FP 15 - Practice Final
What is the individual covered compensation limit for determining employer contributions and plan benefits for qualified plans in 2021?
$290,000
Why would a qualified retirement plan include real estate among its portfolio of investment assets?
As an inflation hedge
Target Benefit
older participants are favored each employee has an individual account. minimum funding standards apply. no guaranteed retirement fixed contribution formula
To be eligible to adopt a SIMPLE 401(k), an employer may have no more than
100 employees who earned at least $5,000 last year.
Annual additions to qualified retirement plans include employer contributions. employee contributions. interest and dividend income. forfeitures reallocated to plan participants.
I, II, and IV
Which of the following are examples of a cross-tested plan? Traditional profit-sharing plan Age-based profit-sharing plan New comparability profit-sharing plan Profit-sharing plan with a Section 401(k) provision
The answer is II and III. An age-based profit-sharing plan and a new comparability profit-sharing plan are examples of defined contribution plans that may be tested for nondiscrimination based on benefits, sometimes called a cross-tested plan.
The Department of Labor (DOL) issues
he Department of Labor issues advisory opinions and rulings (including prohibited transaction exemptions) similar to private-letter rulings, which are issued by the IRS. The DOL does not issue guaranty insurance. The summary plan description is required by the DOL, but the DOL does not approve plan documents. The IRS approves plan documents.
When calculating the nontaxable portion of his IRA, which of the following formulas is
nontaxable portion = [(nondeductible contributions prior to current year + all contributions for current year) ÷ (balances at end of current year + distributions received in current year)] × total distributions during current year
Reed, age 45, has come to you for help in planning his retirement. He works for a manufacturing company, where he earns a salary of $75,000. Reed would like to retire at age 65. He feels this is a realistic goal because he has consistently earned 9% on his investments and inflation has averaged 3%. If Reed expects to live until age 90 and he has a wage replacement ratio of 80%, assuming a capital preservation approach, how much will Reed need to have accumulated on the day that he retires to adequately provide for his retirement lifestyle?
$1,663,516
Maryellen, age 63, is receiving Social Security retirement benefits. She also works part time, and her earnings are $10,000 more than the earnings limit. Her Social Security retirement benefits this year will be reduced by
1 for every 2 dollar earned
Which of these potential employers is most likely to implement a simplified employee pension (SEP) plan?
A small, closely held business
Hibiscus, Inc., has 150 eligible employees, of whom 12 are highly compensated employees (HCEs). Eight of the HCEs and 100 of the non-HCEs benefit from the employer's qualified retirement plan. The average benefit for HCEs is 8% and for non-HCEs is 6%. Does the plan satisfy the coverage tests? Yes, the percentage test is satisfied with 72.46% of non-HCEs covered. Yes, because the percentage test is satisfied; neither the ratio test nor the average benefits percentage test is required.
Both I and II
Which of the following describe differences between a tax-advantaged retirement plan and a qualified plan? IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions. Employer stock distributions from a tax-advantaged plan do not benefit from net unrealized appreciation (NUA) tax treatment.
Both I and II
In 2002, Jim began making contributions to an IRA. He made his sister, Mary, beneficiary of his IRA. In 2021, Jim died at age 74. What is the maximum IRA distribution period?
Mary's remaining single life expectancy in 2022, reduced by one each subsequent year If the death of the IRA owner occurs after the required beginning date, the distribution period for a nonspouse beneficiary is the beneficiary's remaining life expectancy in the year following the year of death, reduced by one each subsequent year.
Tom has determined that a simplified employee pension (SEP) plan is the best fit for his business. Which of the following statements regarding implementing the SEP plan is CORRECT for 2021?
Tom's employees will be 100% vested in the employer contributions to the plan.
Which of the following plans typically use the percentage test when calculating the amount of life insurance that may be held in the plan for a plan participant?
Traditional profit-sharing plan
Which of the following statements regarding Section 457 plans is (are) CORRECT? Deductibility of plan contributions is an important factor for employers choosing a Section 457 plan to consider. Earnings on assets in a Section 457 plan grow tax-deferred until withdrawn. Required minimum distribution rules do not apply. A Section 457 plan is a nonqualified deferred compensation plan.
