Qualified Plans Flashcards

Question

Forefeitures - DB vs. DC

Answer 1

Forfeitures reduce plan costs in DB plans. Forfeitures can reduce plan costs OR be allocated to other members of the plan Ex: Someone leaves job with a $40K balance/benefit. In DB, that goes back into pot to reduce plan costs. In DC, it can do that or allocate

Answer 2

Defined Benefit Plans Participant’s accrued benefit = Present value of the vested expected future payments at retirement. May give credit for prior service Ex formula: 4% x years of service x three highest years of salary Defined benefit plans use commingled accounts. Defined Contribution Plans Participant’s accrued benefit = Vested account balance in the qualified plan. No credit for prior service Ex formula: 4% x current salary = annual benefit DC plan defines contribution just for that year Defined contribution plans generally use separate individual accounts.

Answer 3

Defined Benefit vs. Defined Contribution Pension Plans Below are the primary differences between defined benefit and a defined contribution pension plan. Use of an Actuary Assumption of the Investment Risk Allocation of Plan Forfeitures Coverage Under the PBGC Accrued Benefit versus Account Balance Credit for Prior Service Use of Social Security Integration Commingled versus Separate Accounts Actuary Determine required plan funding range. Assumptions Actuary Required Annually Defined Benefit Pension Plan Cash Balance Pension Plan Actuary Required at Inception Target Benefit Pension Plan No other plans require an actuary Chart \*Actuary required for the target beneficiary plan at inception.

Answer 4

DB plans have mandatory funding requirements The pension benefit is based on a defined funding formula: Flat Amount Formula - equal dollar benefit Flat Percentage Formula - % of salary Unit Credit Formula -years of service x % x salary Unit Credit Formula - increases plan benefit on combination of greater pay and greater length of service. Commingled Accounts Favors Older Plan Entrants Eligibility/Coverage/Vesting - Same as qualified plans.

Answer 5

Type of Defined Benefit Pension Plan - Hybrid Mandatory Funding is required. Pension benefit based on an annual guaranteed contribution rate and guaranteed earnings on the contributions. Commingled Accounts: Participant sees a hypothetical account with hypothetical earnings. Actuarially Determined Employees receive participant statements with hypothetical separate accounts Hypothetical account is accrued benefit which would be payable at retirement. Favors younger plan entrants Conversion to a cash balance hybrid plan. The three requirements for a hybrid plan are: A participant’s accrued benefit, as determined as of any date under the terms of the plan, would be equal to or greater than that of any similarly situated, younger participant. The interest rate used to determine the interest credit on the account balance in the hybrid plan must not be greater than a market rate of return, to be determined under regulations to be issued. For plan years beginning after 2007, the hybrid plan must provide 100 percent vesting after three years of service.

Answer 6

\*pension plans requires mandatory funding

Answer 7

Money Purchase Pension Plans (MPPP) A MPPP is a Defined Contribution Pension Plan. A MPPP has a Mandatory annual funding of a fixed percentage of the employee’s compensation - up to 25%. The participant bears investment risk. There are separate accounts. A MPPP favors younger plan entrants. Eligibility/Coverage/Vesting - same as qualified plans. Not likely to be established after EGTRRA 2001-Since profit sharing plans can contribute up to 25%. MPPP - very similar to profit sharing plans but MPPP require mandatory funding. (think of as cousin to PSP plan)

Answer 8

A Target Benefit Pension Plan is a special type of money purchase pension plan. The plan determines the contribution based on the participant’s age. The participant bears investment risk. The plan favors older plan entrants. Eligibility/Coverage/Vesting - same as qualified plans. Is a defined contribution plan is a cousin to the age based profit sharing plan Only have actuary at very beginning of plan - assumptions are never changed for inflation or anything else

Answer 9

The correct answer is C. The maximum amount payable from a defined benefit pension plan is the lesser of $245,000 (2022) or 100% of the average of the employee’s three highest consecutive years compensation. Because the average of Kim’s compensation is $75,000, she would be limited to receiving a pension benefit at her retirement of $75,000.

