Retirement Planning & Employee Benefits Review Questions Flashcards
Which of the following people would be considered a highly compensated employee for 2019?
- Lucy, a one percent owner whose salary last year was $132,000.
- Drew, a six percent owner whose salary was $48,000 last year.
- Cameron, an officer, who earned $80,000 last year and is the 29th highest paid employee of 96 employees.
- Helen, who earned $130,000 last year and is in the top 20 percent of paid employees.
a) 1 and 4.
b) 1, 2, and 4.
c) 1, 3, and 4.
d) 1, 2, 3, and 4.
b) 1, 2, and 4.
- Lucy and Helen are HC due to compensation being greater than $125,000. Drew is HC because she owns more than five percent of the business. Cameron is not HC because she does not have compensation greater than $125,000.
HC EEs:
Owner EEs
- Either an owner of > 5% for current or prior year, OR
- Compensation in excess of $125,000 for 2019 for prior plan year
Non-Owner EEs
- Compensation in excess of $125,000 for 2019 for prior plan year
Which of the following statements concerning accrued benefits in qualified plans is (are) correct?
- In a defined benefit plan, the participant’s accrued benefit at any point is the participant’s present account balance. The accrual for the specific year is the amount contributed to the plan on the employee’s behalf for that year.
- In a defined contribution plan, the accrued benefit is the benefit earned to date, using current salary and years of service. The accrued benefit earned for the year is the additional benefit that has been earned based upon the current year’s salary and service.
a) 1 only.
b) 2 only.
c) Both 1 and 2.
d) Neither 1 nor 2.
d) Neither 1 nor 2.
- Neither Statement 1 nor Statement 2 is correct because the plan names have been switched. Statement 1 describes a defined CONTRIBUTION plan and Statement 2 describes a defined BENEFIT plan.
In a defined CONTRIBUTION plan , the participant’s accrued benefit at any point is the participant’s present account balance. The accrual for a specific year is the amount contributed to the plan on the employee’s behalf for that year.
In a defined BENEFIT plan, the accrued benefit is the benefit earned to date, using current salary and years of service. The accrued benefit earned for the year is the additional benefit that has been earned based upon the current year’s salary and service.
Snikerdy Corporation owns:
- 95% of the stock of Corporation A,
- 80% of the stock of Corporation B, and
- 75% of the stock of Corporation C.
In addition, Corporation B owns 90% of Corporation D. Unrelated persons own all unaccounted for shares. Snikerdy is the common parent of a parent-subsidiary group consisting of corporations:
a) A only.
b) A and B only.
c) A, B and D only.
d) A, B, C and D.
c) A, B and D only.
- In this example Snikerdy is the common parent of a parent-subsidiary group consisting of Corporation A, B and D. This is because it owns 80% or more of A and B directly. Since B owns 80% of D, it will also be considered in the controlled group.
If a participant’s accrued benefit from a qualified defined benefit pension plan is $2,000 per month, what is the maximum life insurance death benefit coverage that the plan can provide based on the 100-to-1 ratio test?
a) $0.
b) $2,400.
c) $200,000.
d) $240,000.
c) $200,000.
- A qualified pension plan is limited in the amount of term life insurance it is able to purchase with plan assets. The plan must pass either one of two tests, the 25 percent test or the 100 - to - 1 ratio test. Under the 100-to-1 ratio test, the plan can purchase $200,000 ($2,000 x 100) of term life insurance death benefit cover-age.
Jacob is the owner of Office Mart, Inc., and he would like to establish a qualified pension plan. Jacob would like most of the plan’s current contributions to be allocated to his account. He does not want to permit loans, nor does he want Office Mart to bear the investment risk of the plan’s assets. Jacob is 47 and earns $300,000 per year. His employees’ ages are 25, 29, and 32, and they each earn $25,000 per year. Which of the following qualified pension plans would you recommend that Jacob establish?
a) Defined benefit pension plan.
b) Cash balance pension plan.
c) Money purchase pension plan.
d) Defined benefit pension plan using permitted disparity.
c) Money purchase pension plan.
- Because Jacob does not want Office Mart to bear the investment risk of the plan assets, the money purchase pension plan is the option listed that would fulfill his requirements.
Caleb, the 100 percent owner of Caleb’s Car Wash (a sole proprietorship), would like to establish a profit sharing plan. Caleb’s Car Wash’s tax year ends July 31 to coincide with the school year. What is the latest day Caleb can establish and contribute to the plan?
a) Caleb must establish and contribute to the plan by December 31 of the year in which he would like to establish the plan.
b) Caleb must establish the plan by July 31 of the year in which he would like to have the plan and contribute by May 15 of the following year assuming he filed the appropriate extensions.
c) Caleb must establish the plan by July 31 of the year in which he would like to establish the plan and contribute by December 31.
d) Caleb must establish the plan by December 31 of the year in which he would like to establish the plan and contribute to the plan by April 15 of the following year.
b) Caleb must establish the plan by July 31 of the year in which he would like to have the plan and contribute by May 15 of the following year assuming he filed the appropriate extensions.
- Caleb must establish the plan by July 31 of the year in which he would like to have the plan and contribute funds by May 15 (9 1/2 months after year end) the following year assuming he filed all of the appropriate extensions.
Super Skate, the city’s most popular roller skating rink, has a profit sharing plan for their employees. Super Skate has the following employee information: Employee ; Age ; Length of Service
Greg ; 62 ; 14 years
Marsha ; 57 ; 14 years
Jan ; 32 ; 6 months
Peter ; 22 ; 2 years
Cindy ; 19 ; 2 years
Bobby ; 17; 6 months
Mike ; 16 ; 1 year
The plan requires the standard eligibility and the least generous graduated vesting schedule available. The plan is not top heavy. All of the following statements are correct except:
a) Peter and Cindy are 20 percent vested in their benefits.
b) Greg and Marsha became 100 percent vested when they had been employed for six years.
c) Three of the seven people are eligible to participate in the plan.
d) Mike is not eligible for the plan.
a) Peter and Cindy are 20 percent vested in their benefits.