Which of the following statements regarding Section 457 plans is (are) CORRECT? Deductibility of plan contributions is an important factor for employers choosing a Section 457 plan to consider. Earnings on assets in a Section 457 plan grow tax-deferred until withdrawn. Required minimum distribution rules do not apply. A Section 457 plan is a nonqualified deferred compensation plan.
Section 403(b) plan funds may be invested only in
annuities and mutual funds.
Profit Sharing Plans
can use age-weighted formula qualified defined contribution retirement plan. permit in-service distributions. no mandatory contributions
ERISA requirements for qualified plans include
coverage and vesting. participation and fiduciary requirements. reporting and disclosure.
Purpose of Target benefit
its intention is to fund for a targeted benefit at retirement, based on the participant's age and number of years to retirement. The actual contributions may or may not achieve the targeted benefit; therefore, the retirement benefit is not guaranteed.
he actual contribution percentage (ACP) test is required for which of the following plans?
plans that provide employer-matching contributions
In which of the following retirement plans is a participant NOT considered an active participant for determining the deductibility of traditional IRA contributions?
A participant in a Section 457 plan
age-based profit-sharing plan. Under this plan,
A participant's compensation is age-adjusted by multiplying the participant's actual compensation by a discount factor based on the participant's age and the interest rate elected by the plan sponsor. As a result, older employees generally receive the greatest allocation under an age-based profit-sharing plan. Nondiscrimination rules are tested in accordance with benefits rather than contributions. The final retirement benefit is not guaranteed in any type of profit-sharing plan.
What is a fully insured defined benefit plan?
A plan that is funded entirely by life insurance and/or fixed annuity contracts, per IRC Section 412(e)(3)
Roger is 73 years old. He has a modified adjusted gross income (MAGI) of $35,000, of which $10,000 is earned income. What amount can Roger contribute to a traditional IRA or a Roth IRA in 2021?
A total of $7,000 in contributions may be allocated between a traditional IRA and a Roth IRA
Which of the following types of qualified retirement plans do NOT allow integration with Social Security? Traditional defined benefit pension plan Money purchase pension plan Profit-sharing plan Employee stock ownership plan (ESOP)
An ESOP may not be integrated with Social Security.
Ann, age 50, is the beneficiary of her father's traditional IRA, which was funded entirely by tax-deductible contributions. Her father recently died at age 76. Which of the following statements is CORRECT regarding Ann's options for the inherited account?
Ann may execute a direct transfer of the account balance into an inherited IRA and must begin required minimum distributions by December 31 of the year following the year of her father's death.
A new comparability plan will only satisfy the nondiscrimination rules if the plan design satisfies one of either of these:
Each eligible non-highly compensated employee (HCE) must receive an allocation of at least 5% of compensation. If the plan provides for an allocation rate of less than 5%, the minimum allocation rate for the non-HCEs is one-third of the highest allocation rate under the plan.
Which integration method(s) may be used to integrate a defined contribution plan with Social Security? The excess method The offset method
I only
Social Security retirement income beneficiaries who have significant incomes must include up to 85% of their Social Security benefits as income for federal income tax purposes. In regard to the taxation of Social Security retirement benefits, which of these statements are CORRECT? The first threshold or base amount is $25,000 of provisional income for all single, unmarried taxpayers. The first threshold or base amount is $32,000 of provisional income for married taxpayers filing jointly. The second threshold or base amount is $34,000 of provisional income for all single (unmarried) taxpayers. The second threshold or base amount is $44,000 of provisional income for married taxpayers filing jointly.
I, II, III, and IV
Scott and Charlotte are divorced, and Charlotte obtained a qualified domestic relations order (QDRO) assigning her 50% of Scott's qualified retirement plan benefit. How will the QDRO affect the benefits received from the plan? Scott becomes an alternate payee of the plan under the QDRO. The QDRO may specify when Charlotte receives the plan benefit as long as this option is allowed by the plan.. If Charlotte receives an early distribution from the plan pursuant to the QDRO, the distribution is tax exempt. If Charlotte receives an early distribution from the plan pursuant to the QDRO, the distribution is exempt from the 10% early distribution penalty.
