5. Retirement Planning & Employee Benefits. All questions and Comprehensive Course Exam for Retirement Planning and Employee Benefits Flashcards

Question 1

Q

Module 5. Retirement Planning
Lesson 2. Qualified Plans

Question 2

Q

A client’s current annual salary is $100,000. If the client wishes to replace 80% of their current salary, in today’s dollars when they retire in 20 years, what capital amount will be needed to accumulate by the first day of retirement if the expected rate of inflation will be 2%, the expected rate of investment returns is 5%, and the client expects to live 25 years in retirement?
* $1,443,469
* $2,144,922
* $1,759,203
* $2,367,288

Answer

A

$2,144,922

The client will need to accumulate $2,144,922 by the first day of retirement to support the retirement income goal.
Step 1:
100,000 x 80% = 80,000
80,000 [+/-] PV
20, N
2, I/YR
Solve FV
118,875
Step 2:
BEGin mode
118,876 PMT
25, N
[(1.05 ÷ 1.02) – 1 x] = 2.9412 I/YR
0, FV
Solve PV
2,144,922

Question 3

Q

Samantha Kruger asked you, “What is the best way to save for retirement?” How would you answer her?
* A taxable account
* A tax-deferred plan
* Social Security
* Relying on someone else to provide for you

Answer

A

A tax-deferred plan

In retirement planning, the fact that taxes affect personal financial decisions cannot be overstressed.
Of the many options available, using a tax-deferred retirement plan is most beneficial because they allow investment earnings to go untaxed until the earnings are removed at retirement. Social Security, an employer’s retirement plan and an IRA may or may not be taxed.

Question 4

Q

Which of the following questions are relevant to setting retirement goals? (Select all that apply)
* How costly a lifestyle do I want to lead?
* Will I have major medical expenses after retirement?
* Under which income tax bracket are each of my children taxed?
* Do I wish to travel after my retirement?

Answer

A

How costly a lifestyle do I want to lead?
Will I have major medical expenses after retirement?
Do I wish to travel after my retirement?
* The income tax bracket of children of the retiree is irrelevant to setting retirement goals.
* The other questions must be answered to assess the financial goals that must be set before planning for retirement.

Question 5

Q

Russell and Charmin have current living expenses that equal $57,000 a year. Assuming 80% replacement, estimate the amount of income they will need to maintain their level of living in retirement. Assume their average tax rate will be 13%, not including inflation.
* $43,291.84
* $32,279.83
* $52,413.79
* $38,927.32

Answer

A

$52,413.79

Russell and Charmin will need 80% of their current living expenditures of $57,000.
Tax must then be added at the estimated average tax rate of 13%, using the formula retirement income/(1-tax rate).
$57,000 x 0.80 = $45,600
$45,600/(1-0.13) =
$45,600/0.87 = $52,413.79

Question 6

Q

Which part of the Medicare coverage includes hospital insurance benefits?
* Part B
* Part A

Answer

A

Part A
* Part A provides hospital insurance benefits.

Question 7

Q

Match the corresponding types of annuities on the left with the descriptions on the right.
Single Life
Annuity for Life with Period Certain
Joint and Survivor
* Provides payments over the life both the annuitant and his/her spouse.
* Provides a set monthly payment for the person’s entire life.
* A person will receive payment for life, but if he or she dies before the end of certain period, payments will continue to beneficiaries until the end of the period.

Answer

A

Single Life - Provides a set monthly payment for the person’s entire life.
Annuity for Life with Period Certain - A person will receive payment for life, but if he or she dies before the end of certain period, payments will continue to beneficiaries until the end of the period.
Joint and Survivor - Provides payments over the life both the annuitant and his/her spouse.

Question 8

Q

What are the main advantages of the Roth IRA? (Select all that apply)
* Contributions to Roth IRA are tax deductible.
* Qualified withdrawals from Roth IRA are tax free.
* The retiree is never subject to a pre 59 1/2 penalty.
* Earnings grow tax sheltered.

Answer

A

Qualified withdrawals from Roth IRA are tax free.
Earnings grow tax sheltered.
* A Roth-IRA account allows contributions of after tax money to be deposited. These contributions can be withdrawn without taxation or penalty at any time. The earnings on the deposits grow tax sheltered. Untaxed earnings may be withdrawn tax free in the future if certain conditions are met. The Roth-IRA does not provide a tax deduction now but may provide a tax break later, perhaps during retirement. With enough years of growth, a substantial amount of untaxed earnings may be withdrawn tax free, providing a significant income tax advantage during retirement.

Question 9

Q

When planning an annuity payout, there are several options from which to choose. Which option provides the retiree’s beneficiary with benefits until the end of a specified period, if the retiree dies within that period?
* Single life annuity
* Lump sum payments
* Joint and survivor annuity
* Annuity for life with certain period

Answer

A

Annuity for life with certain period
* Under an annuity for life with certain period a person will receive payments for life, but if he or she dies before the end of a certain period, payments will continue to beneficiaries until the end of that period.
* The single life annuity provides a set monthly payment for the person’s entire life.
* The joint and survivor annuity provides payments over the life of both the annuitant and his/her spouse.
* The lump sum payments are not annual payments.

Question 10

Q

Investment strategy must be formulated keeping in mind what factors? (Select all that apply)
* Time horizon
* Risk Tolerance
* Neighbor’s Portfolio
* Tax considerations

Answer

A

Time horizon
Risk Tolerance
Tax considerations
* Among other things, an investment strategy must take into consideration the time horizon, risk tolerance, and tax considerations. It is dangerous to have too much in stocks and bonds and not enough in emergency reserves as liquid assets. The strategy for investment of retirement funds must reflect the investment time horizon. As the time for retirement approaches, funds must be gradually shifted to less risky investments. An increase in inflation rates will affect the value of stocks and bonds. Selling stocks and mutual funds will result in having to pay capital gains taxes. The chief goal of the investment strategy must be to allow a person to earn enough on retirement savings to offset inflation and not to maximize earnings with risky investments.

Question 11

Q

What variables make it difficult to create a financial plan that is exact? Click all that apply.
* Defined benefit plans
* Future tax rates
* Future investment return rate
* The client’s exact life expectancy

Answer

A

Future tax rates
Future investment return rate
The client’s exact life expectancy
* Planners and clients should not expect exactness in the financial planning targets. There are too many variables, such as future investment return rates, future tax rates and client’s exact life expectancy.
* Nevertheless, the targets for retirement planning are near enough to try quantify plans and make sure they are systematically carried out.

Question 12

Q

For qualified plans, how frequently must an employer provide an individual benefit statement?
* Monthly
* Semi-annually
* Quarterly
* Annually

Answer

A

Annually
* For qualified plans, employers are required to provide an individual benefit statement at least once annually.
* This statement is very helpful for retirement planning because it provides detailed account information.

Question 13

Q

In retirement needs analysis, Social Security retirement benefits are adjusted for inflation to the retirement year and subtracted from the current income replacement need.
* False
* True

Answer

A

False

Social Security retirement benefits will automatically be adjusted for inflation so the currently projected benefit is subtracted from the current income replacement need.

Question 14

Q

Each of the following is a question that should be answered when planning for retirement in 15 years EXCEPT:
* Do I want to have money to set aside for my family?
* What is my current monthly budget?
* Do I want to continue staying in my current house or do I want to move to another location?
* Do I wish to travel after my retirement?

Answer

A

What is my current monthly budget?

“What is my current budget” is not a question considered in retirement planning for the future. Cash flow will be important during retirement but is not typically a question addressed among the other key questions when retirement is still 15 years in the future.

Question 15

Q

If the current inflation rate is 2.2% and the current rate of return is 9%, what is the inflation-adjusted rate of return?
* 6.80%
* 4.09%
* 6.65%
* 9.00%

Answer

A

6.65%
* (9 – 2.20) ÷ (1 + 0.022) = 6.65

Question 16

Q

Each of the following may help improve cash flow during retirement EXCEPT:
* Not contributing toward saving for retirement, such as through 401(K) plans.
* Not paying payroll taxes on pension income received.
* Being covered by Medicare and therefore, not having out of pocket healthcare expenses.
* Paying off a mortgage.

Answer

A

Being covered by Medicare and therefore, not having out of pocket healthcare expenses.

Being covered by Medicare and therefore not having out-of-pocket healthcare expenses is not a correct statement. Medicare requires certain deductibles and co-pays.

Question 17

Q

If a client needs to accumulate $2,144,922 by the first day of retirement in 20 years, what level amount must the client save at the end of each month to reach the goal assuming annual inflation of 2% and an annual return of 7%?
* $7,276
* $4,118
* $4,093
* $5,278

Answer

A

$4,118

They need to save $4,118 at the end of each month to reach the retirement funding goal.
END mode
2,144,922, FV
0, PV
20 x 12 = 240, N
7 ÷ 12 = 0.5833, I/YR
Solve PMT
4,117.51 or, $4,118 (rounded)

Question 18

Q

In a retirement needs analysis calculation, if the assumed rate of return is 6% and the assumed inflation rate is 2%, what is the inflation-adjusted rate of return?
* 5.77%
* 4%
* 4.97%
* 3.92%

Answer

A

3.92%

The inflation-adjusted rate is 3.92%. [(1.06 ÷ 1.02) – 1] x 100 = 0.0392.
Alternatively, the inflation-adjusted rate can be calculated: (6 – 2) ÷ 1.02 = 3.92%

Question 19

Q

Raul has a retirement income replacement goal of 60% of his current after-tax salary. If his current salary is $8,000 per month and 15% is assumed for taxes, what will Raul’s annual income be at the beginning of his retirement?
* $48,960
* $76,800
* $6,400
* $6,800

Answer

A

$48,960

$48,6000 is the annual after-tax income.
$8,000 x 12 = $96,000
60% x $96,000 = $57,600
$57,600 x 0.85 (1 – 15% taxes) = $48,960

Question 20

Q

Which of the following retirement savings strategies, with amounts invested at the end of each year, produces the largest lump sum at age 65 assuming an 8% annual return?
* At age 45, investing $10,000 annually
* At age 35, investing $10,000 annually for 10 years with no further additional investments
* At age 35, investing $6,000 annually
* At age 45, investing $100,000 with no additional investments
* At age 35, investing $6,000 annually results in a lump sum at age 65 of $679,699.

Answer

A

At age 35, investing $6,000 annually

At age 35, investing $6,000 annually results in a lump sum at age 65 of $679,699.
N = 30, I/YR = 8, PV = 0, PMT = -$6,000, Solve for FV = $679,699
At age 35, investing $10,000 annually for 10 years with no further additional investments results in a lump sum at age 65 of $675,212.
Step 1: N = 10, I/YR = 8, PV = 0, PMT = -$10,000, Solve for FV = $144,865.62;
Step 2: N = 20, I/YR = 8, PV = -144,865.62, Solve for FV = $675,212
At age 45, investing $10,000 annually results in a lump sum at age 65 of $457,620.
N = 20, I/YR = 8, PV = 0, PMT = -$10,000, Solve for FV = $457,620
At age 45, investing $100,000 with no additional investments results in a lump sum at age 65 of $466,096.
N = 20, I/YR = 8, PV = -$100,000, Solve for FV = $466,096

Question 21

Q

To whom does the Social Security Administration currently mail annual statements?
* Every taxpayer
* Individuals age 59 ½ or older who are receiving Social Security benefits
* Individuals age 60 or older who do not have a “my Social Security” account online
* Individuals age 65 and older

Answer

A

Individuals age 60 or older who do not have a “my Social Security” account online
* Currently, the Social Security Administration mails annual statements to Individuals aged 60 and older who do not have a “my Social Security” account online who are paying into the Social Security system.

Question 22

Q

Which of the following may decrease the necessary annual savings required to meet a retirement income funding goal for a given “in today’s dollars” annual retirement income amount?
* Reducing the age at which one will retire
* Decreased inflation assumptions
* Decreases in Social Security pension assumptions
* Increased income taxes in retirement

Answer

A

Decreased inflation assumptions

Decreased inflation assumptions may decrease the necessary annual savings required because the assumed retirement income goal (in today’s dollars) will decrease due to lower inflation adjustments.

Question 23

Q

Angio Corporation produces and sells equipment to hospitals and doctors for use during heart surgeries. Angio employs 12 salespeople and 26 office staff. All these individuals have been with the company for more than one year and are over age 21.
Angio does not want the qualified plan to cover the sales staff. Eleven of the twelve salespeople are highly compensated and six of the office staff are highly compensated.
Will the plan pass the Safe Harbor Test?
* Yes
* No

Answer

A

Yes

If a total of 17 of the employees are highly compensated, then 21 are non-highly compensated.
Therefore, the plan would need to cover at least 15 non-highly compensated employees to pass (21 x 0.70 = 14.7).
It will cover 20 non-highly compensated employees who work in the office and, therefore, passes the Safe Harbor Test.

Question 24

Q

A plan formula provides 40% of final average compensation with an offset. The lowest paid employee must receive at least what percentage of the final average compensation from the plan?
* 20%
* 40%
* 10%
* 60%

Answer

A

20%

Code and regulations provide limits on the extent of an offset for Social Security. In particular, the rules provide that no more than half of the benefit provided under the formula without the offset may be taken away by an offset.
In this case, the lowest paid employee must receive at least 20% of the final average compensation from the plan (0.40 x 0.50 = 0.20).

Question 25

Q

Using the table below, identify the Highly Compensated Employees (HCEs) at BIF-Brews, Co.
Employee % Ownership Annual Compensation (2021)
Adam 3% $225,000
Brendan 6% $75,000
Jerry 3% $115,000
Mike 5% $135,000
* Adam
* Brendan
* Jerry
* Mike

Answer

A

Adam
Brendan
Mike
* A Highly Compensated Employee (HCE) is:
* More than a 5% owner or
* Compensated in excess of $130,000 (2021) (indexed)

As a result, Brendan (6%) and Mike (5%) meet the 5% ownership standard. Adam is considered a HCE due to his compensation in excess of $130,000 in 2021 (i.e., $225,000).

