Retirement

Question 1

What would be the impact on a money purchase plan if a key employee retires and is replaced by a clerical employee?
A. Company contributions would increase
B. Company contributions would decrease
C. The amount of the company contribution would not change

Answer 1

Question 4: B
The key employee had a higher salary level than the clerical employee. The employer would be contributing less on behalf of a lower paid worker.

Question 2

What impact would increasing investment returns have on a money purchase plan?
A. Employer contributions would increase
B. Employer contributions would decrease
C.
The amount of the employer’s contribution would not change

Answer 2

Question 5: C
Investment returns affect account balances, not contributions.

Question 3

If forfeitures are not reallocated to remaining money purchase plan participants, what effect would that have on employer contributions?
A. Employer contributions would increase
B. Employer contributions would decrease
C. The amount of the employer contributions would not change

Answer 3

Question 6: B
If the forfeiture in a money purchase plan is not reallocated to the remaining participants, then they must be used to reduce company contributions.

Question 4

Which of the following plans would be least appealing to an employer looking to:
1) Maximize benefits for older employees,
2) Provide long-term employees with a secure and specified retirement income, and
3) Tie employees to the company through the benefit program?
A. A defined benefit pension plan
B. A cash-balance pension plan
C. A target-benefit pension plan
D. A profit-sharing plan

Answer 4

Question 10: D
For meeting the three listed objectives, A is the best answer, followed by B (also a DB plan), and finally by C (a DC plan that shares some of the characteristics of a DB).

Question 5

In which of the following qualified retirement plans may forfeitures be allocated to increase account balances of the remaining plan participants?
I. Defined benefit plan
II. Profit-sharing plan
Ill. Money purchase plan
IV. Cash balance plan
A. 1, II
B. I, IV
C. II, III
D. II, IV

Answer 5

Question 11: C
Forfeitures in defined benefit plans and cash balance plans must reduce plan costs or contributions. Money purchase plan forfeitures may (not must) be allocated to employee account balances. Forfeitures in a profit-sharing plan normally are allocated to the plan participants.

Question 6

Which of the following retirement plans can be integrated with Social Security?
I. Stock bonus
II. ESOP III. SEP IV. Defined benefit
V. Target benefit
A. ١,١١, ١٧,٧
B. ١٬ ١١١, ١٧,٧
C. ١,١٧,٧
D. ١, I٧
E. II, III

Answer 6

Question 5: B
A SEP and a stock-bonus plan can be integrated with Social Security. An ESOP cannot be integrated.

Question 7

Question 7
Together, four doctors own 100% of Labs, Inc., a support organization. The respective ownership percentages are 80%, 10%, 5%, and 5%. The doctors own and operate individual practices as personal service corporations with no employees. Each practice provides a defined benefit plan. Which type of controlled group would Labs, Inc. fall under?
A. Parent-subsidiary controlled group (80% combined)
B. Brother-sister controlled group (80% combined)
C. Affiliated service group
D. Leased employees

Answer 7

Question 7: C.
The IRS defines this as an affiliate service group. I realize the 80% factor may lead you to answer this as brother-sister

Question 8

Tom, age 55, has an annual salary of $180,000 (HCE). His company offers a 401(k) plan in which Tom does not participate at this time. His company also has a money purchase pension plan (12%). Tom is considering contributing to the 401(k) plan. Under the best circumstances, what is the maximum amount Tom is allowed to contribute in 2025, including catch-up considering ADP/ACP testing if the NHCEs are contributing 4%?
A. $10,800
B. $18,300
C. $23,500
D. $31,000
E. A maximum total of $70,000

Answer 8

Question 3: B
The deferral is limited to 6% under ADP/ACP testing (4% + 2%) of Tom’s salary ($10,800) plus the $7,500 catchup contribution. Note: The catch up is not an employer contribution; it is an additional amount of employee deferral. The 6% is a plan limitation. The total of employer contributions, employee contributions, and forfeitures to the two plans cannot exceed $70,000 (415 limits).

Question 9

Walter Workaholic works for two related employers. Each employer provides a 401(k) plan. With one employer he earns $50,000, and with the second employer he earns $60,000. If both plans allow for a 6% deferral and a 3% match, how much can he defer in 2025?
A. $3,000
B. $3,300
C. $6,600
D. $23,500
E. $31,000

Answer 9

Question 4: C
6% of the total of $110,000 = $6,600. The plan only allows for a 6% deferral. He cannot defer $23,500.

