Module 1 Qualified Plans Requirements and Regulatory Plan Considerations Flashcards
Susan makes 400k $ working for Great Grapes Inc. She defers 4% into the 401(k) and receives the 4% match. How much will go into her account in 2023?
A)
$56,400
B)
$32,000
C)
$26,400
D)
$22,500
C $26,400
Only the first $330,000 of compensation may be used to determine contributions to qualified retirement plans in 2023. Thus, she contributes 4% of $330,000 in 2023. This amount is MATCHED, so that ups the total percentage contributed to 8% (of $330k) and she gets $26,400 in her 401(k) that year.
Qualified retirement plans have which of the following characteristics?
They are subject to ERISA requirements.
They offer tax deferred earnings to employees
They can discriminate in favor of highly compensated employees
They provide tax deduction for the employer only when the employee is income taxed on the money
I and II
B)
III and IV
C)
I, II, III, and IV
D)
I, II, and III
Statements I and II are correct.
Qualified retirement plans are subject to ERISA requirements.
Qualified retirement plans offer tax-deferred earnings to employees. Example of this 401(k), you’re not taxed on your contributions (or earnings) until you take it out. Then you’re taxed on it at an income level I think.
Qualified retirement plans are subject to ERISA requirements and provide tax deferral on investment earnings for employees. While qualified plans in general can provide different levels of benefits to different classes of employees, qualified plans cannot “discriminate in favor of highly compensated employees” in the sense that there is a legal limit to the amount of the difference. As long as the difference is inside the legal limits, the plan is not discriminatory (by definition). Qualified retirement plans provide an immediate tax deduction on employer contributions.
Which of the following are included in the annual additions limit for defined contribution plans?
Investment gain
Employee elective deferral contributions
Employer contributions
Forfeitures reallocated to the remaining participants in the plan
A)
II, III, and IV
B)
II and III
C)
I and IV
D)
I, II, III, and IV
II III IV.
Which statement regarding qualified retirement plans is CORRECT? Qualified plans…
A)
are subject to ERISA requirements.
B)
offer taxable earnings to employees each year.
C)
provide a deferred tax deduction for employer funding.
D)
can discriminate in favor of highly compensated employees.
Qualified plans are subject to ERISA requirements.
They provide tax deferral on investment earnings for employees. While qualified plans in general can provide different levels of benefits to different classes of employees, qualified plans cannot discriminate in favor of highly compensated employees.
ERISA requirements for qualified plans include:
A)
all of these.
B)
reporting and disclosure.
C)
participation and fiduciary requirements.
D)
coverage and vesting.
All of these
Which of these individuals are “key employees” as defined by the internal revenue code?
A more than 5% owner of the employer company
An employee who received compensation of more than $150k from the employer (for 2023)
An officer of the employer who received compensation of more than $215,000 in 2023
A 1% owner of the employer with an annual compensation from the employer of more than $147,000
A)
I and III
B)
II, III, and IV
C)
II and IV
D)
I and II
I and III
A more than 5% owner of the company
An officer of employer who earned more than $215k (2023)
Option II is one definition of a “highly compensated employee”.
Both II and IV are incorrect because they do not fall within one of the following definitions of a key employee:
-An officer whose annual compensation from the employer exceeds 215k (2023)
-A more than 5% owner of the employer company
-A more than 1% owner of the employer company having annual compensation from the employer in excess of $150k
If a defined contribution plan is top heavy, the required minimum contribution is usually equal to what percentage of each non key participant’s compensation?
If a defined contribution plan is top heavy, the min contribution to the plan is 3% per year unless thee key employees are receiving less than 3%. If the key employees are getting less than 3% contributions, then the non key employees must at least get what the key employees are getting
Which of the following does NOT meet the definition of active participation in a retirement plan for the purposes of determining the deductibility of IRA contributions?
A)
Kerry has benefits accrued for him under his employer’s defined benefit pension plan.
B)
Matt makes contributions to his employer’s qualified plan.
C)
An employee is eligible to defer salary to his employer’s Section 401(k) plan.