Question 26

Q

A qualified retirement plan must meet stringent Code requirements. Which of the following would be most likely to result in plan disqualification?
* Attempting to integrate the plan with Social Security.
* Allowing only employees age 21 and over to be eligible for the plan.
* A requirement that employees must complete five years of service before participating in the plan.
* A provision that results in the plan covering only 70% of non highly compensated employees.

Answer

A

A requirement that employees must complete five years of service before participating in the plan.
* The plan would be disqualified if a five-year waiting period is imposed for plan participation. It cannot require more than one year of service for eligibility. The only exception is that it can require a waiting period of two years, if the plan provides 100% vesting upon entry.

Question 27

Q

Match the following:
Highly Compensated
Top-Paid Group
Key Employee
* A greater than 5% owner; an officer with income in excess of $215,000 or a greater than one percent owner with income greater than $150,000
* The group of employees in the top 20%, ranked on the basis of compensation paid for the year.
* A greater than 5% percent owner or received compensation in excess of $130,000 in the prior year

Answer

A

Highly Compensated - A greater than 5% percent owner or received compensation in excess of $130,000 in the prior year
Top-Paid Group - The group of employees in the top 20%, ranked on the basis of compensation paid for the year.
Key Employee - A greater than 5% owner; an officer with income in excess of $215,000 or a greater than one percent owner with income greater than $150,000

Question 28

Q

Contributions cannot be made even if there are no current or accumulated profits in a Profit Sharing Plan.
* False
* True

Answer

A

False.
* Contributions can be made even if there are no current or accumulated profits. Even a nonprofit organization can have a qualified Profit Sharing Plan.

Question 29

Q

For eligibility purposes, a year of service is defined as which of the following?
* 12-month period during which the employee has at least 1,000 hours of service.
* 12-month period during which the employee has at least 1,500 hours of service.
* 6-month period during which the employee has at least 1,000 hours of service.
* 6-month period during which the employee has at least 1,500 hours of service.

Answer

A

12-month period during which the employee has at least 1,000 hours of service.

For eligibility purposes, a year of service means a 12-month period during which the employee has at least 1,000 hours of service.

Question 30

Q

Which of the following provisions would violate the Code’s vesting requirements for qualified retirement plans?
* In a non-top heavy Defined Benefit Plan, employees are 40% vested after five years of service, and vesting increases by 20% each year until reaching 100% after seven years.
* In a Defined Contribution plan, employees are 100% vested after three years of service, with zero vesting prior to that date.
* In a Defined Benefit plan, employees are 100% vested for a non-top-heavy plan after five years of service, with zero vesting prior to that date.
* For a non-top-heavy Defined Contribution plan, employees are 20% vested after two years of service, and vesting increases by 20% each year until fully vested in six years.

Answer

A

In a non-top heavy Defined Benefit Plan, employees are 40% vested after five years of service, and vesting increases by 20% each year until reaching 100% after seven years.
* In a Defined Contribution plan, the vesting schedule must not exceed the Top Heavy vesting schedules: 2-6 year graded or 3 year cliff. A Defined Benefit plan may use 3-7 year graded and 5 year cliff. Therefore, in a Defined Benefit plan, the employee must be at least 60% vested after five years of service which increases by 20% per year until full vesting in seven years.

Question 31

Q

A loan from a qualified plan to a participant must meet all of the following requirements to be exempt from treatment as a prohibited transaction except?
* It must bear a reasonable rate of interest.
* It must be made available to all participants on a reasonably equivalent basis.
* The amount of a loan must not exceed $10,000
* It must be adequately secured.

Answer

A

The amount of a loan must not exceed $10,000
* A reasonable rate of interest, availability to all participants on a reasonably equivalent basis and adequate securing of loans are three of the requirements for loans to be exempted from the prohibited transaction rules. However, loans may exceed $10,000, but cannot exceed $50,000.

Question 32

Q

A qualified retirement plan must meet stringent Code requirements. Which of the following would be most likely to result in plan disqualification?
* Attempting to integrate the plan with Social Security.
* Allowing only employees age 21 and over to be eligible for the plan.
* A requirement that employees must complete five years of service before participating in the plan.
* A provision that results in the plan covering only 70% of non highly compensated employees.

Answer

A

A requirement that employees must complete five years of service before participating in the plan.
* The plan would be disqualified if a five-year waiting period is imposed for plan participation. It cannot require more than one year of service for eligibility. The only exception is that it can require a waiting period of two years, if the plan provides 100% vesting upon entry.

Question 33

Q

A qualified retirement plan must meet stringent Code requirements. Which of the following would be most likely to result in plan disqualification?
* Attempting to integrate the plan with Social Security.
* Allowing only employees age 21 and over to be eligible for the plan.
* A requirement that employees must complete five years of service before participating in the plan.
* A provision that results in the plan covering only 70% of non highly compensated employees.

Answer

A

A requirement that employees must complete five years of service before participating in the plan.
* The plan would be disqualified if a five-year waiting period is imposed for plan participation. It cannot require more than one year of service for eligibility. The only exception is that it can require a waiting period of two years, if the plan provides 100% vesting upon entry.

Question 34

Q

The savings plan after-tax employee contribution approach is used more often as an add-on to a Section 401(k) plan. State True or False.
* False
* True

Answer

A

True
* Although savings plans with only after-tax employee contributions and employer matching contributions were very popular in the past, the after-tax employee contribution approach is used more often as an add-on to a Section 401(k) plan.

Question 35

Q

Netlink, Inc. is considering the establishment of a qualified plan. Which of the following characteristics suggest the use of a profit sharing plan? (Select all that apply)
* The employees range in ages from 49 to 63, and the company wants one plan that will assure them of an adequate retirement.
* The company already has a defined benefit plan that it wishes to supplement.
* The company’s profits vary from year to year and flexibility in funding requirements is needed.
* The company wants to provide an incentive for employees to improve productivity.

Answer

A

The company already has a defined benefit plan that it wishes to supplement.
The company’s profits vary from year to year and flexibility in funding requirements is needed.
The company wants to provide an incentive for employees to improve productivity.
* A profit sharing plan is appropriate in a company whose profits vary from year to year. It is also offered by employers who want to adopt a qualified plan with an incentive feature as well as to supplement an existing defined benefit plan. It is suitable if many employees are relatively young and have substantial time to accumulate retirement savings. Therefore, a profit sharing plan would not be fitting for older employees who want to be assured of contributions or benefits at retirement.

Question 36

Q

Matilda Sinclair is an employee of Maxwell Inc. Her earnings for this year are $48,000 and she participates in a money purchase plan that is integrated with Social Security. The plan provides for employer contributions of 15% of compensation above an integration level of $22,000 and 11% below the level. What is the total employer contribution to Matilda’s account this year?
* $2,420
* $3,900
* $6,320
* $5,280

Answer

A

$6,320

A plan benefit formula that is integrated with Social Security avoids duplicating Social Security benefits already provided to the employee and reduces employer costs for the plan.
An integrated formula defines a level of compensation known as the integration level.
Employer contributions for compensation above the integration level are of a higher rate than the rate for compensation below the level.
Maxwell Inc.’s contribution to Matilda’s account would be computed as follows:
11% of the first $22,000 of total compensation: $2,420
15% of $26,000 ($48,000 compensation - $22,000 integration level): $3,900
The employer contribution to Matilda’s account this year: $6,320.

Question 37

Q

Employees who participate in savings plans do so on a voluntary basis, contributing a percentage of compensation. Which of the following accurately describes savings plans?
* Savings plans are not subject to any nondiscrimination testing.
* Savings plans are subject to the nondiscrimination requirement and must be monitored to see that the statutory tests are met.
* Employer contributions to savings plans are not deductible.
* Employee contributions to a savings plan are made with before-tax salary deferrals.

Answer

A

Savings plans are subject to the nondiscrimination requirement and must be monitored to see that the statutory tests are met.
* Employer contributions to savings plans are deductible so long as the plan remains qualified, but employee contributions to the plan are not tax deductible. The savings plan must meet an actual contribution percentage test to be deemed nondiscriminatory.

Question 38

Q

Which of the following are not advantages of a Section 401(k) plan? (Select all that apply)
* If funded at the maximum permitted level, it can be counted on to provide adequate retirement savings for virtually all employees.
* It allows employees a choice in the amount they wish to save under the plan.
* Loans or hardship withdrawals may be permitted by the plan.
* It is always simple and inexpensive to administer.
* It can be funded entirely through salary reductions.

Answer

A

If funded at the maximum permitted level, it can be counted on to provide adequate retirement savings for virtually all employees.
It is always simple and inexpensive to administer.
* With a Section 401(k) plan, account balances at retirement age may not provide adequate retirement savings for employees who entered the plan at later ages. Further, due to the ADP nondiscrimination test, a Section 401(k) plan can be relatively costly and complex to administer. The advantages are that it allows employees to choose the amount they wish to save. It also permits loans and hardship withdrawals and can be funded entirely through salary reductions.

Question 39

Q

The contribution levels allowed under a target or age-weighted defined contribution plan:
* Are unlikely to produce an adequate retirement benefit for older plan entrants.
* Can be based on the participant’s compensation and age on entering the plan.
* Are much higher than the amounts that would be allowed under a defined benefit plan.
* Do not have to be tested for nondiscrimination.

Answer

A

Can be based on the participant’s compensation and age on entering the plan.
* A target or age-weighted defined contribution plan formula for annual employer contributions or allocations to participant accounts is based on both the participant’s compensation and age on entering the plan.
* Relating allocation percentages to age results in higher allocation for older plan entrants.
* Defined benefit plans have a recurring annual contribution obligation. Therefore, their contribution levels are higher than a target or age-weighted plan.

Question 40

Q

Lou has taken advantage of his employer’s Roth 401(k) plan. He will contribute $11,000 per year. If, in ten years at age 62, his account balance is $165,000 and Lou decides to withdraw his entire account balance, what will be the taxable portion of that withdrawal?
* $165,000
* $110,000
* $56,000
* None

Answer

A

None
* Since Lou satisfied the five year and is withdrawing his gains following age 59 ½, all gains are tax-free. Contributions are always tax free since they were made with after tax dollars.

Question 41

Q

Gerardo has worked for FIX Company for 3 years and has decided to leave. The company elected a 5-year cliff vesting schedule. His Defined Benefit Plan will be portable and will roll over to his next employer.
* False
* True

Answer

A

False.
* Employees who leave before retirement may receive relatively little benefit from the Defined Benefit Plan. The plan generally lacks portability in that when an employee changes jobs, it usually cannot go with him or her. In addition, since FIX Company has a 5-year cliff vesting schedule, Gerardo would not be vested at all.

Question 42

Q

Compare the Contribution Rate,
Investment Risk, Investment Earmarking, Adequate benefit for older entrants, Administrative Cost in a Cash Balance Plan, Typical Defined Contribution Plan, and Typical Defined Benefit Plan

Answer

A

Cash Balance Plan
Contribution Rate - Percentage of salary (with actuarial aspects)
Investment Risk Employer
Investment Earmarking - Not Available
Social Security Integration - Available
Adequate benefit for older entrants - No
Administrative Cost - Higher
Typical Defined Contribution Plan
Contribution Rate - Percentage of Salary
Investment Risk - Employee
Investment Earmarking - Available
Social Security Integration - Available
Adequate benefit for older entrants - No
Administrative Cost - Lower (unless 401(k) or earmarking)
Typical Defined Benefit Plan
Contribution Rate - Actuarially determined
Investment Risk - Employer
Investment Earmarking - Not Available
Social Security Integration - Available
Adequate benefit for older entrants -Yes
Administrative Cost - Higher

Question 43

Q

Under which of the following hypothetical situations would a cash balance pension plan be indicated?
* The key employees are older and the rank and file employees are relatively young.
* The employer has an existing defined benefit plan and wants to convert to a plan that provides a more attractive benefit to younger employees and lower costs for older employees.
* The employees want to be able to direct the investment of their account assets.
* The employer wishes to have flexibility as to the amount and frequency of contributions to the plan.

Answer

A

The employer has an existing defined benefit plan and wants to convert to a plan that provides a more attractive benefit to younger employees and lower costs for older employees.
* The retirement benefit may be inadequate for older plan entrants. A cash balance pension plan is appropriate when employees are relatively young and the work force is large and the bulk of the employees are middle-income. It is indicated when the employer has an existing defined benefit plan and wishes to convert to a plan that provides a more attractive benefit for younger employees and lower costs for older employees.

Question 44

Q

A defined benefit plan is a qualified plan that provides a specified benefit level at retirement. Which of the following is not a characteristic of defined benefit plans? (Select all that apply)
* The employer and the PBGC guarantee benefit levels within specified limits.
* Defined benefit plans are easy to design, administer and explain to employees.
* Actuarial assumptions are necessary to determine actual contribution amounts.
* The employer is subject to a recurring annual funding obligation.
* Both employers and employees share in assuming the risk of bad investment results in the plan fund.

Answer

A

Defined benefit plans are easy to design, administer and explain to employees.
Both employers and employees share in assuming the risk of bad investment results in the plan fund.
* Defined benefit plans are complex to design and difficult to explain to employees. Moreover, only the employer assumes the risk of bad investment results in the plan fund. The employer must contribute to the plan fund annually. The contribution amount is based on actuarial assumptions. The employer and the PBGC guarantee certain benefit levels within specified limits.

