Practice Exam 2 Flashcards Preview

CFP 4 Retirement & Benefits > Practice Exam 2 > Flashcards

Flashcards in Practice Exam 2 Deck (69)
Loading flashcards...
1

Question 1 of 80

Use the information below about Lisa and Tom Stewart to answer the question that follows.

Lisa and Tom are both age 48 and are planning to retire at age 62.

They estimate that their annual income need at retirement will be $42,000 in today's dollars.

They expect to receive $12,000 (in today's dollars) annually from Social Security and they wish to include this amount in their retirement needs analysis.

Assume that Social Security benefits will be adjusted for inflation.

After discussions with their financial planner, they feel confident that they can earn a 7% after-tax return on their investments and would like to assume that inflation will average 4% over the long term.

Life expectancy tables are provided in IRS Regulations Section 1.401(a)(9)-9. RMD Single Life Table—Life Expectancy indicates a factor of 23.5 years at age 62. RMD Joint Life and Last Survivor Table—Life Expectancy indicates a factor of 29.0 years at age 62.

Due to a history of longevity in both their families, Lisa and Tom would like to assume a retirement period of 35 years.

What amount of assets will Lisa and Tom need at the beginning of their retirement period to fund an annual income need that increases annually with inflation—i.e., a growing annuity?

(LO 1–3)

a. $1,017,211 (+/– $20)

b. $1,135,304 (+/– $20)

c. $1,168,053 (+/– $20)

d. $1,635,275 (+/– $20)

c. $1,168,053 (+/– $20)

STEP 1
Begin
1 P/YR

N = 14
I = 4
PV = 30,000
PMT = 0
FV = ?

FV = 51,950.2934


STEP 2
Begin
1 P/YR

N = 35
I = 2.8846
PV = ?
PMT = 51,950.2934
FV = 0

PV = 1,168,062.4730


2

Question 2 of 80

Use the information below about Kevin and Cindy Penny to answer the question that follows.

Kevin and Cindy are both age 38 and are planning to retire at age 65.

They estimate that they will need a lump sum of $2.4 million at retirement to provide the income stream required during their retirement years.

They project that their current assets will grow to a value of $1.9 million at the first year of retirement.

They feel they can earn a 6% after-tax return on their investments and would like to assume that inflation will average 4% over the long term.

They would like to increase their annual savings amount each year as their incomes increase.

They would like to assume a 30-year period of retirement.

They have no heirs and would like to assume the worst-case scenario: that they will use up all their assets during retirement.

They would like you, their financial planner, to determine the annual serial saving requirement needed to make up for their asset shortfall.

What is the first end-of-year savings payment, adjusted for inflation, that Kevin and Cindy must set aside?

(LO 1–3)

a. $5,060

b. $5,157

c. $7,849

d. $8,626

e. $14,871

b. $5,157

First, the capital utilization method is being used. Their asset shortfall is $500,000 ($2,400,000 – $1,900,000). This shortfall must be deflated at a 4% rate over the 27 years until retirement (age 38 to age 65). The deflated value of additional savings needed at retirement is $173,408.

STEP 1:
Begin
1P/YR

N = 27
I = 4
PV = ?
PMT = 0
FV = 500,000

PV = 173,408.2851

STEP 2:
End
1P/YR

N = 27
I = 1.9231
PV = 0
PMT = ?
FV = 173,408.2851

PMT = 4,958.982

4,958.982 + 4% = 5,157.3413

3

Question 3 of 80

Use the information below about Kent and Susan Olson to answer the question that follows.

Kent and Susan are both age 32 and are planning to retire at age 62.

They estimate that they will need a lump sum of $4.3 million at retirement to provide the inflation-adjusted income stream required during their retirement years.

They project that their current assets will grow to a value of $3.1 million by their first year of retirement.

They feel they can earn a 6% after-tax return on their investments and would like to assume that inflation will average 4% over the long term.

They want to fund their retirement by making level annual payments.

They would like to assume a 26-year period of retirement.

Using the capital utilization method, what annual end-of-year savings will the Olsons need to deposit during their preretirement years?

(LO 1–4)

$9,230

$9,419

$9,600

$15,179

$15,786

$15,179

The $15,179 level payment is determined by using the following variables: 30 years until retirement, 6% after-tax rate of return, and $1.2 million (FV) of additional savings needed at retirement. Then one solves for the payment to be made at the end of the year.

