Retirement Practice Questions

How many years of service do you have to have f you choose to use a flat-percentage formula?

10

When a withdrawal is taken from a SIMPLE, when is the early withdrawal penalty applied if distribution is taken after 2 years?

10% early withdrawal penalty is assessed on the 1040, not at the time of the distribution from the plan.

Target benefit plans and defined benefit plans have which of the following characteristics in common? 1. Minimum funding standards apply. 2. Qualified joint and survivor annuity requirements apply. 3. High investment earnings increase participant retirement benefits. 4. Employer is obligated to provide a specified benefit in retirement. A. 1, 2 B. 1, 3 C. 2, 4 D. 3, 4

A 3: Applies only to the target benefit NOT the DB plan. 4: Applies only to the DB plan NOT the target benefit plan.

Which of the following is a qualified plan which allows employee elective deferrals of 100% of includible salary and has a mandatory employer match? A. Profit Sharing B. Money Purchase C. SIMPLE D. DB

C - A: Not contributory B / D: Do not permit employee elective deferrals.

Which of the following are noncontributory plans? 1. 401(k) and money purchase plans. 2. 401(k) and thrift plans. 3. Thrift plans and ESOPs. 4. Money purchase pension plans and profit sharing plans. A. 4 B. 1, 2 C. 3, 4 D. 1, 2, 3, 4

A - - Non-contributory plans mean the employees do not contribute. - Employers generally contribute to Money Purchase Pension Plans, ESOPs, and Profit Sharing Plans (non-contributory plans). - Employees contribute to 401(k)s and Thrift Plans - Statement 1, 2, 3 list one from both category, making the false statements when asked which are non-contributory.

Which of the following would be eligible to receive Social Security retirement benefits this year (assume each has worked at least a minimum of 20 years in their current position)? 1. A 61-year old teacher at a public school. 2. A 60-year old 25% owner of an S corporation. 3. A 65-year old physician/owner of a professional corporation. 4. A 70-year old sole proprietor who is an outside consultant to the federal government. A. 3, 4 B. 1, 3, 4 C. 4 D. 1, 2, 3, 4

A - 1/2: Too young and do not qualify. *Earliest age for social security benefits is 62.

Which of the following accurately describes some attributes of non-qualified retirement plans? 1. The employee will pay Table 1 costs each year on an "employer pay all" split dollar life insurance arrangement. 2. The employer can deduct the premiums paid for a split-dollar life insurance arrangement in the year the premiums are paid. 3. Death benefits from a split-dollar arrangement, both the employer and the employee's beneficiary's share, are generally tax free. 4. 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. 1, 3 B. 2, 4 C. 1, 4 D. 1, 2

A - 2: 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 premium paid. 3: No tax deductions are taken for any premiums paid on the policy, the DB are tax free. 4: Employee is required to pay the Table 1 cost each year, without regard to premiums paid in previous years.

Which of the following statements concerning tax considerations of nonqualified retirement plans is/are correct? 1. Under IRS regulations an amount becomes currently taxable to an executive before it is actually received if it has been "constructively" received. 2. Distributions from nonqualified retirement plans are generally subject to payroll taxes. A. 1 B. 2 C. 1, 2 D. Neither 1 or 2

A - 2: Payroll taxes are due on deferred compensation at the time the compensation is earned and deferred, not at the date of distribution.

Which of the following is/are true concerning non-qualified deferred compensation plans? 1. They can provide for the deferral of taxation until the benefit is received. 2. They can provide for fully secured benefit promises. 3. They can give an employer an immediate tax deduction an employee a deferral of tax. A. 1 B. 2 C. 3 D. 1, 3 E. 2, 3

A - 2: The benefit cannot be fully secure, the participant has to have a substantial risk of forfeiture to avoid current taxation. 3: Employer cannot receive a tax deduction until the income is taxable to the employee.

A qualified plan that is not a pension plan is... A. Profit Sharing B. Money Purchase C. SIMPLE D. DB

A - B / D: Pension Plans C: Requires employer match and is not a qualified plan.

Which of the following statements concerning the choice of an entity versus a cross purchase partnership buy-sell agreement funded with insurance is false? A. The use of existing insurance to fund the agreement causes a transfer-for-value problem if an entity agreement is selected, but does not cause this problem if a cross purchase approach is used. B. A cross purchase should be selected if the surviving partners expect to sell their interests during their lifetimes. C. An entity approach may solve the affordability problem if one partner is significantly older than the others. D. An entity agreement becomes more desirable as the number of partners included in the agreement increases.

A - B/C/D are all true.

Jacinth is an executive at Papers Unlimited. As part of her compensation she has a restricted stock plan that allows her to receive 2,000 shares of stock after she completes of 5 years of service. At the time of grant the stock was trading at $4 per share. She did not make the 83b election. She met the vesting requirement 8 months ago when the stock was trading at $28. She has decided to sell her stock. All of the following are true, except: A. If she sells the stock today for $3 per share she would have an ordinary loss of $50,000. B. If she sells the stock today for $15 per share she will recognize a capital loss of $26,000. C. If she sells the stock today for $28 per share then she will not recognize any gain or loss. D. If she sells the stock today for $38 per share then she will recognize $20,000 in short term capital gains.

A - When she met the vesting period, she would have recognized W-2 income of $56,000 (2,000 x 28). A: If she sold the stock at $3, she would recognize a capital loss of $50,000 (56,000 basis - 6,000 sale price). Loss from an investment must be netted against gain. If the loss exceeds the capital gain, $3,000 can be taken against ordinary income, not the full amount. If she sold the stock at $15, then she would recognize a capital loss of $26,000 (56,000 basis - 30,000 sale price). If she sold the stock at $28 then she would not recognize any gain or loss (56,000 - 56,000 basis). If she sold the stock at $38 then she would recognize a short term gain of $20,000 (76,000 sale price - 56,000 basis).

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

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

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 employs 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.

A - All DB plans must be covered except for professional firms with < 25 employees. B: DC plan and not subject to PBGC. C: Has < 25 employees. D: DC plan and not subject to PBGC.

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

A - All life insurance in qualified plans is subject to income when purchased, regardless of the type.

Which of the following accurately describe the rules of the "golden parachute" payments made to a disqualified person? 1. W-2 Income 2. 10% excise tax 3. Qualify for 10-year forward averaging if paid out as lump sum. 4. Not subject to payroll taxes. A. 1 B. 2 C. 2, 3 D. 1, 4

A - Also subject to 20% excise tax.

Which transactions between a disqualified person and a qualified plan would be considered prohibited transactions under ERISA? 1. The employer purchases a mortgage note which is currently in default for more than the fair market value. 2. The employer sells a piece of raw (undeveloped) land to the qualified plan for a price substantially below fair market value. 3. Loan to a 100% owner/participant on the same basis as every other participant as set forth in the plan documents. 4. The purchase of employer stock for full and adequate consideration by a 401(k) plan. A. 1, 2 B. 2, 3 C. 1, 2, 3 D. 1, 2, 4

A - Any transaction between a disqualified person and the trust is considered a prohibited transaction. 1: Employer could purchase the mortgage note at a markup to future market value, thus giving the pension 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. 2: Employer's individual taxes would be reduced 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? 1. The waiver must be signed within six months of death. 2. The waiver must be signed only by a plan participant. 3. The waiver must be notarized or signed by a plan official. A. 3 B. 1, 2 C. 2, 3 D. 1, 2, 3

A - Both the plan participant and the nonparticipant spouse must sign the waiver. If the waiver is a separate document, the non-participant spouse must sign.

Which of the following is NOT included as one of the provisions for the continuation of benefits under the COBRA Act? A. All employers offering group health insurance must provide COBRA continuation benefits. B. COBRA benefit durations vary from 18, 29, or 36 months depending on the qualifying event. C. COBRA eligible coverages do include: dental, vision, Medical FSAs, prescription drug plans, mental health plans.

A - COBRA benefits are required of employers who have 20 or more employees.

Which of the following characteristics apply to paired plans (also known as "tandem" plans)? 1. Generally combines a money purchase pension and profit sharing plan. 2. Actuarial assumptions required. 3. Total contributions to the paired plans limited to 15% of payroll by IRC Section 404. 4. Employer bears investment risk. A. 1 B. 2, 4 C. 1, 3, 4 D. 4

A - DC plans do not require actuarial assumptions. Total contributions to both plans are limited to the lesser of 100% or $61,000 by IRC Section 415. The profit-sharing plan is limited by IRC Section 404 to 25% of covered payroll. Employees bear the investment risk.

Which of the following is not a requirement for the owner of corporate stock who sells to an ESOP to qualify for the nonrecognition of gain treatment? A. The ESOP must own at lest 55% of the corporation's stock immediately after the sale. B. The owner must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale. C. The ESOP may not sell the stock within 3 years of the transaction unless the corporation is sold. D. The owner must not receive any allocation of the stock through the ESOP.

A - ESOP must own at least 30% of the corporation's stock immediately after the sale.

Which of the following statements concerning the OASDHI earnings test for the current year is correct? A. Some part-time work is allowed without the loss of retirement benefits for those under normal age retirement. B. The earnings test does not apply after the age of 62. C. Interest and dividends are included in the earnings test. D. The annual exempt amount for a person at normal age retirement is $51,960.

A - Earnings test does not apply at or after normal retirement age. The monthly exempt amount is $4,330 ($51,960) for those months in the year of normal retirement age BEFORE you actually reach normal retirement age. The test uses only earned income. No passive or portfolio income is used in calculating the earnings.

Which of the following is a tax consequence of an employer provided term insurance amount of $200,000 that is 3x an employee's salary? A. Employer is permitted to deduct the premiums paid on the entire amount of coverage. B. Employer is permitted to deduct the premiums paid on the first $50,000 of coverage. C. Employee is subject to tax on the whole benefit. D. Employee is subject to tax on the amount which exceeds 3x their annual salary of $50,000, whichever is less.

A - Employer is permitted to deduct 100% of the premiums, but the employee is subject to taxation on the amount in excess of $50,000.

Corey is covered under his employer's Profit-sharing plan. He currently earns $500,000 per year. The plan is top heavy. The employer made a 5% contribution on behalf of all employees. What is the company's contribution for him? A. $15,250 B. $25,000 C. $61,000 D. $305,000

A - For profit sharing plan, the contribution is limited to the lesser of $61,000 or covered compensation. In this case, since his salary is > than the covered compensation limit ($305,000), you need to take 5% of $305,000.

Which of the following statements does not describe the concept of constructive receipt as it applies to employee benefits and qualified and non-qualified retirement plan? A. Funded non-qualified retirement plans do not incur constructive receipt if the agreement was executed prior to the performance of services. B. Constructive receipt may occur when the funds or benefits are available or accessible to the employee, regardless of whether the funds are actually received. C. Unfunded benefit plans generally avoid constructive receipt because there is a substantial risk of forfeiture. D. Salary reduction benefit plans generally avoid constructive receipt if the agreement was executed prior to the performance of services.

A - Generally, funded plans result in constructive receipt because the employee has control of the assets and there is no substantial risk of forfeiture. Keep in mind the answer is looking for the false statement.

Which of the following are legal requirements for 401(k) plans? 1. Employer contributions do not have to be made from profits. 2. Employee elective deferrals must be made before the compensation is earned. 3. Hardship rules allow in service withdrawals which are not subject to the 10% early withdrawal penalty. 4. ADP tests can be avoided using special safe harbor provisions. A. 1, 2, 4 B. 1, 3, 4 C. 2, 3, 4 D. 1, 2, 3, 4

A - Hardship withdrawals are considered premature withdrawals and are subject to income tax and the 10% early withdrawal penalty if the employee is under 59.5

Kent Reeder, age 52, works as the administrator and curator at the Museum of Antique Manuscripts, a not-for-profit organization in Metropolitan Center. He has worked there 18 years and began contributing to the 403(b) plan 12 years ago but skipped contributing last year. He earns $85,000 a year. He has asked you to maximize his contribution. Which of the following is/are TRUE? 1. He may contribute $20,500 plus $6,500 for age 50+ catch-up, plus $3,000 long service catch-up. 2. He may not contribute to the long-service catch-up this year due to omitting a contribution last year. 3. He may contribute $20,500 plus $6,500 age 50+ catch-up. 4. He may not participate in both the long service catch-up and the age 50+ catchup the same year. 5. He is not eligible for the long service catch-up. A. 3, 4 B. 2 C. 1, 3, 4 D. 1, 3

A - He is not eligible for the long service catch-up because the museum is not a health, education, or religious organization. The maximum contribution limits for 2022 are $20,500 plus the 50+ catch up of $6,500.

Matt is a participant in a profit sharing plan which is integrated with Social Security. The base benefit percentage is 6%. Which of the following statements is true? 1. The maximum permitted disparity is 100% of the base benefit level or 5.7%, whichever is lower. 2. The excess benefit percentage can range between 0-11.7%. 3. Elective deferrals may be increased in excess of the base amount. 4. The plan is considered discriminatory because it gives greater contributions to the HCEs. A. 1, 2 B. 1, 2, 4 C. 2 D. 1, 2, 3, 4

A - His base rate is 6% and the social security max disparity is 5.7% to 11.7%. 3: Integration does not affect voluntary deferrals by employees. 4: Done properly, integration is NOT considered discriminatory.