Question 45

Q

What is the current maximum covered compensation limit in calculating benefits in a qualified plan?
* $22,500 (2023)
* $66,000 (2023)
* $330,000 (2023)
* $246,000 (2023)

Answer

A

$330,000 (2023)
* The current (2023) maximum covered compensation limit in calculating benefits in a qualified plan is $330,000.

Question 46

Q

Each of the following is considered a key employee EXCEPT:
* A more-than-one-percent owner of the employer having annual compensation from the employer of more than $150,000
* An officer of the employer having annual compensation greater than $215,000 (2023)
* A more-than-five-percent owner of the employer
* An employee with compensation greater than $135,000 (2022) and ranked in the top 20% based on compensation

Answer

A

An employee with compensation greater than $135,000 (2022) and ranked in the top 20% based on compensation
* An employee with compensation greater than $150,000 (2023) and ranked in the top 20% based on compensation is a highly compensated employee definition, not a key employee.

Question 47

Q

Which of the following variables is NOT typically used in the year-to-year actuarial assumptions in the funding requirements for a defined benefit plan?
* The assumed employee turnover rate
* The assumed rate of return on plan assets
* The consumer price index
* The assumed mortality rate of plan participants

Answer

A

The consumer price index
* The consumer price index (CPI) is not typically a variable used in the year-to-year actuarial assumptions in the funding requirements for a defined benefit plan.
* Assumed compensation increases are an incorporated variable but not the CPI itself as a separate variable.

Question 48

Q

Under the excess method for integration with Social Security, what is the maximum excess contribution rate to the plan if the base contribution percentage is 5%?
* 10.7%
* 10%
* 5%
* 25%

Answer

A

10%

Under the excess method, the maximum excess contribution rate for compensation above the compensation threshold is the lesser of:
2x the base contribution rate or
the base contribution rate plus 5.7%.

In this example, the lesser of 2x the base contribution rate (2 x 5% = 10%) is the maximum excess contribution.

Question 49

Q

Which of the following vesting schedules is NOT permitted for a defined contribution pension plan?
* 2-to-6-year graded vesting
* 3-year cliff vesting
* 100% immediate vesting
* 3-to-5-year graded vesting

Answer

A

3-to-5-year graded vesting
* Three-to-five-year graded vesting is not permitted for a defined benefit purchase pension plan.
* Three-to-five-year cliff vesting is permitted only in a defined benefit plan.

Question 50

Q

Under which type of sponsored plan is the employee’s pension benefit determined by a formula that takes into account years of service to the employer and, in most cases, wages or salary?
* Defined Contribution Plan
* Defined Benefit Plan
* Profit Sharing Plan
* Tax Advantaged Plan

Answer

A

Defined Benefit Plan

In a defined-benefit plan, the employee’s pension benefit is determined by a formula that takes into account years of service to the employer and, in most cases, wages or salary.
The amount the employee receives is defined for him or her. Most common formulas used to determine the benefit are flat amount, flat percentage and unit credit.

Question 51

Q

Which of the following employees is NOT considered a highly compensation employee under qualified plans rules if the employer makes the “top 20%” election?
* An employee with $120,000 compensation and 2% ownership
* An employee with $150,000 compensation, ranked in the top 20% with 1% ownership
* An employee with 7% ownership and $50,000 compensation
* An employee with $120,000 compensation and 10% ownership
* An employee with $160,000 compensation, 0% ownership, and ranked in the top 20%

Answer

A

An employee with $120,000 compensation and 2% ownership

When an employer has made the top 20% election, only employees with income more than $150,000 (2023) who are ranked in the top 20% based on compensation are considered HCE. Any employee with more than 5% ownership is automatically considered HCE, regardless of compensation.

Question 52

Q

Which of the following is NOT a component in applying the annual additions limit?
* Participant account earnings attributed to employer contributions
* Employer contributions
* Employee elective deferrals
* Reallocated forfeitures

Answer

A

Participant account earnings attributed to employer contributions

Participant account earnings attributed to employer contributions or employee contributions are not a component in applying the annual additions limit.

Question 53

Q

Which of the following is NOT an acceptable vesting schedule for a top-heavy defined benefit plan?
* 3-to-7-year graded vesting
* 3-year cliff vesting
* 2-year cliff vesting
* 2-to-6-year graded vesting

Answer

A

3-to-7-year graded vesting

A top-heavy defined benefit plan must use accelerated vesting.
A 3-to-7-year graded vesting schedule, while acceptable for a defined benefit plan that is not top-heavy, is not acceptable if the defined benefit plan is top-heavy.

Question 54

Q

Which of the following qualified plans does not require mandatory annual minimum funding?
* Cash Balance Pension Plan
* Target Benefit Pension
* Profit-Sharing Plan
* Money Purchase Pension Plan

Answer

A

Profit-Sharing Plan
* All pension plans require annual minimum funding.
* A profit-sharing plan is not required to have annual minimum funding.

Question 55

Q

Under the excess method for integration with Social Security, what is the maximum excess contribution rate to the plan if the base contribution percentage is 6%?
* 5%
* 25%
* 11.7%
* 10%

Answer

A

11.7%
* Under the excess method, the maximum excess contribution rate for compensation above the compensation threshold is the lesser of:
* 2x the base contribution rate or
* the base contribution rate plus 5.7%.

In this example, the base rate + 5.7% (6% + 5.7% = 11.7%) is the maximum excess contribution.

Question 56

Q

All qualified plans must pass one of the following tests EXCEPT:
* Average benefit test
* Safe harbor test
* 50/40 test
* Ratio percentage test

Answer

A

50/40 test
* Not all qualified plans are required to pass the 50/40 test.
* Only defined benefit plans are required to pass the 50/40 test and the 50/40 test must be passed in addition to the safe harbor test, the ratio percentage test, or the average benefits test.

Question 57

Q

Module 5. Retirement Planning
Lesson 3. Non-Qualified Plans

Question 58

Q

Amy is employed at Abacale Corporation and is a key employee. Abacale has a non-qualified plan for Amy and set aside money into it for her in 2018, 2019 and 2020. In 2021, Amy is allowed to take a withdrawal and does so. In what year may Abacale take a deduction?
* 2018
* 2019
* 2020
* 2021

Answer

A

2021
* Abacale Corporation may take a deduction in the year that Amy takes a distribution, or when the funds are made available, which is 2019.

Question 59

Q

Which of the following are features of nonqualified plans? (Select all that apply)
* These plans provide additional retirement benefits to employees.
* They qualify under ERISA.
* The employer has a great deal of flexibility while planning the program.
* These plans can discriminate.

Answer

A

These plans provide additional retirement benefits to employees.
The employer has a great deal of flexibility while planning the program.
These plans can discriminate.
* Nonqualified plans provide employees additional retirement benefits. The plans are not qualified under ERISA requirements. As a result, the employer has freedom while planning the program. The employer can decide who is to be included in the plan. He may want to include only highly compensated employees or members of management. Plan benefits for these groups are forfeitable in full at all times.

Question 60

Q

Which of the following options regarding nonqualified plan vesting rules are true? (Select all that apply)
* The qualified vesting plan rules apply if the plan covers rank-and-file employees.
* They must always meet certain vesting schedules.
* The qualified vesting rules do not apply if the plan covers a select group of management or highly compensated employees.
* For nonqualified deferred compensation benefits to remain tax deferred to the employee, the benefits are forfeitable in full at all times.

Answer

A

The qualified vesting plan rules apply if the plan covers rank-and-file employees.
The qualified vesting rules do not apply if the plan covers a select group of management or highly compensated employees.
For nonqualified deferred compensation benefits to remain tax deferred to the employee, the benefits are forfeitable in full at all times.
* The qualified plan vesting rules apply in the case of rank-and-file employees. If the plan covers only independent contractors or a select group of management or highly compensated employees, benefits may be forfeitable in full at all times.

Question 61

Q

Which of the following are considered advantages of a nonqualified plan? Click all that apply.
* The design is flexible
* Can provide deferral of taxes to employees
* The tax deduction is deferred
* Minimal governmental regulatory requirements

Answer

A

The design is flexible
Can provide deferral of taxes to employees
Minimal governmental regulatory requirements
* Nonqualified plans have many advantages, such as a flexible design, minimal government regulatory requirements, deferral of employee taxes, use by the employer as “golden handcuffs” that help bind the employee to the company, and some assets set aside in some informal arrangements are available to use for corporate purposes.

Question 62

Q

An excess benefit plan makes up the difference between the percentage pay that top executives are allowed under Section 415 and that which rank, and file employees are allowed. State True or False.
* False
* True

Answer

A

True
* Highly compensated employees receive the difference between the amounts payable under their qualified plan and the amount they would have received if there were no benefit limitations under Code Section 415.

Question 63

Q

Which of the following is considered constructive receipt for income tax purposes?
* Amount is payable upon termination
* Credited to an employee’s account
* Set aside
* Amount is payable in five years

Answer

A

Credited to an employee’s account
Set aside
* An amount is treated as received for income tax purposes, even if it is not actually received, if it is credited to the employee’s account, set aside, or otherwise made available. Constructive receipt does not occur if the employee’s control over the receipt is subject to a substantial limitation or restriction.

Question 64

Q

Jennifer is the owner of a software corporation. As an employer she would like to enhance the retirement benefits received by Rob, a senior executive in the company. She consults her financial consultant, Randolph, and inquires about nonqualified plans. He tells her that it is indeed a good idea to opt for a nonqualified plan. He also gives her the various other instances where she can use the plan. Which situations would Jennifer be able to use the plan to benefit both Rob and her? (Select all that apply)
* Jennifer would like to provide Rob with the benefits and at the same time not overshoot the allocated budget.
* Jennifer would like to provide Rob a deferred compensation under conditions that are different from those applicable to the junior employees.
* Rob would be able to create an investment program that will utilize Jennifer’s tax savings to influence his future benefits.
* Jennifer would be able to convey to Rob that his work in the company is appreciated. She would also be able to put to rest a fear that has troubled her regarding Rob not being content.
* Jennifer would like to receive tax deduction the same year in which Rob defers his compensation.

Answer

A

Jennifer would like to provide Rob with the benefits and at the same time not overshoot the allocated budget.
Jennifer would like to provide Rob a deferred compensation under conditions that are different from those applicable to the junior employees.
Jennifer would be able to convey to Rob that his work in the company is appreciated. She would also be able to put to rest a fear that has troubled her regarding Rob not being content.
* As an employer, Jennifer can use the deferred plan to her advantage, as she can provide additional benefits to Rob within the company’s budget. She need not use the same benefit program for all other employees, that is, the plan gives her the flexibility to decide whom to include for the benefit plan. Also, by using the deferred plan she can make sure that Rob is happy with the working conditions in the company. However, Jennifer will not receive a tax deduction in the year that Rob receives the compensation. The deduction will be deferred until the year that the income is taxable to Rob, and this could take up to 30 years or more.

Answer 63

A

Salary continuation formula

Answer 64

A

Salary reduction formula

Answer 65

A

Excess benefit plan

Answer 66

A

Stock appreciation rights

Answer 67

A

Penalty or haircut provision

Answer 68

A

Suspension of participation provision

Answer 69

A

Hardship withdrawal provision

Answer 70

A

True
* An employer purchases life insurance for each plan participant to informally fund the plan. The employer policies are purchased, owned, and payable to the employer.

Answer 71

A

If Bruce would like to provide Tom a life insurance benefit at low cost.
If Tom is in his 30s, 40s, or early 50s.
If a preretirement death benefit for Tom is a major objective, and if Bruce is looking out for an alternative to an insurance-financed nonqualified deferred compensation plan.
If Bruce is seeking a totally selective executive fringe benefit.
* Bruce could use the split dollar life insurance option if he wants to provide Tom retirement benefits without having to spend too much on it.
* This option would be ideal if Tom is in his 30s, 40s or early 50’s, as the plan requires a reasonable duration so as to build up adequate policy cash values and because the cost to the executive, that is the P.S. 58 or Table 2001 cost, can be excessive at later ages.
* He can also use it if a preretirement death benefit for Tom is a major objective.
* He will use this option if he is looking for a totally selective executive fringe benefit.
* The other situation where Bruce can use this option is when he wants to make it easier for shareholder-employees like Tom to finance a buyout of stock under a cross purchase buy-sell agreement, or to make it possible for non-stockholding employees to effect a one-way stock purchase at an existing shareholder’s death.

Answer 72

A

False

Normally, the life insurance policy is owned by the employer who also controls and owns the cash value as well as enough of the death benefit to cover expenses if the executive dies. The balance of the death benefit goes to the executive’s beneficiary.

Answer 73

A

The policy premiums, cash values, and death benefits.
* Split dollar life insurance is an arrangement between an employer and an employee which involves a sharing of the costs and benefits of the life insurance policy. Usually these plans involve a splitting of premiums, death benefits, and/or cash values.

Answer 74

A

As there are few tax or other government regulatory constraints, these plans can be designed to suit the executive or the employer.
Income from the sale of these stocks can be eligible for preferential capital gains treatment.
These plans have little or no out-of-pocket cost to the company.
In the case of nonqualified stock options, tax to the employee is usually deferred at the time of grant.
* The employer has the flexibility to design the plan to suit both himself or herself and the employee. The company bears little or no out-of-pocket cost for these plans. For the employee, tax is generally not payable at the time when a stock option is granted. Taxation occurs when the option is exercised.

Answer 75

A

Denise must recognize ordinary income of $3,000.
* Upon exercise of nonqualified stock options the “bargain element,” the difference between the exercise price and the fair market value, is recognized as ordinary income.

Answer 76

A

There is no regular income tax recognition until the shares are subsequently sold.

There is no gain recognized for regular income tax purposes upon exercise of an incentive stock option. The tax treatment of any gain will be determined when the shares acquired are subsequently sold.

