CH 3 Retirment

WHR, LLC sponsors a defined contribution plan. Vaughn, age 44, has compensation of $160,000 for the year. WHR has made a $15,000 profit sharing plan contribution on Vaughn's behalf and $4,000 of plan forfeitures were allocated to Vaughn's profit sharing plan during the year. How much can Vaughn defer into his CODA plan (401(k)) to maximize his annual contributions to the qualified plan for 2017? A) $18,000. B) $24,000. C) $30,000. D) $34,000.

A ( $18,000.)

Wanka Factory has 100 nonexcludable employees, 10 of whom are highly compensated. Eight of the 10 highly compensated and 63 of the 90 nonhighly compensated employees are covered under Wanka's qualified plan. The average accrued benefits for the highly compensated is 4% and the average accrued benefit for the nonhighly compensated is 1.5%. Which of the following statements is true regarding coverage? 1. The plan passes the ratio percentage test. 2. The plan passes the average benefits test A) 1 only. B) 2 only. C) Both 1 and 2. D) Neither 1 nor 2.

A ( 1 only. Rationale The ratio percentage test compares the % of nonhighly compensated to the % of highly compensated covered. The ratio must be greater than or equal to 70% for the plan to pass the ratio percentage test. The calculation for Wanka's qualified plan is as follows: NHC = 63 ÷ 90 = 70% HC = 8÷ 10 = 80% 70% ÷ 80% = 87.5% (pass) Wanka's plan passes the ratio percentage test requirement of 70%. The average benefits test requires the average benefit of the nonhighly compensated employees to be at least 70% of the average benefit of the highly compensated. Wanka's plan does not satisfy the average benefits test because the average benefit of the nonhighly compensated compared to the average benefit of the highly compensated is less than 70% (1.5%/4% = 37.5%) (fail).)

Cheque Company has 100 eligible employees and sponsors a defined benefit pension plan. The company is unsure if they are meeting all of their testing requirements. How many employees (the minimum) must be covered by Cheque Company's defined benefit pension plan for the plan to conform with ERISA? A) 40. B) 50. C) 70. D) 100.

A ( 40. Rationale The 50/40 rule requires that defined-benefit plans cover the lesser of 50 employees or 40% of all eligible employees. In this example, 40% of 100, or 40 employees, would be the lesser of these two amounts.)

Charles earns $400,000 per year at Home Cleaning Services, Inc. where he has been employed for the last ten years. Home Cleaning Services sponsors a defined benefit plan that provides its employees with a benefit equal to 1.5% per year of service of the employees final compensation. At the current time, what is Charles' retirement benefit payable from the defined benefit plan? A) $40,500. B) $60,000. C) $215,000. D) $270,000.

A ($40,500. Rationale Charles' current projected benefit from the defined benefit plan is $40,500. For the calculation of the benefit the employer cannot consider compensation in excess of $270,000 for 2017. 1.5% x 10 x $270,000 = $40,500.)

Andrew is a small business owner and wants to install a qualified plan that has specific requirements. Which of the following plans meets the following list of requirements? 1. Qualified under IRC Section 401(a). 2. Permits at least 25 percent of employer securities to be invested in the plan. 3. Can use forfeitures to reduce plan contributions. 4. Does not require a joint and survivor annuity distribution option. A) Profit sharing plan. B) 403(b) plan. C) Money purchase plan. D) Cash balance plan.

A (Profit sharing plan. Rationale Requirement 1 eliminates the 403(b) plan. Requirement 2 and 4 limit the choice to a profit sharing plan and requirement 3 means that it could be any plan. The only correct answer is profit sharing plan.)

Which of the following vesting schedules may a top-heavy defined benefit plan use? Years of Service (A) (B) (C) (D) 1 5% 10% 0 0 2 10% 20% 0 0 3 15% 45% 0 20% 4 20% 65% 100% 40% 5 60% 100% 100% 60% 6 100% 100% 100% 80% 7 100% 100% 100% 100%

B

Which of the following vesting schedules may a top-heavy qualified cash balance plan use? A) 1 to 4 year graduated. B) 35% after 1 year, 70% after 2 years, and 100% after 3 years. C) 2 to 6 year graduated. D) 4 year cliff.

B ( 35% after 1 year, 70% after 2 years, and 100% after 3 years. Rationale As a result of the PPA 2006, cash balance plans must vest at least as fast as a three year cliff vesting schedule. The only choice that is possible is the one in choice b.)

