Module 4 Advantaged Plans and Nonqualified Plans Flashcards
Which of these plans may be eligible for a 10-year forward averaging for tax purposes if a qualifying lump-sum distribution is made?
Traditional profit-sharing plan
Simplified employee pension (SEP) plan
Individual retirement account (IRA)
Section 403(b) tax-deferred annuity
A)
I and IV
B)
II and III
C)
I only
D)
I, II, III, and IV
C
Short answer: Has to be from a qualified plan to get 10yr forward averaging.
Only lump-sum distributions from qualified plans may be eligible for 10-year forward averaging. SEP plans, IRAs, and tax-deferred annuities—also known as Section 403(b) plans—are not qualified plans and, therefore, are not eligible for 10-year forward averaging. Remember, to be eligible for 10-year forward averaging, a person must be born before Jan 2, 1936. Thus, only people working into their 80s can today qualify for 10-year forward averaging. Even then, they would have to take a lump-sum distribution to meet another rule to qualify for 10-year forward averaging.
LO 4.1.1
Which of these are characteristics of a Section 403(b) plan (TSA)?
403(b)s and 401(k)s have the same investment options.
Qualifying lump-sum distributions from a TSA are eligible for NUA tax treatment.
Rollovers to IRAs are permitted.
A)
II and III
B)
III only
C)
I and II
D)
I and III
B III only
403(b) - only mutual funds and annuities.
403(b)s and 401(k)s do NOT have the same investment options. Essentially, 403(b)s can only invest in mutual funds and annuities. 403(b)s can also invest in CITs, MEPs, and PEPs, but these are new and are currently very minor. 401(k)s can invest in the employer’s stock. Rollovers are allowable, and NUA tax treatment is not permitted for Section 403(b) plans because a not-for-profit employer does not have employer stock to distribute.
LO 4.3.1
Which of the following plans is a nonqualified deferred compensation plan established by a private, tax- exempt employer, or a state or local government?
A)
Section 457 plan
B)
TSA
C)
SEP plan
D)
SIMPLE
457
Which of these statements regarding basic SIMPLE IRA employer contributions is CORRECT?
A 2% (of employee compensation) nonelective employer contribution can be made for all eligible employees.
A dollar-for-dollar matching contribution up to 3% of compensation can be contributed solely for participating employees who have elected to make contributions.
The employer’s contribution must remain the same for each year the plan is maintained.
The employer must annually communicate its contribution level to employees before the beginning of the employees’ 90-day election period.
A)
I and II
B)
III and IV
C)
I, II, III, and IV
D)
I, II, and III
Statements I and II are correct. An employer can make a 2% nonelective employer contribution in a SIMPLE IRA, where employees eligible to participate receive an employer contribution equal to 2% of their includible compensation (limited to $345,000 in 2024 and subject to cost-of-living adjustments for later years), regardless of whether they make their own contributions. Alternatively, an employer may make a dollar-for-dollar match up to 3% of compensation, where only the participating employees who have elected to make contributions will receive an employer-matching contribution. Each year, the employer can choose which contribution level it will use for the following year’s contributions. The company is required to communicate this information to employees before the beginning of the 60-day election period. SECURE 2.0 added additional options. First, employers are allowed to make additional nonelective contributions for up to 10% of an employee’s compensation with a $5,000 limit on this additional nonelective contribution. Next, employers with 25 or fewer eligible workers (reasonably expected to make at least $5,000 this year and made $5,000 or more in any two preceding years) are allowed to increase their contribution limit for both the regular contribution limit and the age 50+ catch-up contribution by 10%. This is $17,600 in 2024 for the normal contribution limit and $3,850 for the age 50+ catch-up in 2024. Firms with 26-100 workers can also use these increased limits if they increase their normal contributions from a 2% nonelective contribution to a 3% nonelective contribution or increase their match from 3% to 4%. These increased contribution opportunities apply to both types of SIMPLEs (SIMPLE IRAs and SIMPLE 401[k]s). However, this information is only applied in the CFP world if the number of employees is given or there are other indications that the augmented contributions were chosen by the employer. Next, it is not presently known if the 10% increase will be governed by the international agreement called GATT (The General Agreement on Tariffs and Trade) which sets the rules for indexing other retirement numbers like defined benefit plans, defined contribution plans, and IRAs. In all, these augmented contribution opportunities are good things. However, Congress might want to review the definition of the word “simple.” Finally, Congress has placed special emphasis on SIMPLEs as a way to give more workers opportunities to save for their retirement. Currently more than 40% of American workers do not have access to an employer retirement plan.