D)
Betty has employee forfeitures reallocated to her account by her employer but makes no elective deferrals in the same plan year.
C.
If you got it wrong - note that the question asks about IRA contribution, and C tells you about 401(k) contributions. Paragraph below says this: you don’t have to contribute to be considered active for 401(k), BUT for an IRA you have to contribute to be considered active.
For the Section 401(k) retirement plan, an employee is considered covered as long as he or she is eligible to defer part of his compensation; he or she does not have to actually make contributions. Note, however, that active participation for purposes of determining deductibility of IRA contributions differs from being covered under a qualified plan for nondiscrimination testing. Specifically, an employee must be contributing to the plan, having employer contributions to the plan, forfeitures reallocated on his or her behalf, or accruing a defined benefit before he or she is considered an active participant in a qualified plan for IRA purposes. Plan earnings alone do not make someone an active participant. Also, receiving retirement plan benefits do not make someone an active participant.
Which of the following types of retirement plans allow integration with Social Security?
Defined benefit pension plan
Simplified employee pension (SEP) plan
Savings incentive match plan for employees (SIMPLE)
Employee stock ownership plan (ESOP)
A)
II and III
B)
I, II, III, and IV
C)
I only
D)
I and II
I and II.
Defined benefit pension plans and Simplified employee pension plans (SEP) can be integrated with social security.
ESOPS and SIMPLE plans cannot be integrated with social security.
If a qualified contribution retirement plan is found to meet the requirements under the Employee Retirement Income Security Act of 1974 (ERISA) and the IRS regulations, which of these statements is correct?
A)
Employees are not taxed on plan contributions or earnings attributed to plan contributions as long as a plan distribution does not occur.
B)
The employer is permitted to require three years of service eligibility as long as employer contributions are immediately 100% vested to participants.
C)
The participating employees must petition the IRS for acceptance of the plan.
D)
The PBGC will provide coverage to the plan.
A. Employees are not taxed on plan contributions or earnings attributed to plan contributions as long as a plan distribution does not occur.
A “two years of service” eligibility requirement is permitted if 100% immediate vesting is also used. Employees do not petition the IRS for acceptance of the plan. No defined contribution plans are eligible for PBGC coverage.
Which of the following are minimum coverage tests for qualified retirement plans?
Minimum allowed discrimination
Average benefits percentage test
Ratio test
Maximum compensation test
A)
II, III, and IV
B)
I, II, and III
C)
II and III
D)
I and II
II and III
The two minimum coverage tests for qualified retirement plans are the average benefits percentage test and the ratio test. To be qualified, a retirement plan must meet at least tests if the plan does not meet the percentage (safe harbor) test.
Claire is the HR director for major marketing inc. she wants to implement a new qualified retirement plan for the company. there are numerous fed guidelines with which the company must comply. Which of the following fed agencies is tasked with supervising the creation of new qualified retirement plans?
IRS
DOL
PBGC
ERISA
IRS
Which are agencies that administer and ensure compliance with fed laws that apply to qualified retirement plans?
Department of Labor (DOL)
Employee Retirement Income Security Agency (ERISA)
IRS
Pension Benefit Guaranty Corporation (PBGC)
A)
II and IV
B)
I, II, and III
C)
I and III
D)
I, III, and IV
I III IV
Under the reporting and disclosure requirements of the “Employee Retirement Income Security ACT of 1974 (ERISA)”, annual reports and summary plan descriptions are filed with the IRS (which provides copies to the DOL). An annual premium payment form is filed with the PBGC. If the defined benefit plan is not in compliance with funding requirements, the PBGC can terminate the plan.
Dorban products inc, has an annual payroll of $800k. John, the president, wishes to make the maximum contribution to the integrated profit sharing plan this year. What is the amount?
A)
$80,000
B)
25% of base compensation plus 30.7% of excess compensation totaling $245,600
C)
$200,000
D)
$120,000
C
The max contribution is 25% of covered payroll, or $200,000
ERISA requires reporting and disclosure of plan information to all of the following except:
DOL
SEC
IRS
Plan participants
SEC. Why would they care?
