Chapter 16 Fin 407
Defined contribution plans do not specify the annual employer current contribution.
False- Defined contribution plans do specify the annual employer currect contribution.
Employer contributions to qualified plans are not subject to federal income tax but are subject to payroll tax.
False- Employer contributions to qualified plans are not subject to federal income tax or payroll.
A simplified employee pension (SEP) is a tax-deferred noncontributory retirement plan that is employer sponsored and is similar to a qualified profit-sharing plan with regard to funding requirements and contribution limits.
True
Taxpayers can contribute to Roth IRAs after the age of 70 1/2 but are forced to receive minimum distribution at age 70 1/2, as with traditional IRAs.
False- Taxpayers contribute to Roth IRAs after the age of 70 1/2 and are not forced to receive minimum distributions at age 70 1/2, as with traditional IRAs.
The 2 standard vesting schedules pre-approved by the IRS for employer contributions to a defined contribution plan are 5-year cliff and 5-7 graduated vesting.
False- The 2 accelerated vesting schedules are pre-approved by the IRS for employer contributiosn to a defined contribution plan are 3-year cliff and 2-6 graduated vesting.
Generally, all employees who are at least age 18 and have 1 year of service (defined as 1,000 hours within a 12-month period) are considered eligible for a qualified plan.
False- Generally, all employees who are at least age 21 and have 1 year of service (defined as 1,000 hours within a 12-month period) are considered eligible for a qualified plan.
As long as the qualified retirement plan meets the coverage requirement, it is permitted to exclude certain groups of eligible employees from participating in the plan.
True
Annual distributions from qualified retirement plans must generally begin no later than the year in which the participant attains the age of 70 1/2, although the first distribution may be delayed until April 1 of the following year.
True
Qualified retirement plan trusts are tax-exempt entities; therefore, the earnings accruing from contributions from both employers and employees grow income tax deferred until distributed.
True
Qualified retirement plans are either employer or self-employed sponsored plans. The word qualified means that the plan meets Internal Revenue Service requirements.
True
The employer is required to provide a copy of the summary plan description (a document that summarizes the details of the qualified retirement plan) to employees and participants of the plan.
True
Two common expectations to the general income tax treatment of distributions from tax-advantaged retirement accounts include Roth IRAs and lump-sum distributions consisting of employer securities.
True
Which of the following statements describing how qualified pension plans differ from a SEP plan and a SIMPLE is (are) CORRECT? I. Qualified plan rules provide greater flexibility than SEP plan and SIMPLEs in the number and makeup of the employees covered by the plan. II. Contributions must be fully and immediately vested in the contributions to qualified plans, but SEP plan and SIMPLEs are permitted to have vesting schedules. A. I only B. II only C. Both I and II D. Neither I nor II
A. Statement II is incorrect because contributions must be fully and immediately vested in the contributions to SEP plans and SIMPLEs. Qualified plans can have a vesting schedule.
Which of the following statements concerning qualified retirement plans is(are) CORRECT? I. Qualified pension plans include cash balance plans and target benefit plans. II. Qualified profit-sharing plans include stock bonus plans and Section 401(k) plans. A. I only B. II only C. Both I and II D. Neither I nor II
C. Both I and II are correct.
In general, distributions from qualified retirement plans are made in the form of cash and are taxable as capital gains.
False- In general, distributions from qualifeid retirement plans are made in the form of cash and are taxable as ordinary income.
Pension plans may not invest more than 20% of qualified retirement plan assets in employer securities.
False- Pension plans may not invest more than 10% of qualified retirement plan assets in employer securities.
Self-employed persons cannot adopt the majority of qualified retirement plans but can adopt SEP plans and SIMPLEs.
False- Self-employed persons can adopt the majority of qualified retirement plans and can adopt SEP plans and SIMPLEs.
Employer contributions to qualified plans are not subject to federal income tax or payroll tax.
True
Unlike the traditional IRA, the distributions from a Roth IRA are generally tax-exempt.
True
Which of the following is(are) a type(s) of defined contribution, profit-sharing plan(s)? 1. ESOP 2. Stock bonus plan 3. Cash balance plan 4. Target benefit plan A. 2 only B. 1 and 2 C. 3 and 4 D. 1 and 4
B. Cash balance and target benefit plans are types of pension plans. ESOP and stock bonus plans are types of profit-sharing plans.
Which of the following statements concerning similarities between Section 401(k) plans and Section 403(b) plan is(are) CORRECT? I. Both plans permit an employee to defer tax on current income by allowing pretax contributions to be made to the employee's individual account. II. Both plans allow deferrals in the form of a salary reduction chosen by the employee or a contribution made by the employer. A. I only B. II only C. Both I and II D. Neither I nor II
C. Both I and II are correct.
Each of the following is a characteristic of a defined benefit retirement plan EXCEPT A. The plan specifies the benefit an employee receives. B. The plan has less predictable costs than defined contribution plans. C. The plan assigns the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employee. D. The plan is relatively costly to administer compared to defined contribution plans.
C. Risk is assigned to the employer.
A Section 401(k) plan is tax-deferred savings and retirement plan that does not provide the same benefits as, and is governed by different rules than, qualified retirement plans.
