Retirement: 6 403b Plans and Other Plan Issues Flashcards by David Freiler

Retirement 6-2: 403(b) Investment options

Although Section 403(b) plans are frequently referred to as tax-sheltered or tax deferred annuity plans, there are three different investment options listed in IRS
Publication 571:

These are provided through an insurance company. They may be either fixed or variable. A fixed
one provides a guaranteed minimum rate of return while variable ones offer separate investments accounts called “sub accounts,” which are similar to
mutual funds. Available sub accounts may include an account that provides a guaranteed rate, at least for a short term. Other sub-accounts may be invested in
stocks, bonds, money markets, or a combination of these investments.

a. Annuity contracts
b. Custodial accounts holding mutual fund shares
c. Retirement income account.

a. Annuity contracts

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Retirement 6-2: 403(b) Investment options

Although Section 403(b) plans are frequently referred to as tax-sheltered or tax deferred annuity plans, there are three different investment options listed in IRS
Publication 571:

The assets must be held by a bank or an approved nonbank trustee or custodian that meets certain requirements imposed by the IRS. The assets in this account must be invested exclusively in regulated investment company stock, commonly known as mutual funds

a. Annuity contracts
b. Custodial accounts holding mutual fund shares
c. Retirement income account.

b. Custodial accounts holding mutual fund shares

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Retirement 6-2: 403(b) Investment options

Although Section 403(b) plans are frequently referred to as tax-sheltered or tax deferred annuity plans, there are three different investment options listed in IRS
Publication 571:

These are established by a church or church-related organization. They are generally subject to the rules for annuity contracts and must meet certain requirements, such as separate accounting for the participant’s interest in the invested assets.

a. Annuity contracts
b. Custodial accounts holding mutual fund shares
c. Retirement income account.

c. Retirement income account.

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Retirement 6-2: 403(b) Investment options

Life insurance can be offered as part of an annuity contract; however, this component can only be an _____. This is because the primary reason for a 403(b) plan (or any qualified or retirement plan) is to provide retirement benefits, not life insurance.

a. “secondary benefit.”
b. “incidental benefit.”
c. “inessential benefit.”

b. “incidental benefit.”

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Retirement 6-2: 403(b) Investment options

Determination of whether or not the life insurance is incidental is based upon the ratio of the life insurance cost or premium to the total amount contributed to the
Section 403(b) account. The allowable ratio depends upon whether or not the life insurance is ordinary or non-ordinary. Whole life policies are considered
_____.

a. ordinary
b. non-ordinary

a. ordinary

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Retirement 6-2: 403(b) Investment options

Determination of whether or not the life insurance is incidental is based upon the ratio of the life insurance cost or premium to the total amount contributed to the
Section 403(b) account. The allowable ratio depends upon whether or not the life insurance is ordinary or non-ordinary.  \_\_\_\_\_ includes both term insurance and universal life contracts.

a. ordinary
b. non-ordinary

b. non-ordinary

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Retirement 6-2: 403(b) Investment options

For life insurance to qualify as _____, the plans must meet the following limitations:

the premium on ordinary life insurance must be less than 50% of the total contributions;
the premium on non-ordinary plans must be less than 25% of the total contributions; and
when life insurance is included as part of a TSA, the insured participant must include in his or her income each year the cost of the life insurance protection—that is, the economic benefit derived from life insurance.
a. secondary
b. incidental
c. inessential

b. incidental

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Retirement 6-2: 403(b) Investment options

The amount of life insurance protection is based upon the face amount minus the cash value of the contract at the end of the year. The reason it is done this way is
so that the premiums for the actual life insurance protection are paid with _____ dollars; then the death benefit would be distributed tax free to the beneficiary.

a. pretax
b. after tax

b. after tax

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Retirement 6-2: 403(b) Investment options

In order to contribute to a 403(b) plan (or any retirement plan) one must have compensation; what is often referred to as earned income or includible compensation. Here are some examples of what is and is not considered to be compensation.

wages, salaries, and fees for personal service to the employer;
certain taxable accident and health insurance programs;
moving expense payments or reimbursements paid by the employer if not deductible by the employee;
elective deferrals to a Section 401(k), Section 403(b), or similar arrangement;
amounts deferred under a Section 125 cafeteria plan;
amounts deferred under a Section 457 plan.
a. included as compensation
b. not included as compensation

a. included as compensation

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Retirement 6-2: 403(b) Investment options

employer contributions to the employee’s 403(b) account
compensation earned while the employer was not an eligible employer
cost of incidental life insurance.
a. included as compensation
b. not included as compensation

b. not included as compensation

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Retirement 6-2: 403(b) Investment options

Generally, an employee cannot defer more than _____ (in 2016) of compensation in a given tax year. This amount includes deferrals made through all similar plans except the 457 plan, which has its own separate deferral limit.

a. $12,500
b. $18,000
c. $25,000

b. $18,000

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Retirement 6-2: 403(b) Investment options

TSA participants, regardless of their age, who have at least __ years of service with a qualified organization are allowed a “long service catch-up contribution.”
That is, the IRC Section 402(g) limitation on exclusion for elective deferrals is increased. This provision is unique to 403(b) plans.

a. 5
b. 10
c. 15

c. 15

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Retirement 6-2: 403(b) Investment options

A “qualified organization” means any “HER” organization:

Health
Education
_____

a. Religious
b. Real Estate
c. Retail

a. Religious

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Retirement 6-2: 403(b) Investment options

The increase for the long service catch-up is the lesser of the following:

-$3,000
or
-$15,000 reduced by “increases for long service” used in earlier years
or
-$_____ times the number of years of service for the organization, minus the total elective deferrals made in previous years.

a. $5,000
b. $10,000
c. $20,000

a. $5,000

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Retirement 6-2: 403(b) Investment options

a. $2,000
b. $3,000
c. $4,000

b. $3,000

Note that this additional deferral amount is based on years of service, and does not require a minimum age

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Retirement 6-2: 403(b) Investment options

Example. John Smith, age 40, has worked for the local school district and been in the 403(b) plan since he was 24. He recently received an inheritance, so he is in the position to defer as much as possible this year of his $45,000 in compensation. In addition to the $18,000 regular deferral, he may also be able to defer an additional $3,000, since he has been with his employer for at least 15 years. (Note that this additional deferral amount is based on years of service, and does not require a minimum age). If John were to defer the maximum service catch-up each year ($3,000), it would take him five years to achieve the maximum amount available for the service catch-up, which is _____. John is too young to use the age 50 catch-up.

a. $5,000
b. $10,000
c. $15,000

c. $15,000

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Retirement 6-2: 403(b) Investment options

Example 1. Laurie is a public school teacher and participant in her district’s Section 403(b) TSA plan. She is 48 years old and has been with the district for 14
years. Her salary for the year was $58,000, including a salary reduction agreement of $12,600. The district used that $12,600 to purchase a tax-sheltered annuity on her behalf. Since Laurie has made a $12,600 contribution, the district would be limited to a contribution of

a. $30,400
b. $40,400
c. $53,000

b. $40,400

$40,400 ($53,000 – $12,600 = $40,400) if the district made employer contributions.

Section 415 limits the annual contribution to Laurie’s account to the lesser of $53,000 or 100% of Laurie’s compensation. In this case, the Section 415 limit would be $53,000 and would include contributions from the district and Laurie’s salary deferral.

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Retirement 6-2: 403(b) Investment options

a. $30,400
b. $40,400
c. $53,000

b. $40,400

$40,400 ($53,000 – $12,600 = $40,400) if the district made employer contributions.

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Retirement 6-2: 403(b) Investment options

If a participant over-contributes to the TSA, and it is not corrected in a timely fashion, an excise tax of ___ of the excess amount may be imposed. If the contribution was to a custodial account, the tax will apply; if made to an annuity, the excise tax will not apply.

a. 6%
b. 10%
c. 25%

a. 6%

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Retirement 6-2: 403(b) Investment options

An in-service distribution _____ be taken prior to age 59½

a. can
b. can not

a. can

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Retirement 6-2: 403(b) Investment options

TSA plans that are subject to ERISA must provide for a qualified joint and survivor annuity (QJSA). This is the required form of distribution for married plan participants and can be changed only with the written and notarized consent of the spouse. It must provide the surviving spouse a minimum of ___ of the payment that is in effect prior to the death of the deceased spouse.

a. 50%
b. 65%
c. 75%

a. 50%

The plan must also allow participants to choose either a 50% QJSA (at the least) or a 75% QJSA when the benefit is annuitized.