STEP 1:
End
1P/YR

N = 30
I = 6
PV = 0
PMT = ?
FV = 1,200,000

PMT = 15,178.6938

4

Question 4 of 80

Which one of the following is a correct statement about a Roth IRA?

a. An individual could contribute $5,500 to a regular IRA and $5,500 to a Roth IRA in 2016.

b. Withdrawals of up to $10,000 from a Roth IRA for the purchase of a first home are tax free and penalty free if the withdrawals are made at least five years after the first contribution to the Roth IRA.

c. If a non-qualifying distribution is made prior to age 59½, the principal is subject to the 10% penalty but is not considered taxable income.

d. As with conventional IRAs, distributions must begin from a Roth IRA by April 1 of the year following the year the participant reaches age 70½.

b. Withdrawals of up to $10,000 from a Roth IRA for the purchase of a first home are tax free and penalty free if the withdrawals are made at least five years after the first contribution to the Roth IRA.

Answer a. is incorrect because an individual is limited to contributing $5,500 to both IRAs—e.g., the contributions could be $2,750 to a Roth and $2,750 to a conventional IRA.

Answer c. is incorrect because if a non-qualified distribution is made, the tax and penalty apply only to the earnings of the Roth IRA.

Answer d. is incorrect because the minimum distribution rules that require distributions from IRAs beginning at age 701⁄2 do not apply to Roth IRAs, but the minimum distribution requirement for payments after the death of the participant does apply to Roth IRAs.

5

Question 5 of 80

Mr. and Mrs. Dalloway file their taxes jointly. Mr. Dalloway has been out of work for over 18 months. He earned $1,746 this year doing odd jobs. Mrs. Dalloway earned $84,000 this year and is an active participant in the 401(k) plan at work. She contributed $2,700 to her IRA and the maximum to Mr. Dalloway's IRA for this year.

How much can they deduct for their IRA contributions?

(LO 5–2)

$0

$5,500

$5,746

$8,200

$11,000

$8,200

The maximum contribution for spousal IRAs is $5,500. The combined contribution for the husband and wife, however, cannot exceed the total compensation of both spouses, and the deduction cannot exceed the contribution. She only contributed $2,700 to her IRA.

6

Question 6 of 80

Harry Colvert is a full-time employee at Tops Roofing Materials Inc. (TRM); he does not own any stock in TRM. Harry also operates a part-time sole proprietorship consulting business, which is not related to TRM in any way. Last year, his part-time business generated $25,000 of net earnings from self-employment. He wants to maximize the contributions to the profit sharing Keogh plan that he has established for this business.

Which one of the following statements describes the limits that apply in Harry's situation?

(LO 3–9)

a. He is not permitted to contribute any funds to his account in the Keogh plan this year.

b. He may contribute 20% of his net earnings from self-employment to his account in the Keogh plan.

c. He may contribute 25% of his net earnings from self-employment to his account in the Keogh plan.

d. A special calculation must be made that considers his aggregate compensation from TRM and the sole proprietorship.

e. He may contribute $25,000 (100% of his net earnings from self-employment) to the Keogh plan.

b. He may contribute 20% of his net earnings from self-employment to his account in the Keogh plan.

Harry's contribution to his account in the Keogh plan cannot be the full 25% profit sharing contribution.

Due to his owner/employee status, the maximum contribution on his behalf is 20% of his net earnings from self-employment.

(Since the sole proprietorship and TRM are unrelated entities, he is not required to aggregate compensation or contributions.)

7

Question 7 of 80

Which one of the following statements correctly describes a SIMPLE IRA?

(LO 5–6)

a. Employee deferrals are limited to $12,500, and employer contributions are limited to 15% of compensation.

b. SIMPLE IRAs may include loan provisions for participants who have satisfied a two-year participation period.

c. Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% penalty tax.

d. To offer a SIMPLE IRA, an employer can have no more than 50 employees earning a minimum of $5,000.

c. Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% penalty tax.

Answer a. is incorrect because employers' contributions are limited to either a 3% matching or a 2% non-elective.

Answer b. is incorrect. SIMPLE IRAs cannot include a loan provision.

Answer d. is incorrect because employers with up to 100 employees earning a minimum of $5,000 can offer a SIMPLE IRA.

8

Question 9 of 80

If a defined contribution plan is top-heavy, the required minimum employer contribution is equal to what percentage of each non-key participant's compensation?