Answer 10

Life Insurance cannot be the primary focus of the QP Plan must pass the 25% test or the 100 to 1 Ratio test If the policy is a Term or Universal Life Insurance Policy: Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer’s aggregate contributions to the participant’s account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer’s aggregate contributions to the participant’s account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income, or the policy distributed to the participant, at or before retirement. The economic value of pure life insurance coverage is taxed annually to the particpany (

Answer 11

Solution: The correct answer is C. Because Robbie does not want SS Automotive to bear the investment risk of the plan assets, the money purchase pension plan or the target benefit plan would be the available options to fulfill his requirements. The target benefit plan would not fulfill Robbie’s desires because as a percentage of compensation, older employees receive a greater contribution in a target benefit plan and one of the employees is older than Robbie. In such a case, the older employee would receive a greater (as a percentage of compensation) contribution to the plan.

Answer 12

Solution: The correct answer is C. Broad employee participation, as opposed to selective participation, is a requirement of a tax-advantaged retirement plan. All of the others are requirements for “qualified” plans.

Answer 13

Both 1 and 2 are correct.

Answer 14

Solution: The correct answer is B. The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. Here 40% would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees.

Answer 15

Solution: The correct answer is C. The plan does not have to meet the ADP test because it is a noncontributory plan. The plan meets the ratio percentage test and fails the average benefits test. Safe Harbor = 72 ÷ 140 = 51% = Fail Ratio % = (72 ÷ 140) ÷ (29 ÷ 40) = 70.9% = Pass Average Benefit = 4.5 ÷ 6.5 = 69.2% = Fail

Answer 16

Eligibility Employees are eligible who are age 21 and have one year of service (1,000 hours worked during one plan year). There is a special election to require two years of service, but the consequence of such an election is immediate - 100% vesting requirement. Not available for 401(k) plans

Answer 17

Solution: The correct answer is B. Option B is incorrect because the employee would NOT acquire a year of service the day after he worked his 1,000th hour, but after twelve months AND 1,000 hours.

Answer 18

Solution: The correct answer is D. Distributions from qualified plans are usually subject to ordinary income tax, but some lump sum distributions may be eligible for capital gains tax treatment. Statement a is incorrect because profit sharing plans are more commonly established than pension plans. Pension plans are not established because the employer must bear the risk of plan investments. Statement b is incorrect as the earnings within a qualified plan are nontaxable. Statement c is incorrect - payroll taxes are not payable on non contributory plan (employer paid pension plan) rt allocations. Payroll taxes are due on employee deferral contributions.