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Retirement 6-2: 403(b) Investment options

The employee participant who has attained age __ can take a distribution at his or her discretion, within vesting limitations. However, employed participants
who have not reached this age may still be able to tap some of the value in their accounts, either through withdrawals or loans. Most employers offer one or the
other, or both, but they are not required to do so.

a. 55
b. 59½
c. 70½

b. 59½

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Retirement 6-2: 403(b) Investment options

Section 403(b) plans are allowed to provide for in-service hardship withdrawals (_____ offer them). A hardship withdrawal must meet two tests:

the participant must have an “immediate and heavy financial need,” and
the distribution must be necessary to meet that need. (Therefore, loans must be exhausted prior to the granting of the hardship distribution.)

a. they must
b. but do not have to

b. but do not have to

Amount of distribution. In terms of the second test, the distribution cannot exceed the demonstrated financial need, and the need must be such that it cannot
be satisfied from the participant’s other resources.

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Retirement 6-2: 403(b) Investment options

A hardship distribution can be made from

a. salary deferrals
b. salary deferrals and earnings
c. salary deferrals, earnings, and employer contributions

a. salary deferrals

A hardship distribution can be made from salary deferrals only; employer contributions and earnings cannot be withdrawn as part of a hardship
withdrawal. Such distributions are not eligible for rollover, and therefore the 20% mandatory withholding does not apply. Hardship withdrawals create taxable
income, and would normally include a 10% penalty unless one of the exceptions apply.

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Retirement 6-2: 403(b) Investment options With a hardship withdrawal, 20% mandatory withholding ____ apply. a. does b. does not

b. does not Hardship withdrawals create taxable income, and would normally include a 10% penalty unless one of the exceptions apply.

Retirement 6-2: 403(b) Investment options Loans from 403(b) plans are subject to limits stated in the plan and in the underlying investment. Loans generally cannot exceed the lesser of $50,000 or 50% of the participant’s vested account balance. Technically, for balances less than _____ and more than $10,000, the participant can borrow up to $10,000; and for balances less than $10,000 the participant can borrow the entire vested account balance a. $20,000 b. $30,000 c. $40,000

a. $20,000

Retirement 6-2: 403(b) Investment options There is a _ year term limit on loans, except loans used to purchase a home. a. 3 b. 5 c. 10

b. 5

Retirement 6-2: 403(b) Investment options Deferrals _____ be made to a designated Roth 403(b) plan. a. can b. can not

a. can

Retirement 6-2: 403(b) Investment options Tax-free distributions from Roth 403(b) contribution accounts. “Qualified distributions” are distributions made from a Roth 403(b) account when the Roth account owner is at 1. least age 59½, fully disabled, or deceased, and 2. the account has been open for at least five calendar years. The five-year “clock” starts on _____ of the year for which the contribution was made. For example, if a contribution was made in December 2013, the clock would start _____ 2013. a. January 1 b. April 1 c. December 31

a. January 1

Retirement 6-2: 403(b) Investment options If a participant has had a Roth IRA for more than five years, then by moving the Roth 403(b) over to the Roth IRA the five-year requirement _____ been met, regardless of how long the Roth 403(b) has been opened. a. has b. has not

a. has

Retirement 6-2: 403(b) Investment options If a participant has had the Roth 403(b) opened for years, and then establishes a Roth IRA to rollover into, the five-year clock for the Roth IRA will start as of January 1st of the year of the _____. It will not matter how long the Roth 403(b) has been opened in this case. a. Roth 403(b) opening b. rollover

b. rollover

Retirement 6-2: 403(b) Investment options The Roth 403(b) holding period requirement _____ to a participant or his or her beneficiary. a. applies b. does not apply

a. applies For example, if the Roth account owner died after three years, the beneficiary would have to wait an additional two years to meet the five-year holding requirement.

Retirement 6-2: 403(b) Investment options Nonqualified withdrawals from designated Roth accounts, such as the Roth 430(b), have _____ ordering rules than traditional Roth IRAs. a. similar b. different

b. different ``` Nonqualified distributions are treated as a pro rata return of Roth contributions and earnings. The portion of the distribution that represents earnings will be subject to ordinary income tax and possibly a 10% penalty tax for premature distributions. However, the portion of the withdrawal that represents a return of Roth 403(b) contributions would not be subject to tax. ```

Retirement 6-1: 403(b) An employer-employee relationship must exist to allow the individual to be considered an eligible employee. Independent contractors _____ be considered eligible. a. would b. would not

b. would not

Retirement 6-1: 403(b) There are __ types of employers that qualify to offer Section 403(b) plans, as listed in IRA Publication 571. a. 2 b. 3 c. 4

a. 2 Certain tax-exempt organizations and Public educational systems

Retirement 6-1: 403(b) An employer sponsoring a TSA plan may have eligibility requirements similar to a qualified plan, such as 1. minimum age of 21, or 2. _ year of service. a. 1 b. 2 c. 3

a. 1 A TSA plan sponsor could also require two years of service for participation if employer contributions vest 100% immediately.

Retirement 6-1: 403(b) A TSA plan that is provided by a tax-exempt educational institution could use age __ as the minimum age. To use the higher age limit, the plan could not use the two-years-of-service eligibility requirement. a. 18 b. 25 c. 26

c. 26 Use of the age 26 minimum also requires 100% immediate vesting of employer contributions.

Retirement 6-1: 403(b) Universal availability rule. Tax-sheltered annuity plans offering only salary reduction contributions (the employer contributes nothing) are subject to a single nondiscrimination rule. The nondiscrimination requirement is satisfied if all employees who are willing to have a salary reduction of at least $_____ per year are allowed to participate a. $100.01 b. $200.01 c. $2,000.01

b. $200.01

Retirement 6-1: 403(b) To be valid, the salary reduction agreement must be a contract. This contractual agreement between the employer and the employee must have the following characteristics: 1. the agreement must be legally binding and _____ as to salary earned while in effect, 2. more than one agreement with the same employer in any taxable year may be allowed, and 3. the employee may terminate or modify the agreement at any time with respect to amounts not yet earned. a. revocable b. irrevocable

b. irrevocable

Retirement 6-1: 403(b) In regard to the vesting of employees’ contributions, a TSA plan has requirements similar to a Section 401(k) plan—i.e., participants’ salary reductions and any plan earnings on those amounts must be 100% vested. Employer contributions, however, may be subject to vesting requirements. The Pension Protection Act requires all defined contribution plans to vest employer contributions, both matching and non-elective, at least as rapidly as the three-year cliff or the _ year graded vesting schedules. a. 4 b. 5 c. 6

c. 6

Retirement 6-1: 403(b) Three-year cliff vesting. At the completion of three years of service, the participant is fully vested in his or her accumulated employer-provided benefits. Should the employee terminate service with the employer prior to the completion of three years of service, the employee _____ be entitled to any portion of the plan accumulation attributable to employer contributions. a. would b. would not

b. would not

Retirement 6-1: 403(b) Two- to six-year graded vesting. Vesting must occur at a rate of at least ___ per year, beginning at the completion of two years of service. The participant is fully vested at the completion of six years of service. 10% 20% 25%

20%

Retirement 6-1: 403(b) TSA plans provide employees with many of the tax benefits provided by qualified plans, TSAs _____ considered to be qualified a. are b. are not

b. are not

Retirement 6-1: 403(b) When employer matching contributions are part of a 403(b) plan, then the employer must carry out the ___ test. a. ACP (actual contribution percentage) b. ADP (actual deferral percentage)

a. ACP (actual contribution percentage) Note: There is no ADP (actual deferral percentage) test required for 403(b) plans; the ADP test only applies to 401(k) plans.

