Retirement Planning

Jeter is 56 years old and owns Short Stop Sandwiches, a very successful deli in NY City. He sponsors a 401(k) plan with a dollar-for-dollar match up to four percent. The NHCEs deferred three percent this year, while the HCEs deferred six percent. Should he be concerned? A) No. The plan meets the ADP test. B) No. The plan is a safe harbor plan. C) Yes. He can only fix the problem with a corrective distribution. D) Yes. He can fix the problem with a qualified non-elective contribution.

'D'. The plan does not meet the ADP test. If the NHCEs deferred 3%, then the HCEs could only defer 5%. The plan is not a safe harbor plan, even though it provides a benefit equal to that required by a safe harbor plan. The plan is not stated to be a safe harbor plan, which requires the employer to either match 100% of the fist 3% contributed + 50% of the next 2% contributed, or provided a 3% nonelective contribution to all eligible employees. In a safe harbor plan, the employer contributions are 100% immediately vested (we don't know if they are 100% vested immediately unless the question tells us that or tells us it is a safe harbor plan). He could fix the ADP issue with either a corrective distribution from the HCEs, or with a QNEC or a QMC.

What is the tax penalty during the first two years of a SIMPLE?

25%

What percentage of stock must an an ESOP own immediately after the sale?

30%

What is a Negative election clause?

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.

Bradley received 100 ISOs when he joined World Dog Park Corporation on January 3, 2017. The exercise price was $1 per share. If Bradley exercised his options on January 4, 2018, when the fair market value of the stock was $5 per share, Bradley would recognize no income for regular tax purposes. World Dog Park Corp. went public on January 5, 2019. Bradley decided to sell his 100 shares of WDP following the IPO at $20 a share. What is Bradley's tax liability for this transaction? A) Bradley has W-2 income of $400 and short-term gain of $1,500. B) Bradley has a long-term capital gain of $1,900. C) Bo has W-2 income of $400 and long-term capital gain of $1,500. D) Bo has no tax consequences at that time.

B. Bradley would recognize $1,900 of LTCG. Since he met the rules to avoid a disqualifying disposition, selling 2 years from grant and 1 year from exercise, he can benefit from the tax status. He will have a negative $400 AMT adjustment and pay LTCG on the full gain ($20 - $5) x 100 shares and ($5 - $1) x 4 which is the bargain element at exercise.

Your client Jill, who is currently age 42, is in a bind after her husband, Jack, age 44, died from a fall off a cliff while mountain climbing last month. Jill is now the sole provider for their two young children, Hansel and Gretel, and will need additional income to pay for child care for the kids for a few years. Unfortunately, there was no life insurance on Jack's life (who would have ever thought he would die from a fall off a big hill?). Fortunately, Jack did have an IRA valued at $435,000. Which of the following is the best recommendation for Jill regarding withdrawals from the IRA? A) Rollover the IRA into her own IRA and begin taking 72(t) distributions B) Leave the IRA as is and begin taking 72(t) distributions C) Leave the IRA as is and take distributions as needed D) Rollover the IRA into her own IRA and take distributions as needed

C is the answer. Answers A and B are not suitable because the 72(t) substantially equal periodic payments must continue at least until Jill turns age 59½, but she only needs the money for a few years. Answer D is not a good choice because the distributions would be subject to a 10% penalty since Jill is under age 59½. C is the best answer because Jill can take distributions as needed without penalty (death is a penalty exception) then, upon reaching age 59½, roll over the IRA to her own in order to delay required minimum distributions until she turns age 70½ and can name her own beneficiary, who will be able to stretch distributions over their own lifetime after Jill dies.

