Retirement Planning - Module 3

Ellen participates in a SIMPLE 401(k) maintained by her employer. If she has completed two years of service, to what extent is she vested in the employer contributions to her account?

100%

Bernie is a participant in his employer's noncontributory employee stock ownership plan (ESOP). Two years ago, his employer contributed stock with a fair market value of $30,000 into Bernie's account. Bernie retired one year later and took distribution of the stock when its fair market value was $40,000. Two years after his retirement, Bernie sold the stock for $50,000. What is the appropriate tax treatment available to Bernie upon sale of the stock?

$20,000 long-term capital gain Employees are not taxed on stock in an ESOP until the stock is distributed. Upon distribution, the employee must pay ordinary income taxes on the fair market value of the stock when it was contributed to the plan on his behalf. Any net unrealized appreciation (NUA) at that time can be deferred until the stock's subsequent sale. Upon the sale, the NUA portion will be treated as long-term capital gain. Additionally, the growth of the stock subsequent to the distribution will receive long-term capital gain treatment because Bernie held the stock longer than one year after distribution. Therefore, the appropriate tax treatment available to Bernie upon sale of the stock is a $20,000 long-term capital gain.

What is the maximum elective deferral a participant can make to a Section 401(k) plan in 2022, assuming no catch-up provisions apply?

$20,500

Valerie earns $320,000 annually from XYZ Corporation. The company profit-sharing plan provides for a contribution of 25% of participant compensation. What is the amount of the company's contribution for Valerie for 2022?

$61,000

ABC Corporation is a closely held company that wants to establish a qualified retirement plan for its employees. Also, the company wants to improve the marketability of its stock and give the employees an ownership stake in the company. Which of the following plans would help ABC meet all of these objectives?

Employee stock ownership plan (ESOP)

A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary or bonuses simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of these is a rule that applies to Section 401(k) plan elective deferrals? Section 401(k) plan elective deferrals are immediately 100% vested and cannot be forfeited. In-service withdrawals are to be made only if an individual has attained age 62. An extra nondiscrimination test called the actual deferral percentage test applies to elective deferral amounts.

I and III

An employee stock ownership plan (ESOP) is a defined contribution plan that may provide the employer with which of the following advantages? Increased corporate cash flow The ability to borrow money to purchase corporate stock A market for employer stock Financial resources to expand the business

I, II, III, and IV

In addition to meeting the financial needs and resources tests for hardship withdrawals, money may only be withdrawn from profit-sharing plan accounts for the following reasons: Purchase of a primary residence Payment of unreimbursed medical expenses Payment necessary to prevent foreclosure on the participant's primary residence Payment of higher education expenses for the participant, spouse, or dependent children

I, II, III, and IV

Which of these statements regarding the safe harbor rules for Section 401(k) plans is CORRECT? The employer can avoid ACP and ADP testing if it matches 100% up to 4% of compensation for nonhighly compensated employees. The employer can avoid ACP and ADP testing if it makes contributions of 3% or more of compensation for all employees who are eligible to participate in the plan, whether or not the employee chooses to participate. To meet the safe harbor requirements, the matching and non-elective contributions must be immediately 100% vested. The employer must provide notice to each eligible employee about rights and obligations under the plan.

I, II, III, and IV

Which of the following legal requirements apply to employee stock ownership plans (ESOPs)? ESOPs must permit participants who have reached age 55 and have at least 10 years of service the opportunity to diversify their accounts. ESOPs cannot be integrated with Social Security. An employer's deduction for ESOP contributions and amounts made to repay interest on an ESOP's debt cannot exceed 25% of the participants' payroll. The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP.

I, II, and IV

Hardship withdrawals are only allowed from Section 401(k) plans if specifically stated in the plan document and typically for expenses such as vacation costs. medical expenses. college tuition costs. insurance premiums.

II and III

Which of these statements regarding Section 401(k) plans is CORRECT? Employer contributions and their accrued earnings are always immediately 100% vested in the plan. A Section 401(k) plan is a qualified profit-sharing or stock bonus plan. The maximum pretax elective deferral for a participant age 35 is $20,500 in 2022. Elective deferrals in a cash or deferred arrangement (CODA) are not subject to FICA and FUTA taxes.

II and III

Which of the following plans is NOT a cross-tested plan? New comparability plan Employer stock ownership plan Age-based profit-sharing plan Stock bonus plan

II and IV

Ryan wants to take a distribution from his SIMPLE 401(k) account balance from his previous employer and deposit it in an IRA. Which of these statements regarding his transfer is CORRECT? The distribution from the SIMPLE 401(k) plan is not subject to the mandatory 20% income tax withholding requirement. A direct transfer from Ryan's SIMPLE 401(k) to an IRA is not subject to the mandatory 20% income tax withholding requirement.

