Retirement Planning and Employee Benefits
All of the following plans may integrate with Social Security EXCEPT: ESOP Profit Sharing Plan Defined Benefit Target Benefit
The correct answer is A.
Which of the following types of 457 plans permit employees to defer recognition of income without a risk of forfeiture? I. Public 457(b) plans. II. 457(f) plans. III. Private 457(b) plans. a) I only. b) II only. c) I and III only. d) I, II and III
The correct answer is A. 457(f) plans and private 457(b) plans must be subject to a substantial risk of forfeiture
Which of the following vesting schedules may a top-heavy qualified profit sharing plan use? 1 to 5 year graduated 5-year cliff 3 to 7 year graduated 4 to 8 year graduated
The correct answer is A. As a result of the PPA 2006, qualified profit sharing plans must use a vesting schedule that provides participants with vested benefits at least as rapidly as either a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule. This requirement applies without regard to whether the profit sharing plan is a top-heavy plan. Options B, C, and D all vest less rapidly than the required schedule.
Charles, a single 29 year old, deferred 2% of his salary, or $2,000, into a 401(k) plan sponsored by his employer during 2023. What is the maximum deductible IRA contribution Charles can make during 2023?a) a) $0. b) $1,000. c) $4,500. d) $6,500.
The correct answer is A. Charles cannot make a deductible IRA contribution for the year because he is an active participant in a qualified plan with an AGI of at least $100,000 ($2,000/2%), which exceeds the phase-out limits for a single person of $73,000 - $83,000 for 2023.
Kevin is age 62 and collecting Social Security benefits. In order to begin receiving Medicare Part A benefits, he must: a) Do nothing, coverage starts immediately at age 65. b) File a separate application for Medicare upon his 65th birthday. c) Do nothing, coverage starts immediately upon receiving retirement benefits, regardless of age. d) File a separate application for Medicare upon his 67th birthday.
The correct answer is A. Coverage starts automatically. If you receive retirement benefits early, there's no need to file a separate application.
Distributions from qualified plans are always treated as ordinary income. True False
The correct answer is B.
Tracy, age 46, is a self-employed financial planner and has Schedule C income from self-employment of $56,000. He has failed to save for retirement until now. Therefore, he would like to make the maximum contribution to his profit sharing plan. How much can he contribute to his profit sharing plan account? $9,464 $10,409 $11,200 $14,000
The correct answer is B. $56,000 Schedule C net income -3,956 (less ½ self-employment taxes at 15.3% × 0.9235) $52,044 Net self-employment income × 0.20 (0.25/1.25) $10,409 Keogh profit sharing contribution amount
Which of the following statements is/are correct regarding SEP contributions made by an employer? Contributions are subject to FICA and FUTA. Contributions are currently excludable from employee-participant's gross income. Contributions are capped at $22,500 for 2023. a) 1 only b) 2 only c) 1 and 2 d) 1, 2, and 3
The correct answer is B. Statement 2 is the only correct response. Statements 1 and 3 are incorrect. Employer contributions to a SEP are not subject to FICA and FUTA. The 401(k) elective deferral limit and the SARSEP deductible limits are $22,500 for 2023. The SEP limit is 25% of covered compensation up to $66,000 for 2023. Note: The maximum compensation that may be taken into account in 2023 for purposes of SEP contributions is $330,000. Therefore, the maximum amount that can be contributed to a SEP in 2023 is $66,000 (25% × $330,000, limited to $66,000).
A business valued at $3,000,000 has 3 partners. Each of the 3 partners buys a $500,000 life insurance policy on each of the other partners. Which of the following is true? 1. This is an example of an entity purchase plan. 2. This is an example of a cross purchase plan. 3. The policies are under funded. a) 1 only b) 2 only c) 1 and 3 d) 2 and 3
The correct answer is B. This is a cross-purchase life insurance plan. Each person has a one-third interest. Therefore, when the first partner dies, the other two partners will each need to pay $500,000 for a total of $1,000,000 (1/3 of $3,000,000). Thus, the policies are not underfunded.
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? 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. If the employer contribution to key employees is 2%, then the employer contribution to non-excludable, non-key employees must be 2%. The plan must use a vesting schedule that does not exceed either a 2-year cliff or 6-year graded vesting schedule. The plan must fully vest after three years of service if the vesting at two years is zero.
The correct answer is C.
Which of the following qualified plans require mandatory funding? 1. Defined benefit pension plans 2. 401(k) plans with an employer match organized as a profit sharing plan 3. Cash balance pension plans 4. Money purchase pension plans 1 and 3 1, 2, and 3 1, 3, and 4 1, 2, 3, and 4
The correct answer is C. 401(k) plans do not require mandatory funding. The other three require mandatory funding.
Kyle is 54 and would like to retire in 11 years. He would like to live the "high" life and would like to generate 90% of his current income. He currently makes $150,000 and expects $24,000 (in today's dollars) in Social Security. Kyle is relatively conservative. He expects to make 8% on his investments, that inflation will be 4% and that he will live until 104. How much does Kyle need at retirement? $3,631,802 $3,423,275 $3,554,911 $3,480,448
The correct answer is C. Salary = 111,000 (150,000* 90%) - 24,000 = 111,000 N = 11 years to retirement I = 4% inflation PV = 111,000 in salary Solve for FV Answer = 170,879.4003 beg mode PMT = 170,879.40 N = 39 (104 - 65) I = 3.8462 Inflation adjusted rate of return = (1.08/1.04) - 1 * 100 Solve for PVAnswer = 3,554,911.3548
Which statements are correct regarding penalties associated with IRA accounts? 1. Distributions made prior to 59½ are generally subject to the 10% premature distribution penalty. II. RMDs not taken in the required amount will have a 25% excise tax that can be reduced to 10% if taken in a timely manner. a) I only. b) II only. c) I and II. d) Neither I nor II.
The correct answer is C. Statements I and II are both correct. SECURE 2.0 Act revised the excise tax on Required Minimum Distribution from 50% to 25% and may be decreased to 10% if taken in a timely manner.