Retirement 6-3: 403(b) and 401(k) Plans Compared 403(b) and 401(k) Plan Contribution Limits, 2016 Maximum salary reduction (elective deferral): $18,000 (as indexed in 2016), age 50 catch-up provision and 15 years of service catch-up provision a. 403(b) Plan b. 401(k) Plan

a. 403(b) Plan

b. 401(k) Plan .

Retirement 6-3: 403(b) and 401(k) Plans Compared 403(b) and 401(k) Plan Contribution Limits, 2016 Section 415 Limitation: Lesser of $53,000 or 100% of compensation (as indexed in 2016) a. 403(b) Plan b. 401(k) Plan

Both

Retirement 6-3: 403(b) and 401(k) Plans Compared 403(b) and 401(k) Plan Contribution Limits, 2016 Maximum compensation considered: $265,000 (as indexed in 2016) a. 403(b) Plan b. 401(k) Plan

Both

Retirement 6-3: 403(b) and 401(k) Plans Compared 403(b) and 401(k) Plan Contribution Limits, 2016 15 years of service catch-up provision a. 403(b) Plan b. 401(k) Plan

a. 403(b) Plan

Retirement 6-3: 403(b) and 401(k) Plans Compared 403(b) and 401(k) Plan Contribution Limits, 2016 Age 50 catch-up provision a. 403(b) Plan b. 401(k) Plan

Both

Retirement 6-3: 403(b) and 401(k) Plans Compared 403(b) and 401(k) Plan Contribution Limits, 2016 Ability to change salary reduction amount: as specified in the plan a. 403(b) Plan b. 401(k) Plan

Both

Retirement 6-3: 403(b) and 401(k) Plans Compared Retirement plan distributions from 403(b) plans funded with annuity contracts typically take the form of annuity distributions. The plan ____ provide the opportunity to “roll over” the value of the account into another eligible retirement plan, thus deferring taxation to a later date. a. may not b, must

a. may not Furthermore, annuity payments are not eligible for rollover treatment. This may not be a big deal, however, since the balance in the annuity is deferred; only the periodic payments are taxable. Some plans, however, do provide for lump-sum distributions equal to the value of a participant’s account. A lump-sum distribution is one that represents the entire amount of a participant’s plan benefits. These may be rolled over to another eligible retirement plan.

Retirement 6-4: 403(b) Regulatory Issues Types of Plans: A sponsoring employer may choose from four general types of plans In essence, a _____ is a retirement plan sponsored by a financial institution (the sponsoring organization) that an employer can adopt simply by executing an adoption agreement. This is possible because a the plan’s documents—an adoption agreement and a basic plan document—have already been examined and approved by the IRS. Financial institutions, banks, insurance companies, and mutual funds frequently offer these plans so that employers will, hopefully, use their investment products to fund their plans. a. master plans b. prototype plans c. volume submitter plans d. individually designed, or custom-designed, plans

a. master plans

Retirement 6-4: 403(b) Plan Regulatory Issues A master plan consists of a basic plan document, an adoption agreement, and, unless included in the basic plan document, a trust or custodial account document This is the portion of a plan containing all the nonelective provisions applicable to all adopting employers. With just a few exceptions, no options (including blanks to be completed) may be provided in the this document a. basic plan document b. adoption agreement c. trust or custodial account document

a. basic plan document

Retirement 6-4: 403(b) Plan Regulatory Issues A master plan consists of a basic plan document, an adoption agreement, and, unless included in the basic plan document, a trust or custodial account document This is the portion of the plan containing the options that may be selected by an employer. a. basic plan document b. adoption agreement c. trust or custodial account document

b. adoption agreement

Retirement 6-4: 403(b) Plan Regulatory Issues A master plan consists of a basic plan document, an adoption agreement, and, unless included in the basic plan document, a trust or custodial account document This is the portion of a master plan that includes provisions covering such matters as the powers and duties of trustees, investment authority, and the kinds of investments that may be made. With just a few exceptions, all provisions of the this document must be applicable to all adopting employers of that trust, and no options (including blanks to be completed) may be provided in this document. a. basic plan document b. adoption agreement c. trust or custodial account document

c. trust or custodial account document

Retirement 6-4: 403(b) Plan Regulatory Issues Types of Plans: A sponsoring employer may choose from four general types of plans This plan is made available by a sponsoring organization for adoption by employers. It consists of a basic plan document and an adoption agreement. The plan’s documents have already been approved by the IRS. This type of plan usually has a separate trust or custodial account for each adopting employer and the ability to designate a trustee or trustees for the plan. a. master plans b. prototype plans c. volume submitter plans d. individually designed, or custom-designed, plans

b. Prototype plans The IRS permits banks, insurance companies, credit unions, mutual funds, trade or professional organizations, and certain other individuals to sponsor a prototype plan.

Retirement 6-4: 403(b) Plan Regulatory Issues There are two basic types of adoption agreements available for prototype plans: standardized and nonstandardized. A _____ plan is limited in terms of the service requirements that it may impose. It must require an employer to make an allocation of employer contributions (and forfeitures, if any) on behalf of any participant who terminates employment during the plan year and completes at least 501 hours of service during the plan year. The employer’s cost of these required contributions may be significant over the life of the plan; furthermore, such costs may be avoidable. standardized non standardized.

Standardized

Retirement 6-4: 403(b) Plan Regulatory Issues There are two basic types of adoption agreements available for prototype plans: standardized and nonstandardized. A _____ adoption agreement may be drafted to require a participant to complete 1,000 hours of service and/or be employed on the last day of the plan year before being entitled to receive an allocation of employer contributions to the defined contribution plan. (However, the plan administrator has the authority to waive these requirements if necessary to satisfy coverage requirements.) a. standardized b. non standardized

b. Non standardized Because of the limited number of plan design options available under a standardized defined contribution prototype plan’s adoption agreement, an employer with four or more non-highly compensated participants may incur lower contribution costs with a nonstandardized plan.

Retirement 6-4: 403(b) Plan Regulatory Issues Types of Plans: A sponsoring employer may choose from four general types of plans _____ plans are retirement plans drafted to meet the specific needs of particular sponsoring employers. Typically, this plan is established to achieve a particular planning objective of the employer-sponsor. For example, an employer may want to design the plan to provide maximum permitted discrimination in favor of owners or highly compensated employees. These plans are not preapproved by the IRS. a. master plans b. prototype plans c. volume submitter plans d. individually designed, or custom-designed, plans

d. individually designed, or custom-designed, plans Note: An individually designed plan may be inadvertently (or intentionally) created if an adopting employer amends a prototype plan and the amendment is not sanctioned or authorized by the sponsoring organization.

Retirement 6-4: 403(b) Plan Regulatory Issues Types of Plans: A sponsoring employer may choose from four general types of plans A _____ plan is a specimen plan can be structured with a basic plan document and an adoption agreement or as a self-contained single document that only reflects the provisions selected by an adopting employer. In other words, the employer (clients) can adopt the plan on an identical or substantially identical basis. Such plans are preapproved by the IRS. This means that as long as an employer does not deviate from the preapproved language, he or she can feel confident that the plan terms satisfy the IRC requirements. a. master plans b. prototype plans c. volume submitter plans d. individually designed, or custom-designed, plans

c. volume submitter

Retirement 6-4: 403(b) Plan Regulatory Issues Types of Prototype Plans ____ plans are administered by a trustee, typically a bank, trust company, or individual. A trustee is a party named in the trust instrument or plan and authorized to hold the plan’s assets for the benefit of plan participants and beneficiaries. This trustee has title to, safeguards, and manages the pension plan assets. Qualified plans may also be held by a custodial account. In this situation, the custodial account is treated as a trust. a. Trusteed plans. b. Common trust. c. Pooled trust d. Master trust. e. Insured plans

a. Trusteed plans.

Retirement 6-4: 403(b) Plan Regulatory Issues Types of Prototype Plans _____ funds, which may be sponsored by bank trust departments or trust companies, receive plan contributions, invest them, and pay out benefits when due. A plan can own shares or units in different funds with different investment objectives. The funds provide investment diversification along with lower commission and administrative costs. a. Trusteed plans. b. Common trust. c. Pooled trust d. Master trust. e. Insured plans

b. Common trust.