- The standard vesting schedule requires individuals to be 21 years of age and have one year of service before becoming eligible for the plan. Greg, Marsha, and Peter are the only individuals that meet that criteria. The least generous vesting schedules are 3-year cliff and 2-to-6-year graduated vesting. Therefore, Peter is 20 percent vested, and Marsha and Greg became 100 percent vested in the 6th year. Mike is not eligible because he is 16 years old. Cindy is not vested because she is not eligible due to her age.
JMG Company has three employees: Julia, Maria, and Gary. Their compensations are $50,000, $150,000, and $200,000, respectively. JMG is considering establishing a straight 10 percent profit sharing plan or an integrated profit sharing plan using a 10 percent contribution for base compensation and 15.7 percent for excess compensation. Which of the following statements is correct?
a) If the integrated plan is selected, then the total contribution for all employees is $44,799.40
b) The effect of the integrated plan results in an increase in Maria’s contribution of $1,300.
c) If the integrated plan is selected, the base contribution for all employees is $40,000.
d) If the integrated plan is selected, Gary’s total contribution is $31,400.
a) If the integrated plan is selected, then the total contribution for all employees is $44,799.40
Logan owns Airliner, Inc. and sells 100 percent of the corporate stock (all outstanding stock) on January 1 of this year to an ESOP for $5,000,000. His adjusted basis in the stock was $2,400,000. Which of the following is correct?
- If Logan reinvests the $5,000,000 in qualified domestic securities within 18 months, he has a carryover basis of $2,400,000 in the qualified domestic security portfolio and no current capital gain.
- Logan has a long-term capital gain of $2,600,000 reduced by the 20 percent small business credit; there-fore, his gain is $2,080,000 if he does not reinvest in qualified domestic securities within 18 months.
a) 1 only.
b) 2 only.
c) 1 and 2.
d) Neither 1 nor 2.
d) Neither 1 nor 2.
- The $5,000,000 must be reinvested within 12 months, and there is not a 20 percent small business credit. In addition, to qualify for nonrecognition of gain treatment, the Airliner, Inc. stock must have been owned by Logan for at least three years.
Connor is 701⁄2 on April 1 of the current year and must receive a minimum distribution from his qualified plan. The account balance had a value of $423,598 at the end of last year. The distribution period for a 70 year old is 27.4, and for a 71 year old it is 26.5. If Connor takes a $15,000 distribution next April 1st, what is the amount of the minimum distribution tax penalty?
a) $0.
b) $230.
c) $492.
d) $985.
c) $492
- The required minimum distribution for Connor is $15,985 ($423,598 divided by 26.5) because he is 71 years old as of December 31 of the current year. Connor only took a distribution of $15,000, therefore, the minimum distribution penalty (50%) would apply to the $985 balance. Therefore, the minimum distribution penalty is $492 (50% of the $985).
Jose Sequential, age 701⁄2 in October of this year, worked for several companies over his lifetime. He has worked for the following companies (A-E) and still has the following qualified plan account balances at those companies. Company Jose’s Account Balance A $250,000 B $350,000 C $150,000 D $350,000 E $200,000 Jose is currently employed with Company E. What, if any, is his required minimum distribution for the cur-rent year from all plans? Life expectancy tables are 27.4 for age 70 and 26.5 for age 71. a) $0. b) $40,146. c) $41,509. d) $47,445
b) $40,146
- Jose is required to take a minimum distribution for the years in which he is 701⁄2 from each qualified plan, except from his current employer ($1,100,000 27.4 = $40,146). He can delay the payment until April 1 of next year, but the question asks for the distribution required for the current year
Ella, age 70 on February 2, YR4, had the following account balances in a qualified retirement plan. 12/31/YR1 $300,000 12/31/YR2 $350,000 12/31/YR3 $500,000 12/31/YR4 $478,000 12/31/YR5 $519,000 12/31/YR6 $600,000 Assuming that Ella is retired and has never taken a distribution prior to YR5, what is the total amount of minimum distribution required in YR5? Life expectancy factors according to the uniform life table are 27.4 for a 70 year old and 26.5 for a 71 year old. a) $18,037. b) $18,248. c) $35,597. d) $36,286
d) $36,286
- For YR4, look back to YR3: $500,000 / 27.4 = $18,248
- For YR5, look back to YR4: $478,000 / 26.5 = $18,038
- $18,248 + $18,038 = $36,286
Which of the following is true regarding QDROs?
a) The court determines how the retirement plan will satisfy the QDRO (i.e., split accounts, separate interest). b) In order for a QDRO to be valid, the order must be filed on Form 2932-QDRO provided by ERISA.
c) All QDRO distributions are charged a 10% early withdrawal penalty.
d) A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient’s IRA or qualified plan
c) All QDRO distributions are charged a 10% early withdrawal penalty.
- The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is required. Form 2932-QDRO is not a real form. QDRO distributions may be subject to the 10% early withdrawal penalty if the distribution is not deposited into the recipient’s IRA or qualified plan.
Investment portfolio risk is generally borne by the participant/employee in all of the listed qualified plans, except:
- Defined benefit pension plan.
- Cash balance pension plan.
- 401(k) plan.
- Profit sharing plan.
a) 1 and 2.
b) 2 and 3.
c) 3 and 4.
d) 1, 3, and 4.
a) 1 and 2.
- In Defined benefit and Cash balance pension plans, the employer bears all of the investment risk.
A distress termination of a qualified retirement plan occurs when:
- The PBGC initiates a termination because the plan was determined to be unable to pay benefits from the plan.
- An employer is in financial difficulty and is unable to continue with the plan financially. Generally, this occurs when the company has filed for bankruptcy, either Chapter 7 liquidation or Chapter 11 reorganization.
- The employer has sufficient assets to pay all benefits vested at the time, but is distressed about it.