II and IV
After her husband died, Stacy (age 48) decided to take the $120,000 balance from his defined contribution pension plan in cash. If she did so, which of the following statements is CORRECT?
She will receive a check for $96,000, but the distribution will not be subject to the 10% early withdrawal penalty. ecause the distribution is not being rolled over and the distribution is from a qualified plan, the distribution will be subject to a 20% mandatory withholding requirement.
Which of the following statements regarding Section 457 plans is (are) CORRECT? Plans that provide limits on the amounts deferred are called eligible Section 457 plans. Plans that are designed for corporate executives and provide for greater deferral amounts are called ineligible plans.
The answer is both I and II.
A state or local government would choose to establish a Section 457 plan for all the following reasons except
The answer is tax deductibility of employer contributions. Because Section 457 plans are sponsored by tax-exempt entities, deductibility of plan contributions is not an issue and would not be a reason to establish such a plan. A Section 457 plan is not a qualified plan and has no early withdrawal penalty on distributions.
Total annual contributions to an individual participant in a traditional Section 401(k) plan are limited in 2021 to
The answer is the lesser of 100% of compensation, or $58,000. Total annual contributions to a participant's account are limited to the lesser of 100% of employee compensation, or $58,000 (2021) with only the first $290,000 (2021) of employee compensation considered in the contribution formula. The total contribution is made up of the worker contribution, the employer contribution and reallocated forfeitures. The worker contribution alone is limited to $19,500 in 2021 for those 49 and younger.
The answer is stock bonus plan. A stock bonus plan would accomplish ABC Company's objectives. The others are not the best plan for these reasons: Money purchase pension plans only allow for 10% company stock. ESOPs cannot be integrated with Social Security. New SARSEPs can no longer be established.
The answer is traditional defined benefit pension plan. This type of plan is most appropriate for Larry and his business. The business has favorable cash flow and can commit to the annual contribution required by the defined benefit approach. Additionally, Larry's savings need as a percentage of his compensation exceeds anything possible in a defined contribution plan. Finally, Larry is currently age 55 with only 10 years until retirement.
Prosper Company has just implemented a type of qualified retirement plan in which participating employees are divided into groups or classes and each group or class receives an employer contribution equal to a percentage of compensation. Prosper Company's retirement plan is
a new comparability plan.
cash balance pension plans
defined benefit pension plan. employer bears the risk companies with a relatively large and relatively young workforce. Pension Benefit Guaranty Corporation (PBGC). requires actuary
Mark's financial planner has recommended a retirement plan for implementation at Mark's business in 2021. He tells Mark the plan must cover all employees who are at least 21 and have worked for Mark for three of the last five years (part-time employment counts). Contributions must be made for employees who earned at least $650 (2021) in the prior year. The plan can exclude union members if they have their own retirement plan. Which type of plan has Mark's planner recommended?
Simplified employee pension (SEP) plan
Ross Company has a traditional Section 401(k) plan. The actual deferral percentage (ADP) for all eligible non-highly compensated employees (non-HCEs) is 4%. What is the maximum ADP for the highly compensated employees (HCEs) group at Ross Company?
The answer is 6%. The maximum ADP for HCEs at the Ross Company is 6%. To satisfy the ADP test, a traditional 401(k) plan must meet one of the following two tests.
ERISA requires reporting and disclosure of defined benefit plan information to the Pension Benefit Guaranty Corporation (PBGC). plan participants. the Internal Revenue Service. the Department of Labor (DOL).
The answer is I, II, III, and IV. All these statements are correct.
Qualified retirement plans must meet specific vesting requirements. have special tax advantages over nonqualified plans. must provide definitely, determinable benefits. require an annual profit to allow funding for the plan.