Retirement 6-4: 403(b) Plan Regulatory Issues Types of Prototype Plans A _____ trust is sponsored by one employer to combine and accumulate the assets of different plans of the employer and its subsidiaries. a. Trusteed plans. b. Common trust. c. Pooled trust d. Master trust. e. Insured plans

c. Pooled trust

Retirement 6-4: 403(b) Plan Regulatory Issues Types of Prototype Plans _____ are plans in which employer contributions are paid to an insurance company (the funding agency), with the insurance company paying the promised pension plan benefits to eligible recipients. The insurance company usually handles the administrative duties of keeping records and filing reports related to the plan. Accordingly, no trust is needed or required. The insurance company will take employer contributions and invest them in some type of insurance product, such as 1. an annuity contract, 2. a guaranteed insurance contract (GIC), or 3. a whole life policy. a. Trusteed plans. b. Common trust. c. Pooled trust d. Master trust. e. Insured plans

e. Insured plans

Retirement 6-4: 403(b) Plan Regulatory Issues In analyzing the eligibility requirements of a plan, two forms of exclusions must be considered: statutory exclusions and non statutory exclusions. The _____ exclusions typically used are 1. age; 2. length of service; and 3. union membership, if retirement benefits were the subject of good-faith bargaining under the terms of a collective bargaining agreement. a. statutory exclusions b. non statutory exclusions

a. statutory exclusions

Retirement 6-4: 403(b) Plan Regulatory Issues In analyzing the eligibility requirements of a plan, two forms of exclusions must be considered: statutory exclusions and non statutory exclusions. The _____ exclusions typically used are 1. job description classification, 2. form of compensation (for example, salaried employees only), and 3. classification by geographic location or by employment in a specific division of a company. a. statutory exclusions b. non statutory exclusions

b. non statutory exclusions Nonstatutory exclusions are permitted, provided that the qualified plan satisfies the law’s coverage and nondiscrimination requirements. In other words, employees who cannot be excluded for statutory reasons must be counted by the plan for purposes of passing the coverage tests, even if the terms of the plan exclude them for nonstatutory reasons

Retirement 6-4: 403(b) Plan Regulatory Issues IRS regulations impose restrictions on a pension plan’s definition of normal retirement age (NRA). A plan’s NRA cannot be earlier than what is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed (“reasonably representative standard”). Age __ is deemed to be a safe harbor NRA (a reasonably representative retirement age) for a qualified public safety employee (such as firefighter, police officer, etc.). a. 50 b. 55 c. 60

a. 50

Retirement 6-4: 403(b) Plan Regulatory Issues IRS regulations impose restrictions on a pension plan’s definition of normal retirement age (NRA). A plan’s NRA cannot be earlier than what is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed (“reasonably representative standard”). Age __ is deemed to be a safe harbor NRA (a reasonably representative retirement age) for a plan that covers employees other than qualified public safety employees. a. 55 b. 60 c. 62

c. 62

Retirement 6-4: 403(b) Plan Regulatory Issues The normal retirement age usually selected in the adoption agreement is the _____ of 1. attainment of age 65 by the participant, or 2. the fifth anniversary of the date that the participant commenced plan participation. a. earlier b. later

b. later

Retirement 6-4: 403(b) Plan Regulatory Issues A _____ is a retirement plan sponsored by a financial institution that an employer can simply adopt by executing an adoption agreement. It has already been approved by the IRS, and the plan funds are held in a “pooled” trust. a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

a. master plan

Retirement 6-4: 403(b) Plan Regulatory Issues Similar to a master plan in that it consists of a basic plan document already approved by the IRS, however this type of plan typically has a separate funding medium for each adopting employer. a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

b. prototype plans

Retirement 6-4: 403(b) Plan Regulatory Issues Any prototype plans should be sent to the IRS for approval in order to be considered “qualified.” The IRS will respond with an _____ which will let the plan sponsor know if all the legal requirements have been met, and the plan is considered qualified. This should be saved in order to present it if it is requested in future years. a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

c. advanced determination letter

Retirement 6-4: 403(b) Plan Regulatory Issues ERISA eligibility is 21/1, meaning age 21 and 1 year of service. One year of service is defined as having worked 1000 hours or more during the plan year. a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

d. hours of service

Retirement 6-4: 403(b) Plan Regulatory Issues A plan must possess a definition of compensation that will be counted when computing contributions to a plan. For example, will just the base salary count? Will bonuses count? Overtime? a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

e. definition of compensation

Retirement 6-4: 403(b) Plan Regulatory Issues ERISA considers a person who has discretionary authority over plan management, administration, or disposition of plan assets, or a person who renders investment advice for a fee, to be a _____. ERISA requires that a _____ carry out plan responsibilities solely in the interest of the participants and beneficiaries. a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

f. fiduciary

Retirement 6-4: 403(b) Plan Regulatory Issues The______ role is to ensure that the plan is in compliance with the law. This includes determining who is eligible to participate, who is vested, and accrual of benefits. There are also important reporting and disclosure requirements. a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

g. plan administrator

Retirement 6-4: 403(b) Plan Regulatory Issues Anytime the plan is amended a _____ must be provided to participants. a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

i. Summary of Material Modifications

Retirement 6-4: 403(b) Plan Regulatory Issues A _____ must be provided to plan participants and beneficiaries each year. The deadline varies depending upon whether it is a defined contribution plan or a defined benefit plan. a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

j. Summary Annual Report

Retirement 6-4: 403(b) Plan Regulatory Issues The _____ is either the earlier of six years after the actions constituting the breach took place; or three years after the earliest date on which the aggrieved party had actual knowledge of the breach or violation. In cases of fraud or concealment, the _____ for a breach of fiduciary duty will expire no later than six years after the date of discovery of such a breach or violation. There is no time frame limit when a qualified plan cannot be assessed taxes if fraud is involved. a. master plan b. prototype plans c. advanced determination letter d. hours of service e. definition of compensation f. fiduciary g. plan administrator h. Summary Plan Description i. Summary of Material Modifications j. Summary Annual Report k. ERISA statute of limitations

k. ERISA statute of limitations

Retirement 6-4: 403(b) Plan Regulatory Issues Summary Annual Report (SAR) A Summary Annual Report (SAR) must be distributed annually to plan participants and beneficiaries receiving benefits by the later of nine months after the end of the plan year or two months after the Form 5500 due date plus extensions. In essence, the SAR is the plan’s financial statement. a. Defined contribution plans. b. Defined benefit plans

a. Defined contribution plans.

Retirement 6-4: 403(b) Plan Regulatory Issues Summary Annual Report (SAR) An Annual Plan Funding Notice must be provided to the PBGC and to each participant and beneficiary. This notice must be issued 120 days after the close of the plan year unless the plan is a small plan. Small plans may file notice at the time of filing Form 5500. a. Defined contribution plans. b. Defined benefit plans

b. Defined benefit plans

Retirement 6-5: 403(b) Multiple Plan Rules Employer with Multiple Defined Contribution Plans 1. Must ensure that annual additions (employer contribution + employee contribution + forfeitures) per participant do not exceed the lesser of 100% of pay or $53,000. This amount is an aggregate amount that can be allocated among the plans of a single employer. 2. May generally deduct __% of covered payroll. Creating additional plans does not increase this amount. a. 10% b. 15% c. 25%

c. 25%

Retirement 6-5: 403(b) Multiple Plan Rules Employee with Multiple Defined Contribution Plans— Single Employer 1. May contribute up to $18,000 (plus catch up if applicable). This is an aggregate amount that can be allocated among all plans. 2. Aggregate annual additions with the single employer may not be greater than the lesser of 100% of pay or $______. a. $18,000 b. $53,000 c. $265,000