Milton, age 38, earns $170,000 per year. His employer, Dumaine Consulting, sponsors a qualified profit sharing 401(k) plan and allocates all plan forfeitures to remaining participants. If in the current year, Dumaine Consulting makes a 20% contribution to all employees and allocates $4,000 of forfeitures to Milton's profit sharing plan account, what is the maximum Milton can defer to the 401(k) plan in 2017? A) $0. B) $16,000. C) $18,000. D) $24,000.

B ( $16,000. Rationale The maximum annual addition to qualified plan accounts on behalf of Milton is $54,000 for the plan year. This maximum annual additions limit is comprised of employer contributions, plan forfeiture allocations, and employee deferrals. If Dumaine contributes $34,000 ($170,000 x 20%) to the profit sharing plan account and Milton receives $4,000 of forfeitures, he may only defer $16,000 ($54,000 - $34,000 - $4,000) before reaching the $54,000 limit.)

Which of the following people would be considered a highly compensated employee for 2017? 1. Kim, a 1% owner whose salary last year was $150,000. 2. Rita, a 6% owner whose salary was $42,000 last year. 3. Robin, an officer, who earned $105,000 last year and is the 29th highest paid employee of 96 employees. 4. Helen, who earned $132,000 last year and is in the top 20% of paid employees. A) 1 and 4. B) 1, 2, and 4. C) 1, 3, and 4. D) 1, 2, 3, and 4.

B ( 1, 2, and 4. Rationale Kim and Helen are HC due to compensation being greater than $120,000. Rita is HC because she is a >5% owner. Robin is not highly compensated because she does not have compensation greater than $120,000.)

Dole Electronics, a C Corporation, has 4 employees. The company sponsors a profit sharing plan and contributed 10% of employee compensation for the current year to the plan. The company has the following employee information. There is no state income tax and federal withholding is 15% of gross pay. Employee Gross Salary Profit Sharing Contribution Andy $50,000 $5,000 Candy $40,000 $4,000 Mandy $30,000 $3,000 Sandy $20,000 $2,000 Which of the following statements is true? A) Dole Electronics will not be able to take a deduction for the contribution to the profit sharing plan. B) After payroll taxes and withholding, Andy will only receive $38,675 in take home salary. C) Dole electronics will pay FICA payroll taxes of $11,781. D) Candy must include the $4,000 contribution to the profit sharing plan made on her behalf in her gross income for the current year.

B (After payroll taxes and withholding, Andy will only receive $38,675 in take home salary. Rationale Andy will be responsible for payroll taxes on the $50,000 he receives in salary. His payroll will be 7.65% of $50,000 plus $7,500 withholding, thus he will receive $38,675. Dole may deduct the contribution to the profit sharing plan. Dole will only pay payroll taxes of $10,710 (7.65% of $140,000, the total salary paid). Amounts contributed to the profit sharing plan are not subject to payroll taxes. Contributions to profit sharing plans are not included in the employee's gross income at the date of contribution but will be subject to income tax at the date of distribution.)

Aztec clay distributor is a family owned business that is owned by Alice, Bill, Chad and Zion. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. The employee census information is in the chart below. Employee Ownership Salary Deferral Plan Balance Status Alice 30 $330,000 $20,000 $400,000 Officer Bill 3 $210,000 $20,000 $600,000 Chad 4 $80,000 $10,000 $150,000 Dave 0 $180,000 $15,000 $150,000 Officer Erin 0 $140,000 $15,000 $100,000 Frank 0 $50,000 $8,000 $50,000 Ginger 0 $40,000 $0 $10,000 Haley 0 $30,000 $2,000 $30,000 Irish 0 $20,000 $1,000 $10,000 Jen 0 $20,000 $0 $5,000 $1,100,000 $91,000 $1,505,000 What is the most that could be contributed to a profit sharing plan and deducted by Aztec if they set up a profit sharing plan (ignoring any issues with salary deferrals)? A) $184,000. B) $248,000. C) $260,000. D) $275,000.

C ($260,000. Rationale This question is asking the most that could be contributed. Since Alice is over the compensation limit of $270,000 for 2017, her salary has to be reduced by $60,000. The sum of the covered compensation is $1,040,000. 25% of this is $260,000. Some may attempt to cap Alice and Bill at $54,000 and take 25% of the rest of the employees. That method is not correct. Even though 25% of $270,000 is over $54,000, it can be contributed. It just cannot be allocated to Alice or Bill. The excess would have to be allocated to other participants.)

Qualified plans have many benefits to the employee and the employer. However they must satisfy many tests and comply with many limits to maintain their qualified status. Which of the following is correct regarding coverage tests? A) Profit sharing plans must satisfy only the three coverage tests. B) Defined benefit plans must satisfy any two of the four coverage tests. C) Coverage testing can include leased employees as part of the calculation. D) Employees who do not meet the eligibility requirements are still included in the determination of at least one of the coverage tests.