Question 10

A plan participant borrows from her 401(k) account to purchase a house. Under which of the circumstances described below would the loan interest be deductible?
A. The participant, a key employee, secures the loan with the primary residence purchased with the loan.
B. Under the tax code, home mortgage interest is deductible.
C. The participant, a rank-and-file employee, secures the loan with both the primary residence purchased with the loan and elective deferrals.
D. The participant, a rank-and-file employee, secures the loan only with the primary residence purchased with the loan.

Answer 10

Question 5: D
401(k)s [and 403(b)s] plans do allow principal residence loans to key employees and non-key employees alike.
However, interest paid on a plan loan for a principal residence is only deductible under two conditions. 1) The loan is secured by the residence for which the loan is made, and 2) The participant is not a key employee.
Interest on plan loans (even if for a primary residence) will be considered consumer interest if secured by the employee’s own elective deferrals. Home mortgage interest isn’t always deductible. Consumer interest is not deductible.

Question 11

Question 6
Nate, a sole proprietor, is going to contribute to a SEP. His net income is $50,000. What is the maximum amount that he can contribute for the current tax year?
A. $6,059
B. $9,295
C. $10,000
D. $13,500
E. $19,500

Answer 11

Question 6: B
25% short-cut method
$50,000 x 18.59% = $9,295
He is self-employed.

Question 12

Which retirement plan is best for a woman who is a self-employed consultant and will report $150,000 in net Schedule C income this year? She wants to contribute 10% of her Schedule C income.
A. Keogh
B. SEP
C. Traditional IRA
D. Roth IRA

Answer 12

Question 6: B
The SEP allows for an annual contribution up to 18.59% of net Schedule C income. A Keogh answer by itself is incomplete. It should say Keogh DB, MP or PS. The SEP is not complicated to install or maintain.

Question 13

Question 7
Sam’s corporation established a SARSEP in 1991. Regarding the SARSEP, which of the following statements are correct?
1. The 415 limits apply (total additions equal to the lesser of $70,000 or 25% of compensation)
II. New employees, as they join the firm, can be added to the plan as long as the employer has no more
than 25 workers.
III. The maximum 2025 deferral is $23,500 (not including catch-up contributions)
IV. All contributions are 100% vested immediately
A. 1, 1
B. 1, III
C. I, III, IV
D. II, III, IV
E. All of the above

Answer 13

Question 7: E
Answers I through IV are true. SARSEPS are subject to the contribution limit (the lesser of 25% of compensation or $70,000). New employees can be enrolled in the plan. A new plan cannot be started, but currently operating plans may continue.

Question 14

Which investment below is the least suitable for an IRA account for a 28-year-old single client with a moderate risk tolerance ?
A. High-yield municipal bonds
B. Individual stocks
C. Variable annuity (growth)
D. Growth mutual fund

Answer 14

Question 3: A
The least suitable investment is the municipal bonds. The tax-deferred IRA does not need tax-exempt income that will provide relatively low returns then distribution at ordinary tax rates.

Question 15

In 2022, James converted his $25,000 IRA to a Roth IRA. By 2025, his conversion Roth IRA has grown to $31,000, and he withdraws the entire account balance in one distribution. None of the special purposes have been met.
Which of the following statements are true?
1. The $25,000 conversion is not subject to income tax or early withdrawal penalty.
II. The $25,000 conversion is subject to a 10% early withdrawal penalty.
III. The $25,000 conversion is subject to both a 10% early withdrawal penalty and a 10% conversion penalty
tax.
IV. The $6,000 of earnings is subject to both income tax and a 10% early withdrawal penalty.
V. The $6,000 of earnings is subject to a 10% early withdrawal penalty.
A. 1, IV
B. 11, V
C. III, IV
D. 1I, NV
E. III, V

Answer 15

Question 8: D
Five years have not passed since the date of the conversion and none of the special purposes have been met.

Question 16

Question 4
What entity or regulation imposes extensive reporting and disclosure requirements on a defined benefit plan?
A. PBGC
B. ERISA
C. Department of Labor
D. IRS

Answer 16

Question 4: B
A defined benefit plan is subject to all the ERISA requirements for qualified plans (participation, funding, vesting, etc.) and the ERISA reporting and disclosure requirements. This information is disclosed to the plan participants and/or filed with the IRS or the Department of Labor. PBGC is not per se a reporting agency.

Question 17

Joe Mills dies a few months after his 69th birthday. His wife, Wendy, is the sole beneficiary of Joe’s IRA. Match his IRA to the correct distributions.
I.
Take distributions at Joe’s RBD based on Wendy’s single life expectancy recalculated each year
Il. Roll the account balance into Wendy’s IRA; take distributions based on her RBD (new uniform lifetime
table)
III. Take distributions over Wendy’s life expectancy by December 31st of the year after Joe died IV. Take distributions at least as rapidly as under the distribution schedule in effect when Joe died
A.
B.
1
1, Il
C.
D. II, IV

Answer 17

Question 11: B
Answer Ill would be more appropriate for a non-spouse beneficiary. Joe had not started his distributions so the
“at least as rapidly” distribution would not apply in this situation.

