Retirement Flashcards
(35 cards)
Your 22-year-old client is a participant in a qualified plan which has a one-year service requirement. In order to maintain its qualified status which of the following two events accurately describe the longest your client can be kept from entering the plan:
The first day of the plan year beginning after the date on which the employee satisfies the entrance requirement.
The date six months after the date by which the employee satisfies such requirements
Is an ESOP a qualified retirement plan subject to ERISA rules?
Yes
A policy which must cover all eligible dependents if the employer pays the entire premium cost best describes:
a. Group term life insurance.
b. Group paid-up life insurance.
c. Group ordinary life insurance.
d. Dependents’ group life insurance.
D
Answers “A,” “B” and “C” are all benefits for eligible employees, not their dependents. Answer “D” applies to dependents and the employer cannot discriminate.
Dues to business-related organizations provided as a fringe benefit are:
Excludable from the taxable income of all covered employees.
Dues and licenses are excluded from taxable income if directly related to the employee’s job.
Which of the following is NOT true concerning eligibility or “waiting periods”?
-A qualified plan can require a waiting period of up to two years.
-In order to have graded vesting, the eligibility period must be no longer than 12 months.
-Any plan which has an eligibility period exceeding 12 months must have immediate vesting.
-The eligibility period can vary between classes of employees.
The correct answer is D.
The eligibility requirements must be the same for all employees. All other statements are accurate.
Which of the following statements concerning stock bonus plans and ESOPs is(are) true?
-They both give employees a stake in the company through stock ownership and allow taxes to be delayed on stock appreciation gains.
-They both limit availability of retirement funds to employees if an employer’s stock falls drastically in value and create an administrative and cash-flow problem for employers by requiring them to offer a repurchase option (a.k.a. put option) if their stock is not readily tradable on an established market.
I and II
Statement “I” lists advantages of choosing stock ownership plans and ESOPs. Statement “II” lists the disadvantages.
Which of the following characteristics are found in both a defined contribution plan and a defined benefit plan?
Individual accounts.
Actuarial assumptions required.
Retirement benefits based on account values.
Employer bears investment risk.
Statements “I” and “III” apply to defined contribution plans. Statements “II” and “IV” apply to defined benefit plans. None apply to both defined benefit and defined contribution plans.
What’s a key employee?
A key employee is an individual who (1) owns more than 5% of the business, (2) is an officer with compensation greater than $215,000 (2023), or (3) owns greater than 1% of the business and has compensation greater than $150,000.
Bobby’s Bar-b-que wants to establish a social security integrated plan using the offset method. Which of the following plans should he establish?
SIMPLE
ESOP
Money Purchase Pension Plan
Defined Benefit Pension Plan
He should establish the Defined Benefit Pension Plan. Only defined benefit plans can use the offset method. The Money Purchase Pension plan is a Defined Contribution Plan and must use the excess method. Simple’s and ESOPs cannot be integrated.
Which of the following statements concerning rabbi trusts is correct?
-A rabbi trust generally makes distributions to the executive to pay for income tax attributable to the earnings within the trust.
-A rabbi trust calls for an irrevocable contribution from the employer to finance promises under a nonqualified plan, and funds held within the trust cannot be reached by the employer’s creditors.
-A rabbi trust can only be established by a religious organization exempt from tax under IRC 501(c)(3).
-A rabbi trust is established to avoid constructive receipt.
The correct answer is D.
Option a is not correct and more common in a secular trust. Option b describes a secular trust. Option c is a false statement.
Harry wants to retire at age 62 in the current year. To be eligible for reduced OASDHI retirement benefits, how many quarters of coverage must Harry have earned?
Harry must have earned 40 quarters of coverage.
Bob Thornton received his NonQualified Stock Option (NQSO) from his company (publicly traded on the NYSE), one year ago last week, with an option exercise price and stock price of $30. He told you recently, as his trusted financial adviser, that he desperately needed cash, and so he exercised the options last week on the one year anniversary with the stock price at $40 per share, and he sold the stock as it climbed to $45 per share. What will the tax ramifications of these transactions be?
Bob will be taxed as W-2 income for the fair market value of the stock less the exercised price when it is exercised, and then he will be taxed at capital gain rates for the balance when the stock then subsequently sold (long or short term).
He will be required to report the gain as W-2 income of $10 per share when the option is exercised and then another $5 capital gain (long or short) when sold as the question indicates.
Which of the following statements are reasons to delay eligibility of employees to participate in a retirement plan?
-Employees don’t start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service).
-Since turnover is generally highest for employees in their first few years of employment and for younger employees, it makes sense from an administrative standpoint to delay their eligibility.
Both are correct, they speak for themselves. Costs are less w/ the delay
A non-safe harbor 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following statements are rules that apply to 401(k) salary deferrals?
-Salary deferrals into the 401(k) plan are limited to $22,500 for individuals younger than 50 for 2023.
-A non-discrimination test called the actual deferral percentage test applies to salary deferral amounts.
“I” and “II” are correct. ADP test applies in a non-safe harbor plan.
Lisa, age 35, earns $175,000 per year. Her employer, Reviews Are Us, sponsors a qualified profit sharing 401(k) plan, which is not a Safe Harbor Plan, and allocates all plan forfeitures to remaining participants. If in the current year, Reviews Are Us makes a 20% contribution to all employees and allocates $5,000 of forfeitures to Lisa’s profit sharing plan account, what is the maximum Lisa can defer to the 401(k) plan in 2023 if the ADP of the non-highly employees is 2%?