Arthur is a CFP® professional who is meeting with potential clients Andy and Sue for the first time. Andy and Sue have just had a child and are wondering how much they need to save for little Sammy to attend college when he turns 18. Arthur will not be providing investment advice for their college savings, nor is he working with them on other aspects of their finances. Which steps of the planning process is Arthur following? A) Steps 1, 2, and 3 B) Steps 1, 3, and 5 C) Steps 2, 3, 4, and 5 D) Steps 1, 2, 3, 4, 5, and 6

'A'. Arthur is following step 1 (establishing the relationship, limited to just college needs analysis), step 2 (gathering the information needed), and step 3 (evaluating the needs). He is not making any recommendations regarding savings strategies or vehicles, nor is he doing any implementation or monitoring. In this case Arthur is not practicing financial planning or the material elements of financial planning.

According to the CFP Board's Practice Standards, which of the following is/are correct? I. If the scope of the engagement is limited to specific activities, no written agreement is required. II. The Practice Standards do not apply when the practitioner is not engaged in financial planning. A) Only I is correct B) Only II is correct C) Both I and II are correct D) Neither I nor II is correct

'A'. The Practice Standards are always applicable, but their application and the disclosures required by the Rules of Conduct differ between limited engagements and financial planning engagements. Series 500-1 E states that "If the practitioner is engaged by the client to provide only implementation activities, the scope of the engagement shall be mutually defined, orally or in writing."

Alex is 47 years old and needs money from his IRA. He decides to take substantially equal periodic payments. In how many years can he stop taking these distributions? A) 5 years B) 9 years C) 13 years D) 33 years

'C'. The sub equal payments must continue to the greater of five years or age 59 ½.

Bo was awarded 1,000 shares of restricted stock of Data Corp at a time when the stock price was $22. Assume Bo properly makes an 83(b) election on the date of the award. The stock vests 3 years later at a price of $42 and Bo retains the stock. What are Bo's tax consequences in the year the stock vests? A) Bo has W-2 income of $20,000. B) Bo has a long-term capital gain of $20,000. C) Bo has W-2 income of $22,000. D) Bo has no tax consequences at that time.

D. At the time Bo makes the 83(b) election, the value of the stock at that date will be included in his taxable income. Thus, Bo will have W-2 income of $22,000 ($22 x $1,000). When the stock vests, there are no tax consequences.

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.

D: These are the opposite of each other

Which of the following information is most important to gather from an employer before making a recommendation for a qualified retirement plan? A) Employee census information B) Stability of cash flows C) Retirement needs of the owner D) The desire for employees to be able to contribute

Rationale B is the answer. While the other information is also important in identifying a specific type of qualified plan, before a qualified plan can be recommended, it should be determined that contributions can be made on at least a "substantial and recurring" basis.

Ernest converted his Traditional IRA to a Roth IRA on Dec 15, 2015. 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, 2019 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.

Rationale 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.

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. C) She can contribute to a Roth IRA. D) She cannot contribute to a Traditional IRA or Roth IRA.

Rationale 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 $122,000 - $137,000 (2019). B) She can contribute to a Traditional IRA but not deduct her contribution.

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 $120,000 from the employer. III. An officer of the employer who received compensation of more than $185,000. IV. A 1% 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.

Rationale 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 $180,000 (2019), 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 more than $150,000.

Deepak made a contribution to his Roth IRA on April 15, 2017 for 2016. He was 58 years of age at the time and decided it was time he made his first contribution to a Roth IRA. Over the years he has made $30,000 in contributions. On May 15, 2019 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.

Rationale 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 2019 if he was 58 in 2017. However, he did not meet the 5 year holding period. He only has about 4.5 years. 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, 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.

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 $11,000 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.

Rationale Solution: The correct answer is C. Total salary reductions for qualified 401(k) and TSA is limited to $19,000 per year in 2019. 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.

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.

Rationale 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

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

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

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.

Rationale 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 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

Rationale The correct answer is "A." Both the plan participant and the nonparticipant spouse must sign the waiver. Statement "III" is correct. Statement "I" is unfounded.

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.

Rationale 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.

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%

Rationale 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.

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

Rationale 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.

Which of the following would be eligible to receive Social Security retirement benefits (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.

Rationale 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 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.

Rationale 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.

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.

Rationale 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.

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.