Answer 77

A

The exercise price must not be less than 85% below FMV of the stock.
Must be exercised within a specific time period.
Must be an employee of the corporation, its parent, or subsidiary.
Must be approved by stockholders.

Some of the following requirements of Employee Stock Purchase Plans include:
* Must be exercised within a specific time period.
* Must be an employee of the corporation, its parent, or subsidiary.
* Must be approved by stockholders.
* The exercise price must not be less than 85% below FMV of the stock.

Answer 78

A

$10,000
* The below-market loan rules between an executive and his company will not apply to a compensation-related loan for any day which the amount of all loans between the executive and his company do not exceed $10,000.

Answer 79

A

To pay for his son Michael’s college tuition.
To meet the medical expenses incurred during his mother’s yearlong illness.
To purchase life insurance.
* The company will sanction a loan to pay for Michael’s education and to clear the medical expenses that the family had to incur during Christopher’s mother’s yearlong battle against cancer.
* It would also sanction a loan if he wanted to buy a life insurance policy.

The company will, however, reject the loan for the house in Nevada and for settling credit card dues. According to the company policy, only if Christopher were to move from his current office to a different city would a loan be sanctioned for a new home.

Answer 80

A

$9,000
* The amount deductible by Audrey’s employer is $9,000. This would be the difference between the applicable federal rate of interest less the actual interest under the loan agreement, that is, $16,000 less $ 7,000.
* The employer is treated as if it paid the additional compensation to the employee.

Answer 81

A

The loan is secured by a mortgage on the new principal residence of the employee.
The loan is compensation-related and is a demand or a term loan.
The new principal residence is acquired in connection with the transfer of the employee to a new principal place of work and meets the distance and time requirements for a moving expense deduction under Code Section 217.
* It is necessary for the loan to be secured by a mortgage on the employee’s new residence.
* The loan has to be compensation-related. Also, it must be a demand or term loan.
* The new residence has to be acquired in connection with the transfer of the employee to a new principal place of work. It must meet the distance and time requirements for a moving expense deduction under Code Section 217.
* There is no obligation for the loan to be payable in full in 15 days after the old principal residence is sold. The rule that the old residence must not be converted to business or investment use does not apply here.

Answer 82

A

Nonqualified plans typically provide an immediate tax deduction for the sponsoring company upon the establishment of the plan.
* Typically, nonqualified plans do not provide an immediate tax deduction for the sponsoring company.
* The company receives a deduction when the employees receive benefits, or otherwise when the funds are made available.

Answer 83

A

Nonqualified plans must follow a specific format outlined under ERISA.

Nonqualified plans are not subject to all the ERISA rules applicable to qualified plans.
This gives the employer much flexibility in plan design.

Answer 84

A

In a funded plan, the deduction to the employer is deferred until the executive retires and receives the benefits promised.
* The amounts are deductible by the employer when the amount is includible in the employee’s income, that is when the employee has constructive receipt of the funds.

Answer 85

A

An unfunded plan has only the employer’s “mere promise to pay” the promised future benefits.

An unfunded arrangement is a nonqualified plan in which the employee has only the employer’s “mere promise to pay” the deferred compensation benefits in the future, and the promise is not secured in any way.

Answer 86

A

The earnings of plan assets set aside in currently taxable investments to informally fund a nonqualified deferred compensation plan also provide the employer with an offsetting tax deduction.

The earnings of plan assets set aside in currently taxable investments to informally fund a nonqualified deferred compensation plan do not provide the employer with an offsetting tax deduction.
The employer receives no tax deduction until the employee has constructive receipt of the benefits.

Answer 87

A

Salary continuation plan

Salary continuation generally refers to a type of non-elective nonqualified deferred compensation plan that provides a specified deferred amount payable in the future. A salary continuation formula generally uses a defined benefit type of formula to calculate the benefit amount.

Answer 88

A

Lack of security because of depending only on the employer’s unsecured promise to pay.

From the executive’s point of view, the principal problem is lack of security as a result of depending only on the employer’s unsecured promise to pay.
In addition, most of the protections of federal tax and labor law (ERISA) that apply to qualified plans, for example, the vesting, fiduciary, and funding requirements, are not applicable to the typical nonqualified plan.

Answer 89

A

Generally, stock is issued to the executive upon meeting plan requirements.
* Generally, no actual shares are set aside, nor are shares of stock necessarily actually distributed. The value of employer stock simply is the measure by which the benefits are valued.

Answer 90

A

Excess benefit plan
* An excess benefit plan makes up the difference between the qualified plan benefits top executives are allowed under IRC Section 415 and the benefit permitted for rank and file employees. In other words, highly compensated employees receive the difference between the amounts payable under their qualified plan and the amount they would have received if there were no benefit limitations under IRC Section 415.

Answer 91

A

Third-party guarantees
* Employer involvement in securing a third-party guarantee raises the possibility that the guarantee will may the plan to be deemed formally funded for tax purposes.

Answer 92

A

A privately owned company

Section 457 applies to nonqualified compensation plans of state and local government employers and tax-exempt employers/organizations.

Answer 93

A

False

Under Section 457 of the IRC, plans that include limits on the amounts deferred are subject to favorable tax treatment.
These plans are generally referred to as eligible Section 457 plans.

Answer 94

A

True
* Minimum distributions must be made under the rules of Section 401(a)(9) (distributions from IRAs must generally begin as of age 73, which apply to other tax-advantaged plans as well.

Answer 95

A

Sudden illness
Property loss due to casualty
* Sudden and unexpected illness or accident or property loss due to casualty are considered unforeseeable emergencies.

Answer 96

A

Employer
* The employer must be the sole beneficiary in an employer funds a Section 457 plan with life insurance at no current cost to the employee.

Answer 97

A

The provisions must be substantial enough to defer taxes.
It is difficult to design bona fide forfeiture provisions that extend past the executive’s retirement.
Equity-type split-dollar plans need to be investigated if the deferral past retirement is required.
* The main problems encountered in designing such plans would be to develop forfeiture provisions that are substantial enough to defer taxes and yet are acceptable to the executive. It is also quite difficult to design a bona fide, substantial forfeiture provision that extends past the executive’s retirement. Section 457(f) amounts generally are taxable in full, no later than the year of the executive’s retirement.

Answer 98

A

It must retain the ownership of policies.
It must be the sole beneficiary of the policies.
It must have no obligation to transfer the policies.
* A nongovernmental employer can finance a Section 457 plan with insurance contracts at no current cost to employees only if the employer retains all incidents of ownership, is the sole beneficiary and is under no obligation to transfer the policies.
* It is also under no obligation to pass through the proceeds of the policies.

Answer 99

A

She can directly roll over the distribution to an IRA or other eligible plan.
She can directly transfer the amounts to the benefit plan at her new job.
She can use the amount to repay contributions that were previously refunded because of forfeiture of service credit.
* As an employee of a government agency, Sally Sharp would have to include the distributions in income when they are paid. However, this will result in it being taxed in the current year. To avoid paying tax she could directly roll over or make a direct transfer of the amount to other permitted plans or accounts. She can also use the amount to repay previously refunded contributions.

Answer 100

A

$22,500
* While contributions to a government Section 457 plan are not aggregated with contributions to another plan in which the taxpayer participates, this question is testing only the maximum contribution to the Section 457 plan. For Ted, the maximum contribution is $22,500 (2023).

Answer 101

A

A church or synagogue or an organization controlled by a church or synagogue.

Any organization exempt from federal income tax, except for a church or synagogue or an organization controlled by a church or synagogue.

Answer 102

A

A Section 457(b) rollover distribution may only be rolled over to another governmental Section 457(b) plan.

A Section 457(b) rollover distribution may be rolled over to another governmental Section 457(b) plan, a tax-advantaged employer-sponsored plan, a qualified plan, or an IRA.

Answer 103

A

$30,000

Ted can contribute $30,000 to the Section 457 plan for 2023 ($22,500 regular contributions plus the $7,500 age 50+ catch-up allowance).

Answer 104

A

$45,000
* Ted can contribute $45,000 to the Section 457 plan for 2023 under the “last 3 years rule” prior to the normal retirement age in the plan. The “last 3 years rule” allows deferrals up to two times the normal annual maximum. The age 50+ catch-up allowance may not be used in the same year the “last 3 years rule” catch-up is used.

Answer 105

A

$6,600

Lisa will pay $6,600 in federal income tax.
Early distributions from a governmental Section 457(b) plan are not subject to penalty.

Answer 106

A

73
* Minimum distributions must be made under the rules of Section 401(a)(9) must generally begin as of age 73.

Answer 107

A

The tax deduction afforded a plan sponsor for plan contributions is not a driving force in adopting a plan.
* An employer sponsoring a Section 457 plan does not pay federal income taxes, therefore deductibility is not an issue.

Answer 108

A

$22,500
* The maximum deferral into a government Section 457 plan is the lesser of 100% of compensation or $22,500 if no catch-up provisions apply (2023).

Answer 109

A

$45,000
* Contributions to a government Section 457 plan are not aggregated with contributions to another plan in which the taxpayer participates. Ted can contribute $22,500 to the Section 457 plan and $22,500 to the Section 401(k) plan.

Answer 110

A

For long-term accumulation.
To defer taxes on investment income.
To shelter earned income from taxation.

IRAs are used:
* for long-term accumulation,
* to defer taxes on investment income,
* as an alternative to a qualified pension, and
* to shelter earned income from taxation.

Answer 111

A

SEP
Qualified retirement plan
Section 403(b) tax-deferred annuity plan
SMIPLE IRA
* Not 457 plan or Nonqualified retirement plan
* Current law imposes income limitation on the deductibility of traditional IRA contributions for those persons who are “active participants” in an employer retirement plan that is tax-favored. This includes a qualified retirement plan, simplified employee pension (SEP), Section 403(b) tax-deferred annuity plan or SIMPLE IRA.

Answer 112

A

18

Contributions must be made on or before the date on which the beneficiary attains the age of 18.

Answer 113

A

Eligible individuals can contribute up to the maximum annual contribution amount to a traditional IRA
This amount may be deducted from their current taxable income
Investment income earned on the assets held in a traditional IRA is not taxed until it is withdrawn from the account
* Eligible individuals can contribute up to the maximum annual contribution amount to a traditional IRA, and the amount may be deducted from their current taxable income. Income earned from the assets in a traditional IRA is not taxed until it is withdrawn (subject to the 10% early withdrawal penalty).

Answer 114

A

$7,000
* He can contribute $7,000, the $6,000 regular contribution and an additional $1,000 as a “catch-up” contribution as he age 50 or older. He may not be able to deduct his contribution but he can make it.

Answer 115

A

They may make a contribution to an IRA, but it will not be deductible
* For married filing jointly taxpayer who are both participants in an employer-sponsored retirement plan, the deduction for traditional IRA contributions is fully phased out at MAGI of $125,000 (2021). However, they can make nondeductible contributions to the traditional IRA within limits.

Answer 116

A

April 1st following the calendar year in which the participant turns 72

Distributions must begin by April 1 of the year after the year in which age 72 is attained.
If the first RMD is deferred until April 1 of the year following the year in which age 72 is attained, the participant will be required to make two RMDs that year; one distribution by April 1 and the second by December 31.

Answer 117

A

False
* A person needs to have earned income to be able to contribute to an IRA.

Answer 118

A

Can a Roth IRA roll over to a traditional IRA? NO
Are withdrawals tax-free in a traditional IRA? NO
When do the required minimum distributions start in a Roth IRA? NO RMD
Does a Roth IRA have a tax-free buildup during the accumulation period? YES

Answer 119

A

Upon death or disability
First-time home-buying expense

Withdrawals are tax-free in their entirely in a Roth IRA: After a five-year wait, and either:
* Upon death or disability
* First time home-buying expense
* After the age of 59 ½

Answer 120

A

$4,500
* The maximum Roth-IRA contribution for an individual is the lesser of the dollar limit for 2023 ($6,500) or 100% of the individual’s earned income.
* Since Kate has contributed $2,000 to a traditional deductible IRA, she can only contribute an additional $4,500($6,500-$2,000=$4,500) to a Roth IRA for 2023.

Answer 121

A

April 15th

For most individuals or married couples, the contribution cutoff date is April 15th. However, since earnings on a Roth IRA account accumulate tax-free, taxpayers may want to make contributions as early as possible in the tax year.

Answer 122

A

Tax-free

Distributions to beneficiaries after the owner’s death are tax-free to the recipients, but they lose their character as Roth IRAs when distributed. Had the Roth-IRA been established for less than five years, any gain would be taxable at the owner’s death.

Answer 123

A

Income from employment
Income from self-employment
Taxable alimony payments
* Earned income refers to income from employment or self-employment.
* Taxable alimony payments are considered earned income.
* Investment income is not counted as earned income.

Answer 124

A

100% tax
10% penalty
* Premature Roth IRA withdrawals in excess of contributions are taxed in full and may also be subject to a 10% penalty on premature withdrawals.

Answer 125

A

Tax-free

A Roth IRA can be rolled over to another Roth IRA tax-free. There are no tax liabilities.

Answer 126

A

False.
* Qualified plans must be adopted before the end of the year in which they are to be effective. But, on the other hand, SEPs can be adopted as late as the tax return filing date, including extensions, for the year in which they are to be effective.

Answer 127

A

No specific employer amount
Can omit a contribution

An employer offering a SEP does not have to contribute a specific amount or make contribution every year.

Answer 128

A

Simple to implement
Not expensive to administer
A preferred option when an employer wishes to install a retirement plan after the time to adopt a qualified plan has passed.
* A SEP tax-deferred employee retirement plan is very simple to implement and not at all expensive to administer, hence making it a popular choice for employers, and even more so for employers who wish to install a tax-deferred plan and are too late to adopt a qualified plan for the year in question.

