Unit 4 Book 2

Nicholas, age 49, is employed by both NGL Company and Rice Services, which are unrelated companies. Both companies sponsor Section 401(k) plans. Nicholas earns $30,000 at each job and qualifies to participate in both plans. Nicholas' spouse, Kelly, age 50, earns $75,000 and wants to invest for retirement in an IRA. She participates in a Section 457 plan and defers $14,000 per year. What is the maximum total of elective deferrals that Nicholas can make to his companies' retirement plans, and what amount can Kelly contribute to her IRA and deduct for income tax purposes for 2019?

$19,000 and $7,000

What is the maximum elective deferral limit for a Section 403(b)/TSA plan in 2019, assuming no catch-up provisions apply?

$19,000.

Max, age 47, has been participating in his employer's SIMPLE IRA for one year. If he withdraws $1,000 from this plan this year and the withdrawal is not covered by an exception to the penalty tax on premature withdrawals, he will owe a penalty tax of:

$250.

Myra, age 52, has worked for XYZ Educational Opportunities ("The last word in not-for-profit education") for the past 18 years. XYZ sponsors a Section 403(b)/TSA plan. Myra wants to contribute the maximum amount possible to her TSA. Assuming Myra has never before used her available catch-up allowance, what is the total maximum amount she can contribute to her TSA plan for 2019?

$28,000

What is the maximum amount possible that may be contributed to a simplified employee pension (SEP) on behalf of a participant for 2019?

$56,000

Jacob, age 58, is an employee of ABC Company, which sponsors a SIMPLE IRA. The company provides a dollar-for-dollar matching contribution up to 3% of annual compensation. If Jacob's annual compensation is $300,000, what is the maximum employer contribution he will receive in 2019?

9,000

Which of the following statements regarding SIMPLE IRA employer contributions are CORRECT?

A 2% (of employee compensation) non-elective employer contribution can be made for all eligible employees. A dollar-for-dollar matching contribution up to 3% of compensation can be contributed solely for participating employees who have elected to make contributions.

Which of the following regarding a SIMPLE is (are) CORRECT?

A 25% early withdrawal penalty may apply to distributions taken within the first 2 years of participation in the SIMPLE IRA plan.

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.

Which of the following is (are) characteristics of both a SEP plan and a SIMPLE IRA?

An investment in life insurance is prohibited. There is immediate participant vesting in the entire balance. Early withdrawal (pre-age 59½) penalties may apply (with certain exceptions).

Which of the following items is (are) permitted investments in a Section 403(b) plan?

Annuity contract from insurance company. Growth stock mutual fund.

Which of the following are reasons a small business might choose the SIMPLE over a Section 401(k) plan?

Because a SIMPLE is less costly to operate, it is generally the better choice if the employer is not concerned about the design constraints of the plan. The employer expects that it could not satisfy the Section 401(k) nondiscrimination test. If a Section 401(k) plan would be top heavy (benefits for key employees will exceed 60% of total benefits), and the employer wants to minimize employer contributions.

Which of the following can provide Section 403(b) plans (TSAs) for their employees?

Chambers of commerce. Public schools. Public universities. Humane societies.

Which of the following statements regarding SEP plan employee coverage and contribution requirements is (are) CORRECT?

Contributions must be made for all employees who have performed services for the employer for at least three of the past five years and meet age and compensation requirements. Contributions must be made for all employees who have attained age 21 and meet the service requirements. Contributions must be made for all employees who received a minimum of $600 of compensation for the year and meet other participation requirements.

Generally, distributions from TSA/Section 403(b) plans are made only upon:

Disability. Death. Termination of employment. Attainment of age 59½.

Which of the following statements regarding Section 403(b)/TSA plan employee elective deferrals in 2019 is CORRECT?

Employee elective deferrals are subject to FICA (Social Security and Medicare) and FUTA (federal unemployment) payroll taxes.

Which of the following statements regarding the tax ramifications of SIMPLEs is CORRECT?

Employee elective deferrals are subject to payroll tax.

Which of the following are reasons a qualified employer may consider implementing a TSA/Section 403(b) plan?

Employees are interested in accumulating retirement funds with pretax dollars. Employees are interested in reducing their taxable income while saving for the future. The employer doesn't want to bear the full cost of a retirement plan

Which of the following SIMPLE IRA options are CORRECT?

Employers can match employee contributions dollar-for-dollar up to 3%. Employers can contribute up to 2% non-elective contributions for each eligible employee.

A savings incentive match plan for employees (SIMPLE) can be:

Established as an IRA. Established as a Section 401(k) plan. Offered by employers who have 100 or fewer employees.

Christopher works for the Ex-march Company, a small business with 75 employees. Ex-march has decided to establish a SIMPLE IRA plan for all of its employees and will make a 2% non-elective contribution for each of its eligible employees. Christopher's annual salary is $40,000 and he has determined that he cannot afford to make an elective deferral to his SIMPLE IRA. Which of the following statements regarding Christopher's SIMPLE IRA contribution is CORRECT?