$7,000
The maximum annual addition to qualified plan accounts is $66,000. If Reviews Are Us contributes $35,000 ($175,000 × 20%) to the profit sharing plan and Lisa receives $5,000 of forfeitures, she may only defer $26,000 ($66,000 - $35,000 - $5,000) before reaching the $66,000 limit (2023).
However, she will also be limited by the ADP of the non-highly employees because she is highly compensated (compensation greater than $150,000). If the non-highly employees are deferring 2% then the highly compensated employees can defer 4% (2×2=4). Therefore, she is limited to a deferral of $7,000 ($175,000 × 4%).
Your client’s only employer has established a payroll deduction TSA. Your client is single, making more than $64,000 per year. Which of the following is false concerning the plan?
TSA contributions are pre-tax.
TSA contributions are subject to Social Security taxes.
The employer usually does not control the asset allocations in the plan.
Contributions are subject to Federal/State withholding tax.
The correct answer is D.
TSA contributions are subject to payroll taxes (Medicare + Social Security) but NOT income taxes. Note - TSAs are a tax sheltered annuity or 403(b) retirement plan. TSAs are a form of deferred compensation. Only employees of public education systems and nonprofits can participate. TSAs are funded through employee contributions.
Which of the following plans must meet the requirement for a qualified joint and survivor annuity?
Defined benefit plans.
Profit sharing plans.
Target benefit plans.
Money purchase plans.
Only pension plans are required to have a joint and survivor annuity option. Profit sharing plans (including ESOPS) are NOT required to have a joint and survivor annuity option.
What is the early withdrawal penalty for a SIMPLE IRA plan during the 2-year period beginning on the date the employee first participated in the SIMPLE plan?
25% is assessed only during the first 2-year period of participating in the plan. This does not require that each contribution stay in the plan for two years, only that the participant be in the plan for two years.
Joe Liner works at a company that is considering options regarding its future legacy payments and it needs to find current tax deductions. One option the company is considering is funding a VEBA this year. Joe is uneasy but open to the idea because he has heard that more benefits may be funded in the VEBA. Which of the following are permitted under a VEBA?
Life, sickness and accident benefits
Retirement benefits
Severance and supplemental unemployment
Job training
Commuter benefits
Retirement benefits and commuter benefits CANNOT be included in a VEBA.
Which of the following statements is/are characteristic(s) of Tax-Sheltered annuities (TSAs)?
I Salary reduction contributions are NOT reported as W-2 income and are subject to Social Security tax.
II The maximum salary deferral limit is $22,500 for a newly hired employee in 2023, under age 50.
III Employer contributions are deductible by the employer. Loans and “catch-up” contributions may be permitted.
1, 2 and 3
TSA salary deductions are subject to Social Security (payroll) taxes; much like 401K contributions. Remember, TSAs are also known as a 403(b) retirement plan.
Instructor note: Notice it does not say tax deductible. Like all entities, a financial statement is produced and reports revenue and deductible expenses.
Which of the following transactions by a qualified plan’s trust are subject to Unrelated Business Taxable Income (UBTI)?
-A trust obtains a low interest loan from an insurance policy it owns and reinvests the proceeds in a CD paying a higher rate of interest.
-A trust buys an apartment complex and receives rent from the tenants.
-The trust buys vending machines and locates them on the employer’s premises.
-The trust rents raw land it owns to an oil & gas developer.
1 & 3 only
Statements “I” and “III” are subject to UBTI because income from any type of leverage or borrowing within a plan is subject to UBTI. Additionally, any business enterprise run by a qualified plan is subject to UBTI. Statement “II” is not subject to UBTI (assuming it is not subject to leverage) due to a statutory exemption for rental income. Statement “IV” - The rental of raw land is also exempt. If the plan actually participated in the development of the oil & gas reserves, there would be UBTI.
Prince, age 60, is the sole member of Symbols, LLC. Symbols sponsors a 401(k) / profit sharing plan. Prince’s self-employment income (after expenses) was $123,000 and his self-employment taxes were $17,400 for the year. What is the maximum that could be contributed by the employer and Prince for the benefit of Prince for 2023?
$123,000 Net Income
(17,400÷2 = $8,700) Less 1/2 SE Tax
$114,300 Net SE Income
× 0.20 (0.25 ÷ 1.25)
$22,860 Employer contribution
$22,500 Plus 401(k) Deferral (employee elective before deferral)
$7,500 Plus > age 50 catch up
$52,860 Total
Which of the following statements regarding determination letters for qualified plans is true?
A qualified plan which receives a favorable determination letter from the IRS may still be disqualified at a later date.
Determination letters are issued by the IRS at the request of the plan sponsor. The plan sponsor is not required to request a determination letter. Even if the determination letter is requested and approved, the IRS may still disqualify the plan.
In order for a group term life insurance plan to be non-discriminatory, which of the following is true?
If the plan is part of a cafeteria plan, the plan must comply with the non-discrimination rules of Section 125
A plan must benefit 70% of all employees or a group of which at least 85% are not key employees. If the plan is part of a cafeteria plan, it must comply with Section 125 rules. The difference between the bands in “D” must be no greater than 2.5 times the next smaller band with the bottom band being equal to no less than 10% of the top band.