(LO 4–2)

2%

3%

4%

5%

3%

If a defined contribution plan is top-heavy, the minimum contribution to the plan is 3% per year.

9

Question 10 of 80

Which one of the following rules governs how much life insurance may be provided by a qualified defined contribution plan?

(LO 6–6)

a. Any amount of permanent life insurance, accident insurance, or severance benefits may be included as part of the coverage.

b. The 25% incidental benefit cost rule is based on the portion of the premium allocated to the policy's cash value.

c. An employer's costs associated with the purchase of life insurance represent a nondeductible expense.

d. The cost of whole life insurance must be less than 50% of the total employer contribution allocated to a participant's account.

d. The cost of whole life insurance must be less than 50% of the total employer contribution allocated to a participant's account.

The IRS defines the term cost of a whole life insurance policy to be 50% of the premium.

A whole life insurance premium that is less than 50% of the contribution for a participant's account will satisfy the 25% test since the term cost must necessarily be less than 25%.

Therefore, a defined contribution plan which provides that less than one-half the amount allocated annually to each participant's account will be used to purchase whole life insurance meets the 25% test (i.e., total plan contributions used to purchase incidental benefits).

Answers a., b., and c. are incorrect for the following reasons. Incidental benefits do not include severance benefits. The 25% rule is applied to the portion of the premium used to provide term life insurance ( not cash value). Employer expenses for incidental benefits are deductible as plan contributions.

10

Question 12 of 80

Which one of the following correctly states a characteristic of a type of executive benefit plan?

(LO 9–3)

a. Benefits received from a death-benefit-only (DBO) plan are subject to income tax.

b. A supplemental/salary continuation plan requires the employee to forgo current compensation.

c. Benefits payable by an excess benefit plan to an executive cannot exceed $1.5 million.

d. An excess benefit plan must be an unfunded plan.

a. Benefits received from a death-benefit-only (DBO) plan are subject to income tax.

DBO benefits constitute taxable income to the beneficiary.

Answer b. is incorrect because this type of plan does not require the employee to lose any current compensation.

Answer c. is wrong because there is no such limit.

Answer d. is wrong because an excess benefit plan may be funded or unfunded.

11

Question 14 of 80

Which statement is true? A Medicare Part A patient must pay

(LO 1–8)

a. all costs for a hospital stay beyond 150 days.

b. the $360 annual deductible for doctor's services in 2016.

c. all costs above the hospital deductible for a 30-day stay in a hospital.

d. the approved costs of care in a skilled nursing facility for the first 10 days.

a. all costs for a hospital stay beyond 150 days.

The patient must pay all costs related to a hospital stay beyond 150 days.

Answer b. is wrong because it describes the deductible for Medicare Part D coverage.

Answer c. is incorrect because it does not describe a gap; Medicare pays for the cost of the first 60 days in a hospital, but the patient must pay the Part A deductible.

Answer d. is wrong because Medicare will pay the approved charges for the first 20 days in a skilled nursing facility. The gap results from the cost of care that exceeds 20 days (the patient pays the per day copayment) or the need for custodial care.

12

Question 15 of 80

James Erickson is age 56. He has worked for the Minntoe Homeless Relief Council for 18 years and received a salary of $142,000 this year. He plans to retire in nine years and participates in the tax-sheltered annuity (TSA) plan offered by his employer.

Which of the following statements apply to his contributions to the TSA?

I. He can contribute up to $18,000 in 2016, plus any catch-ups for which he may be eligible.

II. He can contribute an additional $6,000 this year under the age 50 catch-up.

III. He can take advantage of the long service catch-up provision and increase his salary deferral limit by $3,000 to make a total possible deferral of $27,000.

IV. He cannot take advantage of the long service catch-up, so his deferral is limited to $24,000.

(LO 6–2)

I and III only

I and IV only

II and III only

I, II, and IV only

I, III, and IV only

I, II, and IV only

The $18,000 salary reduction limit will apply plus the $6,000 age 50 catch-up, making the total $24,000.

James is not an employee of a health, education, or church organization, and therefore is not eligible for the long service catch-up.

He therefore cannot use the catch-up that allows $3,000 increases to the $18,000 limit in 2016.

Since James is 52, the age 50 catch-up allows him to increase his total deferral to $24,000 in 2016.

13

Question 16 of 80

Which of the following correctly states the rules regarding distributions from an IRA plan?