Answer 129

A

May not provide an adequate retirement benefit for him.
May not provide significant benefits
* Employees must not rely upon a SEP to provide them with an adequate retirement benefit. Benefits are significant only if the employer makes substantial, regular contributions to the SEP. But such regular contributions are not a requirement for a SEP, so it may not provide significant benefits.

Answer 130

A

Lesser of 100% of compensation or $66,000 (2023)

The annual additions limit is the lesser of 100% of the participant’s covered compensation or $66,000 (2023).
Annual additions include employee contributions, employer contributions, and reallocated forfeitures.

Answer 131

A

Both lawyers and the secretary but not the clerks
* Contributions do not need to be made to employees until their third year of service.

Answer 132

A

When an employer is looking for an inexpensive plan
When an employer has less than 100 employees
* A SIMPLE IRA is attractive for employers who are looking for inexpensive and easy to install plans. It is ideal for employers with 100 or less employees so that the employer can fund the plan with an employee salary reduction. SIMPLE IRAs are useful for individuals with a small amount of self-employment income, and not for individuals with high self-employment income.

Answer 133

A

constructive receipt

Salary reductions elected after compensation is earned are ineffective as a result of the tax doctrine of constructive receipt.

Answer 134

A

Hospitals
Schools
Adventist Church
* Health care insurance agencies, law firms and health maintenance organizations are not tax-exempt organizations, so they cannot install a Section 403 (b) plan.

Answer 135

A

Lump-sum distributions qualify for special 5-year averaging.
* Contributions to a 403(b) tax deferred annuity plan may or may not be currently taxable. It depends on whether the contributions are traditional or Roth.
* The plan account balances can accumulate tax-free (and may even be distributed under certain circumstances tax free).
* Lump sums do not qualify for any special averaging.

Answer 136

A

$29,000
* Normally, Sara could contribute the maximum salary deferral amount for 2021 of $19,500.
* However, she can take advantage of the age 50 or older catch-up of $6,500 and the “15 years of service” catch-up of another $3,000 for a total of $29,000 assuming that her income from the university is at least that amount.

Answer 137

A

Payments must be substantial and recurring.
* The IRS requires substantial and recurring contributions, or the plan may be deemed to have terminated. This contribution flexibility is very advantageous for small business, whose income may fluctuate substantially from year to year.

Answer 138

A

False
* A money purchase plan is subject to the Code’s minimum funding requirements. These require the employer to make contributions to each employee’s and self-employed person’s account each year equal to the percentage of compensation stated in the plan.

Answer 139

A

True
* Plan loans to an owner-employee are not prohibited transaction under the code, provided the other plan code regulations for loans are followed.

Answer 140

A

Self employed individuals
Employees of an unincorporated business

A Keogh plan only covers one or more self-employed individuals and the employees of an unincorporated business.

Answer 141

A

No
* A Keogh plan can only be set up for an unincorporated business.

Answer 142

A

Long-term capital accumulation
Retirement purposes
Loan purposes
To shelter current earnings from federal income tax for a self-employed individual
* A Keogh plan is used for long-term capital accumulation, loan purposes, retirement purposes, and to shelter current earnings from federal Income tax for a self-employed individual. It is also applicable in the case of an employee of a self-employed individual.

Answer 143

A

$7,500

Sally can contribute and deduct $7,500 (2023).
She is not an active participant in a retirement plan, therefore, her earnings do not prohibit her from deducting the full contribution.
She is eligible for a $6,500 regular contribution plus a $1,000 age 50+ catch-up contribution.

Answer 144

A

$3,250
* Jolene can contribute $3,250 (2023) equally to a traditional IRA and a Roth IRA. Because her divorce was finalized prior to 2019 the alimony she receives is considered compensation for IRA contribution purposes. IRA contributions must be aggregated for purposes of applying the annual maximum.
* Jolene’s alimony ($36,000, annually) + earned income ($5,000) = $41,000 of total income. Therefore, she can fund a total of $6,500 to the IRAs, $3,250 each if evenly split.

Answer 145

A

$18,587

Maria may contribute up to $18,587 to a SEP plan on her behalf this year.
Net earnings from self-employment ($100,000) minus ½ of the SE tax ($7,065) = $92,935
$92,935 x 0.20 (0.25/1.25) = $18,587

Answer 146

A

The lesser of 25% of compensation or $66,000 (2023)
* The 2023 annual employer SEP contributions on behalf of a participant are limited to the lesser of 25% of compensation (capped at $330,000), not to exceed $66,000.

Answer 147

A

$12,000

Ernesto and Maria may each contribute $6,000 (2022) to an IRA this year.
Although Maria is an active participant in a retirement plan, she is not prohibited from contributing to an IRA.

Answer 148

A

A 5-year holding period has been met

Only a 5-year holding period is an absolute requirement for a qualified distribution. There cannot be a qualified distribution without meeting the 5-year holding period requirement. Death, disability, attainment of age 59.5, or first-time home purchase are possible qualifying circumstances for a qualified distribution.

Answer 149

A

$6,000
* Joe can contribute $6,000 (2022) to an IRA.
* Because his divorce was finalized prior to 2019 the alimony he receives is considered compensation for IRA contribution purposes.
* The maximum IRA contribution for an individual younger than 50 is $6,000.

Answer 150

A

$33,000

Sue may contribute up to $33,000 (2023).
Because Sue has been employed by the same school for at least 15 years and has not previously contributed the maximum amount, she is eligible for a special catch-up contribution allowance of $3,000 in addition to the regular contribution limit of $22,500 and the age 50+ catch up allowance of $7,500.

Answer 151

A

A distribution from a SIMPLE IRA within the first two years of participation may be subject to a 10% penalty.
* A distribution from a SIMPLE IRA within the first two years of participation may be subject to a 25% penalty.

Answer 152

A

$5,000

Jerome can contribute $5,000 (2023) to an IRA. Because his divorce was finalized after January 1, 2019, the alimony he receives is not considered compensation for IRA contribution purposes.
He may contribute the lesser of $6,500 (2023) or 100% of his compensation income.

Answer 153

A

$6,000

Ernesto and Maria may each contribute $6,000 (2022) to an IRA this year but only $6,000 may be deducted.
Maria is an active participant in a retirement plan and their MAGI exceeds the deduction phase-out threshold, therefore, no deduction for her contribution is available.
Ernesto’s contribution is fully deductible because their MAGI is below the applicable deduction phaseout.

Answer 154

A

Beneficiaries
Participant
* According to Title 29 section 1104 of the U.S Code of Law, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries.

Answer 155

A

Offering a variety of investment options from all the different asset classes.
Providing education material on the investment options in the plan.
Looking for plan administration that offers reasonable fees.
* A fiduciary must act with care, skill, prudence and diligence of a prudent person with the participant or beneficiary’s best interests in mind. And they have an obligation to diversify the plan’s assets to reduce the risk of loss.

Answer 156

A

He must return the $10,000 and the $5,000 profits to the plan.
* Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries shall be personally liable to make good to such plan any losses to the plan resulting from each breach. They will have to restore to such plan any profits of such fiduciary, which have been made through use of assets of the plan by the fiduciary.

Answer 157

A

Administratively feasible
In the interest of the plan and of its participants and beneficiaries
Protective of the rights of participants and beneficiaries of such plan
* The Secretary of Labor may not grant an exemption under subsection 1108 unless he finds that such an exemption is: administratively feasible, in the interest of the plan and of its participants and beneficiaries, and protective of the rights of participants and beneficiaries of such plan.

Answer 158

A

Fully insured plans may solve the problem of “overfunded” plans.
Funded exclusively by life insurance or annuity contracts.

A fully insured pension plan is one that is funded exclusively by life insurance or annuity contracts. There is no trusteed side fund. Such plans were once common, but the high interest rates of the late 1970s lured many pension investors away from traditional insured pension products.

Answer 159

A

True
* Any employer contribution that has been in the profit-sharing plan for at least two years can be used up to 100% for insurance purchases of any type as long as the plan specifies that the insurance will be purchased only with such funds.

Answer 160

A

False

Insurance outside the plan paid for entirely with after-tax dollars, so there is no tax deferral.

Answer 161

A

It provides a safe investment for a qualified plan.
It provides predictable plan costs for the employer.
* Life insurance provides one of the safest available investments for a qualified plan. In addition, the use of appropriate life insurance products for funding a qualified plan can provide extremely predictable plan costs for the employer. Also, the “pure insurance” portion of a qualified plan death benefit is not subject to income tax. This makes it an effective means of transferring wealth.

Answer 162

A

Combination Plan
Envelope Funding
Fully Insured Pension Plans
* In a combination plan, retirement benefits are funded with a combination of whole life policies and separate assets in a separate trust fund called the “side fund” or “conversion fund”.
* In the envelope funding approach, insurance policies are simply considered as plan assets like any other assets.
* A fully insured pension plan is one that is funded exclusively by life insurance or annuity contracts. There is no trusteed side fund.

Answer 163

A

Insurance purchases are voluntary by participants
The insurance is provided automatically as a plan benefit
The insurance is provided at the plan administrator’s option
* In defined contribution plans, a part of each participant’s account is used to purchase insurance on the participant’s life. This plan can provide (a) that insurance purchases are voluntary by participants (using a directed account or earmarking provision), (b) that the insurance is provided automatically as a plan benefit, or (c) that the insurance is provided at the plan administrator’s option (on a nondiscriminatory basis).

Answer 164

A

The plan trustee
* The plan trustee is the owner according to The Retirement Equity Act of 1984.

Answer 165

A

False

If one dies before the end of the “certain period”, which is generally either 10 or 20 years, payments will continue to their beneficiary until the end of that period.

Answer 166

A

Fixed annuity with single life payout

To outpace inflation, a variable annuity has a better opportunity to outpace inflation than a fixed annuity because of the investment in the separate account. To ensure that Jane receives payments for 10 years, she must select a certain period payout option. Jane could select a single life payout option. However, depending upon her death she may receive more or less than 10 years.

Answer 167

A

The initial benefit will be less

The disadvantage of a joint survivor annuity with a 100 percent survivor benefit is that the initial benefit received will be less because there is a guarantee that the survivor will receive the same payout.
A joint and survivor annuity with a 50 percent payout will pay a higher initial benefit due to the fact that only 50 percent of the benefit will be paid upon one of the annuitants’ deaths.

Answer 168

A

Fixed annuity with single life payout

A fixed annuity guarantees a rate of return because it puts the funds in the general account. With a single payout option, the annuitant will receive payments as long as he or she lives whether that is 1 year or 50 years.

Answer 169

A

$ 216.67

Taxable = Exclusion Ratio (Payment) = 1-(Investment in contract/Expected payout) x payment
= 1- ($20,000/$72,000) x $300
= 216.67

Answer 170

A

$317,000 ordinary income and $83,000 tax-free

The $300,000 account balance plus the life insurance cash value, less the P.S. 58 costs paid of $17,000 is ordinary income.
The balance of the life insurance death benefit, $83,000, is tax-free.

Answer 171

A

High interest rates fueled the demand for fully insured pension plans in the past.

Fully insured defined benefit pension plans were once very common but the high interest rates of the late 1970s lured many pension investors away from traditional insured pension products.

Answer 172

A

Failing to diversify the investments of the plan to minimize the risk of large losses.

Failing to diversify the investments of the plan to minimize the risk of large losses may be a breach of fiduciary duty by a plan fiduciary but is not listed as a prohibited transaction in the IRC.

Answer 173

A

No more than 100 times the projected monthly pension benefit.
* The participant’s insured death benefit must be no more than 100 times the expected monthly pension benefit (100 times limit).

Answer 174

A

Precious metals

The three investment alternatives suggested in IRC Section 404(c) for qualified plans include stocks, bonds, and cash equivalents.

Answer 175

A

3

ERISA dictates that the account holder be given control over the assets in his or her account and provide at least three investment alternatives.

Answer 176

A

A plan fiduciary at the time a breach of fiduciary duty is discovered may be liable even if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary.

No fiduciary shall be liable with respect to a breach of fiduciary duty if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary.

Answer 177

A

Variable
* Contributions made to a variable annuity are put into a separate account that is not part of the insurance company’s general account.

Answer 178

A

50%
* In a defined contribution plan, no more than 50% of contributions on behalf of a participant may be allocated to ordinary life insurance.

Answer 179

A

The economic value of pure life insurance is taxable annually to the participant.

The economic value of pure life insurance is taxable annually to the participant. Any premium contributed to the plan by the participant is subtracted from the taxable annual economic benefit amount.

Answer 180

A

False
* Retirement plans may be different in regards to distributions.
* It is important to review the summary plan document (SPD) of a plan to identify the plan’s distribution options.

Answer 181

A

Preretirement survivor benefit
* The preretirement survivor annuity is an automatic benefit. If no other election is made, a preretirement survivor annuity is provided.

Answer 182

A

It has to be in writing
It must acknowledge the effect of the waiver
It has to be witnessed by a plan representative or a notary public.
* The consent of the nonparticipant spouse to waiver of the preretirement survivorship benefit in favor of an optional benefit form selected by the participant must be in writing, acknowledge the effect of the waiver and be witnessed, either by a plan representative or a notary public. There is no regulation about certification by a plan administrator.

Answer 183

A

Stock bonus plans
Profit sharing plans
Employee stock ownership plans
* All qualified pension plans, including defined benefit plans and defined contribution plans, must provide two forms of survivorship benefits for spouses, the qualified preretirement survivor annuity and the qualified joint and survivor annuity. Stock bonus plans, profit sharing plans and ESOPs generally need not provide these survivorship benefits for the spouse if the participant’s nonforfeitable account balance is payable as a death benefit to that spouse.

