to Jennifer's SIMPLE IRA is $20,750 ($17,000 + $3,750). Jennifer maxes out her contribution at just over 10% of her compensation. Her employer matches the first 3%, dollar for dollar. RPCH10

Randy, age 63, is a participant in the stock bonus plan of XYZ, Inc., a closely held corporation. Randy received contributions in shares of XYZ stock to the stock bonus plan and XYZ, Inc. had the following income tax deductions: Years# of SharesValue per Share (at contribution) 1 100 $12 2 125 $15 3 150 $8 4 200 $18 5 400 $20 Total975 Randy terminates employment in Year 6 and takes a distribution from the plan of 975 shares of XYZ, Inc., having a fair value of $24,000. Which of the following correctly describes Randy's tax consequences for Year 6 from this distribution if Randy does not sell the XYZ stock until Year 8? A: Randy has ordinary income of $15,875 and long term capital gain of $8,125 in Year 6. B: Randy has long term capital gain of $24,000 in Year 6. C: Randy has ordinary income of $15,875 in Year 6. D: Randy has a long term capital gain of $8,125 in Year 6.

Solution: The correct answer is C. Randy's ordinary income is exactly equal to XYZ, Inc.'s deduction at the time of contribution, $15,875 (see chart below) and this will be taxable in the year of the distribution. Randy's net unrealized appreciation is $8,125 ($24,000 - $15,875) and will be taxed as a long-term capital gain when the stock is sold in Year 8. # of SharesValue of ShareValue of Contribution 100 $12 $1,200 125 $15 $1,875 150 $8 $1,200 200 $18 $3,600 400 $20 $8,000 $15,875

Robin began taking required minimum distributions from her profit sharing plan several years ago. Robin died after suffering a heart attack on January 2, 2021. She had named her twin sister Johanna as beneficiary of her profit sharing plan. Which of the following statements is false? A: Johanna may take a full distribution of the profit sharing plan's assets in the year of Robin's death. B: After Johanna's death, her named beneficiary will need to distribute the balance of the account within 10 years of Johanna's death. C: Robin's sister must take a distribution of the profit sharing plan account balance by the end of the fifth year after the year of her death. D: The required minimum distribution can be taken over Johanna's life, the year following Robin's death.

Solution: The correct answer is C. SECURE Act 2019 changed the distribution rules following the account owner's death. The new rules do not differentiate between death before or after RMDs start. Johanna is an Eligible Designated Beneficiary and will be able to distribute the account over her life expectancy. Any balance in the inherited IRA upon Johanna's death* is subject to the 10 year rule. Johanna could elect to take the distributions faster than her life expectancy if she wishes. She will not be subject to distribution within 5 years. *Note on answer choice B: After Johanna's death, the inherited IRA (from Robin) will need to be paid out to Johanna's beneficiary within 10 years of her death.

Shawn, a married 29 year old, deferred 10% of his salary, or $10,000, into a 401(k) plan sponsored by his employer this year. His wife, also 29, was unemployed all year and did not receive unemployment compensation. Assuming Shawn has no other income, what is the maximum contribution Shawn's wife can make to her Roth IRA for this year (2022)? A: $0 B: $1,000 C: $6,000 D: $7,000

Solution: The correct answer is C. Shawn's wife can make a $6,000 Roth IRA contribution, the maximum for this year, because Shawn's AGI of $100,000 ($10,000 deferral divided by 10% deferral percentage) is below the phase-out limit of $204,000 - $214,000 (2022). Even though she does not have any earned income of her own, she can use Shawn's earnings to qualify for the contribution.

Which of the following statements regarding 457 plans is(are) true? I: An individual who defers $20,500 to his 403(b) plan during 2022 can also defer $20,500 to a 457 plan during 2022 (salary and plan permitting). II: A 457 plan allows an executive of a tax-exempt entity to defer compensation into an ERISA protected trust. III: In the final three years before normal retirement age, a participant of a government sponsored 457 plan may be able to defer $41,000 (2022) for the plan year. A: 1 only B: 2 only C: 1 and 3 D: 2 and 3.

Solution: The correct answer is C. Statement 1 is true as the deferral limits for 403(b) plans and 457 plans are separate. Statement 2 is false. The funds deferred to a 457 plan established for a tax-exempt entity do not have ERISA protection. Statement 3 is true as certain 457 plans allow the participants to defer twice the annual deferral limit in the last three years before the plan's normal retirement age.