Answer 19

``` Defined Benefit (DB) Plans A DB plan is top heavy if the present value of the total accrued benefits of key employees in the defined benefit plan exceeds 60% of the present value of the total accrued benefits of the defined benefit plan for all employees. ``` ``` Defined Contribution (DC) Plans A DC plan is top heavy when the aggregate of the account balances of key employees in the plan exceeds 60% of the aggregate of the accounts of all employees. ``` To fix must use (1) top heavy vesting schedules and (2) provide a minimum level of funding to key employees: Top Heavy Vesting -DB plan must accelerate to 2-6 yr. graduated or 3 yr. cliff. (DC plans already meet this vesting schedule) Top Heavy Funding - must provide its non-key employees with mimn level of funding. DC plan that is top heavy must provide each of its nonexcl, non key ee with a contribution equal to at **least 3%** of the ee's compensation for DB plan. must provide its nonkey ee benefit equal to 2% per the ee's years of service multiplied by the ee's avg. compensation over testing period

Answer 20

A key employee is any employee who is: Greater than 5% owner or Greater than 1% owner with compensation in excess of $150,000 (not indexed) or An officer with compensation in excess of $200,000 (2022), but based on last year’s compensation. An Officer is determined based on all the facts \*key emplloyee must be an owner or officer

Answer 21

DC Plans \*Remember CBPP use a 3 yr. vesting cliff

Answer 22

DC plans include 401(k), profit sharing, money purchase, and others. The limit on deductible contributions to a DC plan is 25% of the compensation otherwise paid or accrued to the beneficiaries under the plan for the taxable year. This sounds relatively simple. If an employer pays $1,000,000 in compensation to its workers, then the employer may deduct at most $250,000 in DC plan contributions. * **The limit is not based on the compensation paid to the entire workforce, but rather only to those benefitting under the plan.**

Answer 23

Any of the following individuals are considered an eligible designated beneficiary (EDB): a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the IRA owner, or a child of the IRA owner who has not reached the age of majority.

Answer 24

First RMD must begin by APril 1 of the year following the year in which the participant attains the Age of 72,. All other RMDs = by 12.31

Answer 25

laon may not exceed the lesser of $50K or half the participants vested loan balance. Repayment of Plan Loans - Repayment of Plan Loans * Qualified Plan loans must be repaid within **five years**. * The repayment period is extended up to 30 years if loan proceeds used to purchase a principal residence. * Substantially level amortization of the loan is required over its term. * Payments must be made at least quarterly. * Plan sponsors often apply additional rules and requirements. * Failure to repay the loan as prescribed will consider the value of the loan a taxable distribution. * Possibly subject to the 10% early distribution penalty. * **Termination from employment generally causes the entire loan to become due.** * **Loan is repaid with after tax dollars.**

Answer 26

Conversions are always tax-free because you already paid the tax on it when you converted it distribution is taxable if it is non-qualified. additional 10% penalty applies unless you are subject to one of the exceptions

Answer 27

* ERISA Protection (although the IRA will be protected under federal bankruptcy law). * The 10-year forward averaging possibility, * Net unrealized appreciation possibility, and * Pre-1974 Capital Gain Treatment.

Answer 28

Net unrealized distribution is a lump sum distribution of employer securities usually from an ESOP or Stock Bonus Plan. Ex: A company contributed $20,000 worth of stock into Steve’s Stock Bonus Plan. * The stock is distributed to Steve 5 years later when the stock is worth $100,000. * Steve sells the stock 6 months later for $125,000. * What are the tax consequences? * At Distribution: $20,000 of ordinary income. * At Sale: $80,000 LTCG which represents the NUA; $25,000 STCG (sale of stock 6 months later which is a short term holding period).

Answer 29

* How is adjusted basis created? * After-tax contributions create basis. * Also if the participant was subject to income tax on payment of life insurance premiums. * How is adjusted basis taxed at distribution? * It is treated as a tax-free return of capital to the extent of adjusted basis. * Any distributions above adjusted basis is treated as ordinary income.

Answer 30

* Annuity payments consist of both a return of **principal and earnings.** * The principal portion of each payment is treated as a partially tax-free return of adjusted basis. * The remaining portion is taxed as ordinary income, which is determined by the inclusion/exclusion ratio.