In July of last year (2022) Paul turned 72. He retired years ago and was a participant in his former employer's profit sharing plan. His profit sharing plan had an account balance $600,000 on December 31 of last year, and $450,000 on December 31 of the year prior. According to the Uniform Lifetime Table the factors for ages 72, and 73 are 27.4 and 26.5 respectively. What is the amount of Paul's first required minimum distribution that he must take by the deadline? 21,898 $22,641 $16,981 $16,423
The correct answer is A. $600,000/27.4 = $21,898 is his RMD. Paul turned age 72 last year and he will be required to take his first distribution for the 2022 tax year. The RMD for the first year may be delayed until April 1 of the next year but is still based on the year the taxpayer turns 72. If they delay the first RMD until April 1 of the next year, they will then be required to take two RMDs, the RMD for age 72 that was delayed and the RMD for age 73. SECURE Act 2.0 revised distributions for those reaching 72 after 12/31/22.
Jim, who is age 39, converts a $72,000 Traditional IRA to a Roth IRA in 2021. Jim's adjusted basis in the Traditional IRA is $10,000. He also makes a contribution of $4,000 to a Roth IRA in 2022 for the tax year 2021. If Jim takes a $4,000 distribution from his Roth IRA in 2023, how much total federal income tax, including penalties, is due as a result of the distribution assuming his 2023 federal income tax rate is 22 percent? A.$0 B.$400 C.$880 D.$1,280
The correct answer is A. Any amount distributed from an individual's Roth IRA is treated as made in the following order (determined as of the end of a taxable year and exhausting each category before moving to the following category): - From regular contributions; - From conversion contributions, on a first-in-first-out basis; and - From earnings. All distributions from all of an individual's Roth IRAs made during a taxable year are aggregated. The 10 percent additional tax under IRC Section 72(t) applies to any distribution from a Roth IRA includible in gross income. The 10 percent additional tax under IRC Section 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution and if the distribution is made within the 5-taxable-year period beginning with the first day of the individual's taxable year in which the conversion contribution was made.
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? I. He may contribute $22,500 plus $7,500 for age 50+ catch-up, plus $3,000 long service catch-up. II. He may not contribute to the long-service catch-up this year due to omitting a contribution last year. III. He may contribute $22,500 plus $7,500 age 50+ catch-up. IV. He may not participate in both the long service catch-up and the age 50+ catch-up in the same year. V. He is not eligible for the long service catch-up. a) III and V b) II only c) I, III and IV d) I and III
The correct answer is A. He is not eligible for the long service catch-up because the museum is not a HER (health, education, religious) organization. The maximum contribution limits for 2023 are $22,500 plus the age 50+ catch-up of $7,500.
An individual has determined utilizing the annuity method of capital needs analysis that he needs $1,045,656 at the beginning of his retirement to meet his retirement life expectancy goals. If this individual would like to be more conservative in his retirement planning forecast and maintain this capital balance throughout his retirement life expectancy of 32 years, given an expected earnings rate of 6%, and an inflation rate of 3% during the period, how much more would he need to have at the beginning of his retirement? $162,032 $406,067 $417,246 $674,023
The correct answer is A. N = 32 I = 6% FV = $1,045,656 PMT = $0 PV = $162,032 (Answer)
Which of the following is not true regarding profit sharing plans? A) The plan is established and maintained by the individual employee. B) Allows employees to derive benefit from profits of the company. C) Profit sharing plans cannot discriminate in favor of officers and shareholders. D) Profit sharing plans provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan.
The correct answer is A. Option A is not true regarding profit sharing plans. A profit sharing plan is established and maintained by the employer. The remaining options are true statements.
Which of the employee fringe benefits listed below, if provided by the employer, would be included in an employee's gross income? 1. Business periodical subscriptions 2. Season tickets to professional football games 4. Free parking provided near its business (value of $90 per month) 4. The use of an on-premises athletic facilities (value of $180 per month) 2 only 1 and 2 1, 2, and 3 1, 2, 3, and 4
The correct answer is A. Season tickets to professional football games are includible in the gross income of the employee receiving the tickets. All of the other fringe benefits are excludable. Occasional tickets to sporting events would be excludable.
A distress termination of a qualified retirement plan occurs when: 1) The PBGC initiates a termination because the plan was determined to be unable to pay benefits from the plan. 2) An employer is in financial difficulty and is unable to continue with the plan financially. Generally, this occurs when the company has filed for bankruptcy, either Chapter 7 liquidation or Chapter 11 reorganization. 3) The employer has sufficient assets to pay all benefits vested at the time, but is distressed about it. 4) When the PBGC notifies the employer that it wishes to change the plan due to the increasing unfunded risk. 2 only 1 and 2 1, 2, and 3 1, 2, and 4
The correct answer is A. Statement 2 is the definition of a distress termination. Statement 3 is standard termination. Statement 1 describes an involuntary termination. Statement 4 is simply false.
Jim, age 32, earns $65,000 per year. When he retires at age 62 he believes his wage replacement ratio will be 80% and Social Security will pay him $12,000 in today's dollars. How much must Jim save at the end of each year and make the last payment at 62, if he can earn 10% on his investments, inflation is 3% and he expects to live until age 100? $8,513 $6,513 $3,476 $10,543
The correct answer is A. Step #1 N = 30 (62-32) I = 3 PV = (65,000 × .80) - 12,000 = 40,000 PMT = 0 FV = ? = 97,090.50 Step #2 - BEGIN MODE N = 38 (100 - 62) I = (1.10) / (1.03) - 1 × 100 = 6.7961 PV = ? = 1,400,288.69 PMT = 97,090.50 FV = 0 Step #3 - END MODE N = 30 (62-32) I = 10 PV = 0 PMT = ? = 8,512.70 FV = 1,400,288.69
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? The ESOP must own at least 55% of the corporation's stock immediately after the sale. The owner must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale. The ESOP may not sell the stock within three years of the transaction unless the corporation is sold. The owner must not receive any allocation of the stock through the ESOP.
The correct answer is A. The ESOP must own at least 30% of the corporation's stock immediately after the sale. All of the other statements are true.
Which of the following statements accurately states the tax consequences for group health insurance premiums paid by an employer? a) Non-deductible for employer and excluded from taxable income for employee. b) Deductible for employer and excluded from taxable income for employee. c) Non-deductible for employer and included in taxable income for employee. d) Deductible for employer and included in taxable income for employee.
The correct answer is B.
Jason turned 72 in November of 2021 and is retired. He was a participant in his employer's profit sharing plan. His profit sharing plan had an account balance of $250,000 on December 31, 2022 and $200,000 on December 31, 2021. According to the Uniform Lifetime Table the factors for ages 72, 73, and 74 are 27.4, 26.5, and 25.6 respectively. What is Jason's approximate required minimum distribution due by December 31, 2022? $7,300. $7,547. $9,124. $9,434.