b. $53,000

Retirement 6-5: 403(b) Multiple Plan Rules Employee with Multiple Defined Contribution Plans— Multiple Unrelated Employers 1. May contribute up to $18,000 (plus catch up if applicable) per year. This is an aggregate amount that can be allocated among the plans. 2. Annual additions must be the lesser of 100% of pay or $53,000 ____. 3. Keep in mind that the $18,000 will count against this amount and that Employer A does not know how much an employee contributed to Employer B’s retirement plan. The employee must keep track of his or her individual annual limit of $18,000 when determining the deferral amount. a. across all employers b. per unrelated employer

b. per unrelated employer

Retirement 6-5: 403(b) Multiple Plan Rules Example. Frank, age 42, works for ABC Corporation and DEF Corporation, which are unrelated employers, both of which offer a 401(k) profit sharing plan. Frank earns $100,000 from each employer and wants to make elective deferrals of $10,000 to each plan. How much can Frank have deposited into his plans for the year? a. $18,000 b. $53,000 c. $106,000

c. $106,000 Frank cannot contribute $10,000 to each account as $20,000 would be greater than his annual limit of $18,000. However, Frank can still enjoy up to $53,000 in annual additions to each account for a total of $106,000. (This total includes elective deferrals of up to $18,000 made by Frank to both plans.) As a planner, you would recommend that Frank first maximize any company matches available for his contributions in each account and then contribute according to the options available in each plan as they relate to his overall portfolio allocation.

Retirement 6-5: 403(b) Multiple Plan Rules An employee who participates in his or her employer’s qualified plan and also has a SEP for his or her own unrelated business is allowed to maximize contributions or benefits in each plan. a. is b. is not

a. is An engineer, for example, could participate in the defined benefit plan provided by the engineering firm where he is employed and also contribute up to 25% in the SEP maintained by his separate unrelated consulting business. (This assumes his consulting business is a corporation; if the business is unincorporated, then Keogh plan rules apply, with a maximum contribution of 20% for the owner).

Retirement 6-5: 403(b) Multiple Plan Rules If an employee has both a Section 457 plan and a 401(k) or 403(b) plan, the total amount of salary deferrals allowed for the two plans is: a. $18,000 b. $36,000 c. $53,000

b. $36,000 $36,000—$18,000 each. This is because the 457 plan is not aggregated with the other deferral plans. If, on the other hand, one of the plans is a Section 403(b) and the other is a 401(k), the total amount of salary deferrals allowed for the two plans is $18,000 (in 2016).

Retirement 6-5: 403(b) Multiple Plan Rules Rule #1. If at least one employee is covered by both plans and the defined benefit plan is exempt from PBGC coverage, then the following employer contributions can be made: up to _% of the participant’s compensation (in addition to any 401(k) elective deferrals and catch-up contributions) may be allocated to the defined contribution plan; and the amount needed to meet the defined benefit plan’s minimum funding requirements may be allocated to the defined benefit plan without regard for the amount put into the defined contribution plan. a. 6% b. 10% c. 25%

a. 6%

Retirement 6-5: 403(b) Multiple Plan Rules Rule #2. If _____ is covered by both plans and the defined benefit plan is covered by PBGC, contributions to the defined benefit plan are not counted when calculating the combined plan limit. Hence, the overall deduction limit (“general rule”) does not apply. a. all employees b. at least one employee

b. at least one employee

Retirement 6-5: 403(b) Multiple Plan Rules Rule #3. 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 in this situation; instead, the regular deduction rules for contributions to defined contribution and defined benefit plans apply to each plan, per the plan formulas and actuarial calculations. Note: Employee elective deferrals to a _____ plan are disregarded when applying the rule for employer deductions of contributions made to one or more defined contribution plan and one or more defined benefit plan a. 401(k) b. 403(b) c. 457

a. 401(k) Matching contributions or nonelective employer contributions, however, would be included in calculations of the combined limit.

Retirement 6-6: Controlled and affiliated service groups It is not uncommon to find a company that is owned by an entity that also has an interest in other companies. Should such an entity sponsor an employee benefit plan(s) it needs to be aware that a controlled group could exist. A controlled group consists of ____ or more employers with specific percentages of overlapping or common ownership. a. one b. two c. three

b. two For example, King Industries has two owners, and 15 employees. The owners want to fund a retirement account but leave out the other employees, so they set up a partnership (that owns King Industries) as a separate entity, and then establish a retirement account for just the partnership. The multiple plan rules are meant to address situations such as these.

Retirement 6-6: Controlled and affiliated service groups Types of controlled groups. A ______ controlled group is literally a chain of two or more corporations that consists of two primary components—a parent organization and one or more subsidiary organizations. This relationship often exists with a chain of businesses. To be more specific, a control group exists if one corporation owns an 80% or more interest in another corporation. a. parent-subsidiary b. brother-sister c. combined relationship

a. parent-subsidiary Example: Parent = Corporation A; Subsidiaries = Corporations B, C, and D. Corporation A is the parent corporation and its subsidiaries are Corporations B, C, and D. Corporation E is not a subsidiary of Corporations A, B, C, or D, since it is not 80% owned by one of these companies. An example of what this would mean is that when considering participation requirements and carrying out discrimination testing (such as the ratio percentage test), Companies A, B, C, and D would all be lumped together and treated as if they were one company.

Retirement 6-6: Controlled and affiliated service groups Types of controlled groups. The _____ controlled group relationship is a bit more complicated, and involves common ownership by individuals (or estates or trusts), not corporations. Two tests are performed to determine a brother-sister relationship: the 80% test and the 50% test. a. parent-subsidiary b. brother-sister c. combined relationship

b. brother-sister 1. The same five or fewer persons must own, in aggregate, at least 80% of each organization in the proposed brother-sister controlled group. This 80% ownership is referred to as a “controlling interest.” Under the 80% test, an individual or entity taken into account for purposes of this test must have at least some ownership in each organization being tested. 2. The same five or fewer shareholders have an identical ownership among all companies, which, in the aggregate, is more than 50%; this is referred to as “effective control.”

Retirement 6-6: Controlled and affiliated service groups Types of controlled groups. A _____ consists of three or more organizations that are organized as follows: each organization is a member of either a parent-subsidiary or brother-sister group; and at least one corporation is the common parent of a parent-subsidiary and is also a member of a brother-sister group. a. parent-subsidiary b. brother-sister c. combined relationship

c. combined relationship

Retirement 6-6: Controlled and affiliated service groups Most of the common investment income a plan generally earns comes from dividends, interest, and gains and losses from the sale of securities. However, if the plan conducts an _____ trade or business, then that income is taxed as unrelated business taxable income (UBTI). Qualified plan investment earnings may be subject to income tax to the extent they represent UBTI in excess of $1,000. a. active b. passive

a. active In a qualified plan, UBTI is derived from directly and regularly participating in any trade or business that is not related to the main function of the entity. The reason why retirement trusts are subject to UBTI is that if retirement trusts were allowed to run businesses without any current tax consequences they would have an unfair advantage over competing businesses who have to pay taxes. The primary purpose of a retirement trust account is to save and grow assets for retirement; it is not meant to be a way to run a business.