Answer 184

A

90 days
* An election to waive the joint and survivor form must be made during the 90-day period ending on the annuity starting date, that is, the date on which benefit payments should have begun to the participant.

Answer 185

A

It increases administrative costs

A wide range of options increases administrative costs. Also, the IRS makes it difficult to withdraw a benefit option once it has been established, though this anti-cutback rule has been eased somewhat for plan years beginning after December 31, 2001. Consequently, most employers provide only a relatively limited menu of benefit forms for participants to choose from.

Answer 186

A

Lump sum distribution at retirement
Lump sum distribution at termination of employment
Annuity distribution over the retirement years
Nonannuity distributions over the retirement years as necessary
* Defined contribution plans provide a lump sum benefit at retirement or termination of employment or annuity over the retirement years. Defined contribution plans often also allow the option of taking out nonannuity distributions over the retirement years as they are needed. However, these annuity distributions cannot be made before retirement.

Answer 187

A

If the participant dies before the end of the period
If the participant and spouse die before the end of the period
* Life with period-certain annuities provides payments for a specified period of time, usually 10 to 20 years, even if the participant, or the participant and spouse, both die before the end of that period. Thus, the life with period-certain annuity makes it certain that periodic benefits will continue for the participant’s heirs even if the participant and spouse die early.

Answer 188

A

False
* Employees that make after-tax contributions can receive these amounts free of federal income taxes, although the order in which they are recovered for tax purposes depends on the kind of distribution.

Answer 189

A

High tax bracket
Mandatory 20% withholding
Early distribution penalty
* A participant may not want to take a lump sum distribution because he or she may be in a high tax bracket.
* In addition, he or she may be subject to the 20% mandatory withholding and early distribution penalties.

Answer 190

A

January 1, 1986

Grandfathered rules related to after-tax contributions and 10-year averaging are applied to taxation of plan participants who attained age 50 before January 1, 1986.

Answer 191

A

$115,000
* The nontaxable amount is the total of the participant’s cost basis and the pure insurance amount.
* Therefore, it is calculated as follows: $250,000 (death proceeds) - $160,000 (cash value) = $90,000 (pure insurance amount) + $25,000 (cost basis) = $115,000 (nontaxable amount).

Answer 192

A

After-tax contributions made by the employee.
Cost of life insurance protection reported as taxable income by the participant.
Employer contributions previously taxed to the employee.
Plan loans included in income as a taxable distribution.
* The cost basis includes employee after-tax contributions, cost of life insurance reported as taxable income, employer contributions taxed to employee and plan loans included as taxable income.
* However, rollovers are not included in cost basis because they are not taxed at the time of being rolled over.
* They are generally made to defer tax until the time the funds are actually withdrawn from the plan

Answer 193

A

Section 403(b) plan
Section 401(k) plan
* Any type of qualified plan or Section 403(b) tax-deferred annuity plan may permit loans.
* However, if the plan is subject to ERISA, loans from Section 403(b) tax-deferred annuity plans are subject to the prohibited transaction rules and penalties.
* Section 401(k) plans are qualified plans and therefore allow loans. There are considerable administrative difficulties connected with loans from defined benefit plans because of the actuarial approach to plan funding.
* Loans from IRAs and SEPs are not permitted.

Answer 194

A

Loans are made available to all participants on a reasonably equivalent basis.
Loans are made in accordance with provisions in the plan.
Loans made available bear reasonable rates of interest.
Loans are adequately secure.
* The requirements of the Code are that loans are available to all participants on a reasonably equivalent basis and in accordance with specific provisions set forth in the plan. The loans must bear reasonable rates of interest and must be adequately secured. Loans must not be made available to highly compensated employees in an amount greater than the amounts made available to other employees.

Answer 195

A

Loan interest from a 401(k) plan may be deductible if the loan is used to acquire the borrower’s primary residence.
* The interest for 401(K) loans is typically not deductible but an exception does exist for primary residence loan interest.

Answer 196

A

The participant has not attained the age of 59½.
It is made to the plan participant’s beneficiary or estate before the participant’s death.
It is made upon separation from service before attainment of age 55.
* The early distribution penalty does not apply to distributions made on or after attainment of age 59½. Early distribution will also not attract a penalty if it is made to the plan participant’s beneficiary or estate on or after the participant’s death. The penalty is also not applicable if it is made to pay health insurance costs while unemployed. However, the early distribution penalty is applicable if it is made upon separation from service before attainment of age 55.

Answer 197

A

SIMPLE IRAs

Early distributions from qualified plans, Section 403(b) tax-deferred annuity plans, IRAs and SEPs are subject to a penalty of 10% of the taxable portion of the distribution. In the case of SIMPLE IRAs, the penalty is increased to 25% during the first two years of participation.

Answer 198

A

False

It is true that Dave does not have to take minimum distributions from the plan of his current employer, but he is required to take distributions from the plans of any prior employers or from any IRA accounts that he has.

Answer 199

A

There has been a disaster in the locality of the plan participant.
The participant has met with a disastrous accident.
* The Secretary of the Treasury may waive the 60-day rule where it would be against equity or good conscience to enforce it, including cases of disaster, casualty or other events beyond the participant’s control. However, there is no legislative basis for waiving the 60-day rule for pre-2002 distributions, even where the delays were the result of erroneous advice or the inaction of third parties.

Answer 200

A

A required minimum distribution.
A distribution that is one of a series of substantially equal periodic payments payable for a period of ten years or more.
A hardship distribution.
* Any distribution from an eligible retirement plan is eligible for rollover, except a required minimum distribution, a distribution that is one of a series of substantially equal periodic payments payable for a period of ten years or more or for the life or life expectancy of the employee or the employee and a designated beneficiary, or a hardship distribution.

Answer 201

A

20%

If the direct rollover method is not chosen in the case of a distribution from a qualified plan, Section 403(b) plan or eligible Section 457 governmental plan, the distribution is subject to mandatory withholding at 20%. Distributions from a rollover IRA and employee stock option plan cannot be rolled over.

Answer 202

A

An in-service distribution is not eligible for rollover.

An in-service distribution may be transferred to an eligible retirement plan by means of a direct transfer rollover.

Answer 203

A

Life annuity

For an unmarried participant, a defined benefit plan’s automatic form of benefit is usually a life annuity, which is typically a series of monthly payments to the participant for life, with no further payments after the participant’s death.

Answer 204

A

Joint and survivor annuity

Defined benefit plans must provide a married participant with a joint and survivor annuity as the automatic form of benefit.

Answer 205

A

Section 401(k) Plan
* All pension plans are required to provide the qualified preretirement survivor annuity and the qualified joint and survivor annuity provision. A Section 401(k) plan is not a pension.

Answer 206

A

It must not change the benefit payable to the participant.
* Electing out of the preretirement survivorship benefit will generally increase the participant’s benefit after retirement.

Answer 207

A

$40,000

The maximum loan Larry may take today is $40,000. IRC Section 72(p) provides that aggregate loans from qualified plans to any individual plan participant cannot exceed the lesser of:
$50,000, reduced by the excess of the highest outstanding loan balance during the preceding one-year period over the outstanding balance on the date when the loan is made, or
One-half the present value of the participant’s vested account balance or accrued benefit, in the case of a defined benefit plan.

Answer 208

A

The distribution must be transferred using a direct transfer rollover.
* The distribution must be transferred using a direct transfer rollover.

Answer 209

A

$500,000
* The entire value of a qualified plan death benefit is subject to inclusion in the decedent’s gross estate for federal estate tax purposes.

Answer 210

A

$240,000

If the direct transfer method is not chosen in the case of a distribution from a qualified plan, Section 403(b) plan, or eligible Section 457 governmental plan, the distribution is subject to mandatory withholding at 20%. Larry will receive $240,000 and $60,000 with be withheld for federal income taxes.

Answer 211

A

Payments are distributed for life to the annuitant and continue for the balance of 10 years if the annuitant does not survive 10 years from the commencement of the payments.
* A life with period-certain annuity provides payments for life, but if the annuitant dies before a specified period, usually 10 to 20 years, the beneficiary will continue to receive payments until the period is over.

Answer 212

A

$0
* The employer basis in the stock is taxed as ordinary income in the year of the lump-sum distribution and the gain at the time of the distribution is taxed as long-term capital gain when the stock is subsequently sold.
* In this example, $50,000 is taxed as ordinary income this year and $150,000 is taxed as long-term capital gain when Patty sells the stock.
* The example does not state Patty sold the stock this year

Answer 213

A

25% of the difference between the RMD for the year and the amount distributed.
* If the annual distribution is less than the minimum amount required, there is a maximum penalty of 25% of the amount that should have been distributed but was not distributed.

Answer 214

A

$50,000 is taxed as ordinary income this year and $150,000 is taxed as long-term capital gain when Patty sells the stock.
* The employer basis in the stock is taxed as ordinary income in the year of the lump-sum distribution and the gain at the time of the distribution is taxed as long-term capital gain when the stock is subsequently sold.
* In this example, $50,000 is taxed as ordinary income this year and $150,000 is taxed as long-term capital gain when Patty sells the stock.

Answer 215

A

$0
* Larry is not subject to income tax or penalty for funds distributed under a QDRO. If not rolled over, the recipient is subject to regular income tax on the distribution but distributions under a QDRO are exempt from the 10% early withdrawal penalty tax.

Answer 216

A

Keogh Plan’s contribution on behalf of the owner is based on earned income.
* The unique feature of a Keogh plan, when compared with qualified plans adopted by corporations, is that the Keogh plan’s contribution on behalf of the owner is based on earned income as opposed to compensation.
* Earned income is defined as the self-employed individual’s net income from business after all deductions, including the deduction for the Keogh Plan contributions.

Answer 217

A

Potential exclusion of a base amount of the capital gain of the sale of a primary residencence
Deferral of tax on capital gain recognition on securities until sold
Favorable tax treatment for Roth IRA assets

Three ways saving is encouraged through the tax system are:
* Deferral of tax on capital gains until realized
* Potential exclusion of a base amount of the capital gain of the sale of residence
* Deferral of tax and other benefits for qualified retirement plans and other tax advantaged plans

Answer 218

A

False

In a defined contribution plan, the employer establishes and maintains an individual account for each plan participant.
When the participant becomes eligible to receive benefit payments, the benefit is based on the total amount in the participant’s account.

Answer 219

A

Money Purchase - One of the simplest of all retirement plans. The employer must contribute each year to the plan.
Target Benefit - A defined contribution plan where the participant’s age at plan entry is considered when determining the contribution percentage.
Profit Sharing - In these plans, employer can choose not to contribute.
Defined Benefit - These plans are funded actuarially. The employer assumes the investment risk.

Answer 220

A

Younger employees
Short-term employees
* Employees who value immediate cash are usually younger employees who do not expect to stay with the employer long. In addition, they are often lower-paid employees as well.

Answer 221

A

6
* Under current law, the longest wait permitted for full vesting of matching employer contributions is six years under the graduated two-to-six-year vesting schedule

Answer 222

A

A defined benefit plan makes it relatively easy to design a window plan to encourage early retirement.
A defined benefit plan can be designed to allow full benefits to accrue after a specified period with no further benefits accruing thereafter.
* A defined benefit plan can be designed to allow full benefits to accrue after a specified period with no further benefits accruing thereafter. In addition, a defined benefit plan makes it relatively easy to design a window plan to encourage early retirement.

Answer 223

A

Unrealized capital gains
Capital gains on sale of personal residence
Tax deferral for qualified retirement plans and IRAs
* The federal income tax system imposes tax on income from savings even if it is not used for consumption, with only three major exceptions: deferral of tax on capital gains until realized, exclusion of gain on the sale of a personal residence, and deferral of tax and other benefits for qualified retirement plans and IRAs.

Answer 224

A

True
* Part of the process of implementing a 401(k) is to “sell” the plan to the employees so that all employees, including highly compensated employees, can fully benefit from the plan. If the nonhighly compensated employees are not participating, it limits the amount of participation of highly compensated employees.

Answer 225

A

A defined contribution plan is most likely to meet the objective of assuring adequate retirement income.
* The savings account feature of defined contribution plans attracts younger employers. A defined benefits plan will work well to encourage retirement. It may not meet the objective of assuring adequate income. An ESOP or profit sharing plan tries to create an incentive for employees to maximize performance.

Answer 226

A

Vested employees are taxed on employer contributions in the year contributions are made to the plan.

Vested employees do not pay tax on the employer contributions until they are withdrawn from the plan.

Answer 227

A

Once established, plan contributions are fixed on a yearly basis.
* These plans are funded actuarially, which means that, for a given benefit level, the annual funding amount is greater for employees who are older at entry into the plan, as the time to fund the benefit is less in the case of an older entrant. The required employer contribution may vary year to year.

Answer 228

A

6 years

Employer matching contributions are a feature of a defined contribution plan, namely, a Section 401(k) plan. The longest period over which a defined contribution plan may defer 100% vesting of employer matching contributions is 6 years.

Answer 229

A

Tax-free accumulation of interest on corporate bonds.
* Interest earned on corporate bonds is taxable.

Answer 230

A

Employee Stock Ownership Plan (ESOP)

An ESOP is a type of profit-sharing plan. The other plans listed are types of pension plans.

Answer 231

A

Employee
* A target benefit pension plan is a defined contribution plan.
* All defined contribution plans have employee-directed individual accounts, and the employee bears the investment risk.

Answer 232

A

$22,340

Lynn may contribute $22,340 to her profit-sharing account this year.
$120,000 – (50% x $16,596) = $111,702
$111,702 x 0.20 (0.25 ÷ 1.25) = $22,340

Answer 233

A

Stock bonus plan

A stock bonus plan is structured like a profit-sharing plan. Plan contributions are made in employer stock. Generally, seeking to increase the value of employer stock incentivizes employee productivity because an employee’s individual account balance is based on the value of the employer stock.