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

A - If the company gave everyone a raise then that would increase the company's contributions. If a key employee retired and 2 employees left that would decrease the company's contributions. Since the forfeiture allocations were allocated to the participants they would have no effect on the company's contributions. In a money-purchase pension plan the investment risk is on the employees and thus an increase or decrease in the investments has no impact on contributions.

Karl is a 45-year old employee of Jaxon Industries, a closely-held corporation. Karl's adjusted gross income for the current year is $145,000, and Karl is unmarried. Jaxon Industries does not sponsor a retirement plan for its employees. Which of the following is the most appropriate retirement planning strategy for Karl for 2022? A. Make a $6,000 deductible contribution to a Traditional IRA. B. Make a $6,000 after-tax contribution to a Roth IRA. C. Contribute 20% of his salary to a SEP on a pre-tax basis. D. Contribute $14,000 pre-tax to a SIMPLE IRA.

A - Karl is not part of an employer sponsored plan so no deductibility limits will apply to his contribution. B: Based on AGI, Karl will be ineligible to make a ROTH contribution. C: Employee cannot establish their own SEP and make contributions. Plan would have to be completed by the employer. D: Employee cannot establish their own SIMPLE IRA and make contributions. Plan would have to be created by employer.

Loans from a qualified plan are considered prohibited transactions unless the following requirements are met: 1. There must be a reasonable rate of interest. 2. There is a dollar limitation of the lesser of 50% of the account balance or $12,000. 3. The term of the loan is 10 years unless for primary residence. 4. There is sufficient security. A. 1, 4 B. 1, 3, 4 C. 2, 3, 4 D. 1, 2, 4

A - Limit on loans is the lesser of 50% of the account value or $50,000 for a period of 5 years, unless for a primary residence.

Lisa, age 35, earns $175,000 per year. Her employer sponsors a qualified profit sharing 401(k) plan, which is not a Safe Harbor Plan, and allocates all plan forfeitures to remaining participants. If in the current year, the company makes a 20% contribution to all employees and allocates $5,000 of forfeitures to Lisa's profit sharing plan account, what is the maximum Lisa can defer to the 401(k) plan in 2022 if the ADP of the non-highly compensated employees is 2%? A. $7,000 B. $13,500 C. $17,000 D. $21,000

A - Maximum annual addition to qualified plans is $61,000. If the company contributes 20% of salary ($35,000) and they receive $5,000 of forfeitures, they can only defer $21,000 ($61,000 - $35,000 - $5,000) before reaching the $61,000 limit. However, since non-highly compensated employees are deferring 2%, then the highly compensated employees can defer 4%. Therefore, she is limited to a deferral of $7,000 (175,000 X .04).

Which of the following is/are true regarding negative elections? 1. 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. 2. Negative elections are no longer approved by the IRS. 3. When an employer includes a negative election in its qualified plan, the employer must also provide 100% immediate vesting. A. 1 B. 1, 3 C. 2, 3 D. 1, 2, 3

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.

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. DB Plan

A - Profit sharing plan only requires that contributions be "substantial and recurring". B / C / D - All require minimum contribution levels.

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

A - Qualified profit sharing plans must use a vesting schedule that provides participants with vested benefits at least as rapidly as either a 2-6 year or 3 year cliff vesting schedule.

Ernest converted his Traditional IRA to a Roth IRA on Dec 15, 2018. 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, 2022 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.

A - Roth distributions are tax free if they are made after 5 years and because of death, disability, 59.5 age, or first time home purchase. He does not meet the 5 year holding period or one of the exceptions. His distribution does not receive tax free treatment. Treatment for non-qualifying distributions allows the distributions to be made from basis first, then conversions, then earnings. His basis will be tax free. Conversion is also tax free since we paid tax at the time of the conversion on those earnings. Remaining earnings since establishment of the Roth are $25,000 (100,000 - 15,000 in basis - 60,000 in conversions) will be taxed. 10% penalty does not apply to this distributions 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 distributions 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. 60,000 paid tax at conversion. Subject to penalty. 15,000 in contributions. No tax, no penalty. 25,000 earnings. Taxable and subject to penalty.

Which of the following statements accurately describes the similarities and differences between 401(k) and safe harbor 401(k) plans? A. The safe harbor 401(k) plan has more liberal 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.

A - Safe harbor plans require 100% vesting, while 401(k) plans require 2 year 100% vesting. The matching contributions are different for the plans.

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

A - She can contribute and deduct her contribution since she is not an active participant and therefore, not subject to an AGI limitation.

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

A - She will be able to defer $61,000 plus the catch-up of $6,500 to the 401(k) plan, where she can only contribute $61,000 to the target benefit plan and the SEP. With a 401(k), she can contribute as employee and employer. She cannot set up a deferred compensation plan and defer tax. The catch up contribution can only be made by the employee, therefore it cannot be added to the employer funded plans.

Jeb, age 54, works for Gamma Corporation and Epsilon Corporation. Gamma and Epsilon are both part of the same parent-subsidiary control group. Gamma and Epsilon both sponsor a 25% money purchase plan. If Jeb earns $220,000 at Gamma and $40,000 at Epsilon, what is the maximum employee contribution that can be made to both plans? A. $61,000 B. $65,00 C. $67,500 D. $81,000

A - Since the 2 companies are part of the same controlled group, they will be required to aggregate both plans. Therefore, he will be limited to the dc limit of $61,000. Employer does not make catch-up contributions.

Shane's Rib Shack has a Target Benefit Plan. They have 10 employees with the following compensations: $315k, $100k, $75k, $50k, $50k, $50k, $50k, $25k, $25k, $20k Based on the actuarial tables that was established at the inception of the plan, they should fund the plan with $210,000. What is the maximum deductible contribution that can be made to the plan? A. $187,500 B. $190,000 C. $195,000 D. $210,000

A - Since the plan is DC, the maximum deductible contribution is 25% of total covered compensation. The max covered compensation for all employees is $750,000 (add all together, but use $305 for first one).

Which of the following statements accurately reflect the characteristics of a Section 457 plan? 1. Benefits taken as periodic payments are treated as ordinary income for taxation. 2. Lump-sum distributions are eligible for 5-year and/or 10-year averaging. 3. Deferred amounts are subject to Social Security and Medicare taxes at the later of: performance of services or employee becomes vested in the benefits. 4. Income tax withholding is not required until funds are actually received as opposed to constructively received. 5. Cannot exceed the smaller of $20,500 or 100% includible compensation in 2022. A. 1, 3, 5 B. 2, 4, 5 C. 1, 2, 4, 5 D. 1, 2, 3, 4, 5

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

Which of the following qualified retirement plans are subject to mandatory minimum funding requirements? 1. DB 2. Profit Sharing Plans 3. Money Purchase Pension Plans 4. Target benefit plans 5. Section 401(k) 6. SIMPLE A. 1, 2, 3, 4 B. 1, 3, 4 C. 2, 4, 5 D. 1, 4

B Profit sharing plans are exempt from minimum funding and so are SIMPLE. All pension plans are subject to minimum funding.

Client earns $200k per year. The DB plan uses a funding formula of years of service x average of 3 highest years of comp x 3%. He has been with the employer for 25 years. What is the maximum defined benefit that can currently be used to calculate contributions? A. $61,000 B. $150,000 C. $245,000 D. $305,000

B - Maximum DB is the lesser of $245,000 or compensation. The funding formula is 25 X 200,000 X 3%.

According to ERISA, which of the following is/are required to be distributed automatically to defined benefit plan participants or beneficiaries? 1. Annual accrued benefit as of the end of the previous year. 2. The plans summary annual report. 3. A detailed descriptive list of investments in the plan's fund. 4. Terminating employee's benefit statement. A. 1, 2, 3 B. 1, 2 C. 2, 4 D. 1, 2, 3, 4

C

Generally, younger entrants are favored in which of the following plans? 1. DB 2. Cash Balance Pension Plans 3. Target Benefit Pension Plans 4. Money Purchase Pension Plans A. 4 B. 2, 4 C. 1, 3 D. 2, 3, 4

B

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

B

Factors which would affect a participant's retirement benefits in a target benefit plan include: 1. Actuarial assumptions used to determine plan contributions. 2. Total return on plan assets. 3. Age of participant. 4. Includible compensation for the plan year for participant. A. 1, 2 B. 1, 3 C. 1, 2, 3 D. 1, 2, 3, 4

D

Which of the following people would be considered a key employee for 2022? A. Kara, a 1% owner whose salary last year was $140,000. B. Shanda, a 6% owner whose salary was $42,000 last year. C. Elizabeth, an officer, who earned $80,000 last year and is the 29th highest paid employee of 96 employees. D. Deann, who earned $136,000 last year and is in the top 20% of paid employees.

B Key employee is: 1. > 5% owner 2. >5% owner with compensation > $150,000 3. Officer with compensation > $200,000

Which of the following vesting schedules may a non-top-heavy profit sharing plan use? 1. 2-6 Graduated 2. 3 Cliff 3. 1-4 Graduated 4. 3-7 Cliff A. 1 B. 2, 3 C. 1, 2, 3 D. 1, 2, 3, 4

C - A profit sharing plan must vest at least as rapidly as a 3 year cliff or 2-6 year graduated. Can follow any vesting schedule that provides a more generous vesting schedule.

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

D

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

B - FIRE - Extreme saving, sacrificing, and reaching financial independence before typical retirement age.

Company sponsors a profit sharing plan. They have 100 nonexcludable employees, 20 of whom are highly compensated. 14 of the 20 highly compensated and 48 of the 80 nonhighly compensated employees are covered under the company's qualified plan. The average accrued benefits for the highly compensated is 5% and the average accrued benefit for the nonhighly compensated is 2%. Which of the following statements is true regarding coverage testing? A. Passes safe harbor test. B. Passes ratio percentage test. C. Passes average benefits test. D. Passes ADP test.

B - Safe Harbor - 48 / 80 = 60% FAIL Ratio Percentage - (48 / 80) / (14 / 20) = 85.71% PASS Average Benefits - 2 / 5 = 40% FAIL *ADP test is not applicable because it is not an employee deferral plan.

Funds in an HSA can be used for which of the following: 1. Qualified Medical Expenses 2. Deductibles 3. Vision Care 4. Dental Expenses A. 1, 2 B. 2, 3 C. 1, 3, 4 D. 1, 2, 3, 4

D

Prince, age 60, is the sole member of Symbols, LLC. Symbols sponsors a 401(k) / profit sharing plan. Prince's self-employment income (after expenses) was $123,000 and his self-employment taxes were $17,400 for the year. What is the maximum that could be contributed by the employer and Prince for the benefit of Prince for 2022? A. $43,360 B. $49,860 C. $48,120 D. $51,600

B - (123,000 - (17,400 / 2)) X .20 = 22,860 Employer Contribution $20,500 401(k) employee deferral $6,500 Age 50 Catch-up

Which of the following transactions by a qualified plan's trust are subject to Unrelated Business Taxable Income (UBTI)? 1. A trust obtains a low interest loan from an insurance policy it owns and reinvests the proceeds in a CD paying a higher rate of interest. 2. A trust buys an apartment complex and receives rent from the tenants. 3. The trust buys vending machines and locates them on the employer's premises. 4. The trust rents raw land it owns to an oil & gas developer. A. 1, 2 B. 1, 3 C. 2, 4 D. 1, 2, 4

B - 1 / 3: Subject to UBTI because income from any type of leverage or borrowing within a plan is subject to UBTI. Additionally, any business enterprise run by a qualified plan is subject to UBTI. 2: Not subject to UBTI (assuming it is not subject to leverage) due to a statutory exemption for rental income. 4: The rental of raw land is also exempt.

Which of the following is false regarding incentive stock options? 1. No regular taxable income will be recognized by the employee when the qualified option is granted or exercised. 2. The income from sale of the qualified option will always be taxed as capital gains when the stock is sold. 3. The income from sale of the qualified option will be taxed as ordinary income regardless of when the stock is sold. 4. The employer will not be able to deduct the bargain element of the option as an expense under any circumstance. 5. For favorable tax treatment the stock must be held two years from grant and one year after exercise. A. 2, 4 B. 2, 3, 4 C. 3 D. 1, 2, 5

B - 1 / 5 - True 2 - Be careful of "always" 3 - If held longer than 1 year, they receive capital gains treatment. 4 - Bargain element will be deductible if the sale is a disqualifying disposition.

Which of the following correctly describes characteristics of group universal life insurance? 1. The contract has a master group policy. 2. The employer usually pays all of the policy premiums. 3. Expenses are often lower than for individual universal life policies. 4. Policies off the potential for higher returns than whole life policies. 5. Coverage is based on a combination of decreasing units of group term and accumulating units of single premium whole life. A. 1, 2 B. 3, 4 C. 4, 5 D. 1, 2, 3

B - 1: Applies to group term life 2: False - Usually employee is required to pay part or all of the premium cost of group universal life insurance. 5: Applies to a group whole life program.

Which statement(s) accurately reflect(s) the Tax-Sheltered Annuity (TSA) provisions: 1. Salary reductions into a TSA are exempt from all payroll taxes. 2. 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. 3. Tax sheltered annuities must allow participants to invest in mutual fund, annuities and/or fixed income securities. 4. 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. 1, 2 B. 2 C. 1, 3, 4 D. 4

B - 1: Deferrals are still subject to Social Security and Medicare taxes. 3: TSAs can only invest in mutual funds or annuities and not any direct investments. 4: Total excludable contributions must be for all prior years, not just the past 3.