- When the PBGC notifies the employer that it wishes to change the plan due to the increasing unfunded risk.
a) 2 only.
b) 1 and 2.
c) 1, 2, and 3.
d) 1, 2, and 4.
a) 2 only.
- Statement 2 is the definition of a distress termination. Statement 3 is standard termination. Statement 1 describes an involuntary termination. Statement 4 is simply false.
Nathan, age 46, is a self-employed financial planner and has Schedule C income from self-employment of $56,000. He has failed to save for retirement until now. Therefore, he would like to make the maximum contribution to his profit sharing plan. How much can he contribute to his profit sharing plan account?
a) $9,486.
b) $10,409.
c) $11,200.
d) $14,000.
b) $10,409.
$56,000 schedule c net income -3,956 (less 56,000 x .9235 x .0765) $52,044 net self-employment income x 0.20 (0.25 / 1.25) $10,409
Which statements are correct regarding penalties associated with IRA accounts?
- Generally, distributions made prior to 591⁄2 are subject to the 10% premature distribution penalty.
- There is a 50% excise tax on a required minimum distribution not made by April 1 of the year following the year in which age 701⁄2 is attained.
a) 1 only.
b) 2 only.
c) 1 and 2.
d) Neither 1 nor 2.
c) 1 and 2.
- Statements 1 and 2 are correct.
Lauren, who was divorced in 2015 and is age 55, received taxable alimony of $50,000 in 2019. In addition, she received $1,800 in earnings from a part-time job. Lauren is not covered by a qualified plan. What was the maximum deductible IRA contribution that Lauren could have made for 2019?
a) $1,800.
b) $2,800.
c) $6,000.
d) $7,000
d) $7,000
- The deductible IRA contribution limit is $6,000 for 2019. The additional catch-up amount, for 50 or older, is $1,000 for 2019. Alimony counts as earned income for IRA purposes. She is not covered by a qualified plan and, therefore, is not subject to AGI phaseouts. Therefore, the total (for divorce prior to 12/31/2018 - TCJA 2017) is $7,000 for 2019.
Ashley (age 55) is single, divorced in 2016, and has received the following items of income this year: Pension annuity income from QDRO $21,000 Interest and dividends $5,000 Alimony $1,000 W-2 Income $1,200 What is the most that Ashley can contribute to a Roth IRA for 2019? a) $1,200. b) $2,200. c) $6,000. d) \$\$7,000.
b) $2,200.
- Contributions to Roth IRAs, as well as traditional IRAs, are limited to the lesser of earned income or $6,000 for 2019. Ashley has earned income of $2,200 from the alimony (for a divorce prior to 12/31/2018) and W-2 income she received. Thus, she is limited to a contribution of $2,200. The other $26,000 of income is not earned income and, therefore, is unavailable for contributions to any IRA.
- Note: An additional catch-up contribution of $1,000 for 2019 is permitted for individuals who have attained age 50 by the close of the tax year. Her total remains at $2,200 because that is all the earned income she has.
Which of the following statements is/are correct regarding SEP contributions made by an employer?
- Contributions are subject to FICA and FUTA.
- Contributions are currently excludable from employee-participant’s gross income.
- Contributions are capped at $19,000 for 2019.
a) 1 only.
b) 2 only
c) 1 and 2.
d) 1, 2, and 3.
b) 2 only
- Statement 2 is the only correct response. Statements 1 and 3 are incorrect. Employer contributions to a SEP are not subject to FICA and FUTA. The 401(k) elective deferral limit and the SARSEP deductible limits are $19,000 for 2019. The SEP limit is 25% of covered compensation up to $56,000 for 2019.
- Note: The maximum compensation that may be taken into account in 2019 for purposes of SEP contributions is $280,000. Therefore, the maximum amount that can be contributed to a SEP in 2019 is $56,000 (25% x $280,000, limited to $56,000).
A SEP is not a qualified plan and is not subject to all of the qualified plan rules; however, it is subject to many of the same rules. Which of the following are true statements?
- SEPs and qualified plans have the same funding deadlines.
- The contribution limit for SEPs and qualified plans (defined contribution) is $56,000 for the year 2019.
- SEPs and qualified plans have the same ERISA protection from creditors.
- SEPs and qualified plans have different nondiscriminatory and top-heavy rules.
a) 1 only.
b) 1 and 2.
c) 2 and 4.
d) 1, 2, 3, and 4.
b) 1 and 2.
- SEPs and qualified plans can be funded as late as the due date of the return plus extensions. The maximum contribution for an individual to a SEP is $56,000 for 2019 ($280,000 maximum compensation x 25%, limited to $56,000). Thus, Statements 1 and 2 are correct. Qualified plans are protected under ERISA. IRAs and SEPs do not share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules
Emily, age 62, single, and retired, receives a defined benefit pension annuity of $1,200 per month from Greene Corporation. She is currently working part-time for Jake’s Kitchen Design and will be paid $18,000 this year (2019). Jake’s Kitchen Design has a 401(k) plan, but Emily has made no contribution to the plan, has not been allocated any forfeitures, and Jake will not contribute this year. Can Emily contribute to a traditional IRA or a Roth IRA for the year, and what is the maximum contribution?
a) $6,000 to a traditional IRA or $6,000 to a Roth IRA.
b) $0 to a traditional IRA or $7,000 to a Roth IRA.
c) $7,000 to a traditional IRA or $0 to a Roth IRA.
d) $7,000 to a traditional IRA or $7,000 to a Roth IRA
d) $7,000 to a traditional IRA or $7,000 to a Roth IRA
- Emily has earned income and is 50 or older. She is not an active participant in a retirement plan and even if she were, she is below the income limits.
Kate, age 42, earns $300,000 annually as an employee for Austin, Inc. Her employer sponsors a SIMPLE retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to 3% of covered compensation. What is the maximum contribution (employer and employee) that can be made to Kate’s SIMPLE account in 2019?
a) $13,000.
b) $21,400.
c) $22,000.
d) $56,000.
c) $22,000.