Answer 234

A

The employer receives a tax deduction when employees receive benefits.
* The employer receives a tax deduction when employees receive benefits.

Answer 235

A

25% of aggregate covered compensation
* The maximum deductible employer contribution to a money purchase pension plan, which is a defined contribution plan, is 25% of aggregate covered compensation.

Answer 236

A

Cash balance plan

Only defined benefit plans guarantee the benefit at retirement. Of the plans listed, only the cash balance plan is a defined benefit plan.

Answer 237

A

The employer must make a plan contribution for years in which the company earns a profit.
* A profit-sharing plan is a defined contribution plan under which the employer determines the amount of the contribution each year, rather than having a stated contribution obligation.

Answer 238

A

Pension plan
Welfare plan

Under ERISA, employee benefit plans are divided into two types: pension plans and welfare plans.

Answer 239

A

A dependent care assistance plan
Short-term disability plan
* Qualified plans such as profit sharing, group-term life insurance, and nonqualified deferred compensation all provide some form of death benefits or capital accumulations in their plan. But dependant care assistance or short-term disability plans do not provide for death benefits, as they are provided only for a small period of time and do not consider benefit provision in lieu of death.

Answer 240

A

Employees with five years of service
Part-time employees
* The design feature of group-term life insurance includes the exclusion criteria. When calculating the percent of employees to be covered under the group-term insurance, employees with less than three years of service, part-time/seasonal employees, and employees of the collective bargaining unit can be excluded. Employees with greater than three years service are included in the plan.

Answer 241

A

The Table I rates
* The cost of the first $50,000 of group-term insurance is tax-free to the employees.
* However, for coverage above $50,000, the amount taxable to the employees, or rather the value of the group-term life insurance needs to be calculated on a monthly basis.
* This is done by multiplying by the Table I rates.

Answer 242

A

Profit sharing plans
* Financing a group-term carve-out arrangement requires the implementation of methods such as bonus plans, split-dollar plans, and death benefit plans.
* In order for carve-out programs to work as intended, they need to be carefully designed to avoid Section 79 status.
* This can be achieved if the coverage involves either/and the split-dollar, bonus, or death benefit only plans.

Answer 243

A

“Total and permanent” definition
* The strictest definition of disability is the total and permanent definition that states the disability condition under which an employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. Because of the nature of the defining disability, it is least favorable to the employees.

Answer 244

A

A six-month benefit period has been satisfied and Social Security benefits or the employer’s long-term plan goes into effect
* A short-term disability plan fills the gap between sick pay and the employee’s long–term disability plans. It goes into effect when the employee’s sick pay benefits run out and extends until the six-month limit has been reached, when the employer’s long-term disability plan, if any, and Social Security disability go into effect.

Answer 245

A

Medical expenses incurred for treatment of an injury that caused disability
* Disability plans usually have specific exclusions under which benefits are not paid even if they meet the definitions of disability. All of the above are excluded from payment even if they comply with disability definition, except for medical expenses incurred for treatment of an injury that caused disability. In this case disability benefits are paid due to injury.

Answer 246

A

Lori will pay $600 and the company will pay $1,400
* Lori will pay $600 ($2,000-$250=$1,750x20%=$350($250+$350=$600)) and the company will pay $1,400($2,000-$600).

Answer 247

A

False
* Blue Cross plans are used for hospital bills, and Blue Shield plans used for doctors’ bills.

Answer 248

A

Genetic information
Medical history
Health status
* Participants may not be excluded or required to pay an extra premium on the basis of the following: health status, medical condition (physical and mental), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability.

Answer 249

A

Directors
Independent contractors
Self-employed individuals
* Self-employed individuals, independent contractors, and directors are not counted and exempted from COBRA.

Answer 250

A

Advantages
* Low initial cash flow
* Simplicity
* No nondiscrimination requirements

Disadvantages
* FASB standards require liability
* Increasing cash flow requirements
* Burdens future management/shareholders

Answer 251

A

Increased Pension Benefits
Incidental Qualified Plan Benefit (410(h))
VEBA

No tax deduction until benefits are paid:
* Earmarked Corporate Assets
* Corporate-owned Life Insurance

Answer 252

A

PPOs provide benefits on a fee-for-service basis as their services are used.
PPO participants have financial incentives to use the preferred provider network.
* PPOs typically differ from HMOs in two aspects: First, they provide benefits on a fee-for-service basis as their services are used. Fees are usually subject to a schedule that is the same for all participants in the PPO. Second, plan participants have financial incentives to use the preferred provider network. The primary care physician does not control a participant’s access to specialists, as is the case in most HMO plans.

Answer 253

A

Health maintenance organizations (HMOs)
* Health insurance plans can be of two types – prepaid or postpaid. The principal form of prepaid plan is the health maintenance organization (HMO), where the health care provider is paid in advance.

Answer 254

A

29 months
* Many employers provide benefit plans of continuing insurance coverage for employees and their dependents for some time after the termination of employment under the COBRA rule. COBRA requires that if the termination of employment is due to disability, then the coverage should continue for a period of 29 months. If the termination is due to death of the employee, divorce or separation, or bankruptcy, then the continuation period is 36 months, and in all other cases, except misconduct, the time period is 18 months.

Answer 255

A

Group practice
* HMOs are basically organized in one of three ways – staff model, group practice or medical group model, and individual practice association. In the group practice model, a contract is signed between the HMO and the medical group or groups that would provide the services to subscribers. However, while the HMO does not directly employ the individual doctors and other providers, subscribers must use only the services of those employed by the HMO under the contract.

Answer 256

A

Open Panel
* In an Open Panel plan, the patient can see different primary care providers and refer himself or herself to a specialist within the network.

Answer 257

A

Health Savings Account

Answer 258

A

Medical Savings Account

Answer 259

A

Health Reimbursement Arrangement

Answer 260

A

Flexible Spending Account (FSA)
Cash Compensation
Fixed Benefit Program
* Alternatives to cafeteria plan are flexible spending account (FSA), a fixed benefit program, and cash compensation.

Answer 261

A

They help choose the form of benefits needed
They include cash options in lieu of noncash benefits of same value
They help control cost of the benefit package to the employer
* Cafeteria plans allow employees to choose the form of employee benefits. These plans must include a cash option, wherein employees have an option to receive cash in lieu of noncash benefits of equal value. Cafeteria plans also help control the cost of the benefit package to the employer, as the benefits that are not taken by the employees reduce the employer’s provisionary costs.

Answer 262

A

Scholarships and fellowships
Retirement benefits (not including 401(k) plans)
* Under Code Section 125 and its regulations, only certain qualified benefits can be made available. Cash and most tax-free benefits such as medical expenses and disability income insurance are part of the basic benefit package, but the plan excludes scholarships and fellowships under Section 117 and retirement benefits such as qualified or nonqualified deferred compensations.

Answer 263

A

May carry over only a maximum of $550 in his account to the next year
* At the end of the year, if expenses are less than predicted, it is forfeited. Only $550 can be carried over to the next year.
* The amount forfeited reverts to the employer as it means that the compensation is not to be paid.

Answer 264

A

True
* Discounts on merchandise are almost as valuable as cash to employees but are very inexpensive for the employer because the employer can still make a profit on the items sold or at least recover its cost, but does not have to bear the full cost of marketing and selling the items to the public.

Answer 265

A

General advice regarding retirement planning
* Services may include general advice regarding the employee’s and the spouse’s overall plan for retirement, of which the employer’s qualified plan is only a part.

Answer 266

A

Are sports tickets considered taxable under the IRS de minimus fringe rules? No, unless seasonal tickets
Is use of the company apartment for a weekend taxable under the IRS de minimus fringe rules? Yes
Is occasional typing of personal letters by company secretary taxable under the IRS de minimus fringe rules? No
Where there any items that were considered taxable under the IRS de minimus rules that surprised you? Taxable - Commuting use of company car more than one day per month

Answer 267

A

A reversion of assets to the employer is effectively prohibited.
Smaller employers will find these plans feasible only if they use a vendor of packaged plans provided to groups of employers.
* Installing and administering a WBT or VEBA is complex and costly. A reversion of assets to the employer is effectively prohibited. Smaller employers will find these plans feasible only if they use a vendor of packaged plans provided to groups of employers. While the funding of such plans through a Section 419A(f)(6) plan is theoretically sound, there is a possibility of an IRS attack or changes in the Code affecting these programs.

Answer 268

A

Severance benefit
Death benefit
* Prefunded welfare benefit plans designed primarily for executives generally provide severance pay benefits, death benefits, or a combination of the two, since these are the benefits that tend to provide the most tax advantages.

Answer 269

A

False
* Legal expenses such as the cost of a criminal trial can be the kind of catastrophic expense that is best provided through an insurance-type or group benefit program such as a legal services plan.

Answer 270

A

Season tickets for a major league baseball team
Weekend vacation in company apartment
* Under Code Section 132, benefits that are often referred to as de minimis fringe benefit, states that property or services provided to the employees are not taxable if they are too small to be accountable. IRS regulations have provided guidelines with respect to this so that employees cannot misuse the term “small”.

Answer 271

A

The fund’s qualified cost for the tax year
* If a VEBA is not part of the 10-or-more-employer plan and does not qualify under Code Section 419 A(f)(6), then deductible contributions are severely limited. But the VEBA income is set aside in excess of the Code Section 419A limits. So if the contributions are deductible under provisions of the Code in absence of 419 and 419A, they are done under the deduction acceleration limits of the Code Sections 419 and 419A. Thus the employer’s deduction for the taxable year is limited to the qualified cost of the funds.

Answer 272

A

The COBRA continuation coverage requirements
* IRC Section 4980B provides that the COBRA coverage requirements do not apply to coverage under qualified long-term care services. Qualified long-term care services means only specified services provided to chronically ill persons as defined in Code Section 7702B. So all of the above are part of the definition of qualified long-term care services except the COBRA continuation coverage requirements.

Answer 273

A

Services like tax preparation are included in income
Accounting services are included in income
Legal services are included in income
Brokerage services are included in income
* Services such as tax preparation, accounting, legal, or brokerage services are included in income, without regard to whether they relate to retirement planning.

Answer 274

A

Section 119

Answer 275

A

De minimis fringe

Answer 276

A

Highly compensated

Answer 277

A

Much like a qualified retirement plan, funds remaining when an employee leaves employment can revert to the employer.
* Once contributed to the plan, funds in a VEBA cannot revert to the employer.

Answer 278

A

The premiums paid by the employer and the benefits paid under the policy are tax-free to the employee.
* Generally, premium costs are deductible to the employer, and premiums and benefits are nontaxable to the employee or beneficiary.

Answer 279

A

Salary reductions elected by employees to fund nontaxable benefits under the plan are subject to payroll taxes.
* Salary reductions elected by employees to fund nontaxable benefits under the plan are not subject to payroll taxes resulting in savings to both the participant and the employer.

Answer 280

A

IRC Section 125 requires cafeteria plans to be standardized and offer specific benefits.
* One of the attractive features of a cafeteria plan is that the benefits offered can be customized to best suit the various needs of a specific company’s employees; benefits are not standardized.

Answer 281

A

True
* Without a flexible spending account (FSA), an employee pays for allowable expenses, such as medical plan deductibles with after-tax dollars. A FSA allows these same expenses to be paid for with before-tax dollars.

Answer 282

A

A flexible spending account (FSA) is a type of cafeteria plan.
* A flexible spending account (FSA) is a type of cafeteria plan that provides very specific tax benefits and is often used even by smaller employers, including closely-held businesses. FSAs feature benefit funding through salary reductions by employees.

Answer 283

A

$372
* Sue must recognize an economic benefit of $372:
3 x 120,000 = 360,000
360,000 – 50,000 = 310,000
310,000/1,000 = 310
310 x 0.10 x 12 = 372

Answer 284

A

Coverage is required to be the same for each participant to comply with nondiscrimination rules.
* Under a carve-out plan, coverage may vary for each participant.

Answer 285

A

$252
* Suzi must recognize an economic benefit of $252:
3 x 120,000 = 360,000
360,000 – 50,000 = 310,000
310,000/1,000 = 310
310 x 0.10 x 12 = 372
372 – 120 = 252

Answer 286

A

Any occupation definition of disability
* The ‘any occupation definition of disability’ is most advantageous to the insurance company because it is the most difficult definition of disability for the insured to qualify for benefits.

Answer 287

A

Published by the IRS as general guidance to all taxpayers.
Binding on IRS personnel on the issues covered in them.
* Revenue rulings are published by the IRS as general guidance to all taxpayers. The IRS publishes its Revenue Rulings in IRS Bulletins and is binding on IRS personnel on the issues covered in them.

Answer 288

A

Laws expressed by statutes
* The law as expressed by statutes passed by the U.S. Congress is the highest level of authority and is the basis of all regulation. The court cases, rulings, and regulations are simply interpretations of the statute.

Answer 289

A

Civil Rights Laws

Answer 290

A

State Legislation

Answer 291

A

General Counsel Memorandum

Answer 292

A

Section Field Service Advice

Answer 293

A

Plans of governmental organizations
Plans of churches
Plans of state, federal or local governments
* The employer plans that are exempt from ERISA are plans of state, federal, or local governments or governmental organizations. Plans for churches, synagogues, or related organizations are also exempt. If plans are maintained outside the United States for aliens, then they are exempt. Unfunded excess benefit plans that are a type of nonqualified deferred compensation plan, and plans that are maintained solely to comply with workers’ compensation, unemployment compensation or disability insurance laws are also exempt from ERISA.