The answer is I, II, and III
For which of the following reasons might an employer consider choosing a nonqualified plan over a qualified plan? Greater flexibility Can discriminate in favor of highly compensated employees Subject to fewer ERISA reporting and disclosure requirements Typically provides an immediate income tax deduction for the employer
The answer is I, II, and III.
ratio test requires that
he coverage percentage of non-highly compensated employees must be at least 70% of the coverage percentage of highly compensated
Section 457 plan
not a qualified plan. This plan is a deferred compensation plan that may be established by governmental units or agencies and non-church-controlled, tax-exempt organizations. special catch-up rules. $6,500 Premature distributions from plan are not subject to an early withdrawal penalty.
RISA requires reporting and disclosure of plan information to all the following except
plan sponsors. ERISA requires reporting and disclosure of plan information by plan sponsors to the Internal Revenue Service (IRS), Department of Labor (DOL), Pension Benefit Guaranty Corporation (PBGC), and plan participants.
Under a profit-sharing plan,
the company has flexibility as to annual funding. Pension plans can invest up to 10% only of plan assets in employer stock.Profit-sharing plans have no restrictions regarding investment in employer stock. The employer may deduct a contribution limited to only 25% of participating employees' covered compensation. The employer must make substantial and recurring employer contributions, or the IRS will remove the plan's qualified status. The employee bears investment risk.
Top heavy plan
A retirement plan in which more than 60% of the plan assets are in accounts attributed to key employees top-heavy defined pension benefit plan must provide a minimum benefit accrual of 2% multiplied by the number of years of service (up to 20%). op-heavy defined contribution plan, the employer must make a minimal contribution of 3% of annual covered compensation for each eligible non-key employee. If the contribution percentage for key employees is less than 3%, the contribution percentage to non-key employees can be equal to the key employees' percentage.
Based on George's salary and years of service, he could contribute $19,500 to the Section 403(b) plan that he participates in. However, during the summer he paints homes and contributes $5,000 to a SIMPLE IRA through that employer. How much can George contribute to the Section 403(b) plan in 2021?
The answer is $14,500. The $19,500 that George can contribute to the TSA in 2021 must be reduced by the amount contributed to other salary deferral plans, such as a SIMPLE IRA ($19,500 - $5,000 = $14,500).
Myra, age 52, has worked for XYZ Educational Opportunities for the past 18 years. XYZ sponsors a Section 403(b) or tax-sheltered annuity (TSA) plan. Myra wants to contribute the maximum amount possible to her TSA. Assuming Myra has never used her available catch-up allowance, what is the total maximum amount she can contribute to her TSA plan for 2021?
The answer is $29,000. Myra's basic maximum salary deferral limit is $19,500 in 2021. Her 403(b) lifetime catch-up ($15,000) provision allows her to defer up to an additional $3,000. At age 52, Myra also has available an additional catch-up amount of $6,500
Jack is a single taxpayer who retired at age 62 and receives a qualified plan pension of $1,500 each month. He has begun working as a consultant to various firms and is projecting he will earn $70,000 in 2021. What is the maximum deductible contribution Jack may make to a traditional IRA for 2021?
The answer is $7,000. Jack is not currently an active participant in a qualified plan, is age 50 or older, and has earned income in 2021. Jack may make a deductible IRA contribution of $7,000 (6,000 + $1,000 catch-up) for 2021.
In calculating provisional income for purposes of determining the taxability of Social Security benefits, all of the following items are included except
The answer is 100% of Social Security benefits. Only 50% of Social Security benefits are included in the calculation of provisional income. The other income items listed are components of modified adjusted gross income (MAGI), which is added to 50% of the taxpayer's Social Security benefits in determining provisional income.
Martha has been impressed with the appreciation of the coin collection she received as a gift from her mother and would like to take advantage of this by using coins as an investment in the IRAs. Which of the following statements regarding coins as investments in IRAs is CORRECT?
The answer is American Eagle gold coins are permitted IRA assets. Only permissible collectible that an IRA may invest in is certain U.S. coins, such as the American Eagle gold coin.