- The maximum total contribution is $22,000. ($13,000 maximum employee contribution for 2019 + $9,000 employer match). The maximum employee contribution for 2019 is $13,000. The employer makes matching contributions up to 3% of compensation (SIMPLE maximum). Therefore, the employer can make a contribution of up to $9,000 ($300,000 compensation x 3%). Compensation is not limited with the matching contribution, only the non-elective contribution
Sawyer, age 25, works for Island Horticulture. Island Horticulture adopted a SIMPLE plan 6 months ago. Sawyer made an elective deferral contribution to the plan of $8,000, and Island Horticulture made a matching contribution of $2,400. Which of the following statements is/are correct?
- Sawyer can withdraw his entire account balance without terminating employment.
- Sawyer can roll his SIMPLE IRA into his traditional IRA upon terminating employment.
- Sawyer will be subject to ordinary income taxes on withdrawals from the SIMPLE.
- Sawyer may be subject to a 25% early withdrawal penalty on amounts withdrawn from the SIMPLE.
a) 1 and 2.
b) 1 and 3.
c) 2, 3, and 4.
d) 1, 3, and 4.
d) 1, 3, and 4.
- Statement 1 is correct. SIMPLEs must provide 100% immediate vesting of employer contributions. The entire balance is available for withdrawal. Statement 2 is incorrect. A SIMPLE IRA cannot be rolled into a traditional IRA until the participant has been in the SIMPLE IRA for two years. Tyler has only been in the SIMPLE for 6 months. Statement 3 is correct. The entire withdrawal will be subject to ordinary income tax in the year of withdrawal. Statement 4 is correct because the early withdrawal penalty for a SIMPLE is 25% for withdrawals occurring within the first two years of participation.
Which of the following statements is/are correct regarding TSAs and 457 deferred compensation plans? 1. Both plans require contracts between an employer and an employee.
- Participation in either a TSA or a 457 plan will cause an individual to be considered an “active participant” for purposes of phasing out the deductibility of traditional IRA contributions.
- Both plans allow 10-year forward averaging tax treatment for lump-sum distributions.
- Both plans must meet minimum distribution requirements that apply to qualified plans.
a) 1 only.
b) 1 and 4.
c) 2, 3, and - d) 1, 2, and 4
b) 1 and 4.
- Statements 1 and 4 are correct. Statement 2 is incorrect because a 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an “active participant.” Statement 3 is incorrect because 10-year forward averaging is not permitted from either plan.
Which of the following are permitted investments in a 403(b) TSA (TDA) plan?
- An annuity contract from an insurance company.
- An international gold stock mutual fund.
- A self-directed brokerage account consisting solely of US stocks, bonds and mutual funds.
a) 1 only.
b) 2 only.
c) 1 and 2.
d) 1, 2, and 3.
c) 1 and 2.
- TSA (TDA) funds can only invest in annuity contracts (Statement 1) and mutual funds (Statement 2). No self-directed brokerage accounts are permitted.
What is the maximum catch-up for 2019 under the 457(b) plan “Final 3-Year” rule?
a) $3,000.
b) $6,000.
c) $19,000.
d) $37,000.
c) $19,000.
- The final 3-year catch-up is $19,000 for 2019.
Which of the following is false regarding a deferred compensation plan that is funded using a rabbi trust?
- Participants have security against the employer’s unwillingness to pay.
- Rabbi trusts provide the participant with security against employer bankruptcy.
- Rabbi trusts provide tax deferral for participants.
- Rabbi trusts provide the employer with a current tax deduction.
a) None, they are all true.
b) 2 and 4.
c) 1, 2, and 4.
d) 1, 2, 3, and 4.
b) 2 and 4.
- Rabbi trusts do not provide security against employer bankruptcy or a current tax deduction for the employer.
Which of the following is true regarding employer contributions to secular trusts for employee-participants of a non-qualified deferred compensation agreement?
- Participants have security against an employer’s unwillingness to pay at termination.
- Participants have security against an employer’s bankruptcy.
- Secular trusts provide tax deferral for employees until distribution.
- Secular trusts provide employers with a current income tax deduction.
a) 3 only.
b) 1 and 2.
c) 1, 2, and 4.
d) 1, 2, 3, and 4.
c) 1, 2, and 4.
- Secular trusts are similar to rabbi trusts except that participants do not have a substantial risk of forfeiture and thus, do not provide the employee with tax deferral. Secular trusts provide the employer with a current income tax deduction for contributions. Secular trusts protect the participant from employer unwillingness to pay because they are funded, and they protect from bankruptcy because there is no risk of forfeiture.
Roger receives stock options (ISOs) with an exercise price of $18 when the stock is trading at $18. Roger exercises these options two years after the date of the grant when the stock price is $39 per share. Which of the following statements is correct?
a) Upon exercise Roger will have no regular income for tax purposes.
b) Roger will have W-2 income of $21 per share upon exercise.
c) Roger will have $18 of AMT income upon exercise.
d) Roger’s adjusted basis for regular income tax will be $39 at exercise.
a) Upon exercise Roger will have no regular income for tax purposes.
- Roger does not have income at the date of exercise. Roger’s adjusted basis will be $18. The AMT will be the difference between the fair market value and the exercise price ($39 - $18 = $21).
Which of the following are characteristics of a phantom stock plan?
- Benefits are paid in cash.
- There is no equity dilution from additional shares being issued.
a) 1 only.
b) 2 only.
c) 1 and 2.
d) Neither 1 nor 2.
c) 1 and 2.
- The employee does not actually receive stock in a phantom plan. Instead, the employee receives credits for the stock and the benefits are later paid in cash.
ABC has an Employee Stock Purchase Plan (ESPP). Which statements regarding an ESPP are correct?
- The price may be as low as 85% of the stock value.
- When an employee sells stock at a gain in a qualifying disposition, all of the gain will be capital gain.