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

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.

Rationale 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.

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 $6,000 to Traditional IRA and deduct all $6,000. B) She can contribute $7,000 to Traditional IRA and deduct all $7,000. C) She can contribute $6,000 to Traditional IRA and deduct $0. D) She can contribute $7,000 to Traditional IRA and deduct $0.

Rationale 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 $122,000 - $137,000 (2019). Because she is 50 or older she is allowed to make the $1,000 (2019) catch up contribution.

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.

Rationale 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."

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, II and III only. C) I, II, III and IV. D) None of the above.

Rationale The correct answer is "B." Employees can be excluded up to 3 years or age 21, whichever is longer. Plans can be established and funded up to the date of filing the entity tax return, including extensions. Employee needs to earn only $600 to be included in the plan.

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 and III only. C) II and III only. D) II and IV only.

Rationale The correct answer is "B." In 2019, contributions are limited to the lesser of 100% of earned income or $6,000 or $7,000 if age 50 or over. Deductions may be taken even if an active participant, so being a non-participant is not a requirement. The IRA holder must be under age 70 1/2 to make contributions into an IRA. 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.

Mayu made a contribution to his Roth IRA on April 15, 2014 for 2013. This was his first contribution to a Roth IRA. Over the years he has made $20,000 in contributions. On May 15, 2019 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.

Rationale 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.

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) $0 B) $6,000 C) $12,000 D) $13,000

Rationale The correct answer is "B." Since they are not active participants there is no AGI limitation. However, Sean is above 70.5 and therefore is unable to make a contribution to a Traditional IRA. Jaclyn is able to make a $6,000 (2019) deductible contribution. She does not qualify for the catch up because she is not 50 or older.

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.

Rationale 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.

Rationale 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.

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.

Rationale 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.

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 $9,000 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.

Rationale The correct answer is "C." 403(b) plan assets cannot be invested in individual securities, and 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 2019 may be as high as $27,500 ($19,000 deferral, plus $3,000 from the 15 year rule, plus $6,000 for the 50 and over catch-up).

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.

Rationale 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.

Rationale 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.

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.

Rationale 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.

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 non-qualified.

Rationale 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.

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.

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

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.

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

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.

Rationale 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.

Kyle is 54 and would like to retire in 11 years. He would like to live the "high" life and would like to generate 90% of his current income. He currently makes $150,000 and expects $24,000 (in today's dollars) in Social Security. Kyle is relatively conservative. He expects to make 8% on his investments, that inflation will be 4% and that he will live until 104. How much does Kyle need at retirement? A) $3,631,802 B) $3,423,275 C) $3,554,911 D) $3,480,448

Rationale The correct answer is "C." Salary = 111,000 (150,000* 90%) - 24,000 = 111,000 N = 11 years to retirement I = 4% inflation PV = 111,000 in salary FV = 170,879.40 BEG PMT = 170,879.40 N = 39 104 - 65 I = 3.8462 Inflation adjusted rate of return = [(1.08/1.04) - 1] X 100 Solve for PV Answer "A" is the wrong payment (150,000 -24,000* 90%) = 113,400. Answer "B" is ordinary annuity (end mode). Answer "D" uses 4% for interest (beg mode).

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) $6,000 B) $7,000 C) $19,000 D) $25,000

Rationale The correct answer is "C." Statement "A" ($6,000) is the IRA maximum, NOT 403(b) (TSA) maximum. Statement "B" ($7,000) is the catchup provision amount for IRAs in 2019.

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.

Rationale The correct answer is "C." Statement "I" is incorrect because the employer can always deduct the premiums. Statement "II" - The highly compensated employees may be required to pay taxes on all or part of the reimbursements.

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.

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

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.

Rationale 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.

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.

Rationale 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%.

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%.

Rationale 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.

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.

Rationale 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 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.

Rationale 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.

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) All of the above.

Rationale 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.