II only Statement I is incorrect. SIMPLE 401(k) plans are qualified plans and are subject to mandatory 20% income tax withholding for a distribution that is not a direct trustee-to-trustee transfer. When there is a direct transfer of a distribution from a qualified plan to an IRA, the mandatory 20% withholding rule does not apply.

Which of these are basic provisions of an IRC Section 401(k) plan? Employee elective deferrals are exempt from income tax withholding and FICA and FUTA taxes. An employer's deduction for contributions to a Section 401(k) plan cannot exceed 25% of covered payroll, which is not reduced by the employees' elective deferrals. A Section 401(k) plan cannot require as a condition of participation that an employee complete a period of service longer than one year. Employee elective deferrals may be made from salary or bonuses.

II, III, and IV

Grant, age 51, made an initial contribution of $10,000 to a Roth 401(k) six years ago. He made subsequent contributions of $6,000 annually for the next four years. Grant separated from service this year and took a $50,000 distribution from his Roth 401(k) to purchase a boat. Which of these statements regarding this distribution is CORRECT?

It is partially taxable because Grant was not age 59½ or older, disabled, or deceased.

A Section 401(k) plan does not have to satisfy the ADP and ACP tests if it meets one of the safe harbor provisions. Which of these statements is FALSE?

Mandatory employer contributions under the safe harbor provisions may be subject to a three-year cliff vesting requirement.

The Acme Corporation has six owners, ranging in age from 30 to 60 years old, and 25 rank-and-file employees. The owners want to adopt a qualified retirement plan that will allow them to maximize the contributions to the owners' accounts and minimize the contributions to the accounts of the rank-and-file employees. Which of the following plans would best meet the owners' needs?

New comparability plan

Netcyber, Inc., is a 10-year-old C corporation that has experienced dramatic growth during three of the past five years. There are currently 168 employees. The two owners, who are 35 and 31 years old, wish to establish a retirement plan. Which plan would probably be the best for them?

Profit-sharing plan

Which of the following statements regarding the characteristics or use of a profit-sharing plan is CORRECT?

Profit-sharing plans are best suited for companies that experience fluctuating cash flow.

A client's employer has recently implemented a traditional Section 401(k) plan as part of its profit-sharing plan. Which of these is CORRECT regarding the client's participation in the plan?

The client is immediately vested in all elective deferrals and their accrued earnings.

Jack, age 51, is the owner of an architectural firm with 23 employees, most of whom are younger than 40. The company's cash flow varies from year to year, depending on their contracts. Jack wants to implement a qualified plan that is easy for employees to understand and that is administratively cost-effective. He also wants a plan with an incentive feature by which an employee's account balance increases with company profits. Which of the following plans would be most appropriate for Jack's firm?

Traditional profit-sharing plan

All of these statements regarding a traditional Section 401(k) plan are correct EXCEPT

employer contributions and their accrued earnings are always immediately 100% vested in the plan.

In 2022, what is the maximum amount an employee under the age of 50 may contribute to a traditional Section 401(k) plan as an elective deferral?

$20,500

Which of the following plans is a cross-tested plan? New comparability plan Employee stock ownership plan (ESOP) Age-based profit-sharing plan Stock bonus plan

I and III

Under a profit-sharing plan

the company has flexibility regarding annual funding.

Which of these statements regarding profit-sharing plans is false?

A company that adopts a profit-sharing plan must make contributions each year.

An employer is permitted to make what level of contributions to an employee stock ownership plan (ESOP)?

An ESOP is a defined contribution plan that limits employer contributions to 25% of covered payroll.

How is an age-weighted profit-sharing plan similar to a traditional defined benefit pension plan?

Contribution allocations to older participants may be maximized, while allocations to younger participants may be minimized.

Northwest Instruments Corp. made matching contributions to its SIMPLE 401(k) in the last three years. Assume all eligible employees earn at least the maximum includible compensation limit and all defer the maximum amount allowed. Due to extensive capital expenses anticipated this year, the company is considering how to reduce expenses. It will not be able to continue to make the 3% matching contribution and has called you to discuss their options. Which of these could you recommend?

By providing adequate notice, Northwest Instruments Corp. could move to the 2% non-elective contribution this year, although the savings would be minimal.