LO 4.2.1
Which of the following statements regarding plan requirements for SIMPLE IRAs is CORRECT?
To establish a SIMPLE IRA, a business normally cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation).
Assets in SIMPLE IRAs can be invested in life insurance.
A)
II only
B)
I only
C)
Both I and II
D)
Neither I nor II
I only
Statement II is incorrect because SIMPLE IRAs, like SEP plans, are funded with individual retirement accounts, and these assets cannot be invested in life insurance or collectibles.
LO 4.2.1
Are the investment options available to 401(k) and 403(b) plans different in any way?
A)
Yes, because 401(k) plans can only be invested in mutual funds and/or annuity contracts.
B)
Yes, because 403(b) plans are limited to investing in annuity contracts and/or mutual funds.
C)
No, because both a 401(k) and a 403(b) are qualified plans.
D)
No, because both a 401(k) and a 403(b) have unlimited access to all the same investment products.
B
A 403(b) plan is essentially limited to investing in mutual funds and/or annuity contracts. Conversely, the Internal Revenue Code does not specify which instruments 401(k) funds can be invested in. A 403(b) plan is technically not a qualified plan under the Employee Retirement Income Security Act of 1974 (ERISA). 403(b)s are also allowed to invest in CITs (collective investment trusts), MEPs (Multi-Employer Trust) or PEPs (Pooled Employer Plans). However, these are new, and there are some administrative questions with them. Thus, they do not really exist in the CFP world unless specifically mentioned. The major point is that 403(b)s restrict the investment options in ways that 401(k) do not. For example, a 401(k) can allow investment in the employer’s stock. 403(b)s cannot invest in the employer’s stock because there is no stock in a not-for-profit organization.
LO 4.3.1
Which of these statements is CORRECT in describing a SIMPLE IRA?
A)
Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% penalty tax.
B)
Employee deferrals are limited to $16,000, and employer contributions are limited to 15% of compensation in 2024.
C)
To offer a SIMPLE IRA, an employer can have no more than 50 employees earning a minimum of $5,000.
D)
SIMPLE IRAs may include loan provisions for participants who have satisfied a two-year participation period.
A
Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% early withdrawal penalty.
LO 4.2.1
Kiersten, a single 44-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. She received a large inheritance and would like to save as much as possible for her retirement through her employers. Which one of these is CORRECT in stating the amounts that Kiersten could contribute to the two plans in 2024?
A)
Kiersten can contribute up to $23,000 into both the Acme 401(k) plan and the Douglas School District 457 plan because the 457 plan is not aggregated with other deferral plans.
B)
Kiersten could contribute up to $15,000 in the Acme 401(k) plan and $23,000 in the Douglas School District 457 plan.
C)
Kiersten could contribute double the normal 457 plan contribution and also the age 50 catch-up if she was at least 50 years old.
D)
Kiersten could only contribute a total of $23,000 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 $8,000 into the Douglas School District 457 plan.
B
The basic limit on elective deferrals with both a 401(k) plan and 457 plan is $23,000 in 2024, or 100% of the employee’s compensation, whichever is less. In this case, she only makes $15,000 with Acme, so that is the limit for Acme’s 401(k). The 457 plan is not aggregated with other deferral plans. No one can ever do both the age 50 catch-up and also the double the basis limit to a 457 plan.
LO 4.4.1
Sharon Bender, age 52, has been a teacher in the Lammer County School District for 18 years. Recently, she inherited a large sum of money and wants to minimize her income tax. What is her maximum 403(b) deferral in 2024?
A)
$30,500
B)
$23,000
C)
$33,500
D)
$69,000
c
Sharon can defer the basic $23,000 allowed in 2024, plus $7,500 for the age 50 catch-up and $3,000 for the long service catch-up (15 years of service or more). The $3,000 long service contribution has a life-time maximum of $15,000.