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

Sherman, age 52, works as an employee for Cupcakes Etc, a local bakery. Cupcakes sponsors a 401(k) plan. Sherman earns $50,000 and makes a 10% deferral into his 401(k) plan. His employer matches the first 3% deferral at 100% and they also made a 5% profit sharing contribution to his plan. Sherman also owns his own landscaping business and has adopted a solo 401(k) plan. His landscaping business earned $40,000 for the current year. What is the most that Sherman can contribute in the solo plan, assuming his self-employment taxes are $6,000? A) $19,000 B) $20,000 C) $25,000 D) $27,400

Rationale The correct answer is "D." An individual can defer up to $19,000 (2019) plus an additional $6,000 catch up for all of their 401(k) and 403(b) plans combined. Since he is 50 or older he can contribute the 19,000 + 6,000 = $25,000. Since he already contributed $5,000 into his employer plan he can still defer $20,000 ($25,000 - $5,000) into the solo plan. The employer contributions in this question are in addition to the employee deferral limit. Employer contribution into the solo plan: i) self-employment income $40,000 ii) less 1/2 SE tax $3,000 iii) Net $37,000 iv) X 20% v) employer contribution $7,400 Total contribution to the solo plan = $20,000 + $7,400

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 service, 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

Rationale 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.

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

Rationale The correct answer is "D." Harry must have earned 40 quarters of coverage.

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 15% tax bracket, what is the tax and penalty consequence for this distribution? A) $712.50 B) $775.00 C) $1,187.50 D) $1,900.00

Rationale 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. Therefore, his tax and penalty consequence is $1,900 = $4,750 x 40%. The 40% is represented by 15% tax plus 25% penalty.

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 $56,000 for the current year. II. The limit only applies to defined contribution plans. III. 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.

Rationale The correct answer is "D." 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. Statement "IV" is correct as salary deferral contributions by employees is counted against the IRC 415(c) limit.

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 $19,000 (2019) (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.

Rationale 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 $38,000 for 2019, excluding the catch-up is $19,000 for 2019.

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.

Rationale The correct answer is "D." The timing of employee taxation on properly executed non-qualified and qualified plans are the same.

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.

Rationale 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.

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.

Rationale 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.

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) $8,000 B) $11,000 C) $14,000 D) $16,500

Rationale 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 $6,000 (2019) as a catch-up contribution. Alex can defer $8,000 (4.5% x $177,778) and $6,000 (the catch-up) for a total of $14,000.

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.

Rationale 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

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? 1. The XYZ company plan meets the ratio percentage test. 2. The XYZ company plan fails the average benefits test. 3. 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.

Rationale 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

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 $4,000. The ADP of the 401(k) plan for the NHC is 4%. Wade, who is age 45, earns $190,000 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) $19,000 B) $11,400 C) $9,333 D) $4,667

Rationale 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 $56,000. Since the company contributes $42,000 (20% of $190,000 + $4,000 of forfeiture allocations), he only has $14,000 to split between the deferral and the match. Thus, he contributes $9,333* and the match is $4,667, which when added to the $42,000 totals $56,000. 6% of his salary of $190,000 is $11,400. 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 x that amount goes into the plan. Take 14,000/1.5 = $9,333

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.

Rationale 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.

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 or Prince for the benefit of Prince for 2019? A) $41,860 B) $47,860 C) $49,600 D) $55,850

Rationale The correct answer is b. $123,000 Net Income (17,400/2= $8,700) Less 1/2 SE Tax $114,300 Net SE Income x 0.20 0.25 ÷ 1.25 $22,860 Employer contribution $19,000 Plus 401(k) Deferral (employee elective before deferral) $6,000 Plus > age 50 catch up $47,360 Total

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.

Rationale 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.

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 $19,790. 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) $38,000 B) $56,000 C) $66,021 D) $71,021

Rationale The correct answer is c. 19,000 + 19,000 + 28,021 = 66,021 Dr. Woods can contribute $19,000 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 19,000 (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 -9,895 (Assume his self-employment tax is $19,790, use ½) 140,105 X 20% (contribution rate / (1+contribution rate) = self-employed contribution rate) 28,021

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 (i.e., 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.