The correct answer is B. $200,000 / 26.5 = $7,547 The RMD required to distribute by December 31,2023 is for tax year 2023, when Jason is age 73. The profit sharing balance is used from prior year, December 21, 2022. Although Jason turns 72 in 2022 and can delay the first RMD until the next year, it will have to be taken by April 1, 2023. SECURE Act 2.0 revised the Required Begin Date for Required Minimum Distributions to age 73 for anyone turning 72 after 12/31/22.
Hasani died December 31, 2022, at age 50 leaving his wife Jamille and 4 children ages 4, 7, 15 and 17. His PIA is $2,500 per month. Assuming Jamille does not work how much approximately in total per month will she receive for 2023 for herself and kids (ignoring family maximums)? $5,000 $13,125 $12,300 $15,000
The correct answer is B. 2023 Calculation Jamille is too young to collect as a widow. Widow benefits begin at age 60. Jamille will receive benefit for caring for each of the children under age 16. Each child under age 18 will also receive 75% of the calculated PIA as a payment to them. 3 children x (2,500 x 75%) = 5,625 for care 4 children benefits x ($2,500 x 75%) = 7,500. The 17 year old will receive payments until their 18th birthday or 19th if still in school. Add the two types of benefits together for a total of $13,125.
Generally, which of the following are contributory plans? 401(k) and money purchase pension plans. 401(k) and thrift plans. Thrift plans and ESOPs. Money purchase pension plans and profit sharing plans.
The correct answer is B. Employers generally contribute to Money Purchase Pension Plans, ESOPs, and Profit Sharing Plans. Employees contribute (thus contributory plans) to 401(k)s and Thrift Plans.
Generally, which of the following are contributory plans? a) 401(k) and money purchase pension plans. b) 401(k) and thrift plans. c) Thrift plans and ESOPs. d) Money purchase pension plans and profit sharing plans.
The correct answer is B. Employers generally contribute to money purchase pension plans, ESOPs, and profit sharing plans. Employees contribute (thus contributory plans) to 401(k)s and thrift plans.
Hasani died December 31, 2022, at age 50 leaving his wife Jamille, age 49, and 4 children ages 4, 7, 15 and 17. His PIA is $2,500 per month. If Jamille goes back to work in 2023 and makes $100,000 how much approximately will she receive for the care of the children (ignoring family maximums)? a) $3,500 b) $5,625 c) $6,000 d) $7,500
The correct answer is B. Jamille will receive a benefit for each child she cares for under age 16. Each child under age 18 (19 if in secondary school - ie high school) will also receive a benefit directly. For the care of the children, Jamille will receive 75% of Hasani's calculated PIA. 2,500 x 75% = 1,875 for each of the three children under 16 = $5,625
The following statements concerning retirement plan service requirements for qualified plans are correct EXCEPT: The term "year of service" refers to an employee who has worked at least 1,000 hours during the initial 12-month period after being employed. According to the Internal Revenue Code, if an employee hired on October 5, 20X1 has worked at least 1,000 hours or more by October 4, 20X2, he has acquired a year of service the day after he worked his 1,000th hour. An employer has the option of increasing the one-year of service requirement to 2 years of service. Once an employee attains the service requirement of the plan, the employer cannot make the employee wait more than an additional six months to enter the plan.
The correct answer is B. Option B is incorrect because the employee would NOT acquire a year of service the day after he worked his 1,000th hour, but after twelve months AND 1,000 hours
Andrea died this year (2023) at the age 77, leaving behind a qualified plan worth $200,000. Andrea began taking minimum distributions from the account after attaining age 70½ and correctly reported the minimum distributions on her federal income tax returns. Before her death, Andrea named her granddaughter, Reese age 22, as the designated beneficiary of the account. Now that Andrea has died, Reese has come to you for advice with respect to the account. Which of the following is correct? A) Reese must distribute the entire account balance within five years of Andrea's death. B) Reese must distribute the entire account balance within ten years of Andrea's death. C) In the year following Andrea's death, Reese must begin taking distributions over Andrea's remaining single-life expectancy. D) Reese can roll the account over to her own name, treat the account as her own and name a new beneficiary.
The correct answer is B. SECURE Act 2019 changed distribution rules for beneficiaries of account owners that died after 12/31/19. Whether the account owner died before RBD (Required Begin Date) or after, the distribution rules are now the same. All Designated Beneficiaries must withdraw the account balance within 10 years of the owner's death. Eligible Designated Beneficiaries may distribute over their life expectancy in the year following owner's death. Eligible Designated Beneficiaries are: •Surviving spouse for the employee or IRA owner •Child of employee or IRA owner who has not reached majority •At age of majority becomes a designated beneficiary •Chronically ill individual •Any other individual who is not more than ten years younger than the employee or IRA owner Non-Designated Beneficiaries (no listed Beneficiary) rules are pending clarification from the IRS but we believe must be distributed within 5 years of the account owner's death. The new rules were not clear if the difference for before or after RBD were still applicable. Reese is more than 10 years younger than Andrea, which makes her a Designated Beneficiary.
A SEP is not a qualified plan and is not subject to all of the qualified plan rules. However, it is subject to many of the same rules. Which of the following are true statements? SEPs and qualified plans have the same funding deadlines (due date of return plus extensions). The contribution limit for SEPs and qualified plans (defined contribution) is $66,000 for the year 2023. SEPs and qualified plans have the same ERISA protection from creditors. SEPs and qualified plans have different nondiscriminatory and top-heavy rules. a) 1 only b) 1 and 2 c) 2 and 4 d) 1, 2, 3, and 4
The correct answer is B. SEPs and qualified plans can be funded as late as the due date of the return plus extensions. The maximum contribution for an individual to a SEP is $66,000 for 2023 ($330,000 maximum compensation × 25%, limited to $66,000). Thus, statements 1 and 2 are correct. Qualified plans are protected under ERISA. IRAs and SEPs do not share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules.
A SEP is not a qualified plan and is not subject to all of the qualified plan rules. However, it is subject to many of the same rules. Which of the following are true statements? I. SEPs and qualified plans have the same funding deadlines. II. The contribution limit for SEPs and qualified plans (defined contribution) is $66,000 for the year 2023. III. SEPs and qualified plans have the same ERISA protection from creditors. IV. SEPs and qualified plans have different nondiscriminatory and top-heavy rules. a) I only. b) I and II only. c) II and IV only. d) I, II, III and IV
The correct answer is B. SEPs and qualified plans can be funded as late as the due date of the tax return plus extensions. The maximum contribution for an individual to a SEP is $66,000 for 2023 ($330,000 maximum compensation × 25%, limited to $66,000). Thus, statements I and II are correct. Qualified plans are protected under ERISA. IRAs and SEPs do not share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules.