LO 4.3.1
For purposes of determining active participation status in testing for the deductibility of IRA contributions for a single individual, participation in which of these is NOT considered?
A)
An ESOP
B)
A SEP plan
C)
A governmental Section 457 plan
D)
A Section 403(b) plan
457
A Section 457 deferred compensation plan (typically implemented by state and/or local governments) is not considered in determining active participation status for the deductibility of IRA contributions. Governmental 457 plans are technically deferred comp plans, but they are used generally as retirement plans. So saying contributions to a 457 plan do not make the person an active participant for IRA deductibility purposes is essentially a highly testable rule they made up. Another quirk with 457 plans is that contributions to a 457 plan do not decrease the amount a worker can contribute to another employer retirement plan. Finally, the annual contribution limit for a 457 plan includes both the employer and worker contributions. Thus, if an employer contributed $2,000 to a 457 plan, the worker’s maximum contribution to the other plan would be decreased $2,000.
LO 4.3.2
Which of these statements describing how qualified plans are similar to simplified employee pension (SEP) plans and savings incentive match plans for employees (SIMPLEs) is (are) CORRECT?
Qualified plans, SEP plans, and SIMPLEs all provide for deferral of income taxation.
Plan sponsors of qualified plans, SEP plans, and SIMPLEs make contributions to either a trust, an insurance contract, or an individual retirement account depending on the type of plan.
A)
Both I and II
B)
Neither I nor II
C)
I only
D)
II only
A
The answer is both I and II. Deferred compensation is provided in qualified plans, SEP plans, and SIMPLEs. Depending on the type of the plan, the plan sponsors of qualified plans, SEP plans, and SIMPLEs make contributions to either a trust, an insurance contract, or an individual retirement account. Only qualified plans can make contributions to an insurance contract.
LO 4.2.2
Which of these statements is CORRECT in describing requirements that must be met for a plan to be considered a Section 457 plan?
To avoid adverse income tax effects, the agreement must be signed before the start of the month the participant’s services are provided.
Eligible participants include employees of agencies, instrumentalities, and subdivisions of a state as well as certain Section 501 tax-exempt organizations.
The deferral limit for employees younger than age 50 is the lesser of $23,000 in 2024, or 100% of compensation.
A)
I and III
B)
II only
C)
I and II
D)
II and III
D
All of these organizations may establish a Section 457 plan. Deferrals are limited to the lesser of $23,000 in 2024, or 100% of compensation. Statement I is incorrect because the agreement must be signed before the services will be performed. Thus, you can sign a 457 salary deferral agreement any time during the month for services you will perform after the salary reduction agreement is signed. This is an improvement put in place by SECURE 2.0. Previously, you had to sign the salary reduction before the start of a month to defer during that month.
LO 4.3.2
Bland Foods, Inc., wants to establish a retirement benefit for the company’s executives that is separate from its qualified plan. The plan will be unfunded and pay benefits only as needed from the company’s assets. Bland Foods wants to provide the benefits without requiring the executives to reduce their current salary. Which of these types of plans was most likely chosen by Bland Foods, Inc.?
A)
Defined benefit plan
B)
Nonqualified plan
C)
Section 401(k) plan
D)
Stock bonus plan
B
A nonqualified plan would meet all of the company’s objectives. The other choices are all qualified plans and would be subject to the limitations on funding, contributions, and benefits.
LO 4.1.1
Linda works for a Section 501(c)(3) organization, which has a Section 403(b) plan for its employees. Which of these statements regarding a Section 403(b) plan is CORRECT?
A)
Employer contributions are tax-deductible to the organization.
B)
All employers who offer Section 403(b) plans must make a mandatory matching contribution or make a nonelective contribution for all eligible employees.
C)
Because the organization is a nonprofit, employer contributions to the plan are currently taxable to the employees.
D)
Funding in the plan is essentially limited to annuity contracts and/or mutual funds.
D
Funding in a Section 403(b) plan is essentially limited to annuity contracts and/or mutual funds. 403(b)s can also be invested in CITs, but they are new and have some regulatory questions. Employer contributions to the plan are not currently taxable to the employees. Employer contributions to a Section 403(b) plan are permitted but not mandatory. Employer contributions are NOT tax-deductible to the organization. Not-for-profits do not owe income taxes (unless they have UBTI). It is easy to overlook this on a test. Non-profits do not owe income tax. Sole proprietorships and partnerships do not have stock. These things are obvious in the real world but easy to overlook when you are under the pressure of a test.