Answer 31

Lump Sum Distributions The definition of a lump sum distribution includes: * A distribution of the participant’s **entire account balance** or accrued benefit, * Within **one taxable year,** * **On account of the participant’s death, attainment of age 59½, separation from service, or disability, and** * The employee participated in the plan for at least **five years** prior to the date of distribution. Note: If the participant meets the “Lump Sum” criteria, preferred tax treatment may be available.

Answer 32

* A QDRO is an order, judgment, or decree set forth by a judge that details the right of a third party to receive benefits from another individual’s qualified plan, which is the result of: Child Support and/or Divorce * A QDRO is a nontaxable distribution as long as assets are deposited into an IRA or another qualified plan.

Answer 33

* 72(t) distributions, is a distribution part of a series of substantially equal periodic payments, avoid the 10% penalty. * Requirements for a 72(t) Distribution * Substantially equal periodic payments, * Made at least Annually, * For the life expectancy of the participant or joint lives of the participant and his designated beneficiary. * Payments are made after separation of service. * Payments must continue for the greater of 5 years or until the paraticipant reaches age 59.5 This rule allows account holders to benefit from their retirement savings before retirement age through early withdrawal without the otherwise required 10% penalty. The IRS still subjects the withdrawals to the account holder’s normal income tax rate. Rule 72(t) actually refers to code 72(t), section 2, which specifies exceptions to the [_early-withdrawal tax_](https://www.investopedia.com/terms/e/earlywithdrawal.asp) that allow IRA owners to withdraw funds from their retirement account before age 59½, as long as certain qualifications, known as SEPP regulations, are met. To take advantage of this rule, the owner of the retirement account must take at least five [_substantially equal periodic payments_](https://www.investopedia.com/terms/s/sepp.asp) (SEPPs)

Answer 34

**Considerations when selecting a qualified plan:** * Cash Flow Considerations * Don’t select a plan that requires mandatory funding if there are not stable cash flows. * Administration Costs * Consider costs when selecting a plan (for example, a plan that requires an actuary will have greater admin costs). * Owner’s Business and Personal Objectives * Select a plan that meets the owner’s business and personal objectives. **Tip: Stable cash flows or fluctuating cash flows are key words in plan selection and often part of the fact pattern in the exam.**

Answer 35

**Mandatory funding:** * Determine whether investment risk will be borne by the employer or the employee: * Employer: Either defined benefit pension plan or cash balance pension plan. * If the plan favors older age entrants - Defined benefit pension plan. * If the plan favors younger age entrants - Cash balance pension plan. * Employee: Either target benefit pension plan or money purchase pension plan. * If the employer is willing to endure larger establishment costs - Target benefit pension plan. * If the employer wants low establishment costs - Money purchase pension plan Pension plans require mandatory funding **Discretionary funding:** * If employee contributions to the qualified plan are desired (self reliance - contributory): * Pretax: 401(k) Plan * After-tax: Thrift Plan/401(k) Roth * If only the employer contributes to the qualified plan (noncontributory): * Contributions of company stock: Profit sharing plan, Stock bonus plan, ESOP. * Test benefits for discrimination rather than contributions (cross-test): Age-based profit sharing plan, new comparability plan. * If the employer wants low initial costs - Profit sharing plan. * If the employer is willing to pay additional costs - Stock bonus plan, ESOP, age-based profit sharing plan, or new comparability plan. * If the employer wants integration - Profit sharing plan or Stock bonus plan.

Answer 36

Defined Benefit and Target Benefit Pension Plans

Answer 37

CBPP and the MPPP

Answer 38

A stock bonus plan will allow equity participation without the use of cash flows and the public offering will eventually provide liquidity.

Answer 39

An ESOP would be the most appropriate plan to meet Marie’s objectives. The stock bonus plan would allow Marie to transfer stock, but would not assist her immediately in her retirement plans. The defined benefit and money purchase pension plan would require mandatory funding. The ESOP would provide her with tax benefits and a diversified portfolio because of her age.

Answer 40