RQZ company employs 200 nonexcludible employees, 20 of whom are highly compensated. 16 of these 20 and 125 of the non-highly compensated employees benefit from the RQZ qualified pension plan. The average benefits accrued fro the highly compensated is 8%. The ratio test for the plan just listed is:
A)
86.8%.
B)
80.0%.
C)
69.4%.
D)
70.0%.
A.
20 of the 200 are highly compensated and 16 of those 20 are on the pension plan. 16/20 = 80%
180 of the 200 are non highly compensated. And 125 of those are on the pension plan. 125/180 = 69.44%
69.44% / 80& = 86.8%
The passing percentage for the ratio coverage test is 70%, so it passes.
Which is Correct in describing the integration of a 5% money purchase plan?
A)
The maximum excess contribution percentage is 10.0%.
B)
The maximum excess contribution percentage is 15.7%.
C)
The permitted disparity is 5.7%.
D)
The offset integration method may be used.
A
The max excess contribution percentage is 10%.
A MPP with a base contribution percentage of 5% will have a 5% permitted disparity (lesser of the base (5%) or 5.7%). Therefore the max excess contribution percentage will be 10% (5% base + 5% permitted disparity).
What are the requirements and effect of an eligible investment advice arrangement under the Pension Protection Act?
An eligible investment advice arrangement allows a plan fiduciary to give advice including recommending their own proprietary funds without violating fiduciary rules.
The investment adviser’s fees must be neutral.
An unbiased computer model certified by an independent expert to create a recommended portfolio for the client’s consideration is used.
Investment advisors for IRAs may only use the unbiased computer model option when providing eligible investment advice.
A)
I, III, and IV
B)
I, II, and III
C)
I and II
D)
II and III
I II III
IV is wrong. Investment advisors for IRAs may only use the neutral fee option and not the computer model option when providing eligible investment advice.
Which regarding top heavy plan is correct?
A top heavy defined benefit pension plan must provide accelerated vesting.
A top heavy plan is one that provides more than 50% of its aggregate accrued benefits or account balances to key employees.
A top heavy defined pension benefit plan must provide a min benefit accrual of 2% multiplied by the number of years of service (up to 20%).
For a top-heavy defined contribution plan, the employer must make a minimal contribution of 3% of annual covered compensation for each eligible non-key employee. If the contribution percentage for key employees is less than 3%, the contribution percentage to non-key employees can be equal to the key employees’ percentage.
I III IV
II is wrong, instead of more than 50% it’s MORE THAN 60%. 60% exactly does NOT make a plan top heavy.
Qualified retirement plans should do which of the following?
They must meet specific vesting requirements
They have special tax advantages over nonqualified plans
They must provide definitely determinable benefits
They require an annual profit to allow funding for the plan
I II III
IV is incorrect, annual profit is not required for a qualified plan to be funded.
Which of the following is correct about the permitted (SS integration) rules for DB plans?
A plan that provides a benefit for wages up to the integration level, plus a higher benefit for wages that exceed the integration level, is an integrated defined benefit excess plan.
A plan that provides that an employee’s benefit otherwise computed under the plan formula is reduced by a fixed amount or formula amount in relationship with the person’s Social Security benefit is an integrated defined benefit offset plan.
Covered compensation is the average of the participant’s compensation not in excess of the taxable wage base for the three-consecutive-year period ending with or within the plan year.
The base benefit percentage is determined by calculating the benefits provided by the plan based on compensation below the integration level, and expressing these benefits as a percentage of compensation below the integration level.
I II IV.
III is wrong because covered compensation means the average social security taxable wage base over the last 35 years.
Which of the following fed agencies is tasked with supervising the creation of new qualified retirement plans?
SEC
IRS
DOL
PBGC
IRS
Which of the following statements regarding prohibited transactions by a fiduciary or an individual associated with traditional IRA accounts are CORRECT?
Generally, if an individual or the individual’s beneficiary engages in a prohibited transaction with the individual’s IRA account at any time during the year, it will not be treated as an IRA as of the first day of the year.