Which of the following is/are accurate of a Section 125 cafeteria plan? 1. 30% of the total benefits can accrue to key employees. 2. There must be at least one cash benefit. 3. Deferral of income is not allowed except through a 403(b). 4. Salary reductions can be changed at any time during the year. A. 1 B. 2 C. 2, 3 D. 1, 4

B - 1: Only 25% of the total benefits can accrue to key employees. 3: Deferrals are only allowed through a 401(k) plan. 4: Mid year changes in reductions are allowed only for qualified changes in status.

Which of the following statements is correct regarding a qualified domestic relations order (QDRO)? 1. It may require payments from a qualified plan at the plan's earliest retirement date, even if the plan participant is not retired. 2. It deals with alimony, child support, or marital property rights. 3. It directs distributions under either qualified or nonqualified plans. 4. Funds from the qualified plan can only be distributed at the later of the participant's full retirement age for Social Security benefits or death. A. 1 B. 1, 2 C. 2, 4 D. 1, 2, 3, 4

B - 1: Plan benefits may be paid to a plan participant's former spose before the plan participant has retired. 3: QDROs are only used for qualified plans, not nonqualified plans. 4: Plan benefits may be paid to a plan participant's former spouse before the plan participant has retired.

Which of the following is true regarding qualified ISOs? 1. No taxable income will be recognized by the employee when the qualified option is granted or exercised. 2. The income from the sale of the qualified option will always be taxed as capital gains when the stock is sold. 3. The income from the sale of the qualified option will be taxed as ordinary income regardless of when the stock is sold. 4. The employer will not be able to deduct the bargain element of the option as an expense under any circumstance. 5. For favorable tax treatment the option must be held 2 years and the stock for one year after exercise. A. 2, 4 B. 1, 5 C. 3 D. 1, 2, 5

B - 2: Aren't ALWAYS taxed as capital gain. Only when held for longer than 1 year. 4: Bargain element is deductible in most cases.

A client's employer has recently implemented a Cash Or Deferred Arrangement (CODA) as part of his profit-sharing plan to provide incentive to his employees. For which of the following reasons is the client advised NOT to elect to receive the bonuses in cash but to defer receipt of them until retirement? 1. The client will not pay current federal income taxes on amounts paid into the CODA. 2. The client will not pay Social Security (FICA) taxes on amounts paid into the CODA. 3. The accrued benefits derived from elective employee deferral contributions are non-forfeitable. 4. The accrued benefits from non-elective employer contributions are non-forfeitable. A. 1, 2, 3 B. 1, 3 C. 2, 4 D. 3

B - 2: Deferred comp arrangement contributions are subject to FICA taxes. 4: Contributions made by the company (non-elective) are forfeitable based on a vesting schedule.

The plan permits the employer match to deviate below the required percentage in 2 of the last 5 years. A. Profit Sharing B. Money Purchase C. SIMPLE D. DB

C - Match for profit sharing can vary each year and there is no required percentage. However, a SIMPLE can vary the match in only 2 of 5 years.

A qualified money purchase pension plan contribution (by the employer) is influenced by which of the following factors: 1. Total return on portfolio assets. 2. Forfeitures from non-vested amounts of terminated employee acconts. 3. Increases in participants' compensation due to inflation or performance-based bonuses. 4. Minimum funding as determined by an actuary. A. 1, 2 B. 2, 3 C. 3, 4 D. 2, 3, 4

B - 2: Forfeitures may reduce employer contributions due to contribution offsets or Section 415 limitation on annual additions. 3: Will result in increased contributions by the employer. *Returns on portfolio assets and actuary funding are a concern in defined benefit plans. Minimum funding is not determined by an actuary in a money purchase plan, but as a percent of covered compensation.

Which of the following statements concerning rabbi trusts is (are) CORRECT? 1. A rabbi trust is a trust established and sometimes funded by the employer that is subject to the claims of the employer's creditors, but any funds in the trust cannot generally be used by or revert back to the employer. 2. A rabbi trust calls for an irrevocable contribution from the employer to finance benefits promised under a nonqualified plan, and funds held within the trust cannot be reached by the employer's creditors. 3. A rabbi trust may not be held off-shore as a result of the American Jobs Creation Act of 2004. 4. The American Jobs Creation Act of 2004 prohibits "springing irrevocability" for a rabbi trust if there is a change of control or ownership. A. 1, 4 B. 1, 3 C. 2, 3 D. 1

B - 2: Secular trust. 4: AJCA 2004 does allow springing irrevocability in these circumstances, but not for bankruptcy.

Which of the following requirements must be met for a distribution from a qualified plan to be considered a lump-sum distribution? 1. The entire amount must be distributed during one tax year. 2. The entire value of the employee's account must be distributed. 3. Distributions can include pre-1974 accruals or post-1973 accruals, but not both. A. 1 B. 1, 2 C. 1, 3 D. 2, 3

B - 3: Accruals from pre-1974 and post 1974 can be included in a lump-sum distribution.

Which of the following accurately describes a qualified group life insurance plan? 1. The plan must benefit 70% of all employees, or a group consisting of 85% non-key employees, or a non-discriminatory class, or meet the non-discrimination rules of Section 125. 2. Employees who can be excluded are: those with fewer than 3 years service, part-time / seasonal, non-resident aliens, or those covered under a collective bargaining unit. 3. A non-discriminatory classification is one which has a bottom tier with benefits no less than 10% of the top tier and no more than 200% increase between tiers. 4. The minimum group size is 10. A. 1, 2, 3 B. 1, 2, 4 C. 1, 3 D. 1, 2

B - 3: To be correct, it should state, "A qualified group life insurance plan, if using a non-discriminatory classification, will have a bottom tier with benefits no less than 10% of the top tier and no more than 250% increase between tiers.

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

B - A: Cash Balance Plans are required to offer payment of an employee's benefit in the form of a series of payments for life. C: Neither plan shows actual gains or losses allocable to the account. D: Stated exactly opposite.

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

B - A: General eligibility is 21, not 26. C: Plan could cover part time employees, but generally not. D: Employees become part of a plan only as early as at the next available entrance date after meeting the eligibility requirements.

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

B - A: It deals with a lump sum, NOT annual contributions. C: DB plans deal with PV calculations, not FVs. D: DB plans deal with life annuities, NOT period certain annuities.

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.

B - A: Stock is forfeitable. C: It would have converted $10, not $30. D: Basis would be different.

A plan which requires annual employer contributions equal to a formula determined by each participant's salary is a... A. Profit Sharing Plan B. Money Purchase Plan C. SIMPLE IRA D. Defined Benefit Plan

B - D: Contributions are determined by age as well as salary. C: Employer has contributions determined by the amount of employee deferrals.

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

B - NPV at time 0: 0, g, CF0, 0, g, CFj, 26, g, Nj, 40000, g, CFj, 30, g, Nj, Real Rate of Return, NPV = $264,184.34 Annual Savings Required: N = 27 I = 8 PV = 264,184.34 FV = 0 PMT = $24,159

Stephen, age 60, is a participant in the stock bonus plan of Simi, Inc., a closely held business. Stephen received contributions in shares to the stock bonus plan and Simi, Inc took an income tax deduction as follows. Year 1 - 500 shares $10 / share at time of contribution. Year 2 - 100 shares $12 / share at time of contribution. Year 3 - 250 shares $14 / share at time of contribution. Year 4 - 200 shares $16 / share at time of contribution. Year 5 - 50 shares $18 / share at time of contribution. Stephen terminates employment and takes a distribution from the plan of 1,100 shares having a FMV of $20,000. He sells the stock for $25,000 6 months later. What is Stephen's LT capital gain treatment and when is it taxed? A. $5,000 B. $6,200 C. $11,200 D. $13,800

B - Ordinary Income = Company's deduction at the time of contribution $13,800 (multiply shares at time of contribution and add them up). NUA = $6,200 (20,000 - 13,800). STCG = $5,000 (25,000 - 25,000)

A small business owner in a very specialized field, establishes a SEP for his proprietorship after 2008. He has two employees of 2 1/2 years making $80,000 per year. He uses the statutory maximum exclusions for all employees. He earns $100,000 in modified earned income. What is the maximum allowable plan contribution to the owner's account? A. $16,000 B. $20,000 C. $25,000 D. $40,000

B - 100,000 X 0.20 = $20,000

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

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 contributions since she did not defer. Therefore, she is not an active participant. Since she is not 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.

Which of the following characteristics do not apply to a profit sharing plan? 1. Individual Accounts 2. Qualified Joint and Survivor Annuity (QJSA) always required. 3. Minimum funding requirement. 4. Definite contribution allocation formula. A. 1, 3 B. 2, 3 C. 1, 4 D. 1, 2, 3

B - All DC plans require individual accounts and a definite contribution allocation formula.

What is the best option to increase someone's tax deductible retirement plan contributions? A. Contribute to an IRA in addition to his profit sharing plan. B. Adopt a 401(k) plan in addition to his profit-sharing plan. C. Increase his salary D. Establish a money purchase pension plan in addition to his profit-sharing plan.

B - Allows you to defer an additional $20,500 in salary without counting against the 404 test for profit-sharing plans. A: Not deductible. D: Increases costs without increasing deductions.

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

B - Amount needed to fund retirement is $4,300,000. Inflation adjusted has already been made. Current assets will comprise $3,100,000 of the amount needed. $1,200,000 is shortfall (4,300,000 - 3,100,000). To accumulate $1,200,000 at 6% after-tax over 30 years... N = 30 (62 - 32) I = 6 PV = 0 FV = 1,200,000 PMT = $15,179

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

B - Benefits under the DB plan must be preserved. A: Wearaway was done away with as it negatively effected employees who were near retirement and resulting in employees not accruing additional benefits after a conversion from a DB to a cash balance plan. C: PBGC does not fully guarantee benefits. D: Cash balance plan has a guaranteed return. Employees do not self-direct their assets in a cash balance plan.

Which of the following statements are true in regards to Section 457 plans? 1. Eligible plan sponsors include non-profit organizations, churches, and governmental entities. 2. In-service distributions after age 59 1/2 are allowed in a 457 plan. 3. Salary deferrals are subject to Social Security, Medicare, and Federal unemployment tax in the year of the deferral. 4. Assets of the plans for non-government entities are subject to the claims of the sponsor's general creditors. A. 1, 3 B. 2, 3, 4 C. 1, 2, 4 D. 3, 4

B - Churches are not sponsors of 457 plans.

Spenser is covered under his employer's top-heavy New Comparability Plan. The plan classifies employees into one of 3 categories: owners, full-time employees, part-time employees. Assume the IRS has approved the plan and does not consider it to be discriminatory. The employer made a 4% contribution on behalf of all owners, 2% contribution on behalf of all full-time employees and 1% contribution on behalf of all part time employees. If Spenser currently earns $50,000 per year and is a full-time employee, what is the contribution that should be made for him? A. $1,000 B. $1,500 C. $20,500 D. $61,000

B - Contribution is limited to the lesser of $61,000 or covered compensation. Since the plan is top heavy, the plan must provide a benefit to all non-key employees of at least 3%, therefore, 50,000 X 3% = $1,500.

Which one of the following statements is not true for a defined benefit plan? A. Favors older participants. B. Arbitrary annual contributions. C. Requires an actuary on an annual basis. D. Maximum retirement benefit is $245,000 per year.

B - DB plans favor older participants. It also requires PBGC coverage as mandated by law and needs to be actuarially calculated.

Donald and Daisy are married and file jointly. They are both age 42, both work, and their combined AGI is $120,000. This year Donald's profit sharing account earned over $5,000. Neither he nor the company made any contributions and there were no forfeitures. Daisy declined to participate in her company's defined benefit plan because she wants to contribute to and manage her own retirement money. (Her benefit at age 65 under the plan is $240 a month.) How much of their $12,000 IRA contribution can they deduct? Assume that $6,000 is contributed to each account. A. $6,000 B. $8,700 C. $9,600 D. $12,000

B - Daisy is an active participant. She cannot opt out of a DB plan. Reduction = 6,000 X ((120,000 - 109,000) / 20,000) = 3,300 6,00 - 3,300 = 2,700 Deductible Contribution Donald is not active in the current year so he is eligible for a spousal IRA of $6,000. Their total deductible contribution would be 6,000 + 2,700 = 8,700

Your 22-year-old client is a participant in a qualified plan which has a one-year service requirement. In order to maintain its qualified status which of the following two events accurately describe the longest your client can be kept from entering the plan: 1. The first day of the plan year beginning after the date on which the employee satisfies the entrance requirement. 2. The last day of the plan year during which the employee satisfies such requirements. 3. The date six months after the date by which the employee satisfies such requirements. 4. The first day of the plan year in which the employee satisfies such requirements. A. 1, 2 B. 1, 3 C. 1, 4 D. 2, 3

B - Each plan must have 2 entry dates each year.

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

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

SEP-IRA plans are unique from defined contribution plans in which of the following areas: 1. Length of permissible exclusion from coverage based upon service. 2. Establishment date of the plan. 3. Income requirements for participation. 4. Can be paired with another plan. A. 1, 2, 4 B. 1, 3 C. 1, 2, 3, 4 D. None of the above.