- There is an annual limit of $25,000 per employee.
a) 1 only.
b) 1 and 2.
c) 1 and 3.
d) 2 and 3.
c) 1 and 3.
- Statement 2 is incorrect because only the gain in excess of the W-2 income will be capital gain.
Devon was awarded 1,000 shares of restricted stock of B Corp at a time when the stock price was $14. Assume Devon properly makes an 83(b) election at the date of the award. The stock vests 2 years later at a price of $12 and Devon sells it then. What are Devon’s tax consequences in the year of sale?
a) Devon has W-2 income of $12,000.
b) Devon has a long-term capital loss of $2,000.
c) Devon has W-2 income of $14,000.
d) Devon has a $12,000 long-term capital gain.
b) Devon has a long-term capital loss of $2,000.
- In the year of sale, Devon will have a long-term capital loss of $2,000 ($14,000 - $12,000) because his right to the stock vested. Losses are permitted when 83(b) is elected after the right to the stock has vested.
Marni received 1,000 SARs at $22, the current trading price of Clippers, Inc., her employer. If Marni exercises the SARs three years after the grant and Clipper’s stock is $34 per share, which of the following statements is true?
a) Marni will have an adjusted basis of $22,000 in the Clippers, Inc. stock.
b) Marni will have W-2 income equal to $12,000.
c) Marni will have long-term capital gain of $12,000.
d) Marni will have ordinary income equal to $22,000.
b) Marni will have W-2 income equal to $12,000.
- At the exercise of a SAR, the employee receives the difference between the fair market value and the exercise price as W-2 income. Thus, Marni has W-2 income equal to $12,000 [($34 - $22) x 1,000].
Coldstone Company allows a 25% discount to all nonofficer employees. Officers are allowed a 30% dis-count on company products. Coldstone’s gross profit percent is 35%. Which of the following is true?
a) An officer who takes a 30% discount must include the extra 5% (30%-25%) in his gross income.
b) Any discounts taken by any employee is includable in the employee’s gross income because the plan is discriminatory.
c) All discounts taken by officers (30%) are includable in their gross income because the plan is discriminatory.
d) None of the discounts taken by any employee are includable in their gross income because the discount, in all cases, is less than the company’s gross profit percentage.
c) All discounts taken by officers (30%) are includable in their gross income because the plan is discriminatory.
- The plan is discriminatory to non-highly compensated employees; therefore, all discounts actually taken by officers are includable in the officers’ income, not just the excess of what is available to the nonofficers. Any discount taken by a nonofficer would be excluded from the employee’s gross income.
Juliet is married to Jack and they have one child Angela, age 14, who is in the 6th grade. Angela is a difficult child and she is cared for in the afternoon by the Sisters of Reformation, a group of Catholic nuns. Juliet pays $6,000 per year for the child care. Juliet’s company has a dependent care assistance program. If Juliet makes the maximum use of the dependent care assistance program, how much can she exclude from her income if she files a joint return with Jack?
a) $0.
b) $2,500.
c) $5,000.
d) $6,000.
a) $0.
- Angela is over 13 years old and, therefore, does not qualify for the dependent care assistance program.
Which of the following is true regarding qualified incentive stock options?
I. No taxable income will be recognized by the employee when the qualified option is granted or exercised.
II. The income from sale of the qualified option will always be taxed as capital gains when the stock is sold.
III. The income from sale of the qualified option will be taxed as ordinary income regardless of when the stock is sold.
IV. The employer will not be able to deduct the bargain element of the option as an expense under any circumstance.
V. For favorable tax treatment the option must be held two years and the stock for one year after exercise.
II and IV only.
I and V only.
III only.
I, II and V only.
I and V only.
- In Statement “II,” be careful of “always”! In Statement “III,” if held longer than one year, they receive capital gains treatment. In Statement “IV,” under most circumstances, the bargain element is deductible. There are exceptions when certain qualifications have not been met for deductibility, such as time employed, time to exercise in excess of rules, etc.
Eric works for Carpets, Inc. Carpets, Inc issued him both ISOs and NQSOs during the current year. Which of the following would be the most compelling reason why they might issue both ISOs and NQSOs?
They want to issue over $80,000 in options that are exercisable in the same year.
The NQSOs and ISOs are exercisable in different years.
The company wants to provide the NQSOs to assist the individual in purchasing the ISOs.
Since they are virtually the same there is no compelling reason to issue both in the same year.
The company wants to provide the NQSOs to assist the individual in purchasing the ISOs.
- When both ISOs and NQSOs are available in the same year the individual can exercise and sell the unfavored NQSOs to generate enough cash to purchase and hold the favored ISOs. It would also be valuable to have both if they issued over $100,000 in options exercisable in the same year because there is a $100,000 limit on ISOs.
David is awarded an immediately vested, non-qualified stock option for 1,000 shares of company stock with an exercise price of $35 per share while the stock price is currently $33 per share. What are the tax ramifications, if any at the date of the grant?
$0
The gain between exercise and actual price of $2,000 is immediately taxable.
The awarded option price value of $33,000 will be immediately taxable.
Because these are unrealized gains, neither the option value nor the gain are taxable until the stock is finally sold.
$0
- In the case of NQS Options, the option is not taxed at the grant if the exercise price is equal to or greater than the fair market value of the stock.
Which of the following statements concerning cash balance pension plans is correct?
The cash balance plan is a defined benefit plan because the annual contribution is defined by the plan as a percentage of employee compensation.
The cash balance plan provides a guaranteed annual investment return to participant’s account balances that can be fixed or variable and is 100% guaranteed by the Pension Benefit Guarantee Corporation.
The cash balance plan uses the same vesting schedules as traditional defined benefit plans.
The adoption of a cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand than a traditional defined benefit plan, and as a plan that has more predictable costs associated with its funding.
The adoption of a cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand than a traditional defined benefit plan, and as a plan that has more predictable costs associated with its funding.