Pension Benefit Guaranty Corporation (PBGC) insurance coverage is required for which of the following plans? Traditional defined benefit pension plan Target benefit pension plan Money purchase pension plan Profit-sharing plan
The answer is I only. Money purchase pension plans, profit-sharing plans, and target benefit pension plans do not require PBGC insurance because they are forms of defined contribution plans. Only defined benefit pension plans (traditional defined benefit plans and cash balance plans) require the payment of PBGC insurance premiums.
Which of the following is(are) NOT subject to 20% mandatory federal income tax withholding if a rollover is not a direct transfer? Simplified employee pension (SEP) plan rollovers Section 403(b) plan/TSA rollovers Money purchase pension plan rollovers Profit-sharing plan rollovers
The answer is I only. Of those listed, only SEP plans are not subject to 20% withholding (regardless of the type of rollover). In contrast, all qualified plan and Section 403(b) plan distributions require withholding in the absence of a direct trustee-to-trustee transfer. SEP plans are a type of IRA and do not require 20% withholding.
Which of the following statements describing how qualified pension plans differ from SEP and SIMPLE plans is(are) CORRECT? Qualified plan rules provide greater flexibility in the number and makeup of the employees covered by the plan than do the rules pertaining to SEP and SIMPLE plans. Participants must be fully and immediately vested in the contributions to qualified plans, but SEP and SIMPLE plans are permitted to have vesting schedules.
The answer is I only. Statement II is incorrect because participants must be fully and immediately vested in the contributions to SEPs and SIMPLEs. Qualified plans can include vesting schedules.
Which of the following are true of the actual contribution percentage test (ACP) test for 401(k) plans? The ACP test is not used unless a 401(k) plan has a match or allows employee after-tax contributions. The ACP test uses the same two test structure and percentage rules as the ADP test. The ADP test accounts only for employee deferrals. The ACP test accounts for employer matching and after-tax contributions, but not pretax contributions and elective deferrals. If the ADP of the non-highly compensated employees is greater than 2% but less than or equal to 8%, then the maximum ADP of the highly compensated employees is 2% more than the ADP of the non-highly compensated employees.
The answer is I, II, III, and IV. All statements are true.
Which of the following retirement plans can be integrated with Social Security? Profit-sharing plan Simplified employee pension (SEP) plan Money purchase pension plan Defined benefit pension plan
The answer is I, II, III, and IV. All these plans may be integrated with Social Security. Employee stock ownership plans (ESOPs), savings incentive match plan for employees (SIMPLEs), and salary reduction SEPs (SARSEPs) are not permitted to use integration. Also, employee elective deferrals and employer matching contributions cannot be integrated. LO 1.3.3
In a money purchase pension plan, forfeitures revert to the plan. may be used to reduce future employer contributions. can be reallocated among the remaining plan participants. do not count against remaining participants' annual additions limits.
The answer is I, II, and III. Forfeitures count against the remaining participants' annual additions limits.
A simplified employee pension (SEP) plan requires employer contributions on a nondiscriminatory basis. can be integrated with Social Security. cannot deny participation to any employee 21 years of age or older based on age. imposes mandatory employer contributions.
The answer is I, II, and III. Only statement IV is incorrect. A SEP plan is a retirement plan that uses an IRA as the receptacle for employer/employee contributions. The SEP plan is often a good choice for very small companies because of its low cost and ease of administration. All employer contributions to a SEP plan are discretionary.
Which of the following statements regarding Roth IRAs and pre-tax 401(k) plans is(are) CORRECT? There are income limits for Roth IRAs. There is no income limitation to participate in a pre-tax 401(k) plan. There is no requirement to start taking distributions from a Roth IRA while the original owner is living. There is no requirement to start taking distributions from a pre-tax 401(k) while the participant is living.
The answer is I, II, and III. There is not an income limitation to participate in a pre-tax 401(k) plan. However, there are income limits for Roth IRAs (2021 - modified AGI: $208,000 married/$140,000 single). For Roth IRAs, there is no requirement to start taking distributions while the participant is living. For pre-tax 401(k) plans, distributions must begin no later than age 72, unless the participant is still working and not a 5% owner.