Rationale The correct answer is c. Non qualified distributions from a Roth account are subject to tax on a prorata basis. Since 75% of the value in the account consists of basis and the remaining 25% consists of earnings, that same ratio of basis to income will apply to the $12,000 distribution. It is not a qualified distirubiton because she has not held the account for at least five years.

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.

Rationale 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.

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 be taken from elective deferral amounts or vested employer contributions. 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.

Rationale 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 only be taken from employee deferrals.

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.

Rationale 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 income tax treatment of a cashless exercise of an ISO is favorable compared to 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 tax. 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.

Rationale The correct answer is d. Choice a is not correct as the tax treatment is the same for a cashless exercise of an ISO and an NQSO. 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.

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.

Rationale 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.

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.

Rationale 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 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.

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.

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.

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 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, IV and V. C) I, III and IV only. D) I and VI only.

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.

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%

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

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

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.

On January 1 of Year 1, George was awarded 10,000 ISOs at an exercise price of $5 per share when the fair market value of the stock was equal to $5. On October 30th of Year 2, George exercised all of his ISOs when the fair market value of the stock was $15 per share. On August 13th of Year 3, George sold all of his shares for $20 per share. At the date of sale, what are the tax consequences to George? A) $100,000 AMT adjustment B) $200,000 employer deduction C) $150,000 capital gain D) $150,000 ordinary income

The correct answer is A. The sale of the ISO shares is a disqualifying disposition because the 2 year and 1 year requirements were not met. This disposition results in ordinary income for George in the year of the disposition. The employer also receives a deduction for the same amount. The compensation equals the difference between the value on the date of exercise and the strike price. The remaining gain is treated as a capital gain. There is also a negative AMT adjustment in the year of the disqualifying disposition - in this case it equals $100,000 (# of shares times the difference between the exercise price and the FMV on the date of exercise). The (short term) Capital gain would $50,000 OI would be 100,000 and AMT Adjustment of 100,000 Year 1 - Jan 1 - grant $5. (10,000 shares) Year 2 - Oct 30 - exercise $15 - AMT adjustment of $10 ($100,000) Year 3 - Aug 13 - Sold $20 - Negative AMT Adjustment $10, and taxed at Ordinary Income rates. Sold 10,000 at $20 = 200,000. Two years from grant? Yes. 1 Year from exercise? No = disqualifying disposition. Basis at $5 = 50,000 Gain of $150,000 of which $100,000 is taxed at OI, and the remaining $50,000 is STCG.

Casey, age 42, received a distribution from his 401(k) Roth account of $80,000. He had an adjusted basis in the plan of $420,000 and the fair market value of the account as of the distribution date was $600,000. Assuming he took the distribution to pay for his daughter's college education and that he had been contributing to the Roth account since 2006, calculate the taxable amount of the distribution and any applicable penalty. A) $0 taxable; $0 penalty B) $24,000 taxable; $0 penalty C) $24,000 taxable; $2,400 penalty D) $80,000 taxable; $8,000 penalty

The correct answer is C. The first step is to determine if this is a qualified distribution. It is not since the distribution is not due to age 59 ½, death or disability. Therefore, the distribution is taxable on a pro-rata basis, just as any distribution from a qualified plan. To calculate the amount of the distribution that is taxable, 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 subtracted from one and then multiplied times the gross distribution amount. As such, $24,000 (1-($420,000/$600,000)) x $80,000) of the distribution is taxable and will be subject to income tax and penalty. There is no exception for education from a qualified plan, thus, the penalty applies - 10% of the taxable amount or $2,400.