I. The Section 72 annuity rules govern an IRA distribution that includes nondeductible and deductible contributions.

II. At the IRA owner's death, the account balance exceeding the greater of $150,000 or $112,500, as indexed, is included in the decedent's gross estate.

III. A distribution attributable to contributions to a Roth IRA is subject to the premature distribution penalty tax, if done prior to age 591⁄2.

IV. Distributions related to the death of the IRA owner are exempt from the premature distribution penalty tax.

(LO 5–3)

I and II only

I and IV only

I, II, and III only

I, III, and IV only

II, III, and IV only

I and IV only

Section 72 annuity rules relating to the recovery of the participant's cost basis still apply to an IRA distribution consisting of deductible and nondeductible contributions.

(The Small Business Job Protection Act of 1996 provided a simplified method of cost basis recovery for qualified plans and TSA annuities; the provisions for IRAs were not affected, however.)

Death is an exception to the premature distribution penalty.

Option II is wrong because the total balance of an IRA will be included in the owner's gross estate; however, if the spouse is the beneficiary, the marital deduction may be available.

Option III is wrong because this type of distribution is not subject to the premature distribution penalty (10%). With a Roth IRA, non-qualifying distribution amounts that exceed contributions or include earnings are subject to both income tax and the 10% penalty.

14

Question 17 of 80

Which of the following types of qualified retirement plans are subject to the minimum funding requirements?

I. defined benefit pension plans
II. money purchase pension plans
III. profit sharing plans
IV. Section 401(k) plans
V. target benefit plans

(LO 2–8, 3–11)

I, II, and III only

I, II, and V only

I, III, and IV only

II, III, and V only

I, II, III, IV, and V

I, II, and V only

The only qualified plans exempt from the minimum funding standard are profit sharing plans and stock bonus plans.

Section 401(k) provisions are only permitted with profit sharing plans and stock bonus plans.

15

Question 18 of 80

A qualified plan must allow a 22-year-old employee who satisfies the plan's one-year service requirement to commence participation in the plan no later than which two of the following events?

I. the first day of the plan year beginning after the date on which the employee satisfies such requirements

II. the last day of the plan year during which the employee satisfies such requirements

III. the date six months after the date on which the employee satisfies such requirements

IV. the first day of the plan year in which the employee satisfies such requirements

(LO 2–3)

I and II only

I and III only

I and IV only

II and III only

II and IV only

I and III only

A plan that contains an age 21 and one-year-of-service requirement must provide that an employee who meets the age and service requirements shall participate in the plan no later than the earlier of the first day of the first plan year beginning after the date on which the employee satisfies such requirements, or the date six months after the date by which the employee satisfies such requirements.

16

Question 19 of 80

Which of the following are correct statements about defined contribution pension plans?

I. They use an indefinite allocation formula.

II. They provide a benefit that is based on the value of a participant's account.

III. They require employer contributions to be made from business earnings.

IV. They require fixed employer contributions according to the terms of the plan.

(LO 3–2, 3–3)

I and II only

II and III only

II and IV only

I, II, and III only

II, III, and IV only

II and IV only

Employer contributions to a defined contribution pension plan must be fixed according to the terms of the plan; e.g., a plan could stipulate that the employer shall contribute an amount equal to 10% of the compensation of each participant.

The investment performance of a participant's account balance determines the value of his or her benefit upon termination or retirement.

However, contributions must be made to fund a pension plan, even if an employer has no earnings or profits.

Furthermore, defined contribution plans must use a definite allocation formula; i.e., the annual employer contribution to an employee's account must be fixed or definitely determinable.

17

Question 20 of 80

Which of the following factors affect a target benefit plan participant's retirement benefits?

I. the actuarial assumptions used to determine the contribution to the plan

II. the participant's compensation for the plan year

III. the investment performance of the plan's assets

IV. the age of the plan participant


(LO 3–3)

I and II only

I and III only

I, II, and III only

II, III, and IV only

I, II, III, and IV

I, II, III, and IV

Actuarial assumptions about longevity and interest rates affect the amount contributed to a participant's account.

A participant's compensation directly affects the size of his or her plan benefit.

The value of a participant's target benefit account balance (i.e., a separate account) depends, in part, on the investment performance (gains and losses) of the plan's assets.

Target benefit plans favor older employees who are closer to retirement.

18

Question 22 of 80

Which of the following legal requirements apply to money purchase pension plans?