If an individual borrows money against an IRA annuity contract, the individual must include in gross income the fair market value of the annuity contract as of the first day of the tax year.
Selling property to an IRA by a fiduciary or an individual owner of the IRA is not prohibited.
A 50% penalty will be assessed against an IRA owner who borrows money against her IRA.
A)
II and III
B)
I, III, and IV
C)
I, II, and III
D)
I and II
Statements I and II correctly describe prohibited transactions. Statement III is incorrect. Selling property to an IRA by a fiduciary or an individual owner of the IRA is a prohibited transaction. Statement IV is incorrect. The individual may have to pay the 10% additional tax on premature distributions. Also, if a person uses an Individual Retirement Account (not an Individual Retirement Annuity) as collateral for a loan, then only the amount of the Individual Retirement Account collateralized will be considered distributed. While this is bad, it is not as bad as the treatment of of a collateralized Individual Retirement Annuity in which the entire collateralized account is deemed to be distributed.
For 2023, the maximum annual contribution under a money purchase pension plan on behalf of a participant is the lesser of 100% of the employee’s covered compensation, or
A)
$265,000.
B)
$66,000.
C)
$330,000.
D)
$22,500.
66k
Brad Elberly has been the sole owner and operator of Woodmasters Inc. for the past 15 years. Brad is age 45, and his salary from the business is $130,000. Brad and his wife, Laura, want to retire when Brad is age 65. Relevant information regarding the business is summarized below:
Financial performance fluctuated over the first 10 years.
Cash flow and profits have stabilized during the past five years and are expected to show modest but consistent growth in the future. Excess cash flow of approximately $150,000 is expected to be available this year. Future years should be about the same. Brad has expressed some concern about the company’s outdated equipment and is considering renovating the plant and replacing the outdated equipment over the next five years. The total cost should be about $300,000.
Total compensation for all employees (including Brad) is $245,000.
The four full-time rank-and-file employees range from age 19 to age 38, and have been with Woodmasters for periods ranging from four months to six years. Age and service information is shown below:
Employee Age Completed Years of Service Compensation
Brad 45 15 years $130,000
Beth 38 6 years $40,000
Todd 27 6 months $25,000
Carol 30 2 years $28,000
Jim 19 4 months $22,000
Assume that Brad installs a 10% money purchase plan at Woodmasters this year. The plan provides for a graded vesting schedule. Which of the following statements will be true regarding this money purchase plan?
The plan will be top-heavy.
The plan will not be top-heavy.
An additional 3% must be contributed for the non-key employees.
The plan will be discriminatory due to the ratio of Brad’s salary to the other employees’ salaries.
A I only
In the first year of a qualified plan that uses a compensation-based allocation formula (as a money purchase plan does), it is possible to determine whether the plan will be top-heavy based on the key employees’ compensation as a percentage of covered payroll. Brad’s salary of $130,000 is 65% of the $198,000 covered payroll; since this exceeds 60%, the plan is top-heavy. However, since the plan already contributes 10% no additional contribution is required and vesting need not be accelerated since defined contribution plans must use top heavy vesting.
Which of these statements regarding a top-heavy retirement plan is false?
A)
Top-heavy plans favor key employees by providing more than 60% of the plan benefits to these employees.
B)
Defined benefit pension plans can be top heavy; defined contribution plans cannot.
C)
Close scrutiny of the top-heavy rules is desirable from a planning standpoint because an understanding of these rules coupled with effective personnel decisions and plan design may enable the plan to escape top-heavy status.
D)
Small-business owners are prone to shaping the organization’s retirement plan primarily to shelter taxes for themselves and key employees, thereby creating top-heavy plans.
B
Both DB and DC plans can be top heavy, but both must satisfy rules that apply to top heavy plans
Also worth noting: this is what top heavy means: it favors key employees by providing more than 60% of the plan benefits to them.
Who of the following is a fiduciary for the XYZ Qualified Pension Plan?