Retirement 6-6: Controlled and affiliated service groups 1. generates income from a directly held trade or business (such as owning vending machines in the retirement trust); 2. receives certain types of rental income; 3. uses leverage, such as dividend income generated from stock that was purchased on margin (no leverage allowed, except for directly held real estate); and 4. generates income from investments in a pass-through entity, such as a partnership. a. Unrelated business taxable income (UBTI) b. Not Unrelated business taxable income (UBTI)

a. Unrelated business taxable income (UBTI)

Retirement 6-6: Controlled and affiliated service groups 1. passive income, interest, dividends, royalties, and rents from real property; 2. capital gains from stocks and bonds sold in the retirement trust; and 3. income from directly held real estate, even when leveraged. (Real estate is often the darling of the tax code, the use of leverage creates UBTI except when involving real estate that is directly held – directly held means that the trust owns it directly, not in partnership form.) a. Unrelated business taxable income (UBTI) b. Not Unrelated business taxable income (UBTI)

b. Not Unrelated business taxable income (UBTI)

Retirement 6-6: Controlled and affiliated service groups When a plan provides an insured death benefit through _______, the amount of that benefit is limited by the incidental benefit rule. In a defined contribution plan using ordinary life insurance, the aggregate premiums paid by the plan for the benefit is limited to less than one-half of the aggregate contributions made to the plan on the participant’s behalf; i.e., less than 50%. The IRS has determined that the “pure term” portion of the whole life premium is about 50% of the total premium. In a defined benefit plan, the benefit is limited to “not greater than 100 times the monthly retirement income benefit.” a. Death Benefits Provided by Whole Life Insurance Contracts b. Death Benefits Provided by Term and Universal Life Insurance Contracts

a. Death Benefits Provided by Whole Life Insurance Contracts

Retirement 6-6: Controlled and affiliated service groups When the death benefit is provided by a defined contribution plan through _____, the aggregate amount of premium paid for the participant by the plan must be less than 25% of the aggregate contributions for that participant. Universal life insurance is treated as term insurance under the incidental death benefit rules. For defined benefit plans, the rule is the same as with whole life, the life insurance coverage cannot exceed 100 times the monthly retirement income benefit. a. Death Benefits Provided by Whole Life Insurance Contracts b. Death Benefits Provided by Term and Universal Life Insurance Contracts

b. Death Benefits Provided by Term and Universal Life Insurance Contracts

Retirement 6-7: 457 Plans A 457 plan is a. qualified b. non qualified

b. non qualified

Retirement 6-7: 457 Plans 457 plans have ____ deferral limits as 401k plans. a. the same b, different

a. the same

Retirement 6-7: 457 Plans There are three types of 457 plans, two of them considered “eligible” plans and one of them considered “ineligible.” An ineligible plan is a type of “top hat” plan that is designed so that elective deferrals by executives and other highly compensated participants can exceed the Section 457 salary deferral limit. Under IRC Section 457(f), if the amounts deferred are subject to a substantial risk of forfeiture, the employee can escape taxation on those amounts as long as the forfeiture provision remains in effect. a. eligible (governmental) b. eligible (non-governmental) c. ineligible

c. ineligible In other words, money is not currently taxed to the executive because he has to perform “substantial services” in order to actually receive the money. When (and if) the executive meets the employment and time requirement, then he would be entitled to the money, and would be taxed. This plan allows for a greater deferral of funds than the 457(b) plans, which is the type of 457 plan that most of this chapter will cover.

Retirement 6-7: 457 Plans There are three types of 457 plans, two of them considered “eligible” plans and one of them considered “ineligible.” _____ employers can offer 457 plans on a fairly selective basis. Section 457(b) plans offered by governments can be offered to everyone, particular groups, or even individual employees—such as highly compensated individuals—whom the employer wants to benefit for some reason. Section 457 plans can even be offered to independent contractors; i.e., workers who perform services for the employer and are not classified as employees. In contrast, Section 403(b) plans and 401(k) plans must be offered to all eligible employees and cannot be offered to independent contractors. a. eligible (governmental) b. eligible (non-governmental) c. ineligible

a. eligible (governmental)

Retirement 6-7: 457 Plans There are three types of 457 plans, two of them considered “eligible” plans and one of them considered “ineligible.” ______ 457(b) plans (those offered by tax-exempt organizations) can only be offered to a selected group a. eligible (governmental) b. eligible (non-governmental) c. ineligible

b. eligible (non-governmental)

Retirement 6-7: 457 Plans Nonqualified deferred compensation plans in the private sector preserve tax benefits for participants only if they are ______ in the sense that the plan participant does not have ownership, control or access to the money prior to its distribution. In short, the participant does not have constructive receipt. a. funded b. unfunded

b. unfunded

Retirement 6-7: 457 Plans Governmental 457(b) Plans are _____ unlike non governmental plans a. funded b. unfunded

a. funded The terms of the trust must make it impossible for any part of the assets and income of the trust to be used for, or diverted to, purposes other than for the exclusive benefit of plan participants and their beneficiaries. In other words, money set aside in a governmental 457 plan is not at risk, and the participants in the plan can be assured of getting the money.

Retirement 6-7: 457 Plans Example. Ralph, age 40, whose annual income in 2016 was $90,000, was a participant in his employer’s 457 plan that year. He also participated in the employer’s 403(b) plan. what is the maximum he can contribute to the two plans in total? a. $18,000 b. $36,000

b. $36,000 That means that he is able to contribute, at a maximum, $18,000 (as indexed in 2016) to the Section 457 plan. Ralph was, thus, able to contribute a total of $36,000 to the two retirement plans.

Retirement 6-7: 457 Plans Governmental 457 plans offer two “catch-up provisions.” Like all retirement plans, the age 50 catch-up is available. But 457 plans offer another unique catch-up provision—the final ____ year catch-up rule. a. 1 b. 2 c. 3

c. 3 The final three-year catch-up rule. Both the governmental and nongovernmental 457 plans may use the final three-year catch-up rule. In the last three years prior to the normal retirement age stated in the plan document, an employee is eligible to use the special catch-up provisions for Section 457 plans. These allow the participant who did not make the maximum annual deferrals in prior years to defer in each of the final three years the lesser of the following:  twice the deferral limit in effect for the year, or  the regular limit for the year plus the normal limit that had not been used in previous years. Note: Age 50 catch-up contributions are not taken into account in determining the normal limit used in previous years.

Retirement 6-7: 457 Plans Distributions The Code specifies that a 457 plan shall not make distributions available to participants or beneficiaries until the calendar year in which the participant attains age ___, unless 1. the participant separates from service, or 2. the participant is faced with an unforeseeable emergency. a. 55 b. 65 c. 70½

c. 70½ The last provision is similar to the hardship withdrawals allowed under 403(b) or 401(k) plans, except that any distribution must be related to an unforeseeable emergency. Plans must define an unforeseeable emergency as a severe financial hardship. It could be caused by an unexpected illness or accident suffered by the participant or a member of the participant’s family or a plan beneficiary.

Retirement 6-7: 457 Plans In-Service Distributions A Section 457 plan may, but is not required to, allow participants to take a onetime distribution, or in-service withdrawal, under limited conditions: 1. total amount payable cannot exceed $5,000, 2. no deferral of compensation has been made for at least two years, and 3. the participant has not previously utilized this distribution option under the plan. a. $5,000 b. $15,000

a. $5,000

Retirement 6-7: 457 Plans In-Service Distributions A Section 457 plan may want to “cash out” certain accounts that are small, inactive, and more costly to administer than they are worth. However, it can only make mandatory cash-outs of accounts that meet certain requirements: 1. the accounts do not exceed $5,000, 2. no deferrals have been put into the account for at least __ years, and 3. there have not been any previous distributions under this “cash-out rule.” a. 2 b. 3

a. 2

Retirement (LO 6-1) 1. Which of the following statements describes an advantage that normally accrues to participants in a Section 403(b) plan? Section 403(b) plans are not subject to the required minimum distribution rule. Participants can always borrow up to $50,000 from the Section 403(b) plan in which they participate. Participants receive a tax-deferred accumulation on their contributions. Distributions may qualify for 10-year forward averaging for persons born before 1936.

Participants receive a tax-deferred accumulation on their contributions. Salary deferrals, employer contributions, and the earnings received provide tax-deferred accumulation.

(LO 6-1) 2. Which of the following categories of employers can offer Section 403(b) plans? I. public education systems II. state and local government entities III. certain tax-exempt organizations IV. firms with fewer than 100 employees I and II only I and III only II and III only III and IV only

I and III only The two primary categories of employers that can offer Section 403(b) plans are public education systems and certain tax-exempt organizations.

(LO 6-1) 3. Which of the following describe sources of funding for a Section 403(b) plan? I. rollover or transfer from a qualified plan II. elective salary deferrals III. employer contributions IV. after-tax employee contributions I and II only II and III only II, III, and IV only I, II, III, and IV

I, II, III, and IV A Section 403(b) plan can accept rollovers from a qualified plan, employee salary deferrals, employer contributions, and after-tax employee contributions.