Which of the following statements regarding fully insured Section 412(e)(3) plans is(are) CORRECT? A fully insured plan is inappropriate for an employer who cannot commit to regular premium payments. This type of plan is not required to be certified by an enrolled or licensed actuary. All Section 412(e)(3) plans must meet minimum funding standards each plan year. A Section 412(e)(3) plan is a type of defined benefit pension plan.
The answer is I, II, and IV. Statement III is incorrect. Section 412(e)(3) plans must only meet minimum funding standards if there is a loan outstanding against the insurance policy funding the plan.
Basic provisions of SIMPLE IRAs include which of the following? They are subject to actual deferral percentage test (ADP) nondiscrimination rules. Employees are 100% vested in their elective deferrals. Employees are not fully vested in employer contributions until completing five years of service. Employers with fewer than 100 employees who earned $5,000 during any two preceding years and are reasonably expected to earn at least $5,000 during the current year must be allowed to participate.
The answer is II and IV. Employees are 100% vested in their elective deferrals. Employers with fewer than 100 employees who earned $5,000 during any two . SIMPLE IRAs are not subject to the nondiscrimination rules generally applicable to qualified plans (including top-heavy rules). The employee is 100% vested in both his elective deferrals as well as any employer contributions.
Which of the following persons could make tax-deductible contributions to a traditional IRA regardless of their modified adjusted gross income (MAGI)? A person who participates in a SEP IRA A person who participates in a Section 457 plan A person who participates in a Section 401(k) plan A person who participates in a Section 403(b) plan
The answer is II only. A person who participates in a qualified plan, SEP IRA, or Section 403(b) plan may not be able to make tax-deductible IRA contributions if the participant's MAGI exceeds certain limits. Participation in a Section 457 plan does not subject a person to these limitations.
Which of the following statements regarding the characteristics of a defined benefit pension plan is (are) CORRECT? The law specifies that the maximum allowable benefit payable from the plan is equal to the lesser of 100% of the average of the highest three years of compensation for the participant or $230,000 (2021) annually and the plan assigns the risk of investment performance to the employee. The plan is more costly to administer than defined contribution plans, and it specifies the final benefit an employee receives.
The answer is II only. Statement I is incorrect because defined benefit pension plans assign the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employer.
Sally, age 60, has received a $50,000 distribution from $100,000 she is to receive from her ex-husband's (who is age 55) qualified plan account under a qualified domestic relation order (QDRO). Which of the following statements is CORRECT regarding the QDRO and the distributed funds? Irrespective of the plan document, Sally may demand an immediate cash distribution of the remaining funds from the plan trustees. She may roll over the $50,000 distribution into an IRA. Sally's ex-husband is not subject to an early distribution penalty in the execution of the QDRO. Sally may be required to leave the remaining funds with the plan trustee until the earliest time for distributions under the plan.
The answer is II, III, and IV. A trustee may not be forced to distribute assets from a plan unless the plan document allows for it.
Adam, age 48, and Mary, age 47, were married for 15 years when they divorced last year. Adam died this year. They have two young children, ages 10 and 12, who are cared for by Mary. Adam's 70-year-old mother, Sarah, also survived him. At the time of Adam's death, he was currently, but not fully, insured under Social Security. What benefits are Adam's survivors entitled to under the Social Security program? A dependent parent's benefit A lump-sum death benefit of $255 A children's benefit based on a percentage of Adam's primary insurance amount (PIA) A surviving spouse benefit to take care of a dependent child
The answer is II, III, and IV. One lump-sum death benefit of $255 is payable if he was fully or currently insured. The children's benefit is payable because Adam was currently insured. Adam's divorced spouse (the children's mother) is entitled to a caretaker's benefit for caring for his children under age 16. Adam's mother would only be entitled to a benefit if Adam was fully insured and he had been providing at least half of her support at the time of his death.