Which of the following statements concerning stock bonus plans and ESOPs is(are) true? I: They both give employees a stake in the company through stock ownership and allow taxes to be delayed on stock appreciation gains. II: They both limit availability of retirement funds to employees if an employer's stock falls drastically in value and create an administrative and cash-flow problem for employers by requiring them to offer a repurchase option (a.k.a. put option) if their stock is not readily tradable on an established market. A: 1 only B: 2 only C: Both 1 and 2 D: Neither 1 nor 2

Solution: The correct answer is C. Statement 1 lists advantages of choosing stock ownership plans and ESOPs. Statement 2 lists the disadvantages.

Which of the following statements is true? A: Social Security payments are not adjusted for inflation. B: A worker's average indexed monthly earnings (AIME) will be their Social Security benefit at retirement. C: An individual born in 1950 will reach full retirement age for Social Security purposes at the age of 66. D: A 70 year old worker will have their Social Security benefits reduced based on earnings from their current employment.

Solution: The correct answer is C. Statement C is a correct statement. Statement A is incorrect as the Social Security benefits are adjusted for inflation each year. Statement B is incorrect as the AIME is then adjusted by the PIA to calculate the ultimate Social Security retirement benefit. Statement D is incorrect because after attaining full retirement age, benefits are not reduced based on earnings.

Which of the following statements is true? A: In the year that Electron Products, Inc. has a loss for income tax purposes, they do not have to make a contribution to the 10% money purchase pension plan established in the prior year. B: Because of the risk of mismanagement of plan assets, plan sponsors of defined benefit plans are prohibited from investing more than 5% of the plan's assets in the stock of the plan sponsor. C: In calculating the minimum funding amount for a cash balance plan, the actuary considers plan forfeitures. D: The Pension Benefit Guaranty Corporation (PBGC) guarantees that the participants of a defined benefit plan will receive their accrued benefit as calculated under the private plan funding formula.

Solution: The correct answer is C. Statement C is true as the actuary does consider the plan forfeitures when calculating the minimum funding amount. The plan forfeitures of a cash balance plan are allocated to the future plan funding costs. Statement A is incorrect as Electron will be required to contribute at 10% to the money purchase pension plan as part of the mandatory funding requirements. Statement B is incorrect as the actual limit of investment in the plan sponsor's stock is 10%. Statement D is incorrect as the PBGC only insures to a certain amount - not the full accrued benefit.

Kenny's Aquatics, Inc. sponsors a discretionary profit sharing plan and a 10% Money Purchase Pension Plan. For the current year, aggregate covered compensation totaled $2,000,000. If Kenny's Aquatics would like to contribute the maximum deductible amount to the profit sharing plan, how much can they contribute? A: $0 B: $225,000 C: $300,000 D: $500,000

Solution: The correct answer is C. The combined limit for contributions to multiple plans is 25% of employer covered compensation, $500,000 ($2,000,000 × 25%). In this case, since Kenny's Aquatics made a mandatory MPPP contribution of $200,000, they could only make a contribution of $300,000 ($500,000 - $200,000) to the profit sharing plan.

A company's defined benefit pension plan utilizes a funding formula that considers years of service and average compensation to determine the pension benefit payable to the plan participants. If Kim is a participant in this defined benefit pension plan and she has 30 years of service with the company and average compensation of $275,000, what is the maximum pension benefit that can be payable to Kim at her retirement in 2022? A: $20,500 B: $61,000 C: $245,000 D: $275,000

Solution: The correct answer is C. The maximum amount payable from a defined benefit pension plan is the lesser of $245,000 (2022) or 100% of the average of the employee's three highest consecutive years compensation. Because the average of Kim's compensation is $275,000, she would be limited to receiving a pension benefit at her retirement of $245,000.

Angelo's Bakery has 105 employees. 90 of the employees are nonexcludable and 15 of those are highly compensated (75 are nonhighly compensated). The company's qualified profit sharing plan benefits 8 of the highly compensated employees and 40 of the nonhighly compensated employees. Does the profit sharing plan sponsored by Angelo's Bakery meet the coverage test? A: Yes, the plan meets the average benefits percentage test. B: Yes, the plan meets the general safe harbor test. C: Yes, the plan meets the ratio percentage test. D: Yes, the plan meets ratio percentage test and the general safe harbor test.

Solution: The correct answer is C. The plan meets the ratio percentage test. The percentage of NHC employees covered by the plan is 53.33% and the percentage of HC employees covered by the plan is 53.33%. The ratio percentage of the NHC employees covered by the plan compared to the ratio percentage of the HC employees covered by the plan is 100% (53.33%/ 53.33%) which is greater than the ratio requirement of at least 70%. Another method of determining whether the plan meets the ratio percentage test is to determine the minimum number of nonexcludable NHC employees that must be covered by the plan to pass the ratio percentage test. This can be determined by calculating 70% of the percentage of HC covered by the plan multiplied by the number of nonexcludable NHC employees. In this problem, it would be calculated as follows: [((8/15) × 70%) × 75] = 28. 28 NHC employees must be covered to pass the ratio percentage test. The facts do not give us any information to determine if the plan meets the average benefits percentage test. The plan does not meet the general safe harbor test which requires that at least 70% of the NHC employees are covered by the plan.