B - Employees can be excluded up to 3 years or age 21, whichever is longer. Employee needs to earn only $650 to be included in the plan. Qualified plans can be established and funded up to the date of filing the entity tax return, including extensions.

Which of the following penalties are assessed when prohibited transactions occur? 1. 10% of the amount involved unless shown that ERISA fiduciary standards were satisfied. 2. Penalties can continue when ongoing transactions carry over to subsequent years. 3. The plan must be restored to a financial position no worse than if the transaction had never occurred. 4. Income tax will be assessed against those plan participants who were party to the transaction by the courts. A. 1, 3 B. 2, 3 C. 3, 4 D. 1, 2

B - First tier excise tax for prohibited transactions is 15% of the amount involved and is automatic even if the violation was inadvertent. The second tier excise tax is 100% of the amount involved and is assessed if the prohibited transaction is not remedied. There are no income taxes applied; all remedies are made through restitution and excise taxes.

Your client needs a capital amount of $2,750,000 at retirement which will occur in 30 years. They expect to live in retirement for 35 years. They are anxious to start a savings program to meet this goal. They anticipate an average after-tax rate of return equal to 7%. They are planning on 5% annual inflation. What level of savings put away at the end of each year will provide the Ruhn family with their desired retirement fund? A. $27,208 B. $29,113 C. $67,787 D. $68,884

B - If it said "in today's dollars" then you would account for inflation. N = 30 I = 7 PV = 0 FV = 2750000 PMT = 29,113

HIPAA impact an employee and employer in which of the following ways: 1. Employee without creditable coverage can generally only be excluded by the group health insurance plan (if offered) for up to 12 months. 2. The waiting period is reduced by the amount of "creditable coverage" at a previous employer. 3. If employee does not enroll in the group health insurance at the first opportunity, an 18-month exclusion period may apply. A. 1, 2 B. 1, 2, 3 C. 2, 3 D. 2

B - If you have a pre-existing condition that can be excluded from your plan coverage, 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 although some plans may have a shorter 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".

In order to deduct a contribution to an IRA, which of the following requirements must be met? 1. An individual must have earned income, either personally or jointly from a spouse. 2. Must not be an active participant in an employer-sponsored qualified plan. 3. Must be under the age of 70 1/2. 4. Must make contributions during the tax year or up to the date of filing the federal tax return for the tax year, including extensions. A. I and II only. B. I only. C. II and III only. D. IV only.

B - In 2022, 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. No extension is allowed.

Which of the following would be considered "key employees" for qualified plan testing purposes for 2022? 1. A more-than-5% owner of the employer. 2. An employee receiving compensation greater than $135,000 from employer. 3. An officer of the employer who received compensation of more than $200,000. 4. A 2% owner of the employer having an annual salary of $135,000 from the employer. A. 1, 2 B. 1, 3 C. 2, 4 D. 2, 3, 4

B - Key employee owns > 5% of the business, is an officer with comp > $200,000, or owns > 1% and has comp > $150,000.

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

B - Linda is eligible because she was married at least 10 years and has not remarried. She can take benefits regardless of whether Andrew has begun benefits. Jennifer is not eligible because she was not married to Andrew for at least 10 years. Katie is not eligible because she remarried. Deidre is not eligible even though she is currently married to Andrew, she is not old enough to receive benefits. She can only start to take benefits if he starts taking benefits.

James is covered under his employer's top heavy DB. He currently earns $120,000 per year. The DB uses a funding formula of Years of Service X Average of 3 Highest Years of Comp X 1.5%. He has been with the employer for 5 years. What is the maximum defined benefit that can be used for him for funding purposes? A. $9,000 B. $12,000 C. $61,000 D. $120,000

B - Maximum defined benefit is the lesser of $245,000 or compensation. However, the funding formula will limit his DB to $12,000 (5 X 120,000 X .02). Note that you would use 2% instead because the plan is top heavy.

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

B - Must be age 21 and one year of service, defined as 1,000 hours of service within a 12-month period. Although he meets eligibility on August 22nd of this year, he does not enter the plan until the next available entrance date (October 1st this year).

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.

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 a 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 come out in the order of contributions, conversions, and then earnings. The first $20,000 is not subject to income tax cause it is contributions. The second $20,000 is from conversions, which have been subject to taxation. However, because she rolled them over within the last 5 years, she will have a penalty and there is no exception.

Mayu made a contribution to his Roth IRA on April 15, 2016 for 2015. This was his first contribution to a Roth IRA. Over the years he has made $20,000 in contributions. On May 15, 2022 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.

B - Roth distributions are tax free if they are made after 5 years if they are due to death, disability, 59.5, or first time home purchase. Although he met the 5 year rule, he did not meet one of the four qualifying reasons. 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. This contribution is tax free, leaving only $25,000 in earnings as taxable income. The 10% penalty does not apply since it is for higher education expenses.

Client, age 54, earns $40,000 per year from his company and is a participant in its employer's 401(k) plan. The plan is a qualified automatic contribution arrangement. Ignoring any top-heavy test requirements, what is the maximum amount that the client can defer in the 401(k) plan in 2022? A. $20,500 B. $27,000 C. $61,000 D. $67,500

B - Since they are 50+, they can use catch-up provision which adds an additional $6,500.

A financial planner's client has an IRA with a balance of $140,000 as of January 1. On April 15 of the same year, the client withdraws the entire amount from the IRA and places it in a non-IRA CD for 60 days, earning 9% interest. On the 60th day, the client promptly and timely reinvests the principal of the CD in an IRA containing an aggressive growth fund. On September 15 of the same year, the client becomes dissatisfied with the return and the variability of the investment. The client wants a less risky investment and wants assurance that any IRA distribution will not be taxed at the time of the change. Which of the following is/are acceptable alternatives for the client? 1. Withdraw the funds and reinvest them within 60 days in an IRA that invests exclusively in Treasury instruments. 2. Direct the trustee of the IRA to transfer the funds to another IRA that invests exclusively in Treasury instruments. 3. Withdraw the funds and reinvest within 60 days in an IRA that is an index mutual fund holding common stocks with portfolio risk equal to the SP500. A. 1 B. 2 C. 2, 3 D. 1, 2, 3

B - The client ahs already made a nondirect withdrawal (60-day rollover) this year; therefore, statement 1 is incorrect because they cannot have another rollover within the same year. 2: Permitted alternative 3: Not permitted without the proceeds being included in taxable income and it is the same as statement 1.

Which of the following statements concerning loan provisions in qualified retirement plans is correct? A. Loans must be available to plan participants only after three years of plan participation. B. No loan can exceed $50,000. C. The term of a loan usually cannot exceed three years. D. Because employees are borrowing their own money, no interest need be charged.

B - The loan can be up to 50% of the employer's accrued balance or $50,000, whichever is less. There are mandatory repayments which must occur at least quarterly. The term of the loan can be for a maximum of 5 years, unless the proceeds are used to purchase a residence, then the loan can be for a longer period of time. Most plans have a minimum participation requirement of 2 years before loans are available. A reasonable interest rate must be charged. Many plans have a minimum loan amount of $10,000.

Chad, who just turned 48, owns 15% of FTT and earns $200k per year and is a participant in his employer's 401(k) plan, which includes a qualified automatic contribution arrangement and the associated mandatory non-elective contribution. The actual deferral percentage test for the non-highly compensated employees is 2.5%. FTT made a 20% profit sharing plan contribution during the year to Chad's account. What is the maximum amount that Chad can defer to the plan in 2022? A. $14,000 B. $15,000 C. $20,500 D. $27,000

B - The plan avoids ADP testing because it is a QACA. The ADP is irrelevant. The non-elective contribution on a QACA is 3% as a standard part of the plan. Employer is contributing $40,000 to the profit sharing plan, plus $6,000 as a non-elective contribution (3% of $200,000). Since the 2022 limit is $61,000, Chad can only contribute $15,000.

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

B - These plans PERMIT withdrawal flexibility.

A client's employer has recently implemented a CODA as part of his profit-sharing plan to provide incentive to his employees. The client is advised not to elect to receive the bonuses in cash but to defer receipt of them until retirement for which of the following reasons? 1. The client will not pay current federal income taxes on amounts paid into the CODA. 2. The client will not pay Social Security (FICA) taxes on amounts paid into CODA. 3. The accrued benefits derived from elective contributions are nonforfeitable. 4. The accrued benefits from non-elective contributions are nonforfeitable. A. 1, 2, 3 B. 1, 3 C. 2, 4 D. 1, 2, 3, 4

B - Under a 401(k) plan, deferrals are not subject to income tax, but are subject to payroll taxes (FICA). In addition, these deferrals are not subject to forfeiture since they are the contributions of the employee.

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

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

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

C

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

C

Which of the following statements concerning stock bonus plans and ESOPs is true? 1. They both give employees a stake in the company through ownership and allow taxes to be delayed on stock appreciation gains. 2. 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 is their stock is not readily tradable on an established market. A. 1 B. 2 C. 1, 2 D. Neither 1, 2

C

Which of the following statements is accurate regarding 401(k) plans? A. 401(k) plan must allow participants to direct their investments. B. Deferrals into the 401(k) plan must be contributed by the end of the following calendar quarter into the plan. C. Employees that join the plan must be provided with a summary plan description. D. A 401(k) plan is financially safe because it must have an annual audit.

C

Which of the following statements regarding an age-based profit sharing plan is correct? A. An age-based profit sharing plan provides a greater benefit to those plan participants whose earnings exceed the Social Security wage base and who are over 50 years old. B. An age-based profit sharing plan only provides a benefit to those plan participants whose age is within 10 years of the age of the owner of the plan sponsor. C. An age-based profit sharing plan provides greater benefits to the older plan participants. D. Younger plan participants in an age-based profit sharing plan usually receive the majority of the profit sharing plan allocation.

C

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.

C

Which of the following statements are accurate for a profit sharing plan? A. Leveraging is permitted and the employer's contributions may be made in non-cash assets. B. Voting rights must be passed through to the participating employees. C. The plan must be integrated with Social Security. D. The plan must comply with the prudent investor diversification requirements.

C A: Only LESOP is able to leverage employer securities within a qualified plan. B: Voting rights do not have to be passed through to employees except in ESOPs. D: Typical 10% restriction on employer stock ownership under the "prudent investor" rule is not applied.

All of the following people would be considered a highly compensated employee for 2022 except? A. Kara, a 1% owner whose salary last year was $140,000. B. Shanda, a 6% owner whose salary was $42,000 last year. C. Elizabeth, an officer, who earned $80,000 last year and is the 29th highest paid employee of 96 employees. D. Deann, who earned $136,000 last year and is in the top 20% of paid employees.

C Highly compensated employees are: 1. > 5% owner at any time during the plan year or preceding plan year. 2. Employee with compensation > $135,000 for the prior plan year and is in the top 20% of all paid employees.

In order to be qualified, money purchase plans must contain which of the following? 1. A definite and non-discretionary employer contribution formula. 2. Forfeitures can be reallocated to the remaining participants' accounts in a non-discriminatory manner or used to reduce employer contributions. 3. An individual account must be maintained for each employee of employer contributions. 4. The normal retirement age must be specified. A. 1, 2 B. 2, 4 C. 1, 2, 3 D. 2, 3, 4

C - 4: A normal retirement age must be stated in a DB plan.

This plan can provide for voluntary participant contributions which must be matched by the employer. A. Profit sharing with 401(k) component. B. Money Purchase Plan C. SIMPLE IRA D. Defined Benefit Plan

C - A: Does not require employer match.

Calculate the maximum contribution that could be contributed for an employee, age 41, earning $140,000 annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary. A. $16,800 B. $20,500 C. $37,300 D. $61,000

C - Maximum 401(k) is $20,500. 12% money purchase adds $16,800 (140,000 X .12) Add these together to get $37,300

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

C - A: High savings and low spending in your early working years to allow early retirement as young as your 40s. B: Minimalistic lifestyle where investment or supplemental income only covers basic necessities. D: Acquiring values, beliefs, and behaviors that are acceptable and or expected by society, and not part of the alternative views for retirement.

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

C - A: No income at the date of grant because strike = FMV. B: No regular tax for ISOs.

Which of the following statements concerning COBRA is correct? A. An employer's plan is exempt from COBRA provisions if the employer averages 25 or fewer employees. B. Continuation coverage must be available to terminating employees, but not to full-time employees shifting to part-time status. C. After 36 months, the maximum period for continuation of coverage terminates. D. The government imposes a non-compliance fine on the employer equal to $10 per day per participant.

C - A: Must provide COBRA if they have > 20 employees. B: Change in benefit status will trigger COBRA eligibility. D: COBRA non-compliance carries a penalty of $100 per day per participant.

Which of the following statements are accurate concerning integration ("permissible disparity") rules for qualified plans? 1. The integration base level for a defined contribution plan can exceed the current year's Social Security taxable wage base. 2. Permitted disparity levels reduce benefits in a defined benefit plan if employee retires early. 3. It isn't possible to have a defined benefit plan formula which eliminates benefits for lower paid employees. A. 1 B. 1, 2 C. 2, 3 D. 1, 3

C - 1: Integration levels cannot be higher than the Social Security wage taxable base. It may be lower, but cannot be higher.