Bill's employer maintains a target benefit pension plan. Bill is age 59. The plan was originally designed to benefit a 38-year-old key employee. There is also substantial turnover at Bill's company. Which of the following statements is (are) CORRECT? Bill knows exactly what retirement benefit to expect. Bill's retirement benefit is funded through elective deferrals. Forfeitures are likely to be allocated equally to Bill and the 38-year-old key employee. Contributions to the plan are mandatory.
The answer is IV only. Benefits depend on such plan's account balances, and the final benefit amount is not guaranteed. Target benefit pension plans are funded by the employer, not through employee elective deferrals. Forfeitures in such plans are likely to be unequal as a result of unequal compensation.
Jason, a CFP® professional, has a corporate client whose only two shareholders, ages 57 and 61, have asked for assistance with selecting a corporate retirement plan. His clients have annual compensation from the corporation of $145,000 each. They employ a staff of nine, ages 21 to 40, with annual compensation of $18,000 to $55,000. The clients want a qualified plan that offers maximum benefits for themselves, minimum benefits for the employees, contribution flexibility, and low administrative costs. Which of the following retirement plans should Jason recommend?
The answer is age-weighted profit sharing. An age-weighted profit-sharing plan is a qualified plan that would offer maximum benefits for the shareholders, who are older. An age-weighted profit-sharing plan would also offer flexible contributions and low administrative costs. A defined benefit pension plan would not have contribution flexibility or low administrative costs. Although a profit-sharing plan would offer contribution flexibility and low administrative costs, it would not allow maximum benefits for the principals. A SEP is not a qualified plan. LO 8.1.2
Which of the following statements regarding a stretch IRA is CORRECT? It allows the IRA owner's beneficiary to name his own beneficiary upon the owner's death. It extends or stretches the period of tax-deferred earnings within an IRA possibly over a decade.
The answer is both I and II. A stretch IRA extends or stretches the period of tax-deferred earnings within an IRA beyond the lifetime of the original owner, possibly over a decade.
Ross, age 75, works for Financial Strategies, Inc. The company has a long-established retirement plan. The plan has never required an actuary or Pension Benefit Guaranty Corporation (PBGC) insurance, but the employer is required to make annual mandatory contributions to each employee's account. What type of retirement plan was established by Financial Strategies?
The answer is money purchase plan. A money purchase pension plan requires annual mandatory employer contributions to each employee's account, does not require an actuary, and does not require PBGC insurance. The other choices are incorrect: A cash balance pension plan requires an actuary and PBGC insurance. A target benefit pension plan requires an actuary at the inception of the plan, but not on an annual basis. A traditional defined benefit pension plan requires the services of an actuary annually and PBGC insurance.
ABC Company would like to establish a retirement plan incorporating the following objectives: Attract and retain employees. The employer will make all contributions to the plan with company stock. The plan must integrate with Social Security. What type of retirement plan best suits ABC's objectives?
The answer is stock bonus plan. A stock bonus plan would accomplish ABC Company's objectives. The others are not the best plan for these reasons: Money purchase pension plans only allow for 10% company stock. ESOPs cannot be integrated with Social Security. New SARSEPs can no longer be established.
Which of the following are minimum coverage tests for qualified retirement plans? Nondiscrimination test Average benefits percentage test Ratio test Maximum compensation test
he answer is II and III. The two minimum coverage tests for qualified retirement plans are the average benefits percentage test and the ratio test. In order to be qualified, a retirement plan must meet at least one of these tests if the plan does not meet the percentage (safe harbor) test.
Money Purchase Plan
mandatory contributions individual participant accounts, so the employees bear the investment risk easy to communicate maintains its tax-qualified status, the tax benefits are known year to year. securities held by the plan cannot exceed 10% of the fair market value (FMV) of the plan assets
Section 401(k) plan does not have to satisfy the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests if it meets one of the safe harbor provisions. What are the provisions?
not subject to the top-heavy rules. making nonelective contributions for all eligible employees. making certain matching contributions for non-highly compensated employees who participate in the plan. Employees must be immediately 100% vested in mandatory employer contributions