I. The normal retirement benefit must be specified in the plan.

II. The plan must provide a definite and non-discretionary employer contribution formula.

III. Forfeitures can be reallocated to the remaining participants' accounts in a nondiscriminatory manner or be used to reduce employer contributions.

IV. A separate employer contribution account must be maintained for each participant.

(LO 3–2)

I and II only

II and III only

I, II, and III only

I, II, and IV only

II, III, and IV only

II, III, and IV only

Options II, III, and IV correctly state the employer contribution formula rule, the forfeiture reallocation rule, and the separate account rule for money purchase pension plans.

The first option states a requirement that applies to defined benefit pension plans but not to money purchase plans.

19

Question 23 of 80

Under which of the following circumstances is a target benefit plan (also called age weighted plans) the most appropriate choice for small-business owners?

I. to simplify and reduce the cost of eliminating a defined benefit plan (without termination) by amending it into a target plan

II. where the employer wants to provide larger retirement benefits for key employees who are significantly older than the other employees

III. to meet the employer's goal of maximizing deductible contributions to provide benefits for older, highly compensated employees

IV. where the employer is opposed to assuming the investment risk and prefers the simplicity of a separate account plan

(LO 3–3)

I and II only

I and III only

II and IV only

I, II, and IV only

II, III, and IV only

II and IV only

Options II and IV are correct for the following reasons.

Target benefit plans have benefit formulas similar to those of defined benefit plans, which favor employees who are significantly older and higher paid than the average employee of the employee group.

Because target benefit plans use separate accounts, the participants bear the risk of the plan's investment performance.

Option I is incorrect because amending a defined benefit plan into a target plan will result in termination of the defined benefit plan.

Option III is not true since a DC plan is limited to 25% and a DB plan is not limited by a set percentage.

Therefore the DB plan will usually provide a greater tax deduction if an age-weighted plan works best. The key word to III is "maximize."

20

Question 24 of 80

Gwen Yang is 38 years old and hopes to retire at age 60.

She is president and 100% owner of BaseLine Economics Inc.

Gwen is paid $120,000 in salary plus bonuses by the corporation.

BaseLine Economics Inc. employs five rank-and-file employees with annual salaries ranging from $20,000 to $50,000.

Rank-and-file employees range in age from 28 to 56; turnover among these employees is low.

Cash flow for BaseLine Economics Inc. has been increasing for the past five years and is expected to increase in the future.

Gwen would like to implement a qualified plan that will maximize her retirement benefits and minimize corporate income taxes.

Which of the following are advantages of a profit sharing plan over other plans?

I. This plan offers maximum contribution flexibility.

II. As a percentage of her compensation, Gwen will benefit from the plan each year as much as the other employees from contributions and investment growth.

III. The plan can be integrated to give Gwen an even greater share.

IV. The appropriate plan will provide a maximum contribution equal to 25% of covered compensation.

I and III only

I and IV only

II and IV only

I, III, and IV only

I, II, III, and IV

I, II, III, and IV

This defined contribution plan will maximize benefits for Gwen and will also maximize deductions for the corporation and provide flexibility.

A defined benefit or target plan will not achieve the same benefit results because of Gwen's age.

Forfeitures can be used to subsidize the cost of making plan contributions.

The contribution and the plan's investment growth each year will benefit all the employees about the same as a percentage of compensation.

21

Question 25 of 80

Gwen Yang is 38 years old and hopes to retire at age 60.

She is president and 100% owner of BaseLine Economics Inc.

Gwen is paid $120,000 in salary plus bonuses by the corporation.

BaseLine Economics Inc. employs five rank-and-file employees with annual salaries ranging from $20,000 to $50,000.

Rank-and-file employees range in age from 28 to 56; turnover among these employees is low.

Cash flow for BaseLine Economics Inc. has been increasing for the past five years and is expected to increase in the future.

Gwen would like to implement a qualified plan that will maximize her retirement benefits and minimize corporate income taxes.

Which of the following are advantages of adding a 401(k) provision to the profit sharing plan?

I. The 401(k) feature will permit the participants to save money pretax.

II. By maximizing her deferrals, Gwen can lower the amount of the profit sharing contribution allocated to other participants and still achieve her savings goal.

III. The 401(k) feature can be integrated to give Gwen an even greater deferral amount.

IV. If needed, a 401(k) plan will allow BaseLine Economics Inc. to make a contribution equal to 25% of covered compensation to maximize the plan deduction.