Which of the following statements concerning the use of life insurance as an incidental benefit provided by a qualified retirement plan is (are) correct? I: The premiums paid for the life insurance policy within the qualified plan will trigger a taxable event for the participant at the time of payment. II: Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer's aggregate contributions to the participant's account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer's aggregate contributions to the participant's account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income at or before retirement. A: 1 only B: 2 only C: Both 1 and 2 D: Neither 1 nor 2

Solution: The correct answer is C. This is not the same question covered in class. Every year the plan participant pays income tax on the dollar value of the actual insurance protection -- approximately equal to the term insurance cost. This is commonly called the Table 1 costs (formally PS58 cost). The sum of all those costs is the participant's basis. A taxable event is not the same as taxable. The premium creates a taxable event, the portion of the premium attributed to the Table 2001 costs are taxable. The full premium is not taxable to the employee.

Which of the following is (are) a defined benefit plan formula(s)? A: Unit credit (a.k.a. percentage-of-earnings-per-year-of-service) formula B: Flat-percentage formula C: Flat-amount formula D: All of the above

Solution: The correct answer is D. All of the above are benefit formulas used by defined benefit plans. Unit benefit tends to be utilized most often as it ties in years of service.

Which of the following qualified plans would allocate a higher percentage of the plans current contributions to a certain class or group of eligible employees? I: A profit sharing plan that uses permitted disparity. II: An age-based profit sharing plan. III: A defined benefit pension plan. IV: A target benefit pension plan. A: 2 and 3 B: 1, 2, and 3 C: 2, 3, and 4 D: 1, 2, 3, and 4

Solution: The correct answer is D. All of the listed plans would allocate a higher percentage of a plans current cost to a certain class of eligible employees.

Which of the following would be completed as part of a sensitivity analysis of a retirement plan? A: Consider that the retiree retires one year earlier than originally planned. B: Calculate the retirement plan considering a greater inflation than expected. C: Estimate the annual savings amount each year considering a lesser rate of return. D: All of the above may be completed as part of a sensitivity analysis of a retirement plan.

Solution: The correct answer is D. All of the options may be completed as part of a sensitivity analysis - adjusting the variables of a retirement plan to determine the impact of a change in each variable.

Which of the following situations might convince an employer to choose a nonqualified retirement plan over a qualified profit-sharing plan? A: The employer, a closely held C Corporation, is in the 15% income tax bracket and the sole owner of the employer is in the 35% income tax bracket. B: The employer only wants to meet the organization's objectives of attracting executives, retaining executives, and providing for a graceful transition in company leadership. The employer is not concerned with providing retirement benefits to the rank and file employees. C: The employer is not willing to pay high administrative costs. D: All of the above.

Solution: The correct answer is D. All of the reasons listed might convince an employer to use a nonqualified plan. In option a, the owner of the closely held C Corporation would use a nonqualified plan because the income tax rate of the business is lower than the owner's tax rate. By making the payments into a nonqualified plan the owner will not have any taxable income and the earnings of the plan will be taxed initially to the business at the lower tax rate. Option b is a true statement. As nonqualified plans are typically only established to benefit the executive and there are no requirements to benefit the rank and file. Option c would cause an employer to choose a nonqualified plan because a nonqualified plan requires less administrative costs than a profit sharing plan.

Margaret earned $4,000 during January of this year. She was unemployed for February and March, and during April she earned an additional $3,000. She did not work again until December, at which time she earned $1,200. How many quarters of coverage has Margaret earned for Social Security during this year? A: 1 B: 2 C: 3 D: 4

Solution: The correct answer is D. An individual attains a quarter of coverage for earnings of $1,510 (2022) for wages subject to Social Security, but the maximum quarters per year is 4. The employee earns the quarters as earning income - regardless of the earning date. In this case she earned $8,200 thus 4 quarters.

Marisol was granted 100 NQSOs on January 12, last year. At the time of the option grant, the value of the underlying stock was $100 and the exercise price was equal to $100. If Marisol exercises the options on August 22, of this year when the stock is valued at $145, what are the tax consequences (per share) to Marisol? A: $45 of W-2 income, $100 of short-term capital gain B: $100 of W-2 income, $45 of short-term capital gain C: $145 of W-2 income D: $45 of W-2 income

Solution: The correct answer is D. At the exercise date of an NQSO, the individual will have to buy the stock at the exercise price and will have W-2 income for the appreciation of the stock value in excess of the exercise price. In this case, Marisol will have $45 ($145-$100) of W-2 income. There is no other gain or loss at exercise.