Carolyn Smart wanted to volunteer full-time and decided to retire from Lotsa Cash Corporation at the age 57, after 15 years of service. She requested a total distribution of her account in the Lotsa Cash Corporation's profit sharing plan and received a check, made payable to her. Her account balance was $60,000 on her final day of employment. Which of the following statements describe the consequences of this distribution? 1. Eligible for 10 year forward averaging 2. Subject to 10% penalty 3. Eligible for Rollover 4. Subject to mandatory 20% withholding 5. Exempt from the 10% early withdrawal penalty A. 1, 2, 3 B. 2, 3, 4 C. 3, 4, 5 D. 3, 4

C - 1: She is not old enough. 2: She is not subject to this since this is a qualified plan and she is over 55 (waived for separation of service after age 55). 4: Distributions from qualified plans are subject to mandatory 20% withholding.

Joe is considering taking a position with a new employer at a salary of $150,000. His salary would make him a highly compensated employee in the new company. His previous employer, where he also earned $150,000, has been making the maximum allowed contributions to a money purchase plan. The new company has a 401(k) plan. Joe wishes to continue the highest possible level of pretax deferred savings for retirement. Identify all of the options available to Joe through the new employer's 401(k) plan. 1. Have salary deferrals made in his new 401(k) plan equal to the amounts his previous employer contributed to his profit sharing plan. 2. Take advantage of employer matching in the 401(k) plan, if available. 3. Have the employer make qualified non-elective contributions to his account, if available. 4. Contribute the maximum allowable through salary deferral. A. 1, 2 B. 1, 2, 3 C. 2, 4 D. 2, 3, 4 E. 3, 4

C - 1: The limit on 401(k) is $20,500 and his former employer was contributing 25% of compensation ($37,500). 3: This technique is used to increase amounts to nonhighly compensation employees to meet the ACP test.

Which combination of the following statements is true about a 401(k)? 1. The employee must have a choice of receiving an employer contribution in cash or having it deferred under the plan. 2. Section 401(k) states that during the first year of participation in a qualified CODA, the vested benefit derived from employee contributions can be forfeited if the employee is terminated. 3. As a condition of participation, the plan requires that an employee completes at least 3 years of service with the employer. 4. In addition to an indexed limitation for any taxable year on exclusions for elective deferrals, the law caps the amount of pay that can be taken into consideration for qualified plans. A. 1, 2, 3 B. 2, 4 C. 4 D. 1, 3 E. 2, 3, 4

C - 4: 2022 limit for covered comp is $305,000. Under CODA, employees can elect either to participate and contribute to the retirement plan or retain their compensation and not participate.

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.

C - A: There are limits to the deductibility of contributions to a qualified plan. Generally, 25% of covered compensation can be deducted for a year. B: Employee contributions are subject to payroll tax. D: IRS can get to assets in a qualified plan as well as spouses via a QDRO.

Cafeteria plans have which of the following characteristics? 1. Must offer a choice between at least one qualified "pre-tax" benefit and one non-qualified "cash" benefit. 2. Medical FSAs can reimburse medical expenses not covered by insurance for the participant and all dependents. 3. Changes in election amount during the plan year can only occur with a "qualifying change in family status". 4. Salary reductions are not subject to income taxes but payroll taxes apply. A. 1, 2, 4 B. 2, 3, 4 C. 1, 2, 3 D. 1, 2, 3, 4

C - Cafeteria plans allow salary reductions which are taken from an employee's salary before Federal and State withholding tax as well as Social Security taxes.

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

C - D: The contributions were tax-deductible and therefore the taxpayer does not have basis in the IRA.

A SEP-IRA is a form of defined contribution plan (although not a qualified plan). Which of the following apply to BOTH the SEP-IRA and a traditional defined contribution plan? 1. Employer deductions limited to 15% of covered payroll. 2. Requires a definite, written, non-discriminatory contribution allocation formula. 3. Contributions cannot discriminate in favor of highly compensated employees. 4. Employer contributions subject to Medicare and Social Security taxes. 5. Affiliated service group rules apply. 6. Top-heavy rules do NOT apply. 7. Permissible disparity or integration is NOT allowed. A. 1, 2, 6, 7 B. 2, 3, 6, 7 C. 2, 3, 6 D. 1, 2, 3, 6, 7

C - DC plans have an employer deductibility limit of 25% of covered payroll. All DC plans must have a written allocation formula so assets can be distributed in the mandated individual accounts. Employer contributions must bear uniform resemblance to compensation and cannot discriminate in favor of highly compensated. Employer contributions are not subject to any payroll related taxes. Top-heavy rules do apply to both. Both plans can integrate with Social Security.

Which of the following apply to qualified retirement plans in the US? 1. Relatively small portion of the economy. 2. Tax exempt 3. Deductible to the Employer 4. Exempt from federal regulation A. 1, 4 B. 2, 4 C. 2, 3 D. 1, 2, 3

C - Retirement plans constitute over 10% of the GNP in the US economy. The plans themselves are exempt from taxation and employers do receive a tax deduction for qualifying contributions. Qualified plans are highly regulated.

Which of the following correctly describes the tax implications of a self-funded accident or medical plan where the employer reimburses the employee directly? 1. In a discriminatory plan, the employer cannot deduct the reimbursements paid to the employee. 2. In a discriminatory plan, a highly-compensated employee must include the excess benefit in their income. 3. In a non-discriminatory plan, the benefits received by employees are generally tax free without limitation. 4. 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. 5. In a discriminatory plan, benefits received by non-highly compensated employees are generally tax free without limit. A. 1, 2, 4 B. 2, 3, 4 C. 3, 4, 5 D. 1, 3, 4, 5

C - Self-insured plans are ones in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, self-insured employers pay for claims out-of-pocket as they are presented instead of paying a pre-determined premium. 1: False because the employer can always deduct the premiums. Reimbursements to employees in a self-funded plan are considered the premiums as traditional premiums are not paid to an insurance company, the employer funds the cost. 2: Highly compensated employees may be required to pay taxes on all or part of the reimbursements.

Your client, Sue, age 35, is covered by a pension plan at work, but her spouse, age 37, is not covered by a pension plan. Her salary is $45,000 and his salary is $50,000. How much will go into his account if he contributes the maximum amount to a maximum funded, matching SIMPLE IRA? A. $14,000 B. $19,000 C. $15,500 D. $20,500

C - $14,000 contribution and his employer will match $1 for $1 up to 3% of salary (50,000 X .03 = 1,500). 14,000 + 1,500 = 15,500

Company has an integrated defined benefit pension plan. The plan is funded using a formula of Years of Service X Average of 3 Years Highest Compensation X 1.5%. If Geoffrey has been there for 40 years what is the maximum disparity allowed using the excess method? A. .75% B. 5.7% C. 26.25% D. 60%

C - 35 years and .75% are the maximums that an be used under the excess method. 26.25% = 35 years X .75%

Which of the following statement(s) regarding 403(b) plans is true? A. Assets within a 403(b) plan may be invested in individual securities. B. A 403(b) plan usually provides a 3 to 7 year graduated vesting schedule. C. A 403(b) plan must pass the ACP test if it is an ERISA plan. D. In certain situations, a participant of a 403(b) plan can defer an additional $9,500 as a catch up to the 403(b) plan.

C - 403(b) plan assets cannot be invested in individual securities, and employee contributions to 403(b) accounts are always 100% vested. 3 / 4: True - If employee qualifies for the 15 year rule, the maximum elective deferral for 2022 may be as high as $30,000 ($20,500 deferral, plus $3,000 from 15 year rule, plus $6,500 for the 50+ catch-up provision).

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

C - 403(b) plan is tax-advantaged (tax qualified), not a qualified retirement plan. All others are subject to ERISA rules.

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

C - Allows employees to make pre-tax contributions. Also, the plan is low cost, and 3% contribution would satisfy the employer matching contribution requirements of a SIMPLE plan. A/B/D: All have higher cost structures and do not meet the requirement of a low-cost plan.

Which of the following changes would not be permitted under the anti-cutback rules? A. Changing the benefit accrual for the defined benefit plan from 3% per year to 2% per year for future years. B. Reducing the money purchase pension plan contribution from 6% to 3% for future years. C. Decreasing the maximum benefit under the defined benefit plan from 70% to 50% for all future retirees. D. Switching the vesting for the money purchase pension plan from 3 year cliff to 2 to 6 graduated vesting.

C - Anti-cutback rules state that you cannot "cutback" benefits that have been accrued to date. A / B: Affect future benefits. C: More likely impact current employees who may have accrued 70% benefits, but who have not yet retired. The change would result in a reduction in benefits and is not permitted D: Permitted change and would not result in a reduction in current vesting.

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

C - Broad employee participation is a requirement of a tax-advantaged retirement plan.

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) that generates $200,000 of revenue and $50,000 of expenses. Assume their self-employment tax is $20,000. What is the most that he could contribute to all of the retirement plans this year assuming he establishes a Keogh plan for the DEC? A. $48,500 B. $58,500 C. $69,000 D. $73,000

C - Can contribute $20,500 to each of the 403(b) and 457 plan. In addition, he can establish a Keogh plan and contribute 20% of his net self-employment income after deducting 1/2 self-employment taxes. $150k - 10,000 = $140k X .20 = $28k 28k + 20.5k + 20.5k = 69,000

Which of the following clauses in a 401(k) plan can assist the plan in meeting the requirements of the ADP test? A. Attestation Clause B. No-Contest Clause C. Negative Election Clause D. Deferral Plan Clause

C - Can help 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. A: Does not exist D: Does not exist B: Found in will.

Calculate the maximum contribution (both employer and employee elective deferrals) for an employee (age 39) earning $320k annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money purchase pension plan with an employer contribution equal to 12% of salary. A. $20,500 B. $38,400 C. $57,100 D. $61,000

C - Compensation exceeding $305,000 is not recognized. The employer is contributing 12% of $305,000 for the money purchase plan and the employee may contribute up to $20,500 in 2022 to the 401(k) plan. This totals $57,100.

ohn and Connie, both age 35, are a married couple. Based on their retirement goal, a CFP® professional has determined that they need to save $10,000 per year in order to retire at their desired age of 65. John works for a pharmaceutical company, where he earns a $200,000 annual salary. The company sponsors a 401(k) plan, but does not offer a matching contribution. Connie works for an advertising company, drawing a $62,500 annual salary. She is currently contributing 8% of her salary to the company's 401(k) plan, which offers a dollar-for-dollar match up to 8%. What would be the best option for the CFP® professional to suggest to the couple with respect to their retirement savings goal? A. Suggest John make a 5% contribution to his 401(k) plan, in addition to Connie's contribution to her 401(k) plan. B. Suggest only John contribute 5% to his 401(k) plan. C. Suggest Connie continue to contribute 8% to her 401(k) plan, with John making no contribution. D. Suggest John make a 2.5% contribution to his 401(k) plan, and Connie make a 5.5% contribution to her 401(k) plan.

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

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 this year? A. $6,500 B. $11,000 C. $14,500 D. $20,500

C - Considered highly compensated since they are > a 5% owner. Maximum that he can defer to satisfy the ADP requirements is 4.5% (2.5% + 2%) and since they are over 50, he can defer the additional $6,500 as a catch-up contribution. Alex can defer $8,000 (4.5% X 177,778) and $6,500 (catch-up) for a total of $14,500.

Robert Sullivan, age 56, works for Dynex Corporation, and earns $320,000. Dynex Corp provides a non-elective 2% contribution to its SIMPLE IRA plan. Which one of the following is the maximum amount that could go into Robert's account this year? A. $14,000 B. $20,500 C. $23,100 D. $23,400

C - Covered compensation limit of $305,000 applies here. 14,000 + 3,000 (catch up) + 6,100 (305,000 X .02) = $23,100

Your client has been a business owner for six years. He recently established a SEP for his business. He has two employees of 24 months making $22,000 per year. He asked you to use the statutory maximum exclusions for all employees, including himself. He has self-employment earnings of $78,000. Assume he has self-employment tax of $11,000. The maximum plan contribution to the owner's account will be: A. $19,500 B. $57,000 C. $14,500 D. $13,600

C - Maximum contribution is 25%. (78,000 - (1/2 X 11,000)) X 0.20 = $14,500

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

C - DB is not top heavy. The vesting for the DB plan is a 7 year graded schedule and she is 60% vested in the $10,000. She is 100% vested in the $40,000, but only 80% vested in the employer matching contribution. DB: 5 year cliff or 7 year graded. DC: 3 year cliff or 6 year graded. DB $10,000 and 60% Vested = $6,000 DC EE Contribution $40,000 and 100% Vested = $40,000 DC ER $20,000 and 80% Vested = $16,000 Total Vested = 40,000 + 16,000 + 6,000 = $62,000

Select those statements which accurately reflect characteristics of defined contribution plans? 1. Allocation formula which is indefinite. 2. Account value based benefits. 3. Employer contributions from business earnings. 4. Fixed employer contributions based upon terms of the plan. A. 1, 2 B. 2, 3 C. 2, 4 D. 1, 2, 3

C - DC plans must have a definite allocation formula based upon salary and/or age or any other qualifying factor. Contributions may be made without regard to company profits and because it is a pension plan, are fixed by the funding formula and must be made annually.