Jon, age 48, earns $65,000 gross per year from his employer. Jon saves $15,000 per year for retirement and pays $12,000 per year for his home mortgage. Given this information and considering that Jon will have eliminated his mortgage debt before retirement, what is Jon's expected wage replacement ratio during retirement? 43.16% 50.81% 58.46% 73.89%
The correct answer is B. Salary $65,000.00 100.00% Payroll Taxes ($4,972.50) 7.65% Savings ($15,000.00) 23.08% Mortgage Paid-Off ($12,000.00) >18.46% $33,027.50 50.81%
Which of the following fringe benefits would be included in taxable income? I. Season tickets to the professional baseball team ($2,000 value per year). II. Access to a local gym, not owned by the employer ($800 value per year). III. One-time use of the company dump truck to deliver sand to an employee's residence ($500 value). IV. A crystal plaque worth $150 as an achievement award. a) I only. b) I and II only. c) I and III only. d) I, II, III and IV.
The correct answer is B. Season tickets are taxable. To be deductible/excludable, the gym must be on the employer's property or under the employer's control. De minimus use is not taxable. Awards cannot be cash, but a plaque is fine.
Danielle has worked for the City of Buffalo for the last 20 years. She has deferred $22,500 into her 457(b) plan for 2023. She will attain her normal retirement age under the City's 457(b) plan in 2024. Danielle has prior unused deferral amount of $45,000 as of December 31, 2022. How much can Danielle contribute as her three-year catch-up contribution in 2023? $0 $22,500 $43,500 $45,000
The correct answer is B. Since the plan's normal retirement age for Danielle is 2024, Danielle would be allowed to defer an additional $22,500 in 2023. This is within the three years of the plan's normal retirement age and Danielle has sufficient prior unused deferral. The three year catch up allows a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of: the elective deferral limit, $22,500 in 2023. the basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)
Which of the following statements concerning the use of life insurance as an incidental benefit provided by a qualified retirement plan is (are) correct? The premiums paid for the life insurance policy within the qualified plan are taxable to the participant at the time of payment. Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer's aggregate contributions to the participant's account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer's aggregate contributions to the participant's account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income, or the policy distributed to the participant, at or before retirement. 1 only 2 only Both 1 and 2 Neither 1 nor 2
The correct answer is B. Statement 1 is incorrect. The economic value of pure life insurance coverage is taxed annually to the participant. Statement 2 is correct because the 25 percent test is actually a misnomer, for it is really two tests: a 25 percent test and a 50 percent test, depending on which type of life insurance protection is involved.
Which of the following statements is/are correct regarding TSAs and 457 deferred compensation plans? 1) Both plans require contracts between an employer and an employee. 2) Participation in either a TSA or a 457 plan will cause an individual to be considered an "active participant" for purposes of phasing out the deductibility of Traditional IRA contributions. 3) Both plans allow 10-year forward averaging tax treatment for lump-sum distributions. 4) Both plans must meet minimum distribution requirements that apply to qualified plans. 1 only 1 and 4 2, 3, and 4 1, 2, and 4
The correct answer is B. Statements 1 and 4 are correct. Statement 2 is incorrect because a 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an "active participant." Statement 3 is incorrect because 10-year forward averaging is not permitted from either plan.
Marguerite received nonqualified stock options (NQSOs) with an exercise price equal to the FMV at the date of the grant of $22. Marguerite exercises the options 3 years after the grant date when the FMV of the stock was $30. Marguerite then sells the stock 3 years after exercising for $35. Which of the following statements are true? 1. At the date of the grant, Marguerite will have ordinary income of $22. 2. At the date of exercise, Marguerite will have W-2 income of $8. 3. At the date of sale, Marguerite will have long term capital gain of $5. 4. Marguerite's employer will have a deductible expense in relation to this option of $22. a) 3 only b) 2 and 3 c) 2, 3, and 4 d) 1, 2, 3, and 4
The correct answer is B. Statements 2 and 3 are correct. Marguerite would not have any taxable income at the date of grant provided the exercise price is equal to the fair market value of the stock. Marguerite's employer would receive a tax deduction equal to the amount of W-2 income Marguerite would be required to recognize, $8 of W-2 income, at the date of exercise. Marguerite's long term capital gain is $5, calculated as the sales price of $35, less the exercise price of $30.
Packlite company has a defined benefit plan with 200 nonexcludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the requirements set forth in the IRC? 40 50 80 100
The correct answer is B. The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. Here 40% would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees.
Patrick and Kevin own Irisha Corporation and plan to retire. They would like to leave their assets to their children; therefore, they transfer 70 percent of the stock to a trust for the benefit of their 10 children pro rata. Patrick and Kevin then plan to sell the remaining Irisha shares to a qualified ESOP plan. Which of the following is correct? 1. The stock transfer to the ESOP is not a 50 percent transfer and therefore will not qualify for non-recognition of capital gains. 2. Any transfer to an ESOP of less than 50 percent ownership may be subject to a minority discount on valuation. 1 only 2 only 1 and 2 Neither 1 nor 2
The correct answer is B. There must have been a sale of at least 30% (not 50%) to the ESOP to qualify for non-recognition of capital gain treatment. In addition, any transfer that is less than 50% of the stock of the corporation might be subject to a minority discount on valuation.
Christine is single, 42, and is an active participant in her employer's qualified retirement plan. Her AGI is $77,000 and she makes the maximum traditional IRA contribution. What is her deductible IRA contribution? $6,500 $3,900 $2,600 $0
The correct answer is B. Use the phase out formula. AGI - bottom of the phase out range = ? / range of the phase out ($73,000 to $83,000 in 2023) = phase out. [($77,000 - $73,000) / $10,000] = .4 Deduction = $6,500 - ($6,500 x 40%) = $3,900
Packlite company has a defined benefit plan with 200 nonexcludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the requirements set forth in the IRC? 40 50 80 100
The correct answer is B.The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. Here 40% would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees.