False- A Section 401(k) plan is tax-deferred savings and retirement plan that provides many of the same benefits and is governed by many of the same rules as qualified retirement plans.
Although there are exceptions, in general, employers are required to cover 50% of the eligible nonhighly compensated employees.
False- Although there are exceptions, generally, employes are required to cover 70% of the eligible nonhighly compensated employees.
If Bob is self-employed, the maximum contribution he may make to a Keogh for himself is 25% of net self employment earnings.
False- Bob's maximum contributions for himself is 20%. The returement plan contribution percentage is divided by one plus the retirement contribution percentage. (.25 / 1.25 = 20)
Pension plans are not permitted to allow in-service withdrawals.
False- Defined benefit pension plans may permit in-service withdrawals to participants who are still employed by the company and age 62 or over (PPA 2006).
ERISA provides for nonalienation of benefits, which means that the benefits of the qualified retirement pan are to be used only by the participant or by the participant's family members; therefore individuals who are forced into bankruptcy have protection for their assets held in qualified retirement plans and all IRAs.
False- ERISA provides for nonalienation of benefits, which means that the beneifts of the qualified retirement plan are to be used only by the participant or by the participant's family memebers; therefore, individuals who are forced in bankruptcy have ERISA protection for their assets held in qualified retirement plans not in all IRA accounts. The Bankruptcy ABuse Prevention and Consumer Protection Act created limited bankruptcy protection for IRAs.
Because there is some risk that the employer will be unable to sustain the payment of retirement benefits from a defined benefit plan, sponsors of plans are required to participate in the pension benefit guarantee corporation (PBGC).
True
ERISA provides for nonalienation of benefits, which means that the benefits of the qualified retirement plans are to be used only by the participant or by the participant's family members; therefore, individuals are forced into bankruptcy have protection for their assets held in qualified retirement plans.
True
Graduated vesting allows employees to become partially vested over a period of years.
True
Contributions made by the employee to a qualified plan are always 100% vested and remain the property of the employee.
True
Employee contributions to qualified plans are generally not subject to federal income tax.
True
Which of the following statements describing how qualified plans are similar to SEP plans and SIMPLEs is(are) CORRECT? I. Qualified plans, SEP plans, and SIMPLEs all provide deferred compensation. II. Plan sponsors SEP plans and SIMPLE IRA plans make contributions to an individual retirement account on behalf of the participant. A. I only B. II only C. Both I and II D. Neither I nor II
C. Both I and II are correct.
Which of the following is(are) NOT a type(s) of defined contribution pension plan(s)? 1. ESOP 2. Target benefit plan 3. Money purchase pension plan 4. Thrift plan A. 1 and 2 B. 4 only C. 1 and 4 D. 2 and 3
C. Employee stock ownership plans (ESOPS) and thrift plans are types of defined contribution, profit-sharing plans.
All of the following are example of qualified retirement plans EXCEPT A. A defined benefit pension plan B. A money purchase pension plan C. A profit-sharing plan D. A Section 457
D. Section 457 plan is not a qualified plan. All the others are qualified plans.
Which of the following statements concerning the reasons why business-owners need tax-advantaged retirement plan is(are) CORRECT? I. Tax sheltering income and solving liquidity problems that occur at retirement or death are why business-owners need tax-advantaged retirement plans. II. Sheltering assets from legal liability and bankruptcy and avoiding taxes on excess accumulated earnings are why business-owners need tax-advantaged retirement plans. A. I only B. II only C. Both I and II D. Neither I nor II
C. Statement I and II list the 4 reasons why business-owners need tax-advantaged retirement plans
In 2014, annual IRA contributions are limited to the lesser of $5,500 or earned income for a 40-year old individual.
True
In general, distributions from qualified retirement plans are made in the form of cash and are taxable as ordinary income.
True
In general, pension plans must be funded on an annual basis regardless of whether the company has sufficient cash flow.
True
In the context of qualified retirement plans, an employees is vested when he has ownership rights to the contributions (or benefits) provided by the employer.
True
Net unrealized appreciation (NUA) treatment is not available for distribution from individual retirement accounts (IRAs).
True
Profit-sharing plans are permitted to invest 100% of the qualified retirement plan assets in employer securities.
True
Which of the following is(are) a type(s) of defined contribution pension plan(s)? 1. Target benefit plan 2. Stock bonus plan 3. Money purchase pension plan 4. Profit-sharing plan with Section 401(k) provisions A. 3 only B. 3 and 4 C. 1 and 3 D. 1 and 2
C. Stock bonus plans and profit-sharing plans with Section 401(k) provisions are both types of defined contribution sharing plans.
When employer securities are distribute from a qualified retirement plan, the appreciation above the cost basis, called net unrealized appreciation (NUA), is not subject to income tax upon distribution.
True
Which of the following statements concerning qualified retirement plans is(are) CORRECT? I. Money purchase plans, ESOPs, target benefit plans, and stock bonus plans are all examples of qualified retirement plans. II. Deferred compensation plans, incentive stock option plans, and cash balance plans are all examples of qualified retirement plans. A. I only B. II only C. Both I and II D. Neither I nor II
A. Statement II is incorrect because deferred compensation plans, and incentive stock option plans are examples of nonqualified reitrement plans. A cash-balance plan, however, is an exmpale of a qualified plan.