One of the disadvantages of an ESOP is that the stock is an undiversified investment portfolio. Which of the following statements is correct about ESOPs? 1. Employee, age 55 or older, who has completed 10 years of participation in an ESOP may require that 25% of the account balance be diversified. 2. An employee who receives corporate stock as a distribution from an ESOP may enjoy net unrealized appreciation treatment at the time of distribution. A. 1 B. 2 C. 1, 2 D. Neither 1 or 2

C - ESOP distribution in stocks are NUA. Employees in an ESOP may demand 25% of the current balance be diversified.

To retain its qualified status, a retirement plan must: 1. Have pre-death and post-death distributions. 2. Stipulate rules under what circumstances employee contributions are forfeited. 3. Be intended to be permanent. 4. Be established by the employer. A. 1, 2 B. 2, 3, 4 C. 1, 3, 4 D. 1, 2, 3, 4

C - Employee contributions must be vested and cannot be required to be forfeited.

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

C - Employee is required to pay part or all of the premium cost of group universal life insurance.

Jessie and Carl have been married for 12 years and Jessie gave birth to triplets 4 years ago. Jessie is a Regional Director for a distribution company that offers a 401(k) plan with no match, and Carl is a stay-at-home dad. They are currently in the 24% tax bracket and expect to be in a lower tax bracket in retirement. The best funding vehicle for Jessie and Carl would be: A. Non-deductible traditional IRAs for each of them. B. Flexible premium deferred annuity. C. Jessie's 401(k) D. Roth IRA

C - Even though their 401(k) does not offer a match, it would provide a current income tax deduction.

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

C - If individual has multiple traditional IRAs, the RMD must be calculated separately for each traditional IRA annually. However, the RMDs can be aggregated and the aggregate amount can be distributed from one of the traditional IRAs if the individual desires. A separate minimum distribution must be taken from each qualified plan annually. Roth IRAs do not require minimum distributions.

Which of the following accurately describes the characteristics of a "Rabbi trust"? 1. It is an irrevocable trust but assets are still subject to the employer's creditor demands. 2. The employee is taxed immediately on assets placed into the trust because the trust is irrevocable and the employer doesn't have access to those assets. 3. Retirement payments out of the trust are subject to ordinary income taxes. 4. The survivor's benefit, payable under the trust provisions, will not be included in the survivor's gross estate because it is considered a payment of life insurance. A. 1 B. 1, 2 C. 1, 3 D. 2, 3, 4

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

Which of the following types of funding vehicles is eligible (approved) for TSAs? 1. Fixed Annuity Contracts. 2. Life Insurance policy which develops large cash values. 3. Mutual funds. 4. Variable annuity contracts. 5. Custodial accounts holding individual stocks and bonds. 6. Credit union share account. A. 1, 2, 3, 4, 5, 6 B. 1, 3, 4, 5, 6 C. 1, 3, 4 D. 1, 6

C - Life insurance can only be incidental in the plan. Bank and credit union accounts are not eligible. Custodial accounts can only hold mutual funds. TSA can be invested in annuities and mutual funds.

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

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

Which statements accurately reflect the provisions for a self-employed owner (partnerships and sole proprietorships) in a small business pension plan? 1. Loans are available to owners and employees alike, if each has equal right and terms of the loans. 2. Contributions for owners are based on net earnings rather than wages. 3. Contributions for employees (as percentage of salary) is the same as for the self-employed owner (as a percentage of profit). 4. Lump-sum distribution tax treatment allowed for employees. A. 1, 3 B. 2, 4 C. 1, 2, 4 D. 1, 2, 3, 4

C - Owners must do a conversion so owner's contribution as a percentage of profits is lower than the employees percentage of wages earned.

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%.

C - Parent-subsidiary companies must have substantially equal benefits or cover employees of all subsidiary companies under the same plan.

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. Bottom band of benefits must be less than 10% of the top band with no more than a 2 times differential between bands.

C - Plan must benefit 70% of all employees or a group of which at least 85% are not key employees. 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.

Which of the following are true regarding a rabbi trust? 1. The trust is revocable and the employer can always rescind it. 2. The employer may fund the trust form the general assets of the company. 3. Employer contributions to the trust are exempt from payroll taxes. 4. The trust's assets may be used for purposes other than discharging the obligation to the employee. A. 1, 2, 3 B. 1, 4 C. 2, 3, 4 D. 2 E. 4

C - Rabbi trust is generally used with a non-qualified deferred compensation plan. 1: The trust is not revocable. 3: True for employer contributions. *Assets in the trust ca be used to discharge the indebtedness of the employer. This creates substantial risk of forfeiture and allows the deferred comp to not be treated as taxable income.

Which of the following are permitted under a VEBA? 1. Life, sickness, and accident benefits. 2. Retirement benefits 3. Severance and supplemental unemployment. 4. Job Training 5. Commuter Benefits A. 1, 2, 3 B. 2, 4 C. 1, 3, 4 D. 2, 3, 4

C - Retirement and commuter benefits cannot be included in a VEBA.

Which of the following describe benefits usually available under an employer-provided short-term disability plan? 1. Short-term disability coverage will start on the first day when disability is related to an illness. 2. The definition of disability under short-term disability coverage is defined as the inability to perform the normal duties of one's position. 3. Benefits under a short-term disability plan usually extend for one year. 4. Generally, short-term disability coverage will start after sick pay benefits have been provided to a covered employee. A. 1, 2 B. 3, 4 C. 2, 4 D. 1, 2, 3

C - ST disability benefits usually start the 8th day of an illness (first day of an accident) and generally last no more than 6 months.

Complex Corporation is ready to adopt a profit sharing plan for eligible employees. Which of the following groups would have to be considered in meeting the statutory coverage and participation tests? 1. Employees of Simple Corporation, in which Complex owns 85% of the stock. 2. Employees of Universal Corporation, in which Complex owns 55% of the stock. 3. Rank and file workers at Complex who are union members with a contract that provides retirement benefits as a result of good-faith collective bargaining. 4. Employees who are leased and covered by the leasing corporation's profit sharing plan. A. 1 B. 1, 2 C. 1, 4 D. 2, 3

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

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 ahs 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's options are qualified and Nick's are non-qualified. B. Nick's options are non-qualified and Betty's are non-qualified. C. Nick's options are non-qualified and Betty's are either qualified or non-qualified. D. Betty's options are non-qualified and Nick's options are qualified.

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

Marilyn Hayward is the sole proprietor and only employee of unincorporated Graphics for Green Promotions. In 2022, Marilyn established a profit sharing Keogh plan with a 25% contribution formula. As of December 31, 2022, Marilyn has $140,000 of Schedule C net earnings. The deduction for 1/2 of the self-employment tax is, therefore, $9,891. What is the maximum allowable Keogh contribution that Marilyn can make? A. $20,500 B. $24,311 C. $26,022 D. $32,560

C - Since half of the self-employment tax is given, you can skip the first step in the self-employment contribution formula. 140,000 - 9,891 = 130,109 X .20 = $26,022

Transport Inc. sponsors a qualified plan that requires employees to complete the standard eligibility requirement before entering into the plan. The plan also excludes all other employees as permitted under the code. Which of the following employees would be covered under the plan? A. Jessica, age 32, who has been a secretary for the company for 4 years and works 500 hours per year. B. Brian, age 20, who works in accounting and has been with the company for 23 months. C. Marjorie, a commissioned sales clerk, who works in the Atlanta office. Marjorie is 25 years old and has been with the company for 4 years. D. Peter, age 29, who works in the factory. Peter has been with the company for 9 years and is covered under a collective bargaining agreement.

C - Standard eligibility means 21 and 1 year of service defined as at least 1,000 hours in a 12 month period.

Which of the following statements is/are characteristics of tax-sheltered annuities (TSAs)? 1. Salary reduction contributions are not reported as W-2 income and are not subject to Social Security tax. 2. Maximum salary deferral limit is $20,500 for a newly hired employee, age 30. 3. Employer contributions are deductible. 4. Loans and catch-up contributions may be permitted. A. 4 B. 1, 3 C. 2, 4 D. 1, 2, 3 E. 1, 2, 3, 4

C - TSAs are nonprofit, nontaxed entities. 1: Wrong because salary reduction contributions are subject to Social Security tax. 2: Correct for newly hired employees. Employees who are eligible for the catch-up provisions may defer more. 3: Incorrect since 501(c)(3) organizations are nontaxable entities and, therefore, do not have any deductions. 4: Correct

An employee retired under a DB plan at the end of 2023. Her highest consecutive annual salaries were $90,000, $100,000, and $110,000 respectively in 2021, 2022, and 2023. What is the maximum annual benefit that could have been paid to her under the plan? A. $30,000 B. $90,000 C. $100,000 D. $220,000 E. There is no limit on benefits under a DB plan.

C - The maximum benefit under a defined benefit plan cannot exceed the average of the 3 highest consecutive earnings years within the limit of covered compensation.

Fred's Po-boy shop sponsors an age based profit sharing plan and contributes 20% of total covered compensation to the plan. What is the most that could be contributed by the employer to Will's account if his annual compensation is $230,000 for 2022? Assume Will is 58 years old. A. $46,000 B. $52,500 C. $61,000 D. $64,500

C - The most that could be contributed is the annual 415(c) limit of $61,000 for 2022. There is no indication that if the company contributes 20% that everyone will receive exactly 20%.

Which statements below accurately reflect characteristics of the Tax Sheltered Annuity (TSA)? 1. Annuity payments from a TSA are taxed using the three-year rule. 2. Employers may make matching contributions or contribute a fixed percentage. 3. An employee under age 50, who contributed $8,000 to a 401(k) plan is limited to contributing a maximum of $12,500 to a salary reduction TSA. 4. At the TSA owner's death, the full amount of proceeds paid to beneficiaries is included in the gross estate of the decedent. A. 1, 2, 3 B. 1, 2, 4 C. 2, 3, 4 D. 1, 3, 4

C - Total salary reductions for qualified 401(k) and TSA is limited to the $20,500 per year limit in 2022. Contributions to 401(k)s and 403(b)s are aggregated such that they may not exceed the total annual limit. The TSA has make up provisions that allow certain employees to make up contributions that could have been made in the past but were not. All assets in qualified plans are part of the gross estate of the account owner. Employers may make matching contributions or contribute a fixed percentage of an employee's compensation to a TSA.

Jake established a traditional IRA 5 years ago at a local financial institution. He is considering the purchase of a limited partnership interest with his IRA funds. A CFP professional would inform him that some of the income earned by the LP may be taxable to Jake because of which rules? A. Front-Loading B. Prohibited IRA investments C. Unrelated business taxable income. D. At Risk Rule

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

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

C - Vesting rules are a 3 year cliff or 2-6 year graded vesting schedule.

Company sponsors a 401(k) profit sharing plan with a 50% match. In the current year, the company contributed 20% of each employee's compensation to the profit sharing plan in addition to the match to the 401(k) plan. The company also allocated a forfeiture allocation of $7,000. The ADP of the 401(k) plan for the NHC is 4%. Wade, who is 45, earns $195,000 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. $20,500 B. $11,700 C. $10,000 D. $5,000

C - Wade is highly compensated since he is more than a 5% owners, so the maximum he can defer to satisfy the ADP test is 6% (4% + 2%). Wade is also limited to the 415(c) limit of $61,000. Since the company contributes $46,000 (20% of $195,000 + $7,000 of forfeiture allocations), he only has $15,000 to split between the deferral and the match. Thus, he contributes $10,000 and the match is $5,000

Eric's company issued him both ISOs and NQSOs during the current year. Which of the following would be the most compelling reason why they might issue both ISOs and NQSOs? A. They want to issue over $80,000 in options that are exercisable in the same year. B. The NQSOs and ISOs are exercisable in different years. C. The company wants to provide the NQSOs to assist the individual in purchasing the ISOs. D. Since they are virtually the same, there is no compelling reason to issue both in the same year.

C - When both ISOs and NQSOs are available in the same year the individual can exercise and sell the unfavored NQSOs to generate enough cash o purchase and hold the favored ISOs. It would also be valuable to have both if they issued over $100,000 in options exercisable in the same year because there is a $100k limit on ISOs.

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

C -Dues and licenses are excluded from taxable income if directly related to the employee's job.

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? 1. When the benefits are from life insurance, the cash value portion is taxed under the annuity rules. 2. When benefits are from "pure insurance", the amount is excludable from gross income. 3. If the benefits are from funds not related to life insurance, the includable amount is taxed as ordinary income. 4. If the benefits are not related to life insurance, the beneficiary's cost basis is equal to the participant's cost basis. A. 2, 4 B. 1, 3, 4 C. 1, 2, 4 D. 1, 2, 3, 4

D

Based upon the Internal Revenue Code, which of the following statements is / are accurate? 1. Medical expenses paid as a benefit to a surviving spouse are excludable from gross income only to the extent they would have been excluded if they had been paid to the employee. 2. Highly-compensated employees may lose their tax-free status of medical benefits under a self-insured plan which is discriminatory. 3. A highly-compensated employee may be taxed on part of their medical expenses for which they are reimbursed under a discriminatory self-insured plan, even if the same benefits are available to all workers. A. 1 B. 2 C. 1, 2 D. 1, 2, 3

D

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

D

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 questions that must be addressed as essential and pertinent to the stock option issue? 1. What is the earliest date you can exercise the option? 2. What do you need to do when you exercise the option? 3. Can you exercise using stock you own? 4. When will the option terminate? 5. Can you exercise after your employment terminates? A. 1, 3, 5 B. 2, 4 C. 4 D. 1, 2, 3, 4, 5

D

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

D Definitions of disability are much more liberal under ST disability than LT disability.