Jeff wants to retire in 15 years when he turns 65. Jeff wants to have enough money to replace 75% of his current income less what he expects to receive from Social Security at the beginning of each year. He expects to receive $20,000 per year from Social Security in today's dollars. Jeff is conservative and wants to assume a 6% annual investment rate of return and assumes that inflation will be 4% per year. Based on his family history, Jeff expects that he will live to be 95 years old. If Jeff currently earns $100,000 per year and he expects his raises to equal the inflation rate, approximately how much does he need at retirement to fulfill his retirement goals? A.$1,268,887 B.$2,242,055 C.$2,285,172 D.$3,057,348
The correct answer is C. 10BII Keystrokes Step #1 - NPV at Time Period Zero 0 Cfj 0 CFj 14 orange shift Nj 55,000 CFj 30 orange shift Nj 1.06 divide 1.04 = - 1 × 100 = i Orange shift NPV Answer: 953,522.61 Step #2 - FV of Account at Retirement 15 N 6 I/YR 953,522.61 PV 0 PMT FV Answer: 2,285,172.41
All of the following statements concerning cash balance pension plans are correct EXCEPT: The cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand, and as a cost saving measure. The cash balance plan is a defined benefit plan. The cash balance plan has no guaranteed annual earnings to participants. The cash balance plan is subject to minimum funding requirements.
The correct answer is C. A basic component of a cash balance plan is the guaranteed minimum investment return.
Which of the following statements are correct regarding a retirement plan? I. Employees don't start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service). II. Since turnover is generally highest for employees in their first few years of employment and for younger employees, it makes sense from an administrative standpoint to delay eligibility. III. A tax-exempt educational institution may delay eligibility to age 26 under certain circumstances. I and III only. II only. I, II and III. None of the above.
The correct answer is C. All statements are typical potential qualified plan provisions to delay eligibility of employees to participate in a retirement plan.
Which of the following statements are correct regarding a retirement plan? Employees don't start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service). Since turnover is generally highest for employees in their first few years of employment and for younger employees, it makes sense from an administrative standpoint to delay eligibility. A tax-exempt educational institution may delay eligibility to age 26 under certain circumstances. I and III only. II only. I, II and III. None of the above.
The correct answer is C. All statements are typical potential qualified plan provisions to delay eligibility of employees to participate in a retirement plan.
Which of the following plans require mandatory funding? Defined Benefit Plan Cash Balance Pension Plan ESOP Target Benefit I and II only. I , II and III only. I, II and IV only. I, II, III and IV only.
The correct answer is C. An ESOP does not have mandatory funding requirements.
Robin and Robbie, both age 35, are married and filed a joint return for 2022. Robbie earned a salary of $132,000 in 2023 and defers $6,000 to his employer's 401(k) plan. Robbie and Robin earned interest of $15,000 in 2023 from a joint savings account. Robin is not employed, and the couple had no other income. On April 15, 2023, Robbie contributed $6,500 to an IRA for himself and $6,500 to an IRA for Robin. The maximum allowable IRA deduction on the 2023 joint return is: a) $1,625 b) $3,250 c) $6,500 d) $13,000
The correct answer is C. Anyone with earned income can contribute to an IRA, but the ability to deduct the IRA contribution depends on the individual's AGI and whether the individual is an active participant in a qualified plan. Since Robbie has a qualified plan, they cannot deduct the contribution for him due to his income of $141k ($132k - $6k + $15k) which exceeds the AGI phaseout of $116,000 - $136,000 for 2023. Robin, on the other hand, can deduct her contribution because she does not have a qualified plan and their joint income $147k ($132k + $15k) is less than the $218,000 to $228,000 phaseout for the spouse of an active participant. Therefore, Robin's deduction is $6,500. She can use Robbie's earned income as her own for the contribution as she is not employed.
Which of the following vesting schedules may a top-heavy qualified profit sharing plan use? 2 to 7 year graduated. 5 year cliff. 2 to 4 year graduated. 4 to 8 year graduated.
The correct answer is C. As a result of the PPA 2006, qualified profit sharing plans must use a vesting schedule that provides participants with vested benefits at least as rapidly as either a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule. This requirement applies without regard to whether the profit sharing plan is a top-heavy plan. Employers can be more generous, never less. Options a, b, and d all vest less rapidly than the required schedule.
Robbie is the owner of SS Automotive and he would like to establish a qualified pension plan. Robbie would like most of the plan's current contributions to be allocated to his account. He does not want to permit loans and he does not want SS Automotive to bear the investment risk of the plan's assets. Robbie is 32 and earns $700,000 per year. His employees are 25, 29, and 48 and they each earn $25,000 per year. Which of the following qualified pension plans would you recommend that Robbie establish? Target benefit pension plan Cash balance pension plan Money purchase pension plan Defined benefit pension plan using permitted disparity
The correct answer is C. Because Robbie does not want SS Automotive to bear the investment risk of the plan assets, the money purchase pension plan or the target benefit plan would be the available options to fulfill his requirements. The target benefit plan would not fulfill Robbie's desires because as a percentage of compensation, older employees receive a greater contribution in a target benefit plan and one of the employees is older than Robbie. In such a case, the older employee would receive a greater (as a percentage of compensation) contribution to the plan.
Going Higher Construction sponsors a 401(k) profit sharing plan. In the current year, Going Higher Construction contributed 25% of each employees' compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC was 3.5%. If Bob, age 57, earns $100,000 and is a 6% owner, what is the maximum amount that he may defer into the 401(k) plan for this year? $3,500 $5,500 $13,000 $30,000
The correct answer is C. Bob is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 5.5% (3.5% + 2%) and because he is over 50, he can defer the additional $7,500 (2023) as a catch-up contribution. Bob can defer $5,500 (5.5% × $100,000) and $7,500 (the catch-up) for a total of $13,000.
Marcus has been employed by GCD Enterprises for 15 years, and currently earns $60,000 per year. Marcus saves $15,000 per year. He plans to pay off his home at retirement and live debt free. He currently spends $12,000 per year on his mortgage. What do you expect Marcus' wage replacement ratio to be based on the above information? 28.41% 33.02% 47.35% 55.00%
The correct answer is C. Calculate the Wage Replacement Ratio: Salary$60,000100.00%Payroll Taxes($4,590)7.65%Savings($15,000)25.00%Mortgage Paid-Off($12,000)20.00% Costs in Retirement$28,41047.35%
Donald and Daisy are married and file jointly. They are both age 42, both work, and their combined AGI is $126,000. This year (2023), 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 $13,000 IRA contribution can they deduct? Assume that $6,500 is contributed to each account. a) $3,250 b) $6,500 c) $9,750 d) $13,000
The correct answer is C. Daisy is an active participant. She cannot opt out of a defined benefit plan. Use the phase out formula. AGI-bottom of the phase out range=? / range of the phase out (116,000 to 136,000 in 2023) = phase out. $126,000 - $116,000 = $10,000 $10,000/$20,000 = .50 or 50% 50% x $6,500 = $3,250 Donald is not active this year, he will follow the spousal phase out of $218,000 - $228,000. He is eligible for the full $6,500. They can deduce a total of $9,750.