C ( Coverage testing can include leased employees as part of the calculation. Rationale Choice a, b, and d are incorrect. Qualified plans must satisfy one of the three coverage tests and DB plans must pass one of the three coverage tests and the 50/40 test. The 50/40 test is based on total employees, not necessarily non-highly compensated employees. However, all coverage tests exclude non-eligible employees from the calculation. Any person who provides services to the employer and is not an employee will be considered a leased employee if the following criteria are met: the services provided are pursuant to an agreement between the employer and a leasing organization; such person has performed services for the employer on a substantially full-time basis for a period of at least one year; and such services are performed under the primary control of employer.)

Barry's Graphic Arts Studio sponsors a qualified profit sharing plan. The plan requires employees to complete one year of service and be 21 years old before entering the plan. The plan has two entrance dates per year, January 1st and July 1st. Assuming that today is December 15, 2018 and the Studio has the following employee information, which of the following statements is correct? Employee Age Start Date Barry 35 1/1/2017 Del 34 8/1/2017 Karen 24 6/1/2018 Jenn 18 5/1/2017 A) Two people have entered the plan. B) The qualified plan must provide participants with 100% vesting upon entering the plan because of the eligibility requirements of the plan. C) Del has not yet entered the plan. D) Jenn entered the plan on July 1, 2018.

C ( Del has not yet entered the plan. Rationale Del is not yet in the plan. He met the age and service requirement in August but must wait until the January entrance date to enter the plan. Only one person has entered the plan, Barry. Jenn has not met the age requirement; therefore, she is not eligible for the plan. Karen has not met the service requirement. The plan has the standard vesting, which does not have a 100% vesting requirement. See below for a graphical depiction.)

Which of the following is not an example of a qualified retirement plan? A) ESOP. B) Age-based profit sharing plan. C) ESPP. D) 401(k) plan.

C ( ESPP. Rationale An ESPP, Employee Stock Purchase Plan, is not a qualified retirement plan. The ESPP will be discussed in detail in Chapter 14. All of the other plans listed are qualified retirement plans.)

SK owns SK Ltd, which is a professional firm with five employees that sponsors both a defined benefit plan and a profit sharing plan with a cash or deferred arrangement. The covered compensation for SK Ltd is $600,000. Salary deferrals total $30,000. If the required funding for the defined benefit plan is $120,000, then how much can be contributed to the profit-sharing plan? A) $0. B) $30,000. C) $36,000. D) $150,000.

C ($36,000. Rationale Salary deferrals are not taken into consideration for the multi-plan limits. Since the plan is not subject to PBGC (professional firm with less than 25 employees), the combined limits will apply unless the defined contribution does not exceed 6%. The funding for the defined contribution plan is the greater of the remaining 25 percent limit after taking into consideration the defined benefit funding or six percent. Therefore, $36,000 can be contributed to the defined contribution plan since it is greater than $30,000 (25 percent of $600,000 less $120,000).)

Steve has a qualified plan with an account balance of $2,000,000. In which of the following circumstances would a third party be able to alienate the assets within Steve's qualified plan? 1. A QDRO in favor of a former spouse. 2. A federal tax levy. 3. Creditors in a personal bankruptcy. A) 3 only. B) 1 and 3. C) 1 and 2. D) 1, 2, and 3.

C (1 and 2. Rationale Because a qualified plan is designed to provide individuals with income at their retirement, ERISA provides an anti-alienation protection over all assets within a qualified plan. This anti-alienation protection prohibits the plan assets from being assigned, garnished, levied, or subject to bankruptcy proceedings while the assets remain in the plan so that the individual has income at their retirement. Qualified plan assets are not protected from alienation due to a qualified domestic relations order, a federal tax levy, or from a judgment or settlement rendered upon an individual for a criminal act involving the otherwise protected qualified plan.)

Organic Inc. sponsors a qualified plan that requires employees to complete one year of service and be 21 years old before entering the plan. The plan also excludes all commissioned sales people and all other allowable exclusions allowed under the code. Which of the following employees could be excluded? 1. Sarah, age 32, who has been a secretary for the company for 11 months. 2. Andy, age 20, who works in accounting and has been with the company for 23 months. 3. Erin, a commissioned sales clerk, who works in the Atlanta office. Erin is 25 years old and has been with the company for 4 years. 4. George, age 29, who works in the factory. George has been with the company for 9 years and is covered under a collective bargaining agreement. A) 1 only. B) 1 and 3. C) 1, 2, and 4. D) 1, 2, 3, and 4.