Question 18

Which of the following qualified plan distributions would be exempt from the 10% early withdrawal penalty?
A. Distributions following a separation from service
B. Distributions for a temporary, partial disability
C. A qualified plan loan
D. A distribution for higher education cost for a participant’s child

Answer 18

Question 2: C
Distributions following separation from service must give a year (e.g., age 55). Higher education costs are exempt under IRA rules only. Total, long-term disability is exempt; partial and/or temporary disability does not qualify for the exemption. Plan loans are available at any age tax-free. There is no 59½ rule with plan loans.

Question 19

Esther is eligible to participate in her company’s money purchase plan. She is married to Jim. She has two children: Danny and Suzi. Whom can she name as a beneficiary?
A. Anyone she wishes
B. Her estate
C. Jim
D. Danny
E. Suzi

Answer 19

Question 4: C
The participant, Esther, can only name another beneficiary if Jim consents. The question must say “he waived his right” to choose for the other answers to be correct. Applies to pension plans only (DB, CB, MP and TB) not profit-sharing.

Question 20

Question 5
Arthur and Beth are getting a divorce. Arthur owns an IRA with an account value of $500,000. Under a QDRO, Beth has which of the following rights relative to Arthur’s IRA?
A. None
B. 50% of the value of the account
C. 50% of the value of the account when Arthur turns 59½
D. A QJSA equal to 50% of the value of the account

Answer 20

Question 5: A
QDROs only apply to qualified plans, 403(b)s, and governmental 457s - not IRAs.

Question 21

Question 1
Which of the following statements accurately describe(s) the provisions of constructive receipt as it is applied to
nonqualified deferred compensation plans?
I. Constructive receipt occurs when the funds are available to the employee.
Il. Constructive receipt by employee results in taxation to the employee of the applicable benefits.
Ill. If a company goes through a merger or acquisition, the rabbi trust provisions will automatically trigger
constructive receipt to the employee.
IV. It a company owns the deferred compensation assets, its employee will not have constructive receipt.
A. I, I1, III, IV
B. 1, II, IV
C. 1, II
D. III
E. IV

Answer 21

B. A rabbi trust might trigger constructive receipt due to a merger or acquisition.

Question 22

Which of the following statements are true concerning a rabbi trust?
I. The rabbi trust provides complete protection for the deferred compensation.
Il. The rabbi trust is informally funded.
IlI. The employer may fund the rabbi trust from the general assets of the company.
IV. Employer contributions to the rabbi trust are not subject to payroll taxes until they are distributed to the
employee.
V. The rabbi trust assets may be used for purposes other than discharging the obligations to the employee.
A. 1, 11, I
B. II, III, IV, V
C. III, IV, V
D. 1I, IV

Answer 22

Question 2: B
The assets held in a rabbi trust are always subject to the employer’s creditors. The employer may fund the trust from general assets. Contributions are not subject to payroll taxes, but ultimately distributions are subject to withholding and FICA. The rabbi trust offers no protection in case of bankruptcy or financial obligations of the company.

Question 23

John, a high-performing sales manager for ABC Auto Parts, is unhappy with the company’s 401(k) program. The $350,000 compensation cap and the ADP test are limiting contributions. In an effort to retain John, which of the following opportunities should ABC make available to him?
A. A salary continuation plan invested in a variable annuity policy
B. An increase in company contributions to the 401(k)
C. A secular trust
D. A split-dollar policy
E. A pure deferred compensation arrangement using a VUL policy

Answer 23

Question 3: A
A salary continuation plan is funded entirely by employer contributions. Pure deferred compensation uses a portion of the employee’s current compensation. Nothing indicates a need for life insurance (Answers D and E).
A secular trust contribution would be currently taxable to John and limits his ability to use the funds until the end of the term of the agreement.

Question 24

Twins, Inc. wants to adopt a retirement plan or plans that allow flexible yearly contributions and that can be integrated with Social Security. Which of the following choices best satisfies Twins, Inc!’s objectives?
A. The company could install an ESOP.
B. The company could install a SIMPLE.
C. The company could adopt a tandem plan.
D. The company could adopt a SIMPLE 401(k) plan.
E. The company could install a profit-sharing plan.

Answer 24

Question 12: E
Flexible yearly contributions eliminate the SIMPLE plan, the tandem olan, and the SIMPLE 401(k). A tandem plan was a combination of a money purchase plan and a profit-sharing plan with 401(k) provisions. Tandem plans were applicable before 2001. Integration eliminates the ESOP. SEPs can be integrated with Social Security.