- Cash balance plans are defined benefit plans due to the guaranteed investment returns and benefit formula, not simply a contribution amount. While cash balance plans provide guaranteed rates of return, they are not 100% guaranteed by the PBGC (PBGC has coverage limits). Cash balance plans use 3-year cliff vesting only. Choice d is correct.
Abe’s Apples has an integrated defined benefit pension plan. The plan currently funds the plan using a funding formula of Years of Service × Average of Three Highest Years of Compensation × 1.5%. If Geoffrey has been there for 40 years what is the maximum disparity allowed using the excess method?
.75%
5.7%
26.25%
60%
- 25%
- The maximum disparity using the excess method is the lesser of the formula amount (40 years × 1.5%) or 26.25% (35 years × .75%). 35 years and .75% are the maximums that can be used under the excess method. Note: This level of knowledge is probably not tested on a regular basis, however, because it is part of the board’s topic list this question was added to ensure that you could answer it if it came up on the test.
WestN, Inc. sponsors a 401(k) profit sharing plan with a 50% match. In the current year, the company contributed 20% of each employee’s compensation to the profit sharing plan in addition to the match to the 401(k) plan. The company also allocated a forfeiture allocation of $4,000. The ADP of the 401(k) plan for the NHC is 4%. Wade, who is age 45, earns $190,000 and owns 19% of the company stock. If Wade wants to maximize the contributions to the plan, how much will he defer into the 401(k) plan?
$19,000
$11,400
$9,333
$4,667
$9,333
- Wade is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 6% (4% + 2%). Wade is also limited by the 415(c) limit of $56,000. Since the company contributes $42,000 (20% of $190,000 + $4,000 of forfeiture allocations), he only has $14,000 to split between the deferral and the match. Thus, he contributes $9,333* and the match is $4,667, which when added to the $42,000 totals $56,000. 6% of his salary of $190,000 is $11,400. However, he cannot defer this amount due to the 415(c) limit.
Spenser is covered under his employer’s top-heavy New Comparability Plan. The plan classifies employees into one of three categories: 1) Owners, 2) Full-time employees, 3) Part-time employees. Assume the IRS has approved the plan and does not consider it to be discriminatory. The employer made a 4% contribution on behalf of all owners, 2% contribution on behalf of all Full-time employees and 1% contribution on behalf of all part time employees. If Spenser currently earns $50,000 per year and is a full-time employee, what is the contribution that should be made for him?
$1,000
$1,500
$18,000
$54,000
$1,500
- For a profit sharing plan the contribution is limited to the lesser of $56,000 (2019) or covered compensation. Since the plan is top heavy, the plan must provide a benefit to all non-key employees of at least 3%, therefore; 50,000 × 3% = $1,500.
Which of the following is not a qualified retirement plan?
ESOP.
401(k) plan.
403(b) plan.
Target benefit plan.
403(b) plan.
- A 403(b) plan is a tax-advantaged plan (tax qualified), not a qualified retirement plan. All of the others are qualified plans subject to ERISA rules.
In determining the allowable annual additions per participant to a defined-contribution pension plan account in the current year, the employer may NOT include:
Compensation exceeding $56,000 (indexed).
Compensation exceeding $280,000.
Compensation exceeding the defined-benefit limitation in effect for that year.
Bonuses.
Compensation exceeding $280,000.
- Option “A” - $56,000 is the maximum contribution. Option “C” - Defined contribution plans do not have defined benefits. Option “D” - Bonuses are includible as compensation if the plan so provides.
Cody is considering establishing a 401(k) for his company. He runs a successful video recording and editing company that employs both younger and older employees. He was told that he should set up a safe harbor type plan, but has read on the Internet that there is the safe harbor 401(k) plan and a 401(k) plan with a qualified automatic contribution arrangement. Which of the following statements accurately describes the similarities or differences between these types of plans?
The safe harbor 401(k) plan has more liberal (better for employees) vesting for employer matching contributions as compared to 401(k) plans with a qualified automatic contribution arrangement.
Both plans provide the same match percentage and the same non-elective contribution percentage.
Employees are required to participate in a 401(k) plan with a qualified automatic contribution arrangement.
Both types of plans eliminate the need for qualified matching contributions, but may require corrective distributions.
The safe harbor 401(k) plan has more liberal (better for employees) vesting for employer matching contributions as compared to 401(k) plans with a qualified automatic contribution arrangement.
- Safe harbor plans require 100% vesting, while 401(k) plans with QACAs require two year 100% vesting. The matching contributions are different for the plans. Employees are not required to participate in either plan. Both plans eliminate the need for ADP testing, which means that they eliminate the need for qualified matching contributions and corrective distributions.
Timothy is covered under his employer’s Defined Benefit Pension Plan. He earns $500,000 per year. The Defined Benefit Plan uses a funding formula of Years of Service × Average of Three Highest Years of Compensation × 2%. He has been with the employer for 25 years. What is the maximum contribution that can be made to the plan on his behalf?
$132,500
$225,000
$280,000
It is indeterminable from the information given.
It is indeterminable from the information given.
- Read the question carefully. The question asks “what is the maximum contribution that can be made.” Remember that for a defined pension plan the contribution must be whatever the actuary determines needs to be made to the plan.
Which of the following statements accurately reflects the overall limits and deductions for employer contributions to qualified plans?
I. An employer’s deduction for contributions to a money purchase pension plan and profit sharing plan is limited to the lesser of 25% of covered payroll or the maximum Section 415 limits permitted for individual account plans.
II. An employer’s deduction for contributions to a defined benefit pension plan and profit sharing plan cannot exceed the lesser of the amount necessary to satisfy the minimum funding standards or 25% of covered payroll.
III. Profit sharing minimum funding standard is the lesser of 25% or the Section 415 limits permitted for individual account plans.
I only.
I and II only.
II and III only.
I, II and III.
I only.
- Statement “II” is incorrect because there is no 25% of covered payroll limitation in a DB plan. Statement “III” is incorrect because there is no minimum funding standard for profit sharing plans.