LO 4.3.1
Harry, age 45, works for a nonprofit organization that has adopted both a Section 403(b) and Section 401(k) plan. If he contributes $9,000 to the Section 403(b) plan in before-tax elective deferrals, how much could Harry contribute to the Section 401(k) plan in 2024?
A)
$30,500
B)
$14,000
C)
$0
D)
$23,000
B
The amount of elective deferrals to a Section 403(b) and Section 401(k) plan are aggregated for a combined maximum. In 2024, this maximum is $23,000 for a participant currently under age 50. Accordingly, Harry may contribute only $14,000 ($23,000 − $9,000) to the Section 401(k) plan. (Note that aggregation of contributions does not apply when a Section 457 plan is used in conjunction with either a Section 401(k) plan or a Section 403(b) plan.)
LO 4.4.1
Shock Limited just established a simplified employee pension (SEP) plan for the benefit of its employees. The company has more than 500 employees, 15% of whom are highly compensated. This year, Shock contributed 6% of each eligible employee’s salary to the SEP plan. Several of the employees of the company are unfamiliar with the provisions of SEP plans and have come to you requesting information. Which of these statements regarding the basic provisions of SEP plans is CORRECT?
Employees can roll money that is distributed from a SEP plan into a different IRA within 60 days without withholding or penalty as long as it is not a required minimum distribution.
Contributions must be made for any employee, age 21 or over, who has performed services for the company in three of the past five years and has earned at least $750 during 2024.
Employer contributions are 100% vested immediately.
A SEP plan may exclude members of unions if the unions have their own retirement plan.
A)
I, II, III, and IV
B)
II, III, and IV
C)
I, III, and IV
D)
I, II, and III
All
George has been participating in his employer’s SIMPLE IRA for one year. He is 45 years old. If he withdraws $1,000 from this plan this year and the withdrawal is not covered by an exception to the penalty tax on premature withdrawals, he will owe a penalty tax of
A)
$0.
B)
$100.
C)
$500.
D)
$250.
D
Regular IRA 10%
Simple within first two years 25%
George will incur a $250 penalty tax on the $1,000 withdrawal. Premature withdrawals made from a SIMPLE IRA within two years of initial participation are subject to an early withdrawal penalty tax of 25%. This is a type of early withdrawal penalty for IRAs. It is like all other IRAs except it is 25% instead of 10%. Once a person reaches age 59½, the withdrawal penalty goes away because that is one of the exceptions for an early withdrawal penalty.
LO 4.2.1
Marsha has questions concerning the Section 403(b) plan at State University. She is interested in increasing her overall retirement plan contributions. She is 52 and has worked for the university for 18 years. Which of the following contributions could she make if she participated in her employer’s Section 403(b) plan?
Elective deferral
Age 50 and over catch-up contributions
Special catch-up contributions
A)
None of these
B)
I only
C)
I and II
D)
I, II, and III
All three
An eligible Section 403(b) plan participant may contribute a regular elective deferral, a $7,500 age 50 and over catch-up contribution, and $3,000 under the special catch-up rules. To be eligible for the $3,000 special catch-up rule, the worker must have 15 years of service with a not-for-profit employer involved in health care, education, or a church plan. These not-for-profit organizations can be remembered as “HER” organizations (healthcare, education, and religion). The 403(b)s for all religions are called “church plans” in the Tax Code.
LO 4.3.1
Joyce has decided to offer a retirement plan to her employees. She has selected a savings incentive match plan for employees (SIMPLE) and is trying to decide between a SIMPLE IRA and a SIMPLE 401(k). All of the following statements apply to both types of SIMPLEs except
there is a 25% penalty for early distributions from a participant’s SIMPLE account within two years of entry into the plan.
Both types of SIMPLEs have unlimited creditor protection.
SIMPLEs are not subject to the top-heavy rules that apply to qualified plans.
employer contributions to a SIMPLE are not subject to payroll taxes (FICA and FUTA).