Joe Liner works at a company that is considering options regarding its future legacy payments and it needs to find current tax deductions. One option the company is considering is funding a VEBA this year. Joe is uneasy but open to the idea because he has heard that more benefits may be funded in the VEBA. Which of the following are permitted under a VEBA? I. Life, sickness and accident benefits II. Retirement benefits III. Severance and supplemental unemployment IV. Job training V. Commuter benefits I, II and III only. II and IV only. I, III and IV only. II, III and V only.
The correct answer is C. Retirement benefits and commuter benefits cannot be included in a VEBA
Robin began taking required minimum distributions from her profit sharing plan several years ago. Robin died after suffering a heart attack on January 2, 2021. She had named her twin sister Johanna as beneficiary of her profit sharing plan. Which of the following statements is false? a) Johanna may take a full distribution of the profit sharing plan's assets in the year of Robin's death. b) After Johanna's death, her named beneficiary will need to distribute the balance of the account within 10 years of Johanna's death. c) Robin's sister must take a distribution of the profit sharing plan account balance by the end of the fifth year after the year of her death. d) The required minimum distribution can be taken over Johanna's life, the year following Robin's death.
The correct answer is C. SECURE Act 2019 changed the distribution rules following the account owner's death. The new rules do not differentiate between death before or after RMDs start. Johanna is an Eligible Designated Beneficiary and will be able to distribute the account over her life expectancy. Any balance upon Johanna's death is subject to the 10 year rule. Johanna could elect to take the distributions faster than her life expectancy if she wishes. She will not be subject to distribution within 5 years.
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? I. Eligible for 10 year forward averaging. II. Subject to 10% penalty. III. Eligible for Rollover. IV. Subject to mandatory 20% withholding. V. Exempt from the 10% early withdrawal penalty. I, II and III only II, III and IV only III, IV and V only III and IV only I, IV and V
The correct answer is C. She must be born by 1/1/1936 in order to use 10 year forward averaging. She is not subject to the 10% penalty due to separation of service after age 55. She is eligible for a rollover. She is subject to the 20% withhold since the check went to her (indirect rollover) She is exempt from the 10% penalty, due to separation of services after age 55.
Robert Sullivan, age 56, works for Dynex Corporation, and earns $345,000. Dynex Corp. provides a non-elective contribution to its SIMPLE IRA plan. Which one of the following is the maximum amount that could go into Robert's account this year? (The Section 401(a)(17) limit on includible compensation is $330,000 for 2023) A.$22,100 B.$22,400 C.$25,600 D.$25,900
The correct answer is C. The compensation limit applies to SIMPLE IRAs when non-elective contributions are made. $330,000 × 2% = $6,600 + $15,500 (max EE deferral) + $3,500 (age 50+ catch-up) = $25,600 Choice A is incorrect. It utilizes the correct calculation but does not include the catch-up of $3,500. Choices B and D are incorrect as they calculate the contribution amount using $345,000 × 2% SIMPLE elective contributions do not have a compensation limit. SIMPLE Non-elective contributions are limited to 2% of the covered compensation limit.
A company's defined benefit pension plan utilizes a funding formula that considers years of service and average compensation to determine the pension benefit payable to the plan participants. If Kim is a participant in this defined benefit pension plan and she has 30 years of service with the company and average compensation of $75,000, what is the maximum pension benefit that can be payable to Kim at her retirement? $22,500 $66,000 $75,000 $265,000
The correct answer is C. The maximum amount payable from a defined benefit pension plan is the lesser of $265,000 (2023) or 100% of the average of the employee's three highest consecutive years of compensation. Because the average of Kim's compensation is $75,000, she would be limited to receiving a pension benefit at her retirement of $75,000.
XYZ has a noncontributory qualified profit sharing plan with 310 employees in total, 180 who are nonexcludable (40 HC and 140 NHC). The plan covers 72 NHC and 29 HC. The NHC receive an average of 4.5% benefit and the HC receive 6.5%. Which of the following statements is (are) correct? The XYZ company plan meets the ratio percentage test. The XYZ company plan fails the average benefits test. The plan must and does meet the ADP test. 1 only 2 only Both 1 and 2 1, 2, and 3
The correct answer is C. The plan does not have to meet the ADP test because it is a noncontributory plan. The plan meets the ratio percentage test and fails the average benefits test. Safe Harbor = 72 ÷ 140 = 51% = Fail Ratio % = (72 ÷ 140) ÷ (29 ÷ 40) = 70.9% = Pass Average Benefit = 4.5 ÷ 6.5 = 69.2% = Fail
Brandon's employer gave him restricted stock worth $100,000 (5,000 shares at $20 per share) on January 1st of the current year. Five years later, when all restrictions are lifted, the stock will be trading at $40 per share. Which of the following accurately describes the tax consequences for Brandon in 5 years? a) $200,000 LT capital gain. b) $100,000 W-2 income and 100,000 LT capital gain. c) $200,000 W-2 income. d) $100,000 LT capital gain.
The correct answer is C. The stock is taxable when it vests and is treated as W-2 income. Since there is a five year vesting schedule, it will be entirely W-2 income a that time. Brandon could have filed an 83(b) election upon the granting of the stock and converted the $20 of appreciation per share into capital gains.
What benefits are available to the survivors of a deceased worker who was currently insured but not fully insured at death? I. Lump sum death benefit of $255. II. Mother or father's spousal benefit for caring for a qualifying child under age 16. III. Income benefits to a child under age18. IV. Survivor benefit to spouse (assume not remarried) at age FRA. I and III. II, III, and IV. I, II, and III. I, II, III, and IV.
The correct answer is C. There are no survivor benefits to a surviving spouse with no qualifying child.
When calculating the Wage Replacement Ratio (WRR), what percentage of income is subtracted for a self-employed individual, under the Social Security wage base, for Social Security and Medicare Taxes excluding the Additional Medicare Tax? 7.65% 6.20% 15.30% 12.40%
The correct answer is C. This is an important point to stress as many clients are self-employed and pay both employer and employee portions of the tax, 6.2% social security, 1.45% medicare (7.65%) for the employee portion, and the same for the employer portion for a total of 15.3% (7.65 + 7.65).