Question 25

Question 13 Debra Snow, age 50, works for Tilden, Inc. Tilden provides a defined benefit pension plan. Debra is the VP of creative marketing. She earns $200,000 per year from Tilden. Debra is also a talented artist. This year she sold paintings netting $100,000 after expenses this year. If Tilden adds $100,000 to her defined benefit plan this year, can Debra also fund a SEP? A. No, the $100,000 exceeds the 415 limit of 25% or $70,000. B. Yes, but it is limited to 25% of $100,000 less Social Security offset or $18,590 (18.59%) C. Yes, but it is limited to $23,500. D. No, she is already a participant in a DB plan, and the 1.0 rule applies.

Answer 25

Question 13: B SEP contribution rules are similar to those for a Keogh PS Plan. For self-employed individuals, the maximum contribution percentage is 18 59% /Note: $18.590/$100.000 is 18.59%) of earned income with a 25% plan, and for corporate emplovees (including owners) the contribution limit is 25%. The 1.0 rule has been repealed. Note: She works for two unrelated employers, so both contributions are allowed.

Question 26

Question 7 Stu is a sole proprietor. He has established a 15% profit-sharing plan. In the current year, his business will produce $75,000 of net business profit. What amount can Stu contribute to his Keogh plan? A. $9,032 $ 1 B. $9,090 $1 C. $9,781 1 D. $10,390 $ 1 E. $11,251+1

Answer 26

Question 7: B Shortcut: $75,000 x .1212 = $9,090

Question 27

When may an employee avoid receipt of taxable income when participating in a funded nonqualified deferred compensation plan? A. When the plan is unfunded B. When there is no constructive receipt by the employee C. When there is a substantial risk of forfeiture relative to the compensation that was deferred D. When there is no economic benefit to the employee

Answer 27

Question 23: C When deferred compensation is subject to "substantial risk of forfeiture," the amount, if any, of economic benefit is uncertain and the deferred income is then not taxable until it is distributed.

Question 28

Question 24 Which of the following retirement plans cannot offer plan loans? A. A 401(k) plan B. A 403(b) plan C. A defined benefit plan D. A stock bonus plan E. A SIMPLE plan

Answer 28

Question 24: E Any type of qualified plan [or Section 403(b)] may permit loans (including DBs). Loans from IRA type plans are not permitted.

Question 29

Question 54 If Jane terminates her employment with Worldwide, are there any penalties or requirements to extend coverage to Jane by Worldwide? A. Worldwide must purchase conversion coverage for Jane. B. By not providing continuation coverage for the employees, worldwide must pay a penalty of $100 for each day that continuation coverage is not offered. C. Worldwide loses its deduction for premiums paid on the policy. D. Worldwide would have to offer COBRA to Jane for 18 months. Termination is a qualifying event. E. Even if Worldwide had 4 additional nonparticipating employees, under COBRA rules it would not be required to provide continuation for Jane.

Answer 29

Question 54: E COBRA (health continuation coverage) only affects employers with 20 or more employees. COBRA is based on the number of employees; not how many are participating in the plan.

Question 30

Question 40 Bill feels that after a long downturn the stock market is finally stabilizing. He would like to write options for premium income on stocks he owns. He still wants to hold the stocks for the long-term. Which option choice below makes sense assuming that Bill is bullish on the stock market? A. Sell calls B. Sell puts C. Buy calls D. Buy puts

Answer 30

Question 40: B Selling puts after a long downturn seems logical. Short puts are a bullish position that provides income. Bill is optimistic (positive) about the stocks. In addition, the possibility of an up market seems greater than a downturn. If the market goes up and he sells calls, his stocks will be called away. The other answers are wrong because Bill wants to write (sell) options in order to receive premium income.

Question 31

Bill is concerned about his low level of malpractice coverage. Considering the facts of the case, which of the following choices benefit Bill? I. Invest available future earnings into a variable annuity Il. Each year take all profits out of the business as salary IlI. Raise the deductible and increase the coverage as much as possible IV. Use future earnings to purchase cash value life insurance A. All of the above B. 1, 11 C. 1, III, IV D. II, III, IV E. 1

Answer 31

Question 35: A The variable annuity is creditor protected. Removing assets from the P.A. makes the business less valuable. Bill could take more salary now and invest in annuities or life insurance. He can improve his malpractice per Answer I. Answers lI and V strip all the value out of his P.A. (PSC Corporation). He can then put the cash into an annuity or cash value life insurance policy. Go back to General princioles 10-6 for additional information.