Answer 294

A

Simplified Employee Pension plans
Section 403 (b) plans
Simple IRAs
* Employer-facilitated IRAs, simplified employee pensions (SEPs), SIMPLEs, and Section 403(b) TDA plans are, in some cases, either exempt from ERISA’s reporting and disclosure requirements or subject to reduced ERISA reporting and disclosure requirements. Code Section 125 plans refer to cafeteria plans, which are not included in the ERISA exempt list

Answer 295

A

Holiday premiums
Holiday gifts
Recreational facilities in employer’s premises
Compensation during sabbatical leave

Answer 296

A

An attorney who represents the employer
* An attorney who represents the employer is not typically considered a fiduciary of a qualified plan sponsored by the employer.

Answer 297

A

Secretary of Labor
* The Secretary of Labor is authorized by ERISA to grant administrative exemptions from Section 406 and 407(a).

Answer 298

A

The Employee Retirement Income Security Act of 1974
* The Employee Retirement Income Security Act of 1974 (ERISA) imposes extensive reporting and disclosure requirements on a broad range of employee benefit plans. According to these provisions, various forms and information must be disclosed to plan participants and/or filed with the IRS or the Department of Labor.

Answer 299

A

Form 5500
* Form 5500 is required as a qualified plan’s annual financial report and must be filed with the IRS each year by the end of the seventh month after the plan year ends.

Answer 300

A

Summary Annual Report
* The Summary Annual Report is a summary of financial information from the Annual Report (Form 5500 series) that must be provided to plan participants each year within nine months of the end of the plan year.

Answer 301

A

30 days
* Individual Accrued Benefit Statement can be requested by a plan participant under the plan, and the plan administrator must provide it within 30 days.

Answer 302

A

run a plan solely in the interest of participants and beneficiaries
* The primary responsibility of a qualified plan fiduciary is to run a plan solely in the interest of participants and beneficiaries.

Answer 303

A

Summary Plan Description
* The Summary Plan Description (SPD) is intended to describe the major provisions of the plan to participants in simple language. An SPD must be furnished automatically to participants within 120 days after the plan is established, or 90 days after a new participant enters an existing plan.

Answer 304

A

Section 401(k) plans funded exclusively by employee elective deferrals.
* Section 401(k) plans funded exclusively by employee elective deferrals are qualified retirement plans and subject to ERISA.

Answer 305

A

IRS
* The IRS administers the taxation of contributions and benefits and enforces funding, participation, and vesting standards.

Answer 306

A

General Partnership
* In a general partnership each partner is actively involved in the management of the firm and is fully liable for partnership obligations.

Answer 307

A

False
* Each shareholder’s interest is valued at the time the agreement is drafted, and it should be revalued periodically, and the agreement amended to incorporate the new values.

Answer 308

A

42
* The formula is n(n-1).
7(7-1) =42

Answer 309

A

True
* Any policy cash values, and death proceeds are, therefore, subject to attachment by the creditors of the corporation because the policy values are general corporate assets.

Answer 310

A

The proprietor’s personal representative
* Upon the death of the proprietor, the proprietor’s personal representative generally is obligated to liquidate the business.
* The personal representative is usually named in the last will and testament of the proprietor and could be the spouse or heirs of the proprietor.
* In a sole proprietorship, a partner does not exist.

Answer 311

A

It may result in a forced sale of assets at a fraction of their normal value
Goodwill is completely lost
Partners may lose their means of earning a living
* The law provides that upon the death of a general partner, the partnership is dissolved. Dissolution of the partnership is not taxed, but the deceased partner’s interest in the partnership may have to be used in paying his or her estate tax. This may result in the forced sale of assets, usually at a fraction of their normal value, and goodwill is completely lost. It usually results in them losing their very means of earning a living.

Answer 312

A

They are entitled to a proportionate share of dividends
They have the right to examine corporate records with legitimate reason
They are entitled to participate in all shareholder activities
* Though the minority shareholder’s beneficiaries cannot exercise control in the management of the corporation, they may be able to render life miserable for the survivors. They have rights such as being entitled to a proportionate share of dividends, to examine the corporate records with legitimate reason, and generally to participate in all shareholder activities. The majority shareholder’s beneficiaries can enforce their wills on the surviving shareholders, whereas minority shareholder’s beneficiaries generally cannot.

Answer 313

A

No identified buyer(s) who must buy
No established funding

Some of the problems for a business without a funded buy-sell agreement are:
* No set value for business
* No identified buyer(s) who must buy
* No established funding
* No requirement for family or heirs to sell to surviving owners or employees

Answer 314

A

Majority shareholder
* If the employee is a controlling shareholder, more than 50% in the employer corporation, the corporation’s incidents of ownership in the policy will be attributed to the majority shareholder.

Answer 315

A

The policy premiums, cash values, and death benefits.
* Usually split-dollar plans involve a splitting of premiums, death benefits, and/or cash values, but they may also involve the splitting of dividends or ownership.

Answer 316

A

Collateral assignment
* There are two methods of arranging policy ownership under a split-dollar plan.
* They are the endorsement method and the collateral assignment method.

Answer 317

A

The employee is taxed on the amount of economic benefit received.
* The traditional income tax consequences of a split-dollar plan are that the employee is considered to be in receipt each year of an amount of taxable economic benefit. The employer cannot deduct any portion of the premium contribution. Death benefits from a split-dollar plan, both the employer’s share and the employee’s beneficiary’s share, are generally income tax free.

Answer 318

A

a golden parachute plan
* A golden parachute plan is a compensation arrangement that provides special severance benefits to executives in the event that the corporation changes ownership and the covered executives are terminated.

Answer 319

A

The premiums paid by the business are tax-deductible by the business and the benefits paid under the policy are taxable to the business.
* The premiums paid by the business are tax-deductible by the business and the benefits paid under the policy are taxable to the business. While the benefits paid are taxable to the business, the benefits will be used to pay deductible business expenses, therefore, no tax liability will be incurred.

Answer 320

A

The death benefit is tax-free to the employer.
* The death proceeds of key employee life insurance are tax-free for regular income tax purposes when paid to the corporation.

Answer 321

A

20
* A cross-purchase buy-sell agreement in a partnership with 5 equal partners requires 20 life insurance policies.
* Each of the 5 partners purchases a policy insuring each of the other 4 partners (5 x 4 =20 policies).

Answer 322

A

Employee and owner salaries
* While employee salaries are covered, owner salary is not covered under a business overhead disability insurance policy.

Answer 323

A

The employer
* Under the endorsement method for split-dollar life insurance, the employer owns the policy and is responsible to the insurance company for paying the entire premium.

Answer 324

A

5
* An entity purchase buy-sell agreement requires 5 life insurance policies.
* The partnership purchases one policy insuring each of the 5 partners.

Answer 325

A

By agreement between the company and the insured/owner at the time the buy-sell agreement is agreed upon.
* Under an entity purchase buy-sell agreement the buy-sell purchase price is established by agreement between the company and the insured/owner at the time the buy-sell agreement is agreed upon.

Answer 326

A

Collateral assignment method
* Under the collateral assignment method for split-dollar life insurance, the employee owns the policy and is responsible for premium payments.

Answer 327

A

To provide funding for a cross-purchase buy-sell agreement between the company and the key employee’s estate.
* Key employee life insurance is not used to fund a cross-purchase buy-sell agreement because key employee insurance is owned by the company and a cross-purchase buy-sell agreement is between owners, not between the company and the employee’s estate.

Answer 328

A

Parent has retired
Parent has passed away
Parent is disabled
* If a parent passes away, is receiving retirement benefits, or is receiving disability benefits, a child may receive Social Security benefits, depending on their circumstances. These is a cap to the total family benefits that can be received. Regardless of when a worker wants to receive retirement benefits, a worker needs to be at least 62 years old to start receiving any retirement benefits.

Answer 329

A

False
* The employee shares with the employer for making sure that all the earnings have been reported and they are accurate. The accuracy is important because the employee’s benefits will be based on this record of lifetime earnings.

Answer 330

A

Getting a job
Filing tax returns
Receiving Social Security benefits
* Employers, financial institutions that pay interest and the Internal Revenue Service (IRS) require that an individual present his or her Social Security number. It is not possible to pay into the Social Security program and to collect Social Security benefits without a Social Security number. Many other businesses and government agencies also use the Social Security number for recordkeeping purposes.

Answer 331

A

Jenny will get one credit for each $1,640 she earns not to exceed 4 quarters during a calendar year.
Jenny will have to work for at least 10 years to earn the required 40 credits.
Increased income will increase her Social Security benefits up to a maximum.
* As Jenny works and pay taxes, she earns Social Security credits. In the year 2023, she will earn one credit of each $1,640 of earnings. However, Jenny must work for at least 10 years to qualify for benefits because she can get only a maximum of four credits per year. Although her income is higher, it will not increase her eventual Social Security benefits. The amount of income she earns will increase her benefits up to just the maximum credits available.

Answer 332

A

15.3%
* In a normal year, the employee and the employer each must pay 7.65% of the employee’s gross salary (6.2% for Social Security and 1.45% for Medicare), up to $142,800.
* Therefore the total contribution made is equal to 15.3% of Fitzgerald’s gross salary.

Answer 333

A

$5,652
* Although Michael must pay the full FICA of 15.3%, he will receive a deduction for the employer portion. This is calculated by multiplying his income $40,000 by .9235 which results in $36,940 which is then multiplied by 15.3% to arrive at the FICA amount of $5,652 (rounded up to the nearest dollar).

Answer 334

A

0
* Investment earnings are not subject to Social Security tax and do not receive credits.
* Only earned income subject to Social Security taxes receives Social Security credits.

Answer 335

A

False
* Social work incentives provided by Social Security allow disabled persons to work for a period of time without reducing their benefits.

Answer 336

A

True
* For people reaching full retirement age in 2022. The rate is 8% per year.

Answer 337

A

The person cannot perform any substantial work. The impairment must be expected to last at least 12 months or result in death.
The disability is expected to result in death.
* Persons are considered disabled if they cannot do the work they did before. The Social Security administration must then decide that the disabled cannot adjust to other work because of their medical condition(s). Moreover, the disability must last or be expected to last for at least a year or to result in death. In contrast the dictionary defines disability as a physical or mental condition that prevents a person from leading a normal life, which is not specific and therefore can be debated from person to person.

Answer 338

A

Andrew
Sandra
* Martha is under age 62 but she can receive benefits because she is caring for Karen who is under age 16.
* Peter is disabled and above 19, so he can also receive benefits.
* Karen is under age 18 and is eligible for benefits.
* Andrew is not eligible by any of these rules.
* Sandra is also not eligible, because although she is under 19, she is not studying full-time in any school.

Answer 339

A

62 years
* Age 62 is the earliest a person can collect Social Security retirement benefits. Those who are already receiving widow’s or widower’s benefits, including divorced widows or widowers, can switch to their own retirement benefits as early as age 62.

Answer 340

A

False
* Even if a person has not paid into the system, a person can enroll in Medicare Part A by paying the required premium.

Answer 341

A

5 months
* The waiting period must be 5 full months of disability with benefits payable in the sixth full month of a person’s disability.

Answer 342

A

70%
* Born in 1961, Elsa’s full retirement age under Social Security is 67. Claiming Social Security retirement benefits at age 62 will result in a reduction of her benefit of 30%. She is retiring 60 months prior to her full retirement age.
* The reduction is calculated as follows:
* (5/9ths of 1% x 36 months = 20%) + (5/12ths of 1% x 24 months = 10%) = 30%

Answer 343

A

4
* Tim earns the maximum of 4 credits this year.
* One credit is earned in 2023 for each $1,640 of compensation subject to Social Security taxes up to a maximum of 4 for the year.

Answer 344

A

124%
* Born in 1961, Elsa’s full retirement age under Social Security is 67. Claiming Social Security retirement benefits at age 70 will result in an increase of her benefit of 24%. Delaying Social Security retirement benefits beyond one’s full retirement age increases the benefit by 8% per year.

Answer 345

A

6.2%
* 6.2% of an employee’s compensation up to the wage base limit funds Social Security retirement, disability, and survivor benefits. 1.45% on unlimited compensation funds Medicare.

Answer 346

A

A condition under which the individual is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than 12 months or result in death.
* The Social Security definition of disability is very specific and more restrictive than definitions of disability found in private disability insurance policies.

Answer 347

A

$14,130
* Kristi will pay $14,130 in SE tax for 2023.
100,000 x 0.9235 = 92,350
92,350 x 0.153 = 14,130

Answer 348

A

40
* A covered worker needs 40 credits to qualify for Social Security retirement benefits.

Answer 349

A

$1 will be withheld for every $2 her earned income exceeds $21,240 (2023).
* Born in 1961, Elsa’s full retirement age under Social Security is 67. Claiming Social Security retirement benefits at age 62 and continuing to have earned income would result in benefits being withheld of $1 will be withheld for every $2 her earned income exceeds $21,240 (2023).

Answer 350

A

$255
* Social Security provides a one-time lump-sum death benefit of $255. The death benefit is not per beneficiary.

Answer 351

A

Questions Haven’t Seen Before

Answer 352

A

age 21 and 1 year of service
* The general rule for an employee’s qualified plan participation eligibility is age 21 and 1 year of service with the business.

Answer 353

A

Summary Annual Report
* The Summary Annual Report is a summary of financial information from the Annual Report (Form 5500 series) that must be provided to plan participants each year within nine months of the end of the plan year.

Brainscape's Knowledge GenomeTM

5. Retirement Planning & Employee Benefits. All questions and Comprehensive Course Exam for Retirement Planning and Employee Benefits Flashcards

Course 5. Retirement Planning & Employee Benefits. All questions and Comprehensive Course Exam for Retirement Planning and Employee Benefits

Brainscape's Knowledge Genome^TM