Ricky receives stock options for 12,000 shares of XYZ Corporation with an exercise price of $10 when the stock is trading on the national exchange for $10 per share. The XYZ company plan is an Incentive Stock Option Plan. Which of the following statements are true regarding the options? I. Ricky will be required to hold any ISOs for more than a year after exercise and more than two years from the grant date to have long-term capital gains. II. 2,000 of the options are considered NQSOs. I only. II only. I and II. Neither I nor II.
The correct answer is C. To the extent the fair market value of the stock for which the ISO is exercisable for the first time during any calendar year exceeds $100,000, the excess is treated as a nonstatutory stock option; therefore, 2,000 of the options are NQSOs.
Kenny's Aquatics, Inc. sponsors a discretionary profit sharing plan and a 10% Money Purchase Pension Plan. For the current year, aggregate covered compensation totaled $2,000,000. If Kenny's Aquatics would like to contribute the maximum deductible amount to the profit sharing plan, how much can they contribute? A.$0 B.$225,000 C.$300,000 D.$500,000
The correct answer is C.The combined limit for contributions to multiple plans is 25% of employer covered compensation, $500,000 ($2,000,000 × 25%). In this case, since Kenny's Aquatics made a mandatory MPPP contribution of $200,000, they could only make a contribution of $300,000 ($500,000 - $200,000) to the profit sharing plan.
Angelo's Bakery has 105 employees. 90 of the employees are nonexcludable and 15 of those are highly compensated (75 are nonhighly compensated). The company's qualified profit sharing plan benefits 8 of the highly compensated employees and 40 of the nonhighly compensated employees. Does the profit sharing plan sponsored by Angelo's Bakery meet the coverage test?Yes, the plan meets the average benefits percentage test.Yes, the plan meets the general safe harbor test.Yes, the plan meets the ratio percentage test.Yes, the plan meets ratio percentage test and the general safe harbor test.
The correct answer is C.The plan meets the ratio percentage test. The percentage of NHC employees covered by the plan is 53.33% and the percentage of HC employees covered by the plan is 53.33%. The ratio percentage of the NHC employees covered by the plan compared to the ratio percentage of the HC employees covered by the plan is 100% (53.33%/ 53.33%) which is greater than the ratio requirement of at least 70%.Another method of determining whether the plan meets the ratio percentage test is to determine the minimum number of nonexcludable NHC employees that must be covered by the plan to pass the ratio percentage test. This can be determined by calculating 70% of the percentage of HC covered by the plan multiplied by the number of nonexcludable NHC employees. In this problem, it would be calculated as follows: [((8/15) × 70%) × 75] = 28. 28 NHC employees must be covered to pass the ratio percentage test. The facts do not give us any information to determine if the plan meets the average benefits percentage test. The plan does not meet the general safe harbor test which requires that at least 70% of the NHC employees are covered by the plan.
Which of the following statements accurately reflects the tax consequences of contributions to and distributions from HSAs? I. Contributions by the employee are deductible for AGI. II. Distributions for medical expenses are tax-free. III. Contributions by the employer are excludable from income by the employee. IV. Earnings within the HSA are non-taxable. a) I and II only. b) I, II and III only. c) III and IV only. d) I, II, III and IV.
The correct answer is D
Hasani died December 31, 2022, at age 50 leaving his wife Jamille and 4 children ages 4, 7, 15 and 17. His PIA is $2,500 per month. How many of these family members are entitled to receive his benefits (assuming direct deposits) in 2023? 2 3 4 5
The correct answer is D. 1 for her and 4 to her for the benefit of each child.
The Third Party Administrator (TPA) of the Flying Trapeze Manufacturing Incorporated's Defined Contribution Plan has just informed you, its administrator, that the plan is top heavy. Which one of the following statements is NOT a requirement that applies to your plan? a) Employees must be 100% vested in the plan after three years of service if the vesting at two years is zero. b) If the employer contribution to key employees is 2%, then the employer contribution to non-excludable, non-key employees may be reduced to no lower than 2%. c) Flying Trapeze, Inc. must contribute a minimum of 3% of compensation or the contribution rate of the key employees, if it is lower, to non-excludable, non-key employees for each year that the plan is top heavy. d) The plan's vesting schedule must be 100% vested upon participation.
The correct answer is D. A is correct because the plan must have no longer than a 3 year cliff or 2-6 year graded vesting. If year 2 is zero, it must be a cliff vesting and year 3 must be 100%.
Christine has been the owner of Chris' Antique Dolls for the past 15 years. She decided to establish a retirement plan for her corporation. She wants to make all initial contributions to the plan using company stock and she may integrate with social security. Which of the following would be the best qualified plan for them to consider adopting? Defined benefit pension plan New comparability plan 401(k) plan with a match Profit sharing plan
The correct answer is D. A profit sharing plan will allow a stock contribution and integration with social security. A stock bonus plan would also be an appropriate, but it's not one of the choices.
Qualified retirement plans that permit the employer unlimited investment in sponsor company stock are: I. 401(k) plans. II. Stock bonus plans. III. Profit sharing plans. IV. ESOPs. III only. IV only. III and IV only. I, II, III and IV.
The correct answer is D. All of the listed plans permit 100% stock in the plans. The 401(k) plan is organized as a profit sharing or stock bonus plan
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? A profit sharing plan that uses permitted disparity An age-based profit sharing plan A defined benefit pension plan A target benefit pension plan
The correct answer is D. All of the listed plans would allocate a higher percentage of a plans current cost to a certain class of eligible employees.
Which of the following statements concerning rabbi trusts is (are) CORRECT? I. 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. II. 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. III. A rabbi trust may not be held off-shore as a result of the American Jobs Creation Act of 2004. IV. The American Jobs Creation Act of 2004 prohibits "springing irrevocability" for a rabbi trust if there is a change of control or ownership. I and IV. I and III. II and III. I only.
The correct answer is D. II describes a secular trust. III is incorrect because off-shore Rabbi trusts may still create and hold assets but there is no tax benefit for doing so. Realistically, these are no longer created because of the loss in preferential tax treatment. However, any off-shore Rabbi trust previously created is grandfathered so as long as there are no material changes to the plan it may maintain the pre-AJCA '04 treatment (the preferential tax deferral). IV is wrong because AJCA 2004 does allow springing irrevocability in these circumstances, but not for bankruptcy.