A)
I only
B)
II and IV
C)
I, III, and IV
D)
II and III
A
True statements:
Both SIMPLE IRA and SIMPLE 401k have unlimited creditor protection
Both SIMPLE IRA and SIMPLE 401k are not subject to top-heavy rules (for qualified plans)
Employer contributions to either are NOT subject to FICA and FUTA (payroll taxes).
False statement corrected:
SIMPLE IRA EWP is 25% within the first two years, and this does not happen with SIMPLE 401k first two years.
Both types of SIMPLEs have unlimited creditor protection. Only early distributions from a SIMPLE IRA within the first two years of initial participation in the plan are subject to the 25% early withdrawal penalty.
LO 4.2.1
What makes the SIMPLE IRA so attractive to business owners?
There is no ADP testing.
There is the ability to defer up to $16,000 (2024) without regard to employee participation.
The plan requires top-heavy testing.
The employer isn’t required to make any contributions to the plan on behalf of employees.
A)
I and II
B)
I, II, and III
C)
III and IV
D)
I, II, III, and IV
A
Statements I and II are correct. SIMPLE IRAs are attractive to business owners due to the ability to defer up to $16,000 (2024) without regard to employee participation. There is no ADP testing and there is no top-heavy testing. The trade-off for these benefits is that the employer is required to make a fully vested contribution by either (1) matching elective deferrals dollar for dollar up to 3% (a “3% match”), or (2) contributing 2% of compensation to all eligible employees, regardless of elective salary deferral (limited to the current compensation cap of $345,000).
If the 3% match is chosen for a SIMPLE IRA, the current compensation cap of $345,000 is disregarded. For example, if the owner made $400,000 and deferred 3%, then the contribution would be $28,000. The owner would defer $16,000 and the match would add another $12,000.
LO 4.2.1
Which of these statements regarding plan requirements for SIMPLE IRAs is false?
A)
To establish a SIMPLE IRA plan, a business cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation).
B)
Unlike traditional IRAs, assets can be invested in life insurance.
C)
SIMPLE IRAs are designed to help small businesses offer retirement plans.
D)
The employer must notify participants that they have a 60-day election period just before the calendar year-end to make a salary deferral election or modify a previous election for the following year.
C
SIMPLE IRAs, like SEP plans, are funded with IRAs. Assets in IRAs cannot be invested in life insurance or collectibles.
LO 4.2.1
Which of the following retirement plans can be adopted only by private, tax-exempt organizations, and state or local governments?
A)
Section 403(b) plans
B)
Section 457 plans
C)
ESOPs
D)
Stock bonus plans
457
A Section 457 plan can be adopted only by private, tax-exempt organizations, and state and local government entities. Section 403(b) plans may be adopted by Section 501(c)(3) nonprofit organizations, and ESOPs and stock bonus plans may be adopted by corporations.
LO 4.3.2
Which of the following statements regarding Section 403(b) plans is CORRECT?
Section 403(b) plans are eligible for rollover treatment to IRAs.
Section 403(b) plans permit investment in individual securities.
Employer-matching contributions to a Section 403(b) plan must be immediately 100% vested to the employee.
A)
II only
B)
I only
C)
I and III
D)
I and II
B
hint: remember the vesting schedules for various plans? 403(b)s can do this too.
Only Statement I is correct. Funding options for a TSA include mutual funds and annuities, not individual securities. Employer-matching contributions may be subject to a vesting schedule.
LO 4.3.1
After 16 years of service, Marla, age 56, has received a promotion to department head at her not-for-profit hospital effective January 2024. Her salary will increase to $120,000 annually. Marla wants to start participating in the Section 403(b) plan and maximize her elective deferral to that plan because of her extra income. The hospital also has a money purchase plan that contributes 6% of each employee’s compensation. How will her proposed deferral amount into the 403(b) affect the employer contribution to the money purchase plan?
A)
Marla cannot participate in the Section 403(b) plan because she is receiving employer contributions in the mandatory money purchase plan.
B)
The employer contributions to the money purchase plan are not included in the annual additions limit.
C)
The employer contribution to the money purchase plan is unaffected by Marla’s elective deferral in the Section 403(b) plan.
D)
The employer cannot make a contribution to the money purchase plan for Marla if she begins participation in the Section 403(b) plan.