Jennifer received 1,000 SARs at $18, the current trading price of Clippers, Inc., her employer. If Jennifer exercises the SARs three years after the grant when Clipper's stock is $20 per share, which of the following statements is true? A: Jennifer will have an adjusted taxable basis of $18,000 in the Clippers, Inc. stock. B: Jennifer will have W-2 income equal to $20,000. C: Jennifer will have long-term capital gain of $2,000. D: Jennifer will have W-2 income equal to $2,000.

Solution: The correct answer is D. At the exercise of a SAR, the employee receives the difference between the fair market value and the exercise price as W-2 income. Thus, Jennifer has W-2 income equal to $2,000 [($20-$18)x1,000].

Adelaide Ranch has 325 employees (300 NHC and 25 HC). Of these employees, 300 are nonexcludable (275 NHC and 25 HC). If 208 of these NHC are covered under the Adelaide qualified profit sharing plan, and 25 of these HC are covered under the Adelaide qualified profit sharing plan, with certainty, which of the following coverage tests does Adelaide pass? A: Safe Harbor Test B: Ratio Percentage Test C: Average Benefits Test D: Both the Safe Harbor Test and the Ratio Percentage Test

Solution: The correct answer is D. Both the Safe Harbor Test and the Ratio Percentage Test are certainly passed. The plan covers 208 of the nonexcludable NHC employees which is 75.6% - greater than the 70% required to pass the Safe Harbor Test. The ratio of the NHC covered to the HC covered is 75.6% (75.6%/100%), so the plan passes the Ratio Percentage Test also. The information does not provide the average benefit percentages of the employees to determine whether the plan passes the Average Benefits Test.

Each of the following describe a potential source of money conflict EXCEPT: A: Determining the work life balance and deciding which partner will fulfill the roles of the family. B: Establishing and working towards savings goals. C: Categorizing spending between wants and needs. D: One partner controlling all financial decisions, often referred to as financial enabling

Solution: The correct answer is D. Choices A, B, and C are all true statements and are causes of potential money conflict. Choice D is an incorrect statement because undue financial influence is displayed when one partner exerts control over decisions concerning finances. Financial enabling is displayed by continuing to give money in ways that keeps the recipient from taking responsibility and solving their own problems.

Carla would like to determine her financial needs during retirement. All of the following are costs she might eliminate in her retirement needs calculation except: A: The $175 per month of parking expenses for parking at her place of employment. B: Premiums on disability insurance. C: The Medicare taxes she pays each year. D: Premiums on her life insurance policy.

Solution: The correct answer is D. Depending on the client's objectives and needs, they may still need life insurance. It is unlikely she will need disability insurance during retirement. She would eliminate the parking expense, Medicare taxes, and OASDI since she would no longer have these expenses if she has no W-2 income during retirement.

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.

Solution: The correct answer is 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.

Which of the following situations would create an inclusion in an employee's gross income? A: Kay is the director and manager of Holiday Hotel. As a condition of her employment, Kay is required to live at the hotel. The value of this is $1,000 per month. B: Natalie is a secretary at JKL Law Firm. JKL provides her with free soft drinks. Natalie estimates that she drinks $20 worth of soft drinks per month. C: Brian is an airline pilot with We Don't Crash Airlines, Inc. and is allowed to fly, as a passenger, for free on the airline whenever an open seat is available. D: Eric moved from Houston to New Orleans. His expenses for the move included $1,400 paid to the moving company directly by his employer and $100 of lodging reimbursed to Eric.

Solution: The correct answer is D. Eric must include $1,500 of the reimbursement in his gross income for the moving expenses. To the extent an individual is reimbursed, or has expenses paid for him, for nonqualifying (moving) expenditures, the individual must include the reimbursement in his taxable income. TCJA disallowed a deduction for moving expenses. Kay is required to live at her employer's hotel as a condition of employment, thus the provision of the housing is not taxable. Option B describes the provision of a de minimis fringe benefit to an employee which is not taxable to the employee. Option C describes a "no additional cost benefit" which is not taxable to Brian.