(LO 6-1) 4. Which of the following are among the requirements of a salary deferral agreement between an employer and employee to fund a Section 403(b) plan? I. The agreement must be legally binding and irrevocable as to salary earned while in effect. II. Employees can establish only one agreement with an employer during any taxable year. III. Employees may terminate the agreement at any time with respect to amounts not yet earned. I only I and II only I and III only II and III only

I and III only The agreement is binding and irrevocable regarding salary earned while the agreement is in effect, and the employee can terminate the agreement regarding salary not earned prior to earning that salary.

(LO 6-1) 5. Which of the following describes the nondiscrimination test that a deferral-only 403(b) plan must satisfy? If the plan benefits at least 70% of the non-key employees, the ratio test is satisfied. The ratio test can be satisfied only if the percentage of non highly compensated employees equals at least 75% of the percentage of highly compensated employees. If the plan allows any employee who will defer a minimum of $200 per year to participate, it satisfies the nondiscrimination requirements. The plan is not considered discriminatory if at least 70% of the HCEs benefit.

If the plan allows any employee who will defer a minimum of $200 per year to participate, it satisfies the nondiscrimination requirements.

(LO 6-3) 6. If a TSA plan provides for employer-matching contributions, which of the following tests apply? ADP test ACP test ACP and ADP tests

ACP test When employer-matching contributions are included, a TSA plan would have to include the actual contribution percentage (ACP) test.

(LO 6-1) 7. This year, which of the following is the dollar limitation that the IRC places on normal elective salary deferrals that an employee can contribute to a TSA? $5,500 $12,500 $18,000

$18,000 The dollar limit for salary deferral contributions to a TSA is $18,000 in 2016.

(LO 6-1) 8. Based upon George's salary and years of service, he could contribute $18,000 to the Section 403(b) plan that he participates in. However, during the summer he paints homes and contributes $5,000 into a SIMPLE IRA through that employer. How much can George contribute to the Section 403(b) plan? $5,500 $12,500 $13,000

$13,000 You must subtract the contribution to the SIMPLE IRA from the $18,000 ($18,000 – $5,000 = $13,000).

(LO 6-1) 9. Which of the following correctly shows the maximum 2016 TSA deferral for Patricia Lucero? She is 48 years old, earns $48,000 annually and has been with the district for 14 years. $12,000 $13,000 $18,000

$18,000 She can defer $18,000. She is not eligible for the long service catch-up or the age 50 catch up.

(LO 6-2) 10. Which of the following can be used as a funding vehicle for TSAs? I. stocks II. bonds III. annuities IV. regulated investment company shares held within a custodial account I and II only III and IV only II, III, and IV only I, II, III, and IV

III and IV only The primary investment vehicles for Section 403(b) plans are annuities or mutual funds held in a custodial account, although funds can also be used to purchase life insurance.

(LO 6-1) 11. Which one of the following statements describes a required loan term if an employee borrows from his or her TSA? The amount of the loan could be the greater of 100% of the employee's vested accrued benefit under the plan, or $10,000. Normally, loans cannot exceed the lesser of 50% of the employee's vested accrued benefit under the plan, or $30,000. Other than loans used to purchase a principal residence, the loan must be repaid within five years or it will be taxed as a distribution. Loans can be provided under a Section 403(b) plan that are not subject to the requirements that apply to loans from qualified plans.

Other than loans used to purchase a principal residence, the loan must be repaid within five years or it will be taxed as a distribution. The normal time limit on loans from Section 403(b) plans is five years unless the loan is for the purchase of the participant's primary residence.

(LO 6-1) 12. The vested accrued benefit in George's TSA is $87,500. He has never taken a loan from the plan but is interested in building an addition to his home. Which of the following statements correctly describes George's option? The amount of the loan would be limited to $43,750 and the term would be limited to five years. George could borrow up to $43,750; and since the loan is for his primary residence, it could be for longer than five years. George can borrow up to $50,000, but the term of the loan would be limited to five years. The amount of the loan would be limited to $50,000; and since the loan is for his primary residence, it could be for longer than five years.

The amount of the loan would be limited to $43,750 and the term would be limited to five years. George wants to remodel, not purchase, his home. The amount of the loan cannot exceed 50% of the vested amount in George's account, and the term of the loan would be limited to five years.

(LO 6-1) 13. A distribution cannot be made from a TSA until the employee does which of the following? I. separates from service II. attains age 55 III. becomes disabled or dies IV. qualifies under hardship rules I and II only II and III only I, III, and IV only I, II, III, and IV

I, III, and IV only Distributions can be made when an employee separates from service, becomes disabled or dies, or qualifies under hardship rules.

(LO 6-1) 14. Which of the following statements correctly identifies the tax consequences of a hardship withdrawal from a TSA? Since Section 403(b) plans are not qualified, a hardship distribution is subject only to income taxation without any penalty. All hardship withdrawals would be subject to both taxation and a 10% penalty. Hardship withdrawals that are used to pay certain medical expenses would be subject to income tax, but not to the tax penalty.

Hardship withdrawals that are used to pay certain medical expenses would be subject to income tax, but not to the tax penalty. When a hardship withdrawal is used for medical expenses that exceed 10% (7.5% if participant or spouse is 65) of an individual's adjusted gross income, the 10% penalty would not apply.

(LO 6-1) 15. Which one of the following situations would not be subject to the 10% premature withdrawal penalty? distributions paid to an alternate payee pursuant to a qualified domestic relations order a 46-year-old employee separated from service hardship withdrawal for higher education expenses

distributions paid to an alternate payee pursuant to a qualified domestic relations order Distributions under a QDRO would not be subject to the 10% premature withdrawal penalty.

(LO 6-3) 16. Which of the following types of employers could offer either a Section 403(b) or a Section 401(k) plan? private profit-making corporations with fewer than 100 employees elected school boards tax-exempt hospital state and local governments

tax-exempt hospital Section 501(c)(3) tax-exempt organizations qualify to offer either, or both, a Section 403(b) or a Section 401(k) plan.

(LO 6-3) 17. Which of the following statements correctly compares the contribution limitations of Section 401(k) and Section 403(b) plans? In 2016, normal salary deferrals cannot exceed $18,000 in both plans. Only the 403(b) provides for catch-up deferrals. The maximum annual addition, or Section 415 limitation, applies to Section 401(k) plans, but does not apply to Section 403(b) plans.

In 2016, normal salary deferrals cannot exceed $18,000 in both plans. For both plans, the 2016 maximum salary reduction is $18,000.

(LO 6-3) 18. Identify the correct statement regarding the nondiscrimination requirements of Section 403(b) or Section 401(k) plans. Both plans are subject to the actual deferral percentage (ADP) test. For employee elective deferrals, a Section 403(b) plan satisfies nondiscrimination tests if all eligible employees who are willing to make annual salary reductions of at least $200 are allowed to participate. With employer contributions, the actual contribution percentage (ACP) test applies to Section 401(k) plans but not to Section 403(b) plans.

For employee elective deferrals, a Section 403(b) plan satisfies nondiscrimination tests if all eligible employees who are willing to make annual salary reductions of at least $200 are allowed to participate. When testing just employee salary deferrals, a 403(b) plan satisfies nondiscrimination tests if all eligible employees who are willing to defer at least $200 a year are allowed to participate.

(LO 6-7) 19. Which one of the following statements correctly describes the tax implications of a distribution from a Section 401(k), governmental 457, or Section 403(b) plan? Distributions from these plans can be rolled over into a cafeteria plan. Distributions from a 401(k), governmental 457, or 403(b) plan could be transferred into another qualified plan, a 403(b) plan, SEP, IRA, or governmental 457 plan that accounts for such rollovers separately, or directly rolled to a Roth IRA. Distributions from a 403(b) plan cannot be rolled over or transferred to a SEP.

Distributions from a 401(k), governmental 457, or 403(b) plan could be transferred into another qualified plan, a 403(b) plan, SEP, IRA, or governmental 457 plan that accounts for such rollovers separately, or directly rolled to a Roth IRA. Distributions from a 401(k), 457, or 403(b) plan can, under the Pension Protection Act of 2006, be directly rolled over or transferred into a Roth IRA.