Josh recently died on January 5, 2021 at the age of 63, leaving a qualified plan account with a balance of $1,000,000. Josh was married to Kay, age 53, who is the designated beneficiary of the qualified plan. Which of the following is correct? a) Kay must distribute the entire account balance within five years of Josh's death. b) Kay must begin taking distributions over Josh's remaining single-life expectancy. c) Any distribution from the plan to Kay will be subject to a 10 percent early withdrawal penalty until she is 59½. d) Kay can receive annual distributions over her remaining single-life expectancy.
The correct answer is D. Kay can receive distributions over her remaining single-life expectancy. Kay qualifies as an eligible designated beneficiary as she is 10 years younger, not more than 10 years younger. Answer A is incorrect. She is not required to distribute the entire account within 5 years. Answer B is incorrect. Kay can wait (not must) until Josh would have been 72 to begin taking distributions over her recalculated life expectancy. Answer C is incorrect. The distribution will not be subject to the early withdrawal penalty because the distributions were on account of death.
Each of the following is a characteristic of a defined benefit retirement plan EXCEPT: A.The plan specifies the benefit an employee receives at retirement. B.The law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of salary or $265,000 (2023) per year currently. C.The plan has less predictable costs as compared to defined contribution plans. D.The plan assigns the risk of pre-retirement inflation, investment performance, and adequacy of retirement income to the employee.
The correct answer is D. Option D describes characteristics of a defined contribution plan. Defined benefit plans assign the risk of pre-retirement inflation, investment performance, and adequacy of retirement income to the employer, not the employee.DB plans have three benefit calculations covered in your textbook; unit benefit, flat dollar and flat percent. Only unit benefit uses 100% of average final compensation (or average highest 3 years). All use the max benefit of $230,000 (2021).
Medical Trials Inc. has a cafeteria plan. Full-time employees are permitted to select any combination of the benefits listed below, but the total value received by each employee must be $6,500 a year or less. 1. Group medical and hospitalization insurance for employee only, $3,600 a year. 2. Group medical and hospitalization insurance for employee's spouse and dependents, $1,200 additional a year. 3. Child-care payments, actual cost not to exceed $5,000. 4. Cash required to bring the total of benefits and cash to $6,500. 5. Universal variable life insurance $1,000. Which of the following statements is true? (All employees are full time) A. James chooses to receive $6,500 cash because his wife's employer provides medical benefits for him. James has $2,900 of taxable income ($6,500 - $3,600). B. Matt chooses 1, 2, 5, and $700 cash. He must include $700 in taxable income. C. Randy chooses 1 and 2 and $1,700 in child care. He must include the $1,700 in gross income. D. Robin chooses 1 and 2 and $1,700 cash. Robin must include $1,700 in taxable income.
The correct answer is D. Option D is correct because cash must be included in income. Option A is incorrect because the entire cash distribution will be taxable. Option B is incorrect because the universal variable life insurance premiums of $1,000 cannot be excluded from Matt's gross income. Option C is incorrect because child care payments are excludable benefits.
Which of the following benefits provided by an employer to its employees is currently taxable to the employee? a) Employees of the DEF Department Store are allowed a 15% discount on store merchandise. DEF's normal gross profit percentage is 20%. b) On a space-available basis, undergraduate tuition is waived by Private University for the dependent children of employees (value of $15,000 per semester). c) Fly Airline allows its employees to fly free when there are open seats available on a flight (average value of $200). d) Incidental personal use of a company car.
The correct answer is D. Personal use of a company car is a taxable fringe benefit. All of the other employer fringe benefits listed may be excluded from the employee's gross income.
Meb, the owner of Meb's Hardware, is considering establishing a stock bonus plan. She recently talked with her financial planner, Don T. Know. Don T. Know never studied when he took his certificate program, therefore he gave Meb incorrect information about stock bonus plans. Which of the following statements given to Meb was correct? A) Meb can require the employees to be age 21 and employed for three years before becoming eligible for the stock bonus plan. B) When the employee's of Meb's Hardware receive distributions of stock from the stock bonus plan, they will receive capital gain treatment on the distribution equal to the value of the stock as contributed by Meb's Hardware. C) A valuation of the stock of Meb's Hardware is required when the stock bonus plan is established, but subsequent valuations are unnecessary. D) Meb can establish a stock bonus plan for the previous year anytime before the due date (plus extensions) of Meb's Hardware's tax return.
The correct answer is D. SECURE Act 2019 - allows establishment of a Qualified Plan by filing date of tax return with extensions, following the standards set by the SEP plan. When the employees of Meb's Hardware receive distributions of stock from the plan, the value of the distribution equal to the value at the date Meb contributed the stock will be ordinary income. The appreciation will be long-term capital gain. Meb must have the stock valued at the date the plan is established and at the date of any distributions.
Which of the following statements is/are correct regarding the early distribution 10 percent penalty tax from a qualified plan? Retirement at age 55 or older exempts the distributions from the early withdrawal penalty tax. Distributions used to pay medical expenses in excess of 7.5% of AGI (2021) for a tax filer who itemizes are exempt from the early withdrawal penalty. Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant are exempt from the early withdrawal penalty. III only. I and III only. II and III only. I, II and III.
The correct answer is D. Statements I, II and III are correct. TCDTR Act of 2020 set medical expense deduction to 7.5% of AGI permanently.
Kim Cat, age 42, earns $350,000 annually as an employee for CTM, Inc. Her employer sponsors a SIMPLE 401(k) retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to 3% of covered compensation. What is the maximum contribution (employer and employee) that can be made to Kim's SIMPLE 401(k) account in 2023? $10,500 $15,500 $25,400 $26,000
The correct answer is D. The maximum total contribution is $26,000. ($15,500 maximum employee contribution for 2023 + $10,500 employer match). The maximum employee contribution for 2023 is $15,500. The employer has chosen to make matching contributions up to 3% of compensation (the SIMPLE maximum). Therefore, the employer can make a contribution of up to $10,500 ($350,000 compensation for 2023, not subject to covered compensation limit × 3%), if the plan is a SIMPLE 401(k).
Tony Soprano, age 48, earns $550,000 annually as an employee for City Waste Management. His employer sponsors a SIMPLE IRA retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to 3% of compensation. What is the maximum contribution (employer and employee) that can be made to Tony's SIMPLE IRA account in 2023? $15,500 $25,400 $32,000 $31,000
The correct answer is D. The maximum total contribution is $31,000 ($15,500 maximum employee contribution for 2023 + 3% employer match × $550,000, but limited to $15,500). An employer cannot match more than was contributed, it is a dollar for dollar match.