Joe, the administrator for XYZ’s pension plan
Bill, the investment manager for XYZ’s pension plan
Mary, a CFP® professional, and the paid investment adviser of the XYZ Qualified Pension Plan
Ralph, the XYZ owner who selected Joe, Bill, and Mary
A)
I, II, and IV
B)
I, II, III, and IV
C)
I and III
D)
II and III
All
The administrator for the pension plan
The investment manager for the pension plan
The CFP(R) professional for the pension plan
The owner of the company who select all of the above for the plan
An integrated defined benefit plan providing a 20% flat benefit could provide
A)
a permitted disparity no greater than 25.7%.
B)
a permitted disparity of 26.5% and excess benefit of 40%.
C)
an excess benefit of 26% and 40% permitted disparity.
D)
a permitted disparity of 20% and excess benefit of 40%.
D
A flat defined benefit plan could provide the LESSER OF the 20% base benefit percentage or 26.25%, and excess benefit of 20% + 20%.
Juan worked for ABC for 23 years. DP plan pays 2% of employees average of his five highest years of income. Juan’s average is $60k. How much will he receive each month if he retires this year?
$800
$3,000
$2,300
$1,200
C
$60,000 * .02 * 23 (years) = yearly pension income
/12 = 2,300 monthly income
Gary is employed by the city of Great Rapids, and his sister, Julie, works for Big Heart Children’s Home, a 501(c)(3) nonprofit. Gary participates in a 457 plan and Julie participates in a Section 403(b) plan.
Which of the following statements is CORRECT in indicating how their respective plans compare to each other?
Both plans are based on contracts with the employer.
Both plans allow for the deferral of salary into the plans.
Neither plan is a qualified plan.
Both plans are subject to limits on the amount that can be contributed to the plan.
A)
I and II
B)
I and III
C)
I, II, III, and IV
D)
II, and IV
All
Which of the following describe differences between a tax-advantaged retirement plan and a qualified plan?
IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions.
Employer stock distributions from a tax-advantaged plan do not benefit from NUA tax treatment.
Both
IRA funded employer sponsored tax advantage plans are SEPs, SARSEPs, and SIMPLE IRAs.
Which of the following would NOT be a permitted disparity for a defined benefit plan that uses Social Security integration?
A)
An excess benefit percentage of 20%, if the base percentage is 15%
B)
An excess benefit percentage of 60%, if the base percentage is 30%
C)
An excess benefit percentage of 10% if the base percentage is 5%
D)
An excess benefit percentage of 40%, if the base percentage is 20%
B
Base percentage + permitted disparity = excess benefit %
Permitted disparity goes up to a max of 26.25%.
26.25% = 0.75% per year up to 35 years.
Worthy Tools Inc. is designing a money purchase pension plan for eligible employees. The following information relates to Worthy Tools Inc.:
The seven key employees, all with more than eight years of service, will be eligible for the plan.
Of the 24 full-time rank-and-file employees, ranging in age from 19 to 61 years old, 22 will be eligible for the plan.
Turnover is high; the rank-and-file employees’ average tenure is 20 months. Although occasionally a nonkey employee stays at the company for over two years, none has ever completed more than 2.5 years of service.
The key employees’ compensation totals $650,000; the plan’s covered payroll will total $1,000,000.
The company is installing the plan primarily to provide for its officers’ retirement benefits and is not particularly concerned about employee turnover or about providing retirement benefits for employees. In fact, the company would prefer to minimize the benefits available to rank-and-file employees.
Based on the information about Worthy Tools, which one of the following vesting schedules would be appropriate for the company pension plan?
A)
5-year cliff
B)
3- to 7-year graded
C)
2- to 6-year graded
D)
3-year cliff
3 Year Cliff
The plan will be top-heavy since the pay of key employees is 65% (more than 60%) of the total pay of all plan participants. (Employer contributions to a money purchase plan are allocated to participants’ accounts based on relative pay.) The maximum vesting schedules available to a defined contribution plan are 3-year cliff and 2- to 6-year graded; 3-year cliff would be the best choice for minimizing benefits to rank-and-file employees, who have historically stayed a maximum of two years with the company.