All of the following are advantages of profit-sharing plan to businesses and business owners EXCEPT: A. Allowing discretionary contributions B. In-service withdrawals are prohibited C. Controlling benefit costs D. May be providing legal discrimination in favor of older owner employees
B. An advantage of profit-sharing plans is that they permit withdrawal flexibility.
Which of the following is(are) a type(s) of defined contribution plan(s)? 1. ESOP 2. Money purchase pension plan 3. Stock bonus plan 4. Target benefit plan A. 2 only B. 2 and 4 C. 1, 2, and 4 D. 1, 2, 3, and 4
D. All are types of defined contribution plans.
Which of the following statements concerning qualified retirement plan is(are) CORRECT? I. Cash balance plans, money purchase pension plans, ESOPs, and incentive stock option plans are all examples of qualified retirement plans. II. Target benefit plans, defined benefit plans, profit-sharing plans, and deferred compensation plans are all examples of qualified retirement plans. A. I only B. II only C. Both I and II D. Neither I nor II
D. Neither I nor II is correct. Incentive stock option plans and deffered compensation plans are examples of nonqualified plans.
All of the following statements regarding Roth IRAs are correct EXCEPT A. Total contributions for all Roth IRAs for the year cannot exceed $5,500 (for 2016) for an individual under age 50. B. Roth spousal IRAs are allowed for nonemployed spouses. C. Contributions to a Roth IRA are not deductible but distribution are tax free as long as certain eligibility requirements are satisfied. D. Contributions to Roth IRAs cannot be made after attainment of age 70 1/2.
D. Roth IRA contributions are allowable beyond age 70 1/2.
Which of the following is(are) NOT a type of defined contribution, profit-sharing plan(s)? 1. Target benefit plan 2. ESOP 3. Thrift plan 4. Money purchase pension plan A. 4 only B. 2 and 4 C. 1 and 3 D. 1 and 4
D. Target benfit and money purchase pension plans are types of defined contribution pension plans.
Annual compensation considered for purposes of qualified plans is limited to $270,000 for the year 2016.
False- Annual compensation considered for purposes of qualified plans is limited to $260,000 for 2014.
Qualified retirement plans must be funded on a regular basis. Profit-sharing plans must be funded yearly while contributions to pension plans must be substantial and recurring.
False- Qualifeid retirement plans must be funded on a regular basis. Pension plans must be funded yearly while contributions to profit-sharing plans must be substantial and recurring.
The vesting schedule an employer selects can be more restrictive than the prescribed vesting schedules under the Internal Revenue Code.
False- The vesting schedule an employer selects can be more liberal than the prescribed vesting schedules under the Internal Revenue Code.
Like the payroll tax treatment of employer contributions, employee contributions to qualified retirement plans are generally not subject to payroll tax. Therefore, contributions made by employees will not but subject to FICA taxes.
False- Unlike the payroll tax treatment of employer contributions, employee contributions to qualifed retireemnt plans are generally subject to payroll tax. Contributions made by employees will be subject to FICA taxes.
A SIMPLE allows employees to take elective contributions to an individual retirement plan (IRA) up to $12,500 for 2016 (excluding any allowable catch up).
True
A major advantage of a SEP is that it can be established as late as the due date of the income tax return, including extensions.
True
A profit-sharing plan is a qualified defined contribution plan featuring a flexible (discretionary) employer-contribution provision.
True
A qualified retirement plan must benefit a broad range of employees, not just the highly compensated.
True
Prototype plans are qualified retirement plan documents that have already been approved by the IRS as meeting the requirements of IRC Section 401(a).
True
Qualified retirement plans must be funded on a regular basis. Pension plans must be funded yearly while contributions to profit-sharing plans must be substantial and recurring.
True
Similar to employer contributions, employee contributions to qualified retirement plans are generally not includable in the taxable income of the employee.
True
The annual funding for a defined benefit plan depends on 6 factors: 1.) The life expectancies of the participants. 2.) The mortality experience in the employee group. 3.) The earnings rate and expected earnings rate on plan assets. 4.) The expected wage increases on employees. 5.) The expected inflation rate associated with plan costs. 6.) The expected turnover rate of employees.
True
Two-to-six-year graduated vesting allows those employees who worked for 2 years, for example, to leave the company with some benefit, whereas, under the 3-year cliff vesting schedule, such employees would receive nothing from the contributions made by the employer or from the earnings on employer contributions.
True
Under IRC Section 461(g), qualified retirement plans are considered top heavy if more than 60% of the benefits are attributable to a group of owners and officers called key employees.
True
Union employees, who are covered by a separate collective bargaining agreement, are not required to be covered by their employer's qualified retirement plan.
True
Unlike most qualified retirement plans, with a SIMPLE, there is no percentage limitation on the $12,500 (2016) deferral, and an employee who earned $12,500 (2016) could defer the entire amount.
True