Lisa, age 35, earns $175,000 per year. Her employer, Reviews Are Us, sponsors a qualified profit sharing 401(k) plan, which is not a Safe Harbor Plan, and allocates all plan forfeitures to remaining participants. If in the current year, Reviews Are Us makes a 20% contribution to all employees and allocates $5,000 of forfeitures to Lisa’s profit sharing plan account, what is the maximum Lisa can defer to the 401(k) plan in 2019 if the ADP of the non-highly employees is 2%?
$7,000
$13,000
$16,000
$19,000
$7,000
- The maximum annual addition to qualified plan accounts is $56,000. If Reviews Are Us contributes $35,000 ($175,000 × 20%) to the profit sharing plan and Lisa receives $5,000 of forfeitures, she may only defer $16,000 ($56,000 - $35,000 - $5,000) before reaching the $56,000 limit (2019). However, she will also be limited by the ADP of the non-highly employees because she is highly compensated (compensation greater than $125,000). If the non-highly employees are deferring 2% then the highly compensated employees can defer 4% (2×2=4). Therefore, she is limited to a deferral of $7,000 ($175,000 × 4%).
How do cash balance plans differ from traditional defined benefit pension plans?
Traditional defined benefit plans are required to offer payment of an employee’s benefit in the form of a series of payments for life while cash balance plans are not.
Traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but the cash balance plan defines the benefit in terms of a stated account balance.
In Cash Benefit Plans, these accounts are often referred to as hypothetical accounts because they do not reflect actual contributions to an account or actual gains and losses allocable to the account, whereas in a Defined Benefit Pension Plan they do.
Pension Plans are available to retirees in a lump sum payment, whereas Cash Balance Plans are not.
Traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but the cash balance plan defines the benefit in terms of a stated account balance.
- Answer “A” is incorrect because Cash Benefit Plans are required to offer payment of an employee’s benefit in the form of a series of payments for life. Answer “C” is incorrect, because neither plan shows actual gains or losses allocable to the account. Answer “D” is incorrect and stated exactly opposite of how it is in fact.
Carol, age 55, earns $200,000 per year. Her employer, Reviews Are Us, sponsors a qualified profit sharing 401(k) plan, which is not a Safe Harbor Plan, and allocates all plan forfeitures to remaining participants. If in the current year, Reviews Are Us makes a 18% contribution to all employees and allocates $7,000 of forfeitures to Carol’s profit sharing plan account, what is the maximum Carol can defer to the 401(k) plan in 2019 if the ADP of the non-highly employees is 1%?
$4,000
$19,000
$10,000
$25,000
$10,000
- The maximum annual addition to qualified plan accounts is $56,000. If Reviews Are Us contributes $36,000 ($200,000 × 18%) to the profit sharing plan and Lisa receives $7,000 of forfeitures, she may only defer $13,000 ($56,000 - $36,000 - $7,000) before reaching the $56,000 limit. However, she will also be limited by the ADP of the non-highly employees because she is highly compensated (compensation greater than $125,000). If the non-highly employees are deferring 1% then the highly compensated employees can defer 2% (1×2=2). Therefore, she is limited to a deferral of $4,000 (200,000 x 2%). Since she is 50 or older she can also defer the catch-up amount of $6,000 which is not subject to the ADP limitation. Therefore, her maximum deferral is $10,000.
Matt is a participant in a profit sharing plan which is integrated with Social Security. The base benefit percentage is 6%. Which of the following statements is/are true?
I, The maximum permitted disparity is 100% of the base benefit level or 5.7%, whichever is lower.
II. The excess benefit percentage can range between 0% and 11.7%.
III. Elective deferrals may be increased in excess of the base income amount.
IV. The plan is considered discriminatory because it gives greater contributions to the HCEs.
I and II only.
I, II and IV only.
II only.
I, II, III and IV.
I and II only.
- His base rate is 6% and the social security maximum disparity is 5.7% for 11.7% as the top of his range.
Statement “III” is incorrect because integration does not affect voluntary deferrals by employees. Statement “IV” is incorrect because, done properly, integration is NOT considered discriminatory.
Which of the following apply to legal requirements for a qualified thrift/savings plan?
Participants must be allowed to direct the investments of their account balances.
Employer contributions are deductible when contributed.
In-service withdrawals are subject to financial need restrictions.
After-tax employee contributions cannot exceed the lesser of 100% of compensation or $56,000.
After-tax employee contributions cannot exceed the lesser of 100% of compensation or $56,000.
- This correctly describes the Section 415(c) limits on maximum contributions permitted by law. Participants do not have to be given the right to direct their investments. Employees make after-tax contributions to a thrift; employers don’t make contributions. Answer “C” is incorrect because only 401(k) plans have statutory hardship withdrawal requirements, not thrift/savings plans.
Generally, which of the following are noncontributory plans?
I. 401(k) and money purchase pension plans . II. 401(k) and thrift plans. III. Thrift plans and ESOPs. IV. Money purchase pension plans and profit sharing plans. IV only. I and II only. III and IV only. I, II, III and IV.
IV only.
- Employers generally contribute to Money Purchase Pension Plans, ESOPs, and Profit Sharing Plans. Employees contribute (thus contributory plans) to 401(k)s and Thrift Plans.
Which of the following statements concerning stock bonus plans and ESOPs is(are) true?
I. They both give employees a stake in the company through stock ownership and allow taxes to be delayed on stock appreciation gains.
II. They both limit availability of retirement funds to employees if an employer’s stock falls drastically in value and create an administrative and cash-flow problem for employers by requiring them to offer a repurchase option (a.k.a. put option) if their stock is not readily tradable on an established market.
I only.
II only.
I and II.
Neither I or II.
I and II.
- Statement “I” lists advantages of choosing stock ownership plans and ESOPs. Statement “II” lists the disadvantages.
Which of the following vesting schedules may a non-top-heavy profit sharing plan use?