Jorge Vasquez retires at age 65 and receives a lump-sum distribution worth $650,000. The market value of employer securities is $135,000, and the cost basis for the securities is $60,000. He is in the 32% income tax bracket. He has chosen to roll the company securities separately from the remainder of his retirement plan base on his financial planner's advice. Within 3 weeks of the transfer, he decides to sell all his shares of stock when it is valued at $140,000. What are his tax consequences for this transaction? A) $21,100 LTCG B) $25,600 STCG C) $12,000 STCG D) $11,250 LTCG and $1,600 STCG

The correct answer is D. Jorge would roll $135,000 of employer stock to a brokerage account. The basis in the stock of $60,000 would be taxable to him at the time of the rollover. $60,000 at 32% is $19,200. When he sells the stock, the remainder is taxed at LTCG rates base on NUA rules. At the time of sale, his shares were worth $140,000, the remainder of the NUA distribution (135,000-60,000) at 15% LTCG rate = 11,250. The value above NUA is $5,000 and is STCG (32%) = 1,600. Had he rolled the entire balance to an IRA, the full distribution would be at ordinary tax rates ($80,000 at 32%= 25,600). The balance of $515,000 will roll tax-deferred to an IRA.

Ella received nonqualified stock options (NQSOs) with an exercise price equal to the FMV at the date of the grant of $20. Ella executes a cashless exercise when the FMV of the stock was $30. Which of the following statements are true? A) Ella has ordinary income at the time of the grant. B) Ella has W-2 income at the time of exercise of $30. C) Ella has capital gain of $10 when the stock is sold. D) Ella will receive less than $10 due to withholding and transaction costs.

The correct answer is D. Statement 1 is false - there is no income at the time of grant when the strike price equals the FMV on the date of grant. Statement 2 is false. W-2 income equals $10 at the time of exercise. Statement 3 is false since there is no capital gain. Statement 4 is correct.

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.

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

Joe has owned and operated Baseball Memories, Inc. for the last 20 years. His employees have been with him most of that time and he has set up a retirement plan and other benefits for them. Joe's brother Landon is starting his own company, Landon's Landscaping. Landon admires what his brother is building and believes it is a good time to start thinking about his future. He asks Joe to introduce him to his financial planner. Landon knows there are a lot of options out there for retirement planning. At Landon's second meeting with his new planner Tom, Tom suggests a few options, one being a SEP plan. Which option is similar in funding to a SEP? A) Cash balance plan B) Profit sharing plan C) SIMPLE D) Defined benefit plan

The correct answer is b. The SEP is employer funded up to 25% of an employees compensation. These characteristics are most similar to a profit sharing plan. The profit sharing plan would be beneficial for a startup since they will not have mandatory contributions each year.

Dana is an executive of STEEL, Inc. She earns $500,000 during the year and defers $13,000 into the SIMPLE. STEEL, Inc uses the maximum match for SIMPLE Plans. How much would the matching contribution be for Dana? A) $15,000 B) $13,000 C) $10,000 D) $8,400

The correct answer is b. The matching contribution is 3 percent of an employee's compensation up to $13,000 for 2019. The covered compensation limit does not apply with the match for a SIMPLE.

Bo was awarded 1,000 shares of restricted stock of Data Corp at a time when the stock price was $22. Assume Bo properly makes an 83(b) election on the date of the award. The stock vests 3 years later at a price of $42 and Bo sells it then. What are Bo's tax consequences in the year he makes the 83(b) election? A) Bo has W-2 income of $20,000. B) Bo has a long-term capital gain of $20,000. C) Bo has W-2 income of $22,000. D) Bo has no tax consequences at that time.

The correct answer is c. At the time Bo makes the 83(b) election, the value of the stock at that date will be included in his taxable income. Thus, Bo will have W-2 income of $22,000 ($22 x $1,000).

Barron is the CFO of Bo, Inc. He earns $500,000 during the year and defers $13,000 into the Bo SIMPLE. Bo, Inc. utilizes a non-elective contribution for their plan. What is the contribution made on behalf of Barron for 2019? A) $13,000 B) $10,000 C) $8,400 D) $5,600

The correct answer is d. The non-elective contribution equals 2 percent of compensation up to the covered compensation limit, which is $280,000 for 2019.