(LO 3–11, 4–1)

I and III only

I and IV only

II and IV only

I, II, and IV only

II, III, and IV only

I, II, and IV only

I. is true.

II. is true since she can save part of her savings goal through deferral and then lower the contribution percentage to the amount needed to make up the rest of the goal.

Deferrals and matching contributions may not be integrated.

IV. is true.

22

Question 26 of 80

Frank Scott, your client, received a letter from his brother-in-law advising him about his 401(k) plan. The following sentences from that letter were sent to you by Frank. Which ones are true with respect to a profit sharing 401(k) plan?

I. Before non-elective employer contributions can be made, there must be profits.

II. Hardship withdrawals must come only from deferrals and cannot include matching contributions or earnings.

III. Salary reduction elections must be made before the compensation is earned.

IV. Special safe harbor provisions can be used to comply with the ADP tests.

(LO 4–1, 4–2)

I and II only

II and III only

I, II, and III only

I, II, and IV only

II, III, and IV only

II, III, and IV only

Options II, III, and IV correctly describe the restrictions on hardship withdrawals, the timing of salary reduction elections so as to avoid constructive receipt, and the availability of special provisions ("safe harbors") to enable a 401(k) plan to comply with the ADP tests.

Option I is incorrect because contributions can be made to a profit sharing plan even if the employer does not have current or accumulated profits.

23

Question 27 of 80

Frank's letter from his brother-in-law also touched on his other retirement plan, a defined benefit plan, and he has forwarded to you the parts of the letter he doesn't understand. Which of the following statements in the letter about the defined benefit plan are true?

I. A separate account must be maintained for each plan participant.

II. The maximum benefit permitted by law is reduced proportionately for each year of participation less than 10.

III. The services of an actuary are needed to demonstrate that the minimum funding standards are satisfied.

IV. A definitely determinable retirement benefit must be provided regardless of employer profits.

(LO 2–1, 2–5)

I and II only

II and III only

I, II, and III only

I, II, and IV only

II, III, and IV only

II, III, and IV only

Options II, III, and IV correctly state the rules concerning the 10-year participation requirement for the maximum benefit, the need for an actuary to demonstrate adequate funding, and the requirement that the plan's benefit be definite.

A pension plan's benefit cannot be conditional upon the employer's earning profits.

Option I is incorrect because defined benefit plans do not maintain a separate account for each participant.

24

Question 28 of 80

Frank's brother-in-law also said that all actuarial assumptions cause a defined benefit plan's costs to increase. Which of the following actuarial assumptions or methods increase the costs associated with funding a defined benefit plan?

I. use of a high interest rate assumption
II. use of a low turnover rate assumption
III. use of a high mortality assumption
IV. use of a salary scale assumption

(LO 2–5)

I and II only

I and III only

II and IV only

I, II, and IV only

II, III, and IV only

II and IV only

Options II and IV are correct for the following reasons.

A low turnover rate assumption requires greater funding because more participants are assumed to remain employed and receive benefits.

A salary scale assumption requires greater funding because salaries (and hence benefits) are assumed to increase.

The higher the interest rate assumption used, the lower the projected cost of funding the plan.

Also, the higher the mortality assumption used, the lower the projected cost of funding the plan.

25

Question 29 of 80

Which of the following legal requirements apply to a salary reduction simplified employee pension plan (SARSEP)?

I. Lump-sum distributions from a SARSEP are eligible for 10-year forward-averaging treatment, assuming all other legal requirements are satisfied.

II. An existing (pre-1997) SARSEP may be maintained by a sole proprietorship, partnership, or corporation, under the provisions of prior law.

III. The actual deferral percentage for all highly compensated employees must not exceed the actual deferral percentage of all other eligible employees multiplied by 1.25.

IV. A new SARSEP may not be established after 1996.

(LO 4–5)

I and III only

I and IV only

II and IV only

I, III, and IV only

II, III, and IV only

II and IV only

Options II and IV are correct statements about SARSEPs because for-profit entities are permitted to maintain SARSEPs in existence at 12/31/96, under the terms of prior law; beginning in 1997, new SARSEPs may not be established.

Options I and III are incorrect because SARSEP distributions are not eligible for forward averaging, and the SARSEP deferral percentage for each highly compensated employee must not exceed the average deferral percentage for all nonhighly compensated employees multiplied by 1.25.

26

Question 30 of 80

Which of the following are correct statements about Keogh plans?