D ( 1, 2, 3, and 4. Rationale Each of these employees can be excluded from the plan. Sarah does not meet the service requirement. Andy does not meet the age requirement. Erin can be excluded because she is a commissioned salesperson. George is excluded because he is covered under a collective bargaining agreement.)

SJ, Inc. covered the following employees under a qualified plan. 1. Joan, a 9% owner and employee with compensation of $30,000. 2. Lind, a commissioned salesperson with compensation of $160,000 last year (the highest paid employee). 3. Reilly, the chief operating officer, who had compensation of $137,000 last year but was not in the top 20% of paid employees. 4. Garner, the president, who was in the top 20% of paid employees with compensation of $195,000. Assuming the company made the 20% election when determining who is highly compensated, which of the following statements is correct? A) Exactly three people are key employees. B) Exactly two people are highly compensated. C) Lind is a key employee but is not highly compensated. D) Reilly is neither highly compensated nor a key employee.

D ( Reilly is neither highly compensated nor a key employee. Rationale For 2017, a key employee is an employee who at any time during the plan year or prior year met one of the following definitions: • A greater than 5% owner; • A greater than 1% owner with compensation > $150,000 (not indexed); or • An officer with compensation in excess of $175,000. For 2017 highly compensated employees are employees that are: • A more than 5 percent owner at any time during the plan year or preceding plan year, or • An employee with compensation in excess of $120,000 for the prior plan year, and if elected, is in the top 20% of paid employees ranked as to compensation.)

Billy's company sponsors a 401(k) profit sharing plan with no employer match, but the company did make noncontributory employer contributions because the plan was top-heavy. Billy quit today after six years with the company and has come to you to determine how much of his retirement balance he can take with him. The plan uses the least generous graduated vesting schedule available. What is Billy's vested account balance? Employer Employee Contributions $2,000 $2,000 Earnings $600 $600 A) $2,600. B) $4,160. C) $4,680. D) $5,200.

D ($5,200. Rationale Billy is entitled to 100% of his contributions and the earnings on those contributions. The employer contributions, which were not matching contributions, will follow the least generous graduated vesting schedule for a top-heavy plan. The least generous graduated vesting schedule is a 2 to 6 year graduated vesting schedule for a 401(k) plan. At six years, Billy would be 100% vested in the employer contributions and the earnings on the employer contributions. Thus, Billy's vested account balance is $5,200.)

Mouse Emporium sponsors a single-employer defined benefit pension plan that is covered by the PBGC and a qualified profit sharing plan. Mouse's annual covered compensation is $2,000,000 and the actuary has determined that a $600,000 contribution must be made to the defined benefit plan for the year. If Mouse would like to contribute the maximum to their defined contribution plan, how much could Mouse contribute to the defined contribution plan in 2017? A) $0. B) $54,000. C) $100,000. D) $500,000.

D ($500,000. Rationale Because Mouse's defined benefit plan is covered by PBGC, it is not taken into account for the overall contribution limitation for the defined contribution plan as a result of PPA 2006. Therefore, Mouse's can contribute $600,000 to its defined benefit plan and still contribute 25% of its covered compensation (or $500,000) to its defined contribution plan.)

Aztec clay distributor is a family owned business that is owned by Alice, Bill, Chad and Zion. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. The employee census information is in the chart below. Employee Ownership Salary Deferral Plan Balance Status Alice 30 $330,000 $20,000 $400,000 Officer Bill 3 $210,000 $20,000 $600,000 Chad 4 $80,000 $10,000 $150,000 Dave 0 $180,000 $15,000 $150,000 Officer Erin 0 $140,000 $15,000 $100,000 Frank 0 $50,000 $8,000 $50,000 Ginger 0 $40,000 $0 $10,000 Haley 0 $30,000 $2,000 $30,000 Irish 0 $20,000 $1,000 $10,000 Jen 0 $20,000 $0 $5,000 $1,100,000 $91,000 $1,505,000 Who are the highly compensated employees, assuming Aztec does not use the exception as part of the definition of highly compensated employee? A) Alice and Bill. B) Alice, Bill, Dave, and Erin. C) Alice, Bill, Chad, and Dave. D) Alice, Bill, Chad, Dave, and Erin.

D (Alice, Bill, Chad, Dave, and Erin. Rationale Alice, Bill, Chad, Dave, Erin are all highly compensated. Chad is deemed to own stock from his parents. The others have income above the 2017 annual limit of $120,000.)