LO 1.3.1
Benjamin Scott, age 42, earns $110,000 a year and wants to establish a profit-sharing plan. He employs four people whose combined salaries are $58,000 and who range in age from 24 to 30. The average employment period for all employees is three-and-a-half years. Which vesting schedule is best suited for Benjamin’s plan?
A)
Three-to seven-year graded vesting
B)
Five-year cliff vesting
C)
Two-to-six-year graded vesting
D)
Three-year cliff vesting
The choices for vesting in a defined contribution plan are: (1) 100% full and immediate, (2) three-year cliff, or (3) two-to-six graded. Because of the average length of employment, the most suitable vesting schedule from Benjamin’s point of view (cash flow if termination occurs and reallocated forfeitures to Benjamin) is graded vesting. Five-year cliff vesting and three-to-seven-year graded vesting are not available to Benjamin’s company for a profit-sharing plan.
LO 1.3.1
Which of the following statements regarding nonqualified retirement plans is CORRECT?
A)
Benefits are received by the employee income-tax-free.
B)
Contributions are deductible by the employer when contributed to the plan.
C)
Nonqualified plans are subject to the same Employee Retirement Income Security Act of 1974 (ERISA) requirements as qualified plans.
D)
Nonqualified plans do not have to meet the nondiscrimination requirements that apply to qualified plans.
Nonqualified plans do not have to meet the nondiscrimination requirements that apply to qualified plans. Nonqualified plans are not subject to all ERISA requirements applicable to qualified plans. Benefits are not deductible by the employer until paid and are includable in the employee’s taxable income at the time of receipt.
LO 1.2.1
Which of the following qualified plan reporting and disclosure documents is considered the annual report for the plan, and must be filed annually with the IRS?
A)
Form 5500
B)
Summary Annual Report (SAR)
C)
Summary of Material Modification (SMM)
D)
Summary Plan Description (SPD)
An annual report (Form 5500 series) must be filed with the IRS annually by the end of the seventh month after the plan year ends. The Form 5500 is also required to be filed with the Department of Labor.
LO 1.4.1
What is the 2023 limit on maximum includible compensation for retirement plan purposes?
A)
$330,000
B)
$66,000
C)
$22,500
D)
$265,000
For the purposes of determining qualified plan benefits and employer contributions, employee includible compensation is capped at $330,000 for 2023.
LO 1.3.2
Which of these is FALSE regarding defined contribution plans?
A)
Includible compensation is limited to the lesser of 100% of compensation or $265,000 in 2023.
B)
The employer contribution limit is 25% of the participating employees’ payroll.
C)
The retirement benefit is not certain; investment risk is borne by the participant.
D)
The maximum allowable employee deferral amount for workers is $22,500 in 2023, not counting any catch-ups.
The maximum amount of includible compensation is $330,000, not $265,000. $265,000 is a maximum defined benefit test number in 2023.
LO 1.3.2
Which of the following are CORRECT statements about the overall limits on employer contributions to and deductions for qualified plan contributions?
An employer’s deduction for contributions to a money purchase pension plan and profit sharing plan cannot exceed 25% of the participants’ payroll.
If a company has a defined benefit plan and a defined contribution plan and no employee is covered by both plans, the overall deduction limit does not apply.
An employer’s deduction for contributions to a defined benefit pension plan and profit sharing plan cannot exceed the lesser of the amount necessary to satisfy the minimum funding standards or 25% of the participants’ payroll.
A plan may lose its qualified status if the contribution for a participant exceeds IRC Section 415 limits.
A)
II and IV
B)
I, II, and IV
C)
I and II
D)
I and III
Options I, II, and IV accurately state the following rules: the deduction limitation for defined contribution pension and profit sharing plans; one of the rules governing the contribution limit for an employer who maintains both a defined benefit and a defined contribution plan; and the possible loss of qualified status if the contribution for a plan participant exceeds the Section 415 limits. Option III is incorrect because if the overall deduction limit applies, the deduction for a combination defined benefit plan and profit sharing plan cannot exceed the greater of the amount necessary to meet the minimum funding requirements or 25% of the participants’ payroll.
LO 1.3.2