C
The maximum amount Marla may defer to the Section 403(b) plan that will affect the annual additions limit for 2024 of $69,000 is $23,000, so the employer contribution to the money purchase plan is unaffected in this case. Her total annual additions will be $40,700: $33,500 into the 403(b) by Maria ($23,000 + $3,000 catch-up for more than 15 years of service to the university + $7,500 for being age 50 or older). Then, her employer will contribute $7,200 into the money purchase plan. Marla may participate in both the money purchase plan and the Section 403(b) plan. The age 50+ catch-up contribution to the Section 403(b) plan are not included in the annual additions limit; however, this does not matter in this case because her total contributions from all sources are less than $69,000 in 2024. In other words, Marla will be contributing $33,500 to her 403(b), but only $26,000 counts toward her $69,000 limit for 2024 because the age 50+ catch-up does not count toward the annual addition limit of $69,000 in 2024. Thus, she has $43,000 left after the 403(b) is accounted for. The $7,200 going into the money purchase is nowhere near maxing her out.
LO 4.4.1
The simplified employee pension (SEP) IRA is one of the easiest plans to set up and maintain. A SEP IRA eliminates which of these?
The administrative complexity found in many retirement plans
Lengthy and detailed government reporting
Numerous nondiscrimination tests
Complicated restrictive contribution formulas associated with many retirement plans
A)
III and IV
B)
I, II, III, and IV
C)
I and II
D)
I, II, and III
All
4.2.2
This year Nicholas, 47, has been employed by both NGL Company and Rice Services, which are unrelated companies. Both companies sponsor Section 401(k) plans. He made $40,000 at each job and qualifies to participate in both plans. His spouse, Kelly, 50, earns $75,000 and wants to invest for retirement in an IRA. She participates in a Section 457 plan and defers $23,000 per year. What is the maximum total of elective deferrals that Nicholas can make to his companies’ retirement plans, and what amount can Kelly contribute to her IRA and deduct for income tax purposes this year?
A)
Nicholas: $23,000, Kelly: $8,000
B)
Nicholas: $69,000, Kelly: $7,000
C)
Nicholas: $37,000, Kelly: $0
D)
Nicholas: $30,500, Kelly: $8,000
A
Here’s the thought process:
MAGI for both is $155,000 (40,000*2 + 75,000)
Looks like it’s too high income for IRA contribution tax free, BUT Section 457 contribution doesn’t make her an active member in a company plan - so the threshold moves up to that 215k-225k threshold.
She’s under that, so she can contribute and deduct, AND she’s 50+, so she can put an extra thousand in.
Her: $8,000.
From there, he’s not over 50, which means he can’t do the catch up of $7500.
The maximum that Nicholas can defer in 2024 is $23,000 under the employee elective deferral rules. The maximum elective deferral is $23,000 for an individual under age 50, regardless of how many related or unrelated employers are involved. Kelly can contribute a maximum of $8,000 to her IRA ($7,000 maximum contribution + an additional catch-up contribution of $1,000 because she is already age 50). Participants in a Section 457 plan are not considered active participants for IRA contribution deductibility. Kelly can contribute and deduct the maximum allowable to her IRA, because the phaseout amounts for deductible contributions for married filing jointly taxpayers with an active participant spouse is $230,000–$240,000 MAGI in 2024.
LO 4.4.1
Linda works for a Section 501(c)(3) organization that sponsors a Section 403(b) plan. Which of these statements regarding a Section 403(b) plan is CORRECT?
A)
A special catch-up provision available for Section 403(b) plan participants allows the elective deferral amount to be doubled in the last three years before the plan’s normal retirement age.
B)
Funding in the plan is essentially limited to annuity contracts or mutual funds.
C)
Because the organization is a nonprofit, employer contributions to the plan are currently taxable to the employees.
D)
403(b)s do not allow a worker to elect to treat employer contributions as Roth contributions.
B
Always remember: 403(b)s are almost always limited to Annuities and Mutual Funds.