Limited to 25% of overall employee covered compensation Where to deduct? * Sole Proprietors – Schedule C * Farm – Schedule F * Partnership – Form 1065 * Corporation – Form 1120 * Self-Employed Person – Deduction for AGI on Form 1040 There is a formula to determine the deduction limit for self-employed individuals. Although self-employed individuals may adopt basically any qualified plan, the plan they choose to adopt is referred to as a Keogh plan. * A Keogh plan is simply a qualified plan for a self-employed person. Self-Employed persons calculation (Keogh Plans) * Self Employed Contribution Rate = Contribution to other participants ÷ (1 + contribution to other participants) * Example: A 25% contribution to employees results in a self employed contribution rate of: .25 ÷1.25 = 20%

Answer 41

Step 1: Calculate the contribution rate of the self-employed individual: Self-employed contribution rate = Contribution rate to other participants ÷ (1+ Contribution rate to other participants) = .25 ÷ 1.25 = .20 or 20% Step 2: Calculate the self-employment tax: $200,000 (self-employment income) X 92.35% = $184,700 (net earnings subject to self-employment tax) 12.4% x 147,000 + 2.9% x 184,700 = $23,584.3 (self-employment tax) Step 3: Calculate the self-employed individual’s contribution: $200,000 (Self Employment Income) - 11,792.15 (½ SE Tax (23,584.3 ÷ 2)) = 188,207.85 (earned income) 188,207.85 (earned income) X 20% (SE Contribution Rate (.25/1.25)) = $37,641.57 (SE Contribution) The self-employment tax rate is 15.3%: 12.4% of that part goes to Social Security and 2.9% for Medicare. This rate applies to 92.35% of self-employment income within the SS wage base: **You can deduct half of your self-employment tax on your income taxes**. So, for example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you'll need to pay that money when it's due during the year, but at tax time $1,000 would be deductible on your 1040.

Answer 42

The self-employment tax rate is 15.3%: 12.4% of that part goes to Social Security and 2.9% for Medicare. This rate applies to 92.35% of self-employment income within the SS wage base: **You can deduct half of your self-employment tax on your income taxes**. So, for example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you'll need to pay that money when it's due during the year, but at tax time $1,000 would be deductible on your 1040.

Answer 43

* Forfeitures occur when employees terminate employment and they forfeit unvested contributions to the plan. * **Defined Benefit Plans** * Forfeitures are required to reduce future employer plan funding costs. * **Defined Contribution Plans** * Forfeitures may **reduce** employer plan funding costs, or * Forfeitures may be **allocated** to accounts of remaining participants. Tip: The CFP® exam seems to prefer allocation to remaining participant accounts.

Answer 44

The PBGC guarantees pension benefits, such as: * Defined Benefit Pension Plans * Cash Balance Pension Plans **PBGC does not cover defined contribution plans**, or plans of professional service corporations with 25 or fewer participants. The plan sponsor pays premiums of: * $88 (2022) per plan participant, and * $48 per $1,000 of plan underfunding. The maximum annual PBGC benefit is $74,454.60 for 2022. **The maximum guaranteed amount is generally based on the age when first start receiving benefits from the PBGC. The amount shown here is based on age of 65. See** [**_Maximum Monthly Guarantee Tables_**](https://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee) **for amounts for other ages. See** [**_Premium Rates_**](https://www.pbgc.gov/prac/prem/premium-rates) **for list of premium rates.**

Answer 45

* When terminating a qualified plan: * **All participants become fully vested.** * The plan must not have been established as a temporary program. * Defined Benefit Plans * Standard - Voluntary and may occur when the plan has sufficient assets to pay all liabilities at the time of final distributions. * Distress - Voluntary and may occur when an employer is in financial difficulty and unable to continue the plan. Usually when the employer has filed chapter 7 or 11 bankruptcy. * Involuntary - Initiated by the PBGC when the plan is unable to pay benefits from the plan and the PBGC wants to limit the amount of exposure to the PBGC. * Defined Contribution Plans * Terminate contributions after fulfilling all contribution requirements.

Answer 46

To satisfy the Safe Harbor requirements, the plan must commit to make a nonelective contribution of at least 3% to all eligible employees regardless of whether or not they elect to make deferrals under the plan. These contributions must be immediately 100% vested. Such a Safe Harbor plan is exempt from the ADP test. It will also be exempt from the Top-Heavy test if no employer contributions other than safe harbor nonelective contributions are made for the applicable plan year.

Answer 47