I. Benefits provided by a defined benefit Keogh plan cannot exceed the lesser of $210,000 or 100% of a participant's average compensation for his high three years.

II. Keogh plans are qualified plans established by any unincorporated business entity.

III. Keogh contributions for owner-employees are based on their gross salary.

IV. Keogh plans are permitted to make loans to common-law employee participants and owner-employees.

(LO 3–9)

I and II only

I and III only

II and IV only

I, II, and IV only

II, III, and IV only

I, II, and IV only

Options I, II, and IV are correct statements about defined benefit Keogh plan restrictions, business entities that adopt Keogh plans, and the availability of Keogh plan loans to common-law employee participants and owners.

Option III is incorrect because Keogh plan contributions for owner-employees are based on their net income, which is not the same for tax purposes as gross salary.

27

Question 31 of 80

Which of the following statements correctly describe requirements that must be met for a plan to be considered a Section 457 plan?

I. Distributions from the plan are not permitted until age 701⁄2.

II. To avoid adverse income tax effects, the agreement must be executed during the same month as the participant's services are provided.

III. Eligible participants include employees of agencies, instrumentalities, and subdivisions of a state as well as Section 501 tax-exempt organizations.

IV. The deferral limit is the lesser of $18,000 in 2016, or 100% of compensation.

(LO 6–7)

I and II only

I and III only

II and III only

II and IV only

III and IV only

III and IV only

All of these organizations may establish a Section 457 plan.

Deferrals are limited to the lesser of $18,000 in 2016 or 100% of compensation.

Option I is wrong because one could receive a distribution prior to age 701⁄2 if it was due to separation from service or an unforeseen emergency.

Option II is incorrect because the agreement must be executed before the first day of the month in which the services will be performed.

The result will be a loss of the tax deferral for that month if the agreement is made during the month.

28

Question 32 of 80

Which of the following are correct statements about the top-heavy rules?

I. An employer's minimum top-heavy contribution to a money purchase pension plan is the lesser of 3% of compensation per year for non-key employees or the highest contribution percentage made for a key employee if the highest contribution percentage is less than 3% of compensation.

II. An employer's top-heavy contribution to a money purchase pension plan must be at least 3% of compensation per year for each employee.

III. For purposes of applying the 60% top-heavy test, benefits include any distributions made due to separation from service during the last year and any in-service distributions made during the last five years.

IV. Any employee with annual earnings from the employer in excess of $260,000 is considered a key employee.

(LO 2–3)

I and II only

I and III only

II and IV only

I, II, and IV only

II, III, and IV only

I and III only

Options I and III are correct statements about the minimum contribution to a top-heavy plan and the years taken into consideration for purposes of determining the top-heavy status of a plan.

Option II is incorrect because the required minimum top-heavy contribution must be made on behalf of each non-key employee.

Option IV is incorrect because a key employee is defined as a more-than-1% owner of the employer company, with annual compensation from the employer in excess of $150,000 or an officer of the employer whose annual compensation from the employer exceeds $170,000 in 2016, or a more-than-5% owner.

29

Question 33 of 80

Which of the following individuals are "key employees" as defined by the Internal Revenue Code?

I. a more-than-5% owner of the employer company

II. an employee who received compensation of more than $120,000 from the employer (looking back to 2015)

III. an officer of the employer who received compensation of more than $170,000 in 2016

IV. a 1% owner of the employer with an annual compensation from the employer of more than $113,700

(LO 2–3)

I and II only

I and III only

II and IV only

II, III, and IV only

I and III only

Options I and III correctly define two situations where an individual is treated as a "key employee."

Option II is one definition of a highly compensated employee.

Both options II and IV are incorrect because they do not fall within one of the following definitions of a key employee:

-an officer of the employer whose annual compensation from the employer exceeds $170,000 in 2016;
-a more-than-5% owner of the employer; or
-a more-than-1% owner of the employer having annual compensation from the employer in excess of $150,000.

30

Question 34 of 80

Which of the following are correct statements about the overall limits on employer contributions to and deductions for qualified plan contributions?

I. An employer's deduction for contributions to a money purchase pension plan and profit sharing plan cannot exceed 25% of the participants' payroll.

II. 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.

III. 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.

IV. A plan may lose its qualified status if the contribution for a participant exceeds IRC Section 415 limits.

(LO 6–5)

I and II only

I and III only

II and IV only

I, II, and IV only

I, II, and IV only

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.