Lee, a single individual, turned 71 on December 13, 2021. The fair market value of his 401(k) plan was $400,000 December 31, 2021 and $425,000 on December 31, 2022 The factors, according to the Uniform Life Table, for ages 72, and 73 are 27.4, and 26.5, respectively. What is the amount of Lee's initial required minimum distribution for 2022? A: $16,038 B: $15,511 C: $15,094 D: $14,599

Solution: The correct answer is D. Lee will have to take a RMD for the tax year 2022 when he turned 72, but can defer distribution for his first RMD. Lee will not be required to begin taking minimum distributions until April 1, 2023 (April 1 of the year after he attains the age of 72 - he attained age 70 1/2 after to 12/31/19). The calculated required minimum distribution using the plan balance as of the end of the prior year and the table life factor for his age as of the end of the distribution year would be $14,599 ($400,000/27.4) SECURE Act change the RMD begin age to 72 only for those that reach 70 1/2 after 12/31/19. Those that reach 70 1/2 prior to 12/31/19 are grandfathered under the old rules.

Which of the following statements concerning accrued benefits in qualified plans is (are) correct? I: In a defined benefit plan, the participant's accrued benefit at any point is the participant's present account balance. The accrual for the specific year is the amount contributed to the plan on the employee's behalf for that year. II: In a defined contribution plan, the accrued benefit is the benefit earned to date, using current salary and years of service. The accrued benefit earned for the year is the additional benefit that has been earned based upon the current year's salary and service. A: 1 only B: 2 only C: Both 1 and 2 D: Neither 1 nor 2

Solution: The correct answer is D. Neither Statement 1 nor Statement 2 are correct because the plan names have been switched. Statement 1 describes a defined CONTRIBUTION plan and Statement 2 describes a defined BENEFIT plan.

Which of the following statements regarding a SEP is true? I: The maximum contribution to a SEP is the lesser of 100% of compensation or $61,000 for 2022. II: A SEP is appropriate for an employer with many part-time employees who wants to limit coverage under the SEP. III: Contributions to a SEP must vest at least as rapidly as a 5-year cliff vesting schedule or 2 to 6 year graduated vesting schedule. IV: If a partnership makes a flat percentage contribution equal to 25% of all employees' salary for the year to a SEP, a partner earning $100,000 during the year would receive a $25,000 contribution. A: 4 only B: 1 and 3 C: 1 and 4 D: None of the statements are true.

Solution: The correct answer is D. None of the statements are true. The maximum contribution to a SEP is the lesser of 25% of compensation or $61,000 for 2022. A SEP is inappropriate for an employer with many part-time employees who want to limit coverage under the SEP as the SEP requires coverage after age 21 with service 3 of the last 5 years and $650 of compensation. Contributions to a SEP are always 100% vested. A partner is considered self-employed and therefore subject to the special calculation for self-employed individuals.

Each of the following must be accounted for in retirement planning EXCEPT: A: Inflation. B: Work life savings rate. C: Health of retiree. D: Age of self-sufficient heirs.

Solution: The correct answer is D. Self-sufficient heirs do not need to be accounted for in a retirement plan. Self-sufficient heirs will have no impact on the retiree's plans or goals as there are no mandatory costs or payments to be made to them. In contrast, inflation must be considered as it erodes the purchasing power of the retirement savings and other retirement plan assets. Work life savings rate must also be accounted for as it will determine, coupled with other factors, the amount the retiree will have available during retirement. Finally, the retiree's health must be considered in the retirement plan as it is an indication of the retiree's life expectancy, and thus, the amount the years that will need to be funded.

Which of the following qualified plan distributions are subject to a 10% early withdrawal penalty? I: Carolyn, age 56, currently employed by UBEIT Corporation, takes a $125,000 distribution from the UBEIT 401(k) plan. II: Brad, age 60, takes a $1,000,000 distribution from his employer's profit sharing plan. Ten days after receiving the $800,000 check (reduced for 20% withholding), Brad deposited the $800,000 into a new IRA account. III: Tara, age 22, withdraws $2,000 of her contributions from her 401(k) plan. A: 1 only B: 3 only C: 2 and 3 D: 1 and 3

Solution: The correct answer is D. Situation 1 is subjected to the 10% early withdrawal penalty because Carolyn has not separated from service. Situation 2 will not be subjected to the 10% early withdrawal penalty because Brad is older than 59 1/2. Situation 3 will be subjected to the 10% penalty because Tara does not qualify for any of the exclusions from the 10% penalty.

Ivan, age 45, is an active participant in his employer's 401(K) plan has an AGI of $275,000. He has a traditional IRA, with a balance of $600,000. How much of his traditional IRA can he convert to a ROTH IRA, in the current year? A: $0 B: $100,000 C: $275,000 D: $600,000

Solution: The correct answer is D. There is no income limit any longer for conversions to a ROTH IRA.