Which of the following are basic provisions of an IRC Section 401(k) plan? 1. Employee elective deferrals are exempt from income tax withholding and FICA / FUTA taxes. 2. Employer's deduction for a cash or deferred contribution to a Section 401(k) plan cannot exceed 25% of covered payroll reduced by employees' elective deferrals. 3. 401(k) plan cannot require, as a condition of participation, that a full-time employee complete a period of service greater than 1 year. 4. Employee elective deferrals may be made from salary or bonuses. A. 1, 3 B. 1, 4 C. 2, 4 D. 2, 3, 4

D - 1: All CODA plans, including 401(k)s, subject the income to Social Security and Medicare tax even though Federal and state income tax is deferred by placing the income into the plan. 3: A 401(k) CANNOT require 2 years of service before participation. The 2 years of service rule is for qualified plans other than 401(k). A 401(k) can require 2 years of service for employer matching, not employee participation. All employees age 21 with 1 year of service can participate.

Which of the following characteristics are found in both a defined contribution plan and a defined benefit plan? 1. Individual Accounts 2. Actuarial Assumptions Required 3. Retirement benefits based on account values. 4. Employer bears investment risk. A. 1 B. 2, 4 C. 1, 3, 4 D. None of the above

D - 1: DC 3: DC 2: DB 4: DB

In a DC plan that utilizes plan forfeitures to reduce future employer plan contributions, which of the following components must be factored into the calculation of the maximum annual addition limit? 1. Forfeitures that otherwise would have been reallocated. 2. Annual earnings on all employer and employee contributions. 3. Rollover contributions for the year. 4. Employer and employee contributions to all defined contribution plans. A. 1, 2, 3 B. 1, 3 C. 2, 4 D. 4

D - 1: Forfeitures which are not allocated to individual accounts are not considered annual additions. 2: Earnings are not considered annual additions. 3: Rollovers are previous contributions and earnings so they are not calculated as annual additions.

In a money purchase pension plan that utilizes plan forfeitures to reduce future employer plan contributions, which of the following components must be factored into the calculation of the maximum annual addition limit? 1. Forfeitures that otherwise would have been reallocated. 2. Annual earnings on all employer and employee contributions. 3. Rollover contributions for the year. 4. Employer and employee contributions to all defined contribution plans. A. 1, 2, 3 B. 1, 3 C. 2, 4 D. 4 E. 1, 2, 3, 4

D - 1: Forfeitures will be used to reduce contributions. Annual earnings ever impact contributions to D plan. Rollover contributions do not impact annual additions. *However, employee and employer contributions in total for al plans cannot exceed the lesser of 100% of an employee's compensation or $61,000.

Jane Smith, age 56, has $500,000 in an IRA rollover account from her previous employer's profit sharing plan. She also receives a monthly retirement pension from her previous employer's qualified plan of $30,000 per year. Jane needs an extra $20,000 per year from her IRA in order to meet her living expenses until her Social Security payments begin at age 62. Which of the following is true? 1. Since she is under 59.5, she will pay a 10% penalty tax on any amounts withdrawn from her IRA. 2. Jane will have to report the $20,000 withdrawal as ordinary income on her personal income tax return. 3. Jane can avoid the 10% penalty tax if she bases her withdrawal on the "substantially equal payment" method available to individuals under 59.5. 4. The $20,000 per year withdrawal from Jane's IRA will be subject to the 15% excise tax on "excess distributions" from qualified plans. A. 1 B. 2 C. 3 D. 2, 3 E. 1, 4

D - 1: She could avoid the 10% penalty through substantially equal payments. 2: True because the withdrawal is income. 3: True (minimum of 5 years). 4: False

Which of the following are characteristics of a non-qualified deferred compensation agreement for an individual? 1. It may provide for benefits in excess of qualified plan limits. 2. Contribution underlying the agreement may NOT be structured as additional comp to the employee. 3. Must be entered into prior to the rendering of services to achieve deferral of compensation. 4. Contribution underling the agreement may be paid from the current compensation of the employee. A. 1, 2 B. 1, 3 C. 2, 3 D. 1, 3, 4

D - 2: Incorrect - Underlying contribution may be structured as additional compensation. 4: Represents a so-called pure deferred compensation plan.

Services provided on a discounted or free basis to employees are not includible in taxable income to the employee under which of the following circumstances? 1. The employer must incur no substantial cost in providing the service. 2. Services offered to the employees must be in the line of business in which they are working. 3. Services cannot be discounted > 25% of the price that is available to customers. 4. If there is a reciprocity agreement between 2 unrelated employers in the same line of business. A. 1, 2 B. 2, 3 C. 3, 4 D. 1, 2, 4

D - 3: Percent of discount is limited to 20%.

Joyce is a party to a Qualified Domestic Relations Order (QDRO) relating to her previous spouse's retirement plan. Which of the following statement regarding restrictions related to a QDRO is/are true? 1. Cannot assign a benefit that the plan does not provide. 2. Cannot assign a benefit that is already assigned under a previous order. 3. If the participant has no right to an immediate cash payment from the plan, a QDRO cannot require such a payment. 4. QDRO funds may not be rolled over into a rollover IRA. A. 1, 3 B. 2, 4 C. 2, 3, 4 D. 1, 2, 3

D - 4: Not accurate in that a distribution as a result of a QDRO may be rolled over into an IRA as long as the rollover is accomplished within 60 days of the distribution.

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

D - A / B / C: All benefits for eligible employees, not their dependents. D: Applies to dependents and the employer cannot discriminate.

T/F: SIMPLE IRAs do not require 20% withholding when it is withdrawn from the account.

True - They are not qualified plans.

Nicole has adjusted gross income for the year of $126,000, has just retired, and wants to roll-over her employer sponsored profit-sharing plan into a Roth IRA. The profit-sharing plan is currently worth $291,000 made up entirely of employer contributions. Which of the following is not true? A. Nicole may rollover the entire amount of her profit-sharing plan. B. Nicole must include the converted amount in taxable income upon conversion. C. Distributions of any converted amount will be tax free. D. Penalties will always be due on the converted amounts withdrawn for purposes other than the exceptions to 72(t).

D - A: Beginning in 2010, there is no AGI phase-out associated with conversions to Roth IRAs so she can rollover as little or as much as she wants. B: The converted amount will be included in taxable income in the year of conversion. C: Distributions of any converted amounts will always be tax-free; however penalties may be due under certain circumstances. D: Penalties on converted amounts are applicable within the first 5 years from conversion only.

Which of the following statements regarding ISOs and NQSOs is correct? A. The tax treatment of a cashless exercise of an ISO is the same as the cashless exercise of a NQSO. B. One of the disadvantages of an ISO is that the sale of the stock attributable to an ISO may result in the taxpayer paying alternative minimum tax. C. IRC 409A provides harsh penalties when a company grants an ISO or NQSO with a strike price that exceeds the current FMV of the employer's 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.

D - A: ISO is not subject to payroll tax, NQSO is subject to payroll tax. B: Sale of ISO share of stock will generally have a negative adjustment for AMT, not positive. C: Only applies if the strike price is less than the FMV on the date of grant.

Luna Autobody wants to establish a pension plan. They want the employees to bear the investment risk and favor older employees. Which plan should they establish? A. Age based profit sharing plan. B. Cash Balance Pension Plan C. Money Purchase Pension Plan D. Target Benefit Pension Plan

D - A: Not a pension plan, it is a profit sharing plan.

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

D - A: PBGC does not provide coverage for cross-tested plans. B: Cross-tested plan is a type of qualified profit sharing plan and therefore generally requires the filing of a Form 5500 each year. C: Only DB plans permit 5 year cliff vesting schedules.

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

D - A: Should read 70%. B: Should read 70% ratio of HNCE to HCE. C: Reversed with 50 employees or 40% of employees with a minimum of 2/3 employees.

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

D - A: There must not be another source of funds. B: They are generally subject to a penalty unless there is an exemption. C: Hardship distribution can be taken from employee deferrals and employer contributions.

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.

D - B: Secular trust.

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

D - D - Provides for survivor of the employee. Beneficiary designation cannot be altered.

Assuming the company made the 20% election when determining who is highly compensated, which of the following statements is correct? 1. Joan, 10% owner and employee with $45,000 compensation. 2. Lind, a commissioned salesperson with compensation $200k last year (highest paid employee). 3. Reilly, COO, who had compensation of $150,000 last year but was not in the top 20% of employees. 4. Garner, the president, who was in the top 20% of paid employees with a compensation of $195,000. A. Exactly 3 people are key employees. B. Exactly 2 people are highly compensated. C. Joan is a key employee but is not highly compensated. D. Reilly is neither highly compensated nor a key employee.

D - Key Employee: >5% Owner > 1% Owner & > $150,000 Compensation Officer with Compensation > $200,000 Highly Compensated: > 5% Owner > $135,000 Compensation and top 20% of paid employees.

Lien, age 35, recently left his employer, GoGoRoller, a roller blade manufacturer. He left after 18 months because the working conditions were unbearable. GoGoRoller sponsored a SIMPLE IRA. Lien deferred $3,000 into the plan during his time there and the employer contributed $1,500. When he terminated he withdrew the entire account balance of $4,750. Assuming he is in the 12% tax bracket, what is the tax and penalty consequence for this distribution? A. $570 B. $775 C. $1,187.50 D. $1,757.50

D - 25% penalty for early withdrawals in the first 2 years. Contributions were $4,500 plus $250 of growth for a total of $4,750 in the account. 4,750 X (25% + 12%) = $1,757.50

Which of the following retirement plans would permit a single employee making $100,000 a year to still make a fully deductible $6,000 contribution to an IRA? A. 401(k) B. 403(b) C. SEP D. 457 E. Defined Benefit

D - 457 is not a qualified plan or SEP. Does not prevent a participant making $100,000 from having a deductible IRA. Participants in a SEP and the 3 others are considered "active participants and would be precluded from making a deductible IRA contribution.

JP is covered under his employer's Profit-Sharing plan. He currently earns $500k per year. The plan is top heavy. The employer made a 10% contribution on behalf of all employees. What is the maximum retirement benefit that can be paid to him? A. $50,000 B. $61,000 C. $245,000 D. Cannot be determined by the information given.

D - A profit sharing plan is limited to the lesser of $61,000 or covered compensation, however, the actual retirement benefit will be whatever is in the account balance at the time of retirement.

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? 1. Profit-sharing plan that uses permitted disparity. 2. Age-based profit sharing plan. 3. Defined benefit pension plan. 4. Target benefit pension plan. A. 1 B. 1, 3 C. 2, 4 D. 1, 2, 3, 4

D - All of the listed plans would allocate a higher percentage of a plans current cost to a certain class of eligible employees.

Your client, a single-filer, has an income of $80,000. Which of the following conditions would prevent a deductible IRA contribution from being made by your client? 1. Participated in a Section 457 deferred compensation plan. No other retirement plans were available to the employee. 2. Made contributions to a 403(b) plan. 3. Received retirement payments from a pension plan at age 65 (no longer an employee at the sponsoring employer). 4. Has account in previous employer's profit-sharing plan. Received no employer contributions. No forfeiture allocations were made. 5. Eligible to participate in a defined benefit plan, but waived participation when it was calculated that employee retirement benefits would be greater with the IRA. A. I, II and IV only. B. II, IV and V only. C. II, III, IV and V only. D. II and V only.

D - An active participant is an employee who has benefitted under one of the following plan through a contribution or an accrued benefit during the year: - Qualified Plan - Annuity Plan - Tax Sheltered Annuity (TSA AKA 403(b)) - Certain government plans - SEPs - SIMPLE 1: Non-qualified deferred comp and is not taken into consideration for active participation status. 2 / 4: On the list above. Any individual who is eligible for a DB plan is considered an active participant. 3: Not active participation. 5: Described without contributions or forfeitures and is not "active participation", but a change in conditions regarding employer contributions or forfeitures could stem deductibility of IRA contributions.

Your client's only employer has established a payroll deduction TSA. Your client is single, making more than $61,000 per year. Which of the following is TRUE concerning the plan? A. The phase-out maximum AGI of $60,000 in the current year does apply. B. TSA contributions are not subject to Social Security taxes. C. The employer usually controls the investment selections. D. Contributions are not subject to Federal/State Withholding tax.

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

Which of the following legal requirements apply to Employee Stock Ownership Plans (ESOPs)? 1. ESOPs must permit participants, who are aged 55 or older and who have at least 10 years of participation, the opportunity to diversify their accounts. 2. ESOPs can be integrated with Social Security. 3. An employee's deduction for ESOP contributions and amounts made to repay interest on an ESOP's debt cannot exceed 25% of the participant's payroll. 4. The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP. A. 1, 2 B. 2, 4 C. 1, 2, 3 D. 1, 4

D - Deductions for interest payments are not limited for ESOP plans. Deductions for repayment of principal is limited to 25% of covered compensation.