The year an individual reaches age 72 is their first RMD year. **The RMD for the first RMD year must be taken by April 1 of the following year**. This April 1 deadline is the individual's required beginning date (RBD). All other RMDs must be taken by December 31 of the year to which they apply.

Answer 48

**Solution:** The correct answer is B.

Answer 49

A noncontributory plan is any pension plan or other type of benefit plan that is paid for entirely by the employer. Participants in the plan are not required to make any payments. Employers frequently set up life insurance noncontributory plans for their employees, though the total amount of coverage tends to be low. Noncontributory plans are most beneficial for low-income employees, who might not otherwise be able to afford the associated benefits.

Answer 50

Only certain types of entities may establish a 401k plan: -corporations * partnerships * -proprietorship's * LLCS * tax exempt entities employee cannot be required to complete more than 1 year of service as a condition of participation in a 401k arrangements. This is bc the employee elective deferral contributions are already 100% vested Contributions to 401ks plans can be made as: (1) employee elective deferral contributions (roth or trad) 2) after tax contribution 3)employer matching 4)PSP contributions 5) employer contributions to solve ADP/ACP problems

Answer 51

\_\_\_\_% /yr. x # of yrs of service x avg. of highest 3 yrs of salary

Answer 52

aggregate value of employer stock cannot exceed 10% of the FMV of the PP assets at time they are purchase

Answer 53

* use of an actuary (DB requires annual, higher costs) **TBPP uses actuary at inception and MPPP does not require actuary b.c anual contr is pre-defined)** * assumption of risk **(DB = ER, DC= EE)** * disposition of plan forfeitures (reduce costs or allocate to ee) **(DB =reduce future costs, DC= costs or allocated to ther participants)** * coverage under the PBGC **(DB= yes, DC= no)** * use of SS integration **(DB = yes, excess or offest method, DC =excess onky)** * calc of accrued benefit or account balance **(DB= accrued benefit, DC = account balance)** * ability grant credit for prior service **(DB = yes, DC = no)** * comingled funds vs separate **(DB = comingled, DC= separate)** **DB plans usually favo4r older employees, DC plans usually favor younger** **howber., CBPP plans favor younger entrants bec formula is based on # of yrs. employed w. firm**

Answer 54

CBPP shares many characetiersi with DC plans, but is in fact a DB plan basic component is a guaratneed investment return (guranteed interest credit)

Answer 55

defined contribution plan. provides for a contribution to the plan each year of a fixed percentage of the EE's compensation benefits younger empl0oyees because of compounding effects of and number of contributions

Answer 56

type of MPPP DC plan. determines contirbution based on to participant's account based on benefit that will be paid from participants account at retirement. ***Tip:** A target benefit plan is a type of qualified defined contribution plan. Because target benefit plans utilize participant age as one of the factors in determining plan contributions, these plans generally result in a contribution allocation that tends to benefit older participants.*

Answer 57

* there is no mandatory funding of a profit sharing plan * contributions are generally discretionary but funding myust be substantial and recurring * doesn't have to contirbute in year in which company made no profits and.or year in which it made profits * 25% conitrbutions limit of covered comp

Answer 58

2022: annual deferral limit $20,500 catch up 50+: 6,500 total eelctive defrral $27K For decades, Americans working in the private sector have relied on [_401(k) plans_](https://www.investopedia.com/terms/1/401kplan.asp) to fund their retirement. However, if you take a job in the federal government or the military, you can expect a different investment vehicle as part of your benefits package: the [_thrift savings plan (TSP)_](https://www.investopedia.com/terms/t/thrift_savings_plan.asp). Thrift plans allow for after tax deferrals. The two plans differ when it comes to investment choices, with a TSP offering fewer fund options than a typical 401(k).

Answer 59

roth/traditional: $1,000 401K : $6,500

Answer 60

acp claculated exactly same as ADP safe harbor from adp/acp testing: 4% noncontirbutory ER contribution

Answer 61

acp claculated exactly same as ADP safe harbor from adp/acp testing: 4% noncontirbutory ER contribution

Answer 62

max loan of up to lessed of ½ the vested plan accured benefit up to $50K msust be repaid within 5 years

Answer 63

**Solution:** The correct answer is A. Incidence of ownership of life insurance policies assigned within three years of death are includible in the decedent’s estate as a gift, as are CRATs and CRUTs. Any amount of gift tax subject to the gross up rule is includible in the taxable estate but must be for gifts made within three years of death.

Answer 64