Ex-march must make a non-elective contribution of $800 for Christopher.

Penalty-free Section 457 distributions can only be made:

For an in-service withdrawal. For an unforeseen emergency. For separation from service. In the year the participant attains age 70½.

Section 403(b)/TSA employer contributions:

Must abide by the annual additions limit. Must not discriminate in favor of highly compensated employees.

Which of the following are advantages of a SIMPLE IRA?

No actual deferral percentage (ADP) or actual contribution percentage (ACP) tests. Allows employee pretax contributions. Easy to install and administer. Simple to understand and explain to employees.

Which of the following statements describing how qualified plans are similar to SEP plans and SIMPLEs is (are) CORRECT?

Qualified plans, SEP plans, and SIMPLEs all provide for deferred compensation. Plan sponsors of qualified plans, SEP plans, and SIMPLEs make contributions to either a trust, an insurance contract, or an individual retirement account depending on the type of plan.

Which of the following statements regarding Section 403(b) plans is (are) CORRECT?

Section 403(b) plans are eligible for rollover treatment to IRAs.

Which of the following retirement plans, maintained by an employer, would also permit an eligible employer to establish a SIMPLE?

Section 457 plan.

Tax issues relating to Section 457 plans include:

Section 457 plans are sponsored by tax-exempt entities; therefore, deductibility of contributions is not an issue for the employer. Public (government) plans do not incur a 10% penalty for early withdrawal prior to retirement or upon termination of employment. Distributions from a Section 457 plan are not eligible for favorable lump sum distribution treatment (10-year averaging, capital gain treatment, NUA) allowed for qualified plans.

Simplified employee pension (SEP) IRAs are primarily used by:

Sole proprietorships. Small, closely held businesses.

Which of the following are characteristics of a SIMPLE?

The ACP test is not required for a SIMPLE. Distributions from a SIMPLE IRA used to pay higher education costs are exempt from the early withdrawal penalty.

The simplified employee pension (SEP) IRA is one of the easiest plans to set up and maintain. A SEP IRA plan eliminates:

The administrative complexity found in many retirement plans. Lengthy and detailed government reporting. Numerous nondiscrimination tests. Complicated restrictive contribution formulas associated with many retirement plans.

How does simplified employee pension (SEP) plan participation affect an employee's IRA contributions?

The deductibility of an active participant's IRA contribution depends upon his MAGI. SEP plan participation does not reduce or eliminate an employee's ability to fund an IRA. Employees who participate in a SEP plan are considered active participants in an employer-sponsored retirement plan for the tax year in which an employer contribution is made.

Which of the following are common features of a TSA/Section 403(b) plan?

The plan is typically funded by employee elective deferrals. The benefit is dependent on the investment results. The investment risk is borne by the employee. The plan may permit in-service withdrawals.

Which of the following statements regarding TSAs/Section 403(b) plans are CORRECT?

The sponsor must be a tax-exempt organization that meets the requirements of Section 501(c)(3), a governmental organization, or public educational organization. In-service withdrawals may be permitted.

What makes the SIMPLE IRA so attractive to business owners?

There is no ADP testing. The ability to defer up to $13,000 (2019) without regard to employee participation.

Which of the following statements regarding plan requirements for SIMPLE IRAs is(are) CORRECT?

To establish a SIMPLE IRA, a business normally cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation).

Which of the following statements regarding plan requirements for SIMPLE IRAs is NOT correct?

Unlike traditional IRAs, assets can be invested in life insurance.

A simplified employee pension (SEP) plan:

Uses an individual retirement account as a funding vehicle. Must follow the rule regarding nondiscriminatory contributions.

All of the following statements regarding the basic provisions of a Section 457 plan are correct EXCEPT:

a Section 457 plan is a qualified plan of governmental units or agencies, and non-church-controlled, tax-exempt organizations.

All of the following statements regarding simplified employee pension (SEP) plans are correct EXCEPT:

all part-time employees can be excluded.

Unlike traditional IRAs, assets can be invested in life insurance.

annuities and mutual funds.

A simplified employee pension plan (SEP):

can be established by any type of employer.

All of the following statements regarding Section 457 plans are correct EXCEPT:

contributions are after-tax but funds grow tax deferred.

Which of the following statements with respect to simplified employee pension (SEP) contributions made by an employer is CORRECT? Contributions are:

currently excludible from the employee's gross income.

Generally, for SIMPLE contributions:

earnings within the account are tax deferred.

Basic provisions of SIMPLE IRAs include:

employees are 100% vested in their elective deferrals.

While Section 403(b)/TSA plans are an excellent source of retirement savings, they do have some disadvantages, such as:

investments are limited to mutual funds and annuities. Section 403(b) plans must comply with the ACP test for employer matching contributions.

The Section 403(b)/TSA special lifetime catch-up contribution:

is limited to a maximum lifetime of $15,000.