(LO 6-7) 20. Which one of the following statements correctly describes a Section 457 plan? Section 457 plans are top-hat plans designed for highly compensated employees of C corporations or partnerships. Section 457 plans are nonqualified deferred compensation plans that may be established by state or local government entities or by Section 501(c)(3) organizations. State and local governments can establish qualified plans similar to Section 401(k) plans, but they are referred to as Section 457 plans.

Section 457 plans are nonqualified deferred compensation plans that may be established by state or local government entities or by Section 501(c)(3) organizations. Section 457 plans can be offered only by state or local governments or Section 501(c)(3) organizations; in a 501(c)(3) organization, they may be offered just to highly paid key executive type of employees, but in state or local governments they can be offered to all employees.

(LO 6-7) 21. David is age 47 and qualifies for a Section 457 plan through his job with the state. David's salary is $37,500. What is the maximum salary deferral that David can contribute to the Section 457 plan in 2016? $5,500 $8,500 $12,500 $18,000

$18,000 The dollar limit applicable to Section 403(b), 457 and 401(k) plans is $18,000 in 2016.

(LO 6-7) 22. Assume that Mike earns $32,000 at his job with the state and qualifies for participation in a Section 457 plan. He also works part-time with a firm that offers a SIMPLE IRA. Mike will be contributing the maximum into the SIMPLE IRA in 2016. How much can Mike contribute to the Section 457 plan? $2,000 $5,500 $18,000

$18,000 Mike could contribute $18,000 to the Section 457 plan in addition to the $12,500 contributed to the SIMPLE plan in 2016. Since the 457 plan is not aggregated with other plans, a participant could contribute $18,000 to a 457 plan and, if also participating in a SIMPLE plan, contribute an additional $12,500 to that plan; or if participating in a 403(b) or 401(k), contribute up to $18,000 to one of those plans.

(LO 6-7) 23. Which of the following statements correctly describes a Section 457 catch-up provision? The final three-year catch-up provision allows all participants of a Section 457 plan to contribute an additional $18,000 during the three years preceding retirement. The other catch-up is for those who have attained age 50. They can increase their deferrals by $6,000 (in 2016) in all but the last three years before retirement. The final three-year catch-up provision allows participants to make contributions up to twice the maximum deferral allowed for a 457 plan. The additional deferral amount is available only from prior unused deferrals and is to make up for those years when deferrals were less than the maximum allowed. The other catch-up is for those who have attained age 50. They can increase their deferrals by $6,000 (in 2016) in all but the last three years before retirement if they use the final three-year catch-up. During the final three years before retirement, a participant in a Section 457 plan could contribute up to the lesser of 100% of compensation, or $53,000. The other catch-up is for those who have attained age 50. They can increase their deferrals by $6,000 (in 2016) in all but the last three years before retirement.

The final three-year catch-up provision allows participants to make contributions up to twice the maximum deferral allowed for a 457 plan. The additional deferral amount is available only from prior unused deferrals and is to make up for those years when deferrals were less than the maximum allowed. The other catch-up is for those who have attained age 50. They can increase their deferrals by $6,000 (in 2016) in all but the last three years before retirement if they use the final three-year catch-up.

(LO 6-7) 24. Which of the following statements describes an advantage that normally accrues to participants in a Section 403(b) plan? Distributions from a Section 403(b) plan can be rolled over directly into a Roth IRA. Participants can always borrow up to $50,000 from the Section 403(b) plan they participate in. Participants receive a tax-deferred growth on their 403(b) stock accounts. Distributions may qualify for 10-year forward averaging for persons born before 1936.

Distributions from a Section 403(b) plan can be rolled over directly into a Roth IRA. Distributions from a Section 403(b) plan can be rolled into a Roth IRA due to the changes included in the Pension Protection Act of 2006.

(LO 6-4) 25. Which one of the following statements correctly identifies who would be considered a retirement plan fiduciary? ERISA's fiduciary standards cover the trustee of a qualified retirement plan. ERISA's fiduciary standards cover those providing legal services to a qualified retirement plan. ERISA does consider investment managers or investment advisers as fiduciaries.

ERISA's fiduciary standards cover the trustee of a qualified retirement plan. ERISA's fiduciary standards cover the trustee and require that the investments of a qualified retirement plan be diversified.

(LO 6-1) 26. Which one of the following types of employees could qualify for a Section 403(b) plan? An employee of the state teachers' retirement system would qualify for participation in a Section 403(b) plan. Politically appointed university regents would qualify for participation in a Section 403(b) plan. State highway department employees would qualify for participation in a Section 403(b) plan. Janitors working for a public school system could qualify for participation in a Section 403(b) plan.

Janitors working for a public school system could qualify for participation in a Section 403(b) plan. Anyone who performs services as an employee for a public school, either directly or indirectly, is eligible to participate in a Section 403(b) plan. This includes principals, teachers, clerical employees, and janitors.

(LO 6-5) 27. Kiersten, a single 24-year-old, works for two unrelated employers: Acme Inc. and Douglas School District. With Acme, she qualifies for a 401(k) plan; she also qualifies for the Douglas School District Section 457 plan. She earns $15,000 from Acme Inc. and $26,000 from Douglas School District. Which one of the following correctly states the amounts that Kiersten can contribute to the two plans in 2016? Kiersten can contribute up to $18,000 in both the Acme 401(k) plan and the Douglas School District 457 plan because the 457 plan is not aggregated with other deferral plans. Kiersten could contribute up to $15,000 in the Acme 401(k) plan and $18,000 in the Douglas School District 457 plan. Kiersten could only contribute a total of $18,000 in both plans, but would be limited to $15,000 in the Acme 401(k) plan. If she contributes $15,000 to the Acme 401(k) plan, she could only put $3,000 into the Douglas School District 457 plan.

Kiersten could contribute up to $15,000 in the Acme 401(k) plan and $18,000 in the Douglas School District 457 plan. The basic limit on elective deferrals with both a 401(k) plan and 457 plan is$18,000in 2016, or 100% of the employee's compensation, whichever is less. The 457 plan is not aggregated with other deferral plans.

(LO 6-4) 28. Plan administrators are not required to send participants a description of survivor benefits. monthly statements of individual account balances. a description of vested benefits to terminated employees. a report of the investment performance of plan assets.

monthly statements of individual account balances. Statements of individual account balances are required to be sent annually to individuals who request them. In practice, however, some plan administrators send such statements quarterly, even if they have not been requested.

(LO 6-1 and LO 6-7) 29. Which one of the following types of employers can offer either a 403(b) plan or a 457(b) plan? Any employer that can offer a Section 403(b) plan could also sponsor a Section 457(b) plan. Churches and qualified church-controlled organizations may offer either or both a Section 403(b) and a Section 457(b) plan. A state university or college could offer either or both a Section 403(b) and a Section 457(b) plan.

A state university or college could offer either or both a Section 403(b) and a Section 457(b) plan. A state university or college could offer either or both a Section 403(b) and a Section 457(b) plan. State and local governments and organizations exempt from federal income tax are eligible to offer Section 457 deferred compensation plans, but churches and church-controlled organizations cannot.

(LO 6-6) 30. Under what circumstances may an employer disregard "leased employees" for purposes of the qualified plan tests? One reason that an employer may disregard "leased employees" for purposes of the qualified plan tests is when they do not make up more than 20% of the employer's non highly compensated employees. Employers must always include "leased employees" for purposes of the qualified plan tests. Employers do not need to include "leased employees" who are covered under the leasing organization's profit sharing plan for purposes of the qualified plan tests.

One reason that an employer may disregard "leased employees" for purposes of the qualified plan tests is when they do not make up more than 20% of the employer's nonhighly compensated employees. The employer may disregard "leased employees" if (1) they do not make up more than 20% of the employer's nonhighly compensated employees, and (2) they are covered by the leasing organization's money purchase pension plan. The plan must provide (a) at least a 10% employer contribution, (b) immediate participation, and (c) 100% immediate vesting.

Retirement: 6 403b Plans and Other Plan Issues Flashcards

(144 cards)