**Solution:** The correct answer is B. Lisa’s transfers to her grandson's law school was a qualified transfer. The gift to the neighbor is not a qualified transfer because the payment was not made directly to the educational or medical institution, but the transfer is eligible for the annual exclusion. As such, the taxable amount of each is $0 and $0, respectively. The transfer of the remainder interest in the GRAT to Lisa’s daughter is valued at $60,000 ($100,000 - $40,000). Since it is a gift of a future interest, the transfer is not eligible for the annual exclusion. Accordingly, Lisa’s total taxable gifts are $60,000. A gift of a future interest is **where the person who receives the gift does not yet have the unrestricted right to the immediate possession, use and enjoyment of the property, but will have these rights at a later time** a) No part of the value of a ***gift*** of a ***future interest*** may be excluded in determining the total amount of ***gifts*** made during the “calendar period”

Answer 65

**Solution:** The correct answer is D. In general, when a donor makes a gift of property other than cash to a donee, the donee will take the property at the donor’s adjusted basis. The holding period of the donee will include the holding period of the donor for purposes of subsequent transfers and the determination of long or short-term capital gains. An exception to the general basis rule occurs when the donor gives property with a fair market value in excess of his adjusted basis and the donor pays gift tax. The gift tax associated with the appreciation is added to the donor’s original adjusted basis to determine the donee's basis. Based on the previous gift above the 2021 annual gift exclusion, the exclusion will not be used in calculating basis of the property. Thus, the basis would be: $20,000 + ($40,000 × ($80,000/$100,000)) = $52,000 The gain on the asset would be $200,000 − $52,000 = $148,000.

Answer 66

**Solution:** The correct answer is D. Option a is incorrect because additional contributions may not be made to a CRAT. Option c is incorrect because a CLUT is not a charitable remainder trust. Option b is incorrect because each donation is a separate annuity and the annuity it not a remainder trust.

Answer 67

**Charitable Remainder & UniTrust (CRUT)** * The annuity must pay a fixed percentage of at least 5% of the annual FMV as revalued. * There is an annual valuation. * The donor can contribute after the inception of the trust. * The trust can provide for catch up provisions allowed only if the distributed income is less than the required stated %. * Remainder Interest at the inception must be ≥ 10% of the initial value of the donated assets. * More flexible than a CRAT. A charitable remainder unitrust (also called a CRUT) is **an estate planning tool that provides income to a named beneficiary during the grantor's life and then the remainder of the trust to a charitable cause**. The donor or members of the donor's family are usually the initial beneficiaries.

Answer 68

A charitable remainder annuity trust (CRAT) is a type of gift transaction in which a donor (also known as a “grantor,” “trustor,” or “benefactor”) contributes assets to an [_irrevocable trust_](https://www.investopedia.com/terms/i/irrevocabletrust.asp) that then donates to one or more charities while also paying a fixed income to one or more designated noncharitable beneficiaries in the form of an [_annuity_](https://www.investopedia.com/terms/a/annuity.asp). The value of the annuity is calculated as a fixed percentage of the initial value of the trust’s assets, and that amount must be no less than 5% but no more than 50%.¹ Because it is irrevocable, the terms of the CRAT cannot be altered, and legal ownership of the assets belongs to the trust and not the donor. A CRAT lasts either until the donor dies or after a set period of no longer than 20 years, at which time any funds remaining in the trust are then donated to one or more previously selected charitable beneficiaries, [_which can be public charities or private foundations_](https://www.investopedia.com/financial-edge/1112/the-difference-between-private-foundations-and-public-charities.aspx).¹

Answer 69

**Solution:** The correct answer is B. Option b is an advantage of using a revocable living trust. Option a is incorrect because use of a revocable living trust does not reduce the grantor’s federal estate taxes because the full fair market value of the trust assets are included in the grantor’s gross estate. Option c is incorrect for the same reason. Option d is incorrect because the trust agreement, not the grantor’s will, controls the distribution of the trust assets.

Answer 70