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

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

COBRA mandates employers provide continuation coverage for former employees except under which of the following circumstances: 1. Employer has < 20 employees. 2. Employee retires at the age of 65. 3. Death of the employee. 4. Involuntary termination of employment due to gross misconduct. A. 1 B. 3 C. 1, 3, 4 D. 1, 2, 4

D - Employers must continue medical coverage to pay for final medical expenses after the death of the employee.

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.

D - He could delay taking a distribution from the account for 2 years. At that point, the distribution would be qualified since it meets the 5 year rule and is on account of death. A: Distribution is not a qualified distribution since the 5 year rule has not been met. B: He could begin taking distribution the year following death or a distribution within 5 years. C: First distribution would consist of previously taxed contributions and would not be taxable.

Jan is an executive at Papers Unlimited. As part of her compensation she has a restricted stock plan that allows her to receive 500 shares of stock after she completes 5 years of service. At the time of grant (three years ago) the stock was trading at $5 per share. The stock is currently trading at $25 per share and she has been with the company for 3 years. Which of the following is true? A. If she made the 83b election today she would recognize W-2 income of $12,500. B. If she made the 83b election at the time of grant and she left the company today she would recognize capital gain of $10,000. C. If she made the 83b election at the time of grant and she left the company today she would recognize a loss of $2,500. D. If she made the 83b election at the time of grant and 5 years later sold the stock for $35 per share her capital gain treatment would be $15,000.

D - If she made the 83b election at the time of the grant then she would have had W2 income at the time of $2,500 (500 X 5). If she later sold for $35 per share then she would recognize capital gain of $15,000 (500 X (35 - 5). Note that by saying she sold the stock the question implies that she met the vesting requirement. If she left the company today before meeting the vesting period, she would not be allowed to take a loss on W-2 income that she included in income in the year of grant. The 83b election cannot be made today, it must have been made within 30 days after the date the stock was initially transferred at grant.

Sherman, age 52, works as an employee for a local bakery. The bakery sponsors a 401(k) plan. Sherman earns $50k and makes a 10% deferral into his 401(k) plan. His employer matches the first 3% deferral at 100% and they also made a 5% profit sharing contribution to his plan. Sherman also owns his own landscaping business and has adopted a solo 401(k) plan. His landscaping business earned $40,000 for the current year. What is the total contribution that can be made to the solo plan, assuming his self-employment taxes are $6,000. A. $20,500 B. $22,900 C. $28,800 D. $29,400

D - Individual can defer up to $20,500 plus an additional $6,500 catch-up provision for all of their 401(k) and 403(b) plans combined. Total Contribution to Solo Plan = $22,000 ($20,500 - $5,000 to employer's plan + 6,500 catch-up) + $7,400 employer contribution ((40,000 - 3,000) X .20).

All of the following accurately reflect the characteristics of a stock bonus plan, except: A. Useful in cash flow planning for plan sponsor due to cashless contributions. B. Provides motivation for employees because they become "owners". C. 20% withholding does not apply to distributions of employer securities and up to $200 in cash. D. May not allow "permissible disparity" or integration formulas.

D - Integration formulas are not allowed under an ESOP plan but are allowed under a stock bonus plan. All other statements are accurate in their description.

Which of the following is true regarding target benefit plans? A. Owner can name any beneficiary. B. Favors younger employees. C. Covered by PBGC. D. Investment risk is on employee.

D - Investment risk is on employee since it is a DC plan. A: They can only name someone other than their spouse if they have a valid waiver signed by the spouse. C: Target benefit is not covered under PBGC.

Kyle had contributed $20,000 in nondeductible contributions to his traditional IRA over the years. This year the account balance was $52,000 and he made a withdrawal of $5,000. What amount is reported on Kyle's Form 1040? A. $5,000 only B. $1,923 only C. $3,077 only D. Both $5,000 and $3,077

D - Kyle will report the total distribution of $5,000 and the taxable amount of the distribution of $3,077 calculated as $32,000 / 52,000 X 5,000. Account balance = $52,000 Non-deductible contributions = $20,000 $32,000 would be taxable 32,000 / 52,000 = .6154 5,000 X 61,54 = $3,076.92

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

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

Which of the following are correct statements about self-employed retirement plans? 1. Benefits provided by a self-employed defined benefit plan cannot exceed the lesser of $245,000 or 100% of income in 2022. 2. May be established by an unincorporated business entity. 3. Contributions to "owner-employees" are based upon their gross salary. 4. Such plans are permitted to make loans to common law employee participants. A. 1, 2 B. 1, 3 C. 2, 4 D. 1, 2, 4

D - Loans are available tot eh common law employees of the firm. 3: Incorrect because owner-employee contributions are based upon total earned income in the business, not just salary.

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

D - Maximum loan is the lesser of 50% of vested amount or $50,000 paid in quarterly (or more frequent) payments over 5 years, unless used for home purchase. Loan must carry reasonable interest rate.

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.

D - NUA treatment is not applicable since David did not take a lump sum distribution. Therefore, the distribution is treated as ordinary income.

A non-qualified deferred compensation plan that provides the targeted key employees with only a promise to pay benefits at a future time is known as a: A. Supplemental Executive Retirement Plan (SERP) B. Funded Deferred Compensation Plan C. Excess Benefit Plan D. Unfunded Deferred Compensation Plan

D - No assets are segregated so the plan is considered unfunded even though the employer may establish a pool of assets to meet the obligation. Those assets are still owned by the employer and subject to the creditors of the employer.

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

D - No provision for a distribution without penalty under this circumstance. Edward is only 40 and education withdrawals are allowed in IRAs, not qualified plans.

Which of the following is NOT a qualified employee fringe benefit? A. Medical expenses NOT covered by medical health plan are paid under a reimbursement plan. B. Major medical health insurance plan or HMO premiums. C. LT Disability Insurance D. $150,000 group term life insurance policy.

D - Only $50,000 of group term life is a qualified benefit. Medical benefits are a tax-free employee benefit.

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

D - Only life insurance may be included in a qualified retirement plan. The entire premium for universal life cannot exceed 25% of the employer's aggregate contributions, and 50% for whole life insurance to qualify under incidental benefit rules. Any pension contributions used to purchase life insurance inside a qualified plan are deductible to the employer.

Which of the following plans must meet the requirement for a qualified joint and survivor annuity? 1. Defined benefit plans. 2. Profit sharing plans. 3. Target benefit plans. 4. Money purchase plans. A. 1 B. 1, 3 C. 1, 2, 3 D. 1, 3, 4

D - Only pension plans are required to have a joint and survivor annuity option. Profit sharing plans (including ESOPs) are NOT required to have a joint and survivor annuity option.

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

D - Provides a DB and the employee receives an account to see how much they have. A: Not DB Plan C: Not DB Plan B: Pension plan but it does not provide employee with a defined benefit, only a defined contribution.

Larry and Terry plan to contribute a total of $2,900 to their IRAs for the current year. Larry has contributed $2,000 to his IRA and Terry will contribute $900. They both work outside the home and file a joint income tax return. Larry is a teacher at the local high school. His employer makes contributions into a 403(b) plan for Larry. Terry's employer makes contributions into her stock bonus plan account. Their modified AGI for the current tax year is $110,000. What is the combined maximum amount, if any, they are allowed to deduct for their IRA contribution? A. $-0- B. $2,500 C. $2,000 D. $2,900

D - Reduction is ((110,000 - 109,000) / 20,000) X 6,000 = $300). Maximum deduction is 6,000 - 300 = $5,700 each. Therefore, their entire $2,900 of total contributions between the both of them are deductible.

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

D - Retirement benefit is determined solely by the account value.

During the 5 year holding period, for tax and penalty purposes, withdrawals from a ROTH IRA are: A. Subject to 10% penalty and taxed as ordinary income. B. Treated as a withdrawal on a LIFO basis. C. Not subject to any penalty, but taxed as ordinary income. D. Treated as a withdrawal on a FIFO basis.

D - Roth dollars are contributed with 'already been taxed' dollars, and therefore are no longer taxable.

Which of the following retirement plans would permit an employee (filing single status) making $100,000 a year to still make a fully deductible $6,000 contribution to an IRA in 2020? A. 401(k) B. 403(b) C. SEP D. 457

D - Section 457 plans are nonqualified deferred compensation plans and do not make the employee an "active participant" in a qualified retirement plan. 401(k) / 403(b) / SEP - All make employees active participants.

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

D - She can contribute and deduct her contribution to a Traditional IRA since she is below the AGI limitation for a single active participant ($68,000 - $78,000). She can also contribute to a ROTH because she is below the AGI limitation of $129,000 - $144,000. Remember that coverage for any day during the year will constitute being an active participant.

Stephen, age 60, is a participant in the stock bonus plan of Simi, Inc., a closely held business. Stephen received contributions in shares to the stock bonus plan and Simi, Inc took an income tax deduction as follows. Year 1 - 500 shares $10 / share at time of contribution. Year 2 - 100 shares $12 / share at time of contribution. Year 3 - 250 shares $14 / share at time of contribution. Year 4 - 200 shares $16 / share at time of contribution. Year 5 - 50 shares $18 / share at time of contribution. Stephen terminates employment and takes a distribution from the plan of 800 shares having a FMV of $20,000. He sells the stock for $25,000 6 months later. What is Stephen's LT capital gain treatment and when is it taxed? A. $5,000 B. $6,200 C. $11,200 D. $0

D - Stephen did not take a lump sum distribution and does not qualify for NUA treatment. All of the distribution will be subject to ordinary income tax and the remainder will be taxed at STCG because he only held it for 6 months.

Your client's only employer has established a payroll deduction TSA. Your client is single, making more than $64,000 per year. Which of the following is false concerning the plan? A. TSA contributions are pre-tax. B. TSA contributions are subject to Social Security taxes. C. The employer usually does not control the asset allocations in the plan. D. Contributions are subject to Federal/State withholding tax.

D - TSA contributions are subject to payroll taxes (Medicare + Social Security) but NOT income taxes.

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

D - These plans can be discriminatory among clearly definable classes, must be in written form, and may require full-time employment to participate.

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 PBGC. 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 2 factors: selecting a benefit design that employees can more easily understand than a traditional DB plan and as a plan that has more predictable costs associated with its funding.

D - They are DB plans due to the guaranteed investment returns and benefit formula, not simply a contribution amount. They are not 100% guaranteed by the PBGC though. They use 3 year cliff vesting only.

Which of the following apply to legal requirements for a qualified thrift / savings plan? A. Participants must be allowed to direct the investments of their account balances. B. Employer contributions are deductible when contributed. C. In-service withdrawals are subject to financial need restrictions. D. After-tax employee contributions cannot exceed the lesser of 100% of compensation or $61,000.

D - This correctly describes the Section 415(c) limits on maximum contributions permitted by law. Participants do not have to be given the right to direct their investments, employees make after-tax contributions to a thrift, employers don't make contributions. C: Only 401(k) plans have statutory hardship withdrawal requirements, not thrift/savings plans.

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

D - This describes a traditional retirement of saving and retiring once one is in their 60s.

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

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

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.

D - Vested options are taxable based on the value of the option to the extent the FMV exceeds the option price.

Your client has the following beliefs about the allocation of forfeitures of contributions to employees who leave the company. Which of the following statements is/are correct? 1. Departing plan participants are entitled to their entire account balances regardless of the vesting schedule in effect. 2. Forfeitures could be allocated to plan participants in exactly the same manner as the employer's contributions. 3. Unless specific steps were taken to the contrary, the allocation of forfeitures in this company's plan over time would tend to discriminate in favor of the relatively few longer-hired and more highly-paid employees. 4. The company could use forfeitures to offset amounts it would otherwise contribute to employees' accounts. A. 2 B. 1, 2 C. 1, 4 D. 3, 4 E. 2, 3, 4

E - 1: Incorrect, vesting is critical to entitlement. 2: Permitted method of allocating forfeitures.

Your client wishes to install a retirement plan in the company in which the pension benefits to employees are guaranteed by the PBGC. Which ones meet this requirement? 1. Profit sharing 2. Money Purchase 3. Target Benefit 4. Defined Benefit A. 1, 2 B. 2, 3 C. 1 D. 3, 4 E. 4

E - Only 2 pension plans (DB and cash balance) require PBGC insurance.

What is a PS58 cost?

Requires that every year, a plan participant in a qualified plan has to pay income tax on the dollar value of the actual insurance protection which is equal to the term insurance cost.

Meredith is an executive at Papers Unlimited. As part of her compensation she has a restricted stock plan that allows her to receive 1,000 shares of stock after she completes of 5 years of service. At the time of grant the stock was trading at $2 per share. She made a proper 83b election. She met the vesting requirement 6 months ago when the stock was trading at $35. She has decided to sell her stock. Which of the following is true? A. If she sells the stock today for $1 per share she is not entitled to a loss. B. If she sells the stock today for $15 per share she will recognize $13,000 in long term capital gain. C. If she sells the stock today for $28 per share then she will recognize $26,000 in short term capital gains. D. If she sells the stock today for $38 per share then she will recognize $3,000 in short term capital gains.

When she made the 83b election, she would have recognized W-2 income of $2,000 (1,000 X $2). Her holding period would have started at the date of the grant. When she met the vesting period she would not have recognized anything since she made the 83b election.