I. 2 to 6 year graduated.
II. 3-year cliff.
III. 1 to 4 year graduated.
IV. 3 to 7 year cliff.
I only
II and III only
I, II and III only
I, II, III and IV
I, II and III only
- As a result of the PPA 2006, a profit sharing plan must vest at least as rapidly as a 3-year cliff or 2 to 6 year graduated schedule without regard to the plan’s top-heavy status. The profit sharing plan can follow any vesting schedule that provides a more generous vesting schedule.
Select those statements which accurately reflect characteristics of defined contribution pension plans?
I. Allocation formula which is indefinite.
II. Account value based benefits.
III. Employer contributions from business earnings.
IV. Fixed employer contributions based upon terms of plan.
I and II only.
II and III only.
II and IV only.
I, II and III only.
II and IV only.
- Defined contribution pension plans must have a definite allocation formula based upon salary and/or age or any other qualifying factor. Contributions may be made without regard to company profits and, because it is a pension plan, are fixed by the funding formula and must be made annually.
J.P. is covered under his employer’s Profit Sharing Plan. He currently earns $500,000 per year. The plan is top heavy. The employer made a 10% contribution on behalf of all employees. What is the maximum retirement benefit that can be paid to him?
$24,000
$50,000
$54,000
Cannot be determined by the information given.
Cannot be determined by the information given.
- Read the question carefully. The question asks “what is the maximum retirement benefit that can be paid to him.” Remember that for a profit sharing plan the contribution to an employer is limited to the lesser of $56,000 (2019) or covered compensation however, the actual retirement benefit will be whatever is in the account balance at the time of retirement.
Which one of the following statements is NOT correct?
Profit-sharing plans fall under the broad category of defined contribution plans.
Profit-sharing plans are best suited for companies which have unstable cash flows.
A company which adopts a profit-sharing plan is required to make annual contributions to the plan.
The maximum tax-deductible employer contribution to a profit-sharing plan is 25% of covered compensation.
A company which adopts a profit-sharing plan is required to make annual contributions to the plan.
- The employer is not required to make any particular percentage of profits. Though contributions must be substantial and recurring, the plan concerns itself more with allocation requirements rather than with contributions. As long as contributions are recurring, they need not be made in a year where the employer has not made a profit.
Shane’s Rib Shack has a Target Benefit Plan. They have 10 employees with the following compensations: Employee Compensation
$300,000 $100,000 $75,000 $50,000 $50,000 $50,000 $50,000 $25,000 $25,000 $20,000 Based on the actuarial table that was established at the inception of the plan they should fund the plan with $210,000. What is the maximum deductible contribution that can be made to the plan?
$181,250
$186,250
$195,000
$210,000
$181,250
- Since the plan is a defined contribution plan the maximum deductible contribution is 25% of the total covered compensation. The max covered compensation of all employees is $725,000. Thus the maximum deductible limit is $181,250 ($725,000 × 25%). Remember to limit employee 1 to the $280,000 (2019) covered compensation limit. The actuarial table amount is irrelevant because this a defined contribution plan.
Robin just started at Financial University Network (FUN) and has been encouraged by several of the “old timers” to save part of her salary into the 401(k) plan. She is not yet convinced as she likes to shop. Which of the following statements is accurate regarding 401(k) plans?
A 401(k) plan must allow participants to direct their investments. Deferrals into the 401(k) plan must be contributed by the end of the following calendar quarter into the plan. Employees that join the plan must be provided with a summary plan description. A 401(k) plan is financially safe because it must have an annual audit.
Employees that join the plan must be provided with a summary plan description.
- Answer c is correct as employees must be given a summary plan description, which provides basic information about the operation of the plan. Answer a is not correct as some 401(k) plans may have the asset managed by an investment manager. However, most 401(k) plans will provide for employee self directing of their 401(k) balances. Answer d is not correct as there is no requirement for an annual audit of a 401(k) plan.
An actuary establishes the required funding for a defined benefit pension plan by determining:
The lump sum equivalent of the normal retirement life annuity benefit of each participant.
The amount of annual contributions needed to fund single life annuities for the participants at retirement.
The future value of annual employer contributions until the participant’s normal retirement date, taking an assumed interest rate, the number of compounding periods, and employee attrition into account.
The amount needed for the investment pool to fund period certain annuities for each participant upon retirement.
The amount of annual contributions needed to fund single life annuities for the participants at retirement.
- Statement “A” is incorrect because it deals with a lump sum, NOT annual contributions. Statement “C” is incorrect because DB plans deal with present value calculations, not future values. Statement “D” is incorrect because DB plans deal with life annuities, NOT period certain annuities.
One of your clients wants to know the maximum amount that might be allocated to her 401(k) account in the current year. She expects to earn $80,000. What amount can you tell your client will be the maximum total annual additions which could be made to her account?
$19,000, the employee elective deferral
$20,000, 25% of income
$25,000
$56,000
$56,000
- The section 415 limit is applied to all annual additions. The lesser of 100% of income or $56,000 (2019) is the restriction. This amount includes all company contributions and salary deferral maximums.
Calculate the maximum contribution (both employer and employee elective deferrals) for an employee (age 39) earning $285,000 annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary.
$19,000
$33,600
$52,600
$56,000
$52,600
- For the purposes of this calculation, the compensation exceeding $280,000 is not recognized. The employer is contributing 12% of $280,000 (or $33,600) for the money purchase plan and the employee may contribute up to $19,000 in 2019 to the 401(k) plan. This totals $52,600.
Match the following statement with the type of retirement plan which it most completely describes: “A plan which requires annual employer contributions equal to a formula determined by each participant’s salary” is a…
Profit sharing plan.
Money purchase plan.
SIMPLE IRA.
Defined benefit plan.
Money purchase plan.
- Defined benefit plan and cash balance plan (Answer “D”) contributions are determined by age, as well as salary. Answer “A” doesn’t require annual contributions. Answer “C” has employer contributions determined by the amount of employee deferrals.