**Solution:** The correct answer is A. Only the GPOA Trust would be included in Mary’s gross estate. Because the withdrawal right of the Bypass trust was limited to an ascertainable standard, its assets are not included in Mary’s gross estate. Mary does not have an interest in the assets of the charitable trust so those assets are also not included in her gross estate.

Answer 71

**Solution:** The correct answer is B. The alternative valuation is not beneficial because there is no estate liability. No estate tax is due therefore no installment payment is needed and 6166 does not apply. The estate is not a closely held business (C corporation) so Section 303 redemption does not apply. It is likely the administrative expenses would be beneficial on the Estate Income tax return (Form 1041) to offset the income from the stocks paid during the estate and before distribution.

Answer 72

**Solution:** The correct answer is A. At the end of the trust term, ownership of the house is transferred to the beneficiaries of the QPRT. All of the other statements are true.

Answer 73

A qualified personal residence trust (QPRT) is a specific type of [_irrevocable trust_](https://www.investopedia.com/terms/i/irrevocabletrust.asp) that allows its creator to remove a personal home from their estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary. Qualified personal residence trusts allow the owner of the residence to remain living on the property for a period of time with "retained interest" in the house; once that period is over, the interest remaining is transferred to the beneficiaries as "remainder interest."

Answer 74

* The charity receives the income; the remainder is left to a noncharitable beneficiary. * Used by high net worth individuals who do not need current income. * Generally uses appreciating assets! * The CLT must be a grantor trust in order to receive a charitable income tax deduction.

Answer 75

two years of service - 100% vesting (not available for 401k plans)

Answer 76

must cover lesser of 50 employees or 40% of of employee (remeber “employees come first”)

Answer 77

Ex: profit sharing plan

Answer 78

key employees : greater than 5% owner greater than one percent owner with comp in excfess of $150K officer with comp in excess of $200K

Answer 79

Defined Benefit Plans only Annually (DB): DBPP, CBPP Inception: TBPP MPPP does not need an actuary

Answer 80

Wage base for Social Security is up to $147K (6.2% for ss not taken out after that) Social security integration: excess method (DB and DC plans) - provides an excess benefit to those participants whose earnings are in excess of the SS wage base offset method (DB plans only) - reduces benefit to those employees whose earnings are below the ss wage base

Answer 81

**Self-Employment Tax Rate** ## Footnote The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). For 2021, the first $142,800 of your combined wages, tips, and net earnings is subject to any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement (tier 1) tax. The amount increased to $147,000 for 2022. (For SE tax rates for a prior year, refer to the Schedule SE for that year). All your combined wages, tips, and net earnings in the current year are subject to any combination of the 2.9% Medicare part of Self-Employment tax, Social Security tax, or railroad retirement (tier 1) tax. If your wages and tips are subject to either social security tax or the Tier 1 part of railroad retirement tax, or both, and total at least $142,800, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings. An additional Medicare tax rate of 0.9 % applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012. See the [_Questions and Answers for the Additional Medicare Tax_](https://www.irs.gov/businesses/small-businesses-self-employed/questions-and-answers-for-the-additional-medicare-tax) page for more information.

Answer 82

DC plans - participant bears investment risk

Answer 83

not required to pass ADP or ACP tests ER muyst provide 3% non-elective contribution to all eligible employees Or matching 100% up to 3% **_\*\*ER contributions are 100% vested at all times (no vesting schedule)_**

Answer 84

The amount of salary deferrals you can contribute to retirement plans is your individual limit each calendar year no matter how many plans you're in. This limit must be aggregated for these plan types: * 401(k) * 403(b) * SIMPLE plans (SIMPLE IRA and SIMPLE 401(k) plans) * SARSEP If you’re in a [_457(b) plan_](https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans), you have a separate limit that includes both employee and employer contributions. Make sure you don’t exceed your individual limit. If you do and the excess isn’t returned by April 15 of the next year, you could be subject to double taxation: * once in the year you deferred your salary, and * again when you receive a distribution.

Qualified Plans Flashcards

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