Funding for a 403(b)/TSA is essentially limited to annuity contracts and mutual funds. CITs, MEPs, and PEPs are also available due to the SECURE Act, but they are rare. The special catch-up provision that allows double the basic contribution in the last three years before the plan document’s normal retirement date applies to 457 plans, not 403(b)s. Next, people employed by a not-for-profit organization are taxed like everyone else. Ministers are an exception to this, but that is beyond the scope of the CFP program. 403(b)s allow a worker to elect to treat employer contributions as Roth contributions. However, it is always best to wait until you are fully vested before electing to treat employer contributions as Roth contributions. What would happen if you separated from service before being fully vested? You would lose the non-vested money for sure.
LO 4.3.1
Which of these is a disadvantage of a SIMPLE IRA?
A)
No actual deferral percentage (ADP) or actual contribution percentage (ACP) tests
B)
Simple to understand and explain to employees
C)
Lower contribution limits than a 401(k)
D)
Easy to install and administer
C
The answer is lower employee contribution limits than a 401(k). Employees may make an elective deferral as a percentage of compensation up to $16,000 (2024). This is a disadvantage because the maximum employee elective deferral for 401(k) plans is higher. The other statements are advantages of a SIMPLE IRA.
LO 4.2.1
Bonnet Company has 50 employees, of which 40 earned at least $5,000 in the prior year and are expected to earn at least that much in the current year. Bonnet Company does not currently maintain a retirement plan. If Bonnet implements a SIMPLE IRA, which of these statements is false?
A)
All of the employees of Bonnet Company are eligible to participate in the plan.
B)
The effective includible compensation limit for workers younger than age 50 for SIMPLE IRAs is $533,333 for 2024 when the employer elects the 3% match.
C)
Employees may make elective deferrals into the SIMPLE IRA as a percentage of compensation of up to at least $16,000 in 2024.
D)
The includible compensation limit is $345,000 if Bonnet Company decides on the 2% nonelective employer contribution.
A
Only the employees of Bonnet Company who earned at least $5,000 in the prior year and expect to earn at least that amount in the current year are eligible to participate in the plan (40 employees). Employees may make an elective deferral into the SIMPLE IRA as a percentage of compensation of up to at least $16,000 in 2024. Those age 50 and above can add an additional $3,500. The unofficial, but mathematically set, effective includible compensation limit for SIMPLE IRAs for employees under age 50 is $533,333 in 2024 when the employer elects the 3% match ($16,000 ÷ 0.03). The includible compensation limit is $345,000 if Bonnet Company decides on the 2% nonelective employer contribution.
LO 4.2.1
Which of these are characteristics that simplified employee pensions (SEPs) share with qualified profit sharing plans?
Limitation on employer contributions
Application of controlled group rules
Nondiscrimination requirements
Statutory eligibility requirements (age 21, one year of service)
A)
I, II, and III
B)
II, III, and IV
C)
II and IV
D)
I and II
a
SEPs and profit sharing plans are both subject to the 25% limit on deductible employer contributions, the controlled group rules, and nondiscrimination requirements. Eligibility requirements are different for a SEP. With a SEP, the eligibility test is age 21 and at least three of the last five years of service plus earning at least $750 in 2024.
LO 4.2.2
Which of the following employers is eligible to establish a Section 403(b) retirement plan?
A)
An S corporation
B)
A public school system
C)
All hospitals
D)
The federal government
Public school
Which of these statements are true with regard to a simplified employee pension (SEP) plan?
Requires employer contributions on a nondiscriminatory basis
Can be integrated with Social Security
Participation cannot be denied on the basis of age to any employee 21 years of age or older
Imposes mandatory employer contributions
A)
I, II, III, and IV
B)
III and IV
C)
I and II
D)
I, II, and III
d
Only Statement IV is incorrect. A SEP plan is a retirement plan that uses an IRA as the receptacle for employer/employee contributions. The SEP plan is often a good choice for very small companies because of its low cost and ease of administration. All employer contributions to a SEP plan are discretionary. Participation cannot be denied on the basis of age for any employee who earns at least $750 in 2024. However, there is another qualification for coverage with a SEP: The worker must have also worked for the employer for at least three of the preceding five years (including working part-time).
LO 4.2.2
Which of these statements describing how qualified plans are similar to SEP plans and SIMPLEs is CORRECT?
Qualified plans, SEP plans, and SIMPLEs all provide for deferred compensation.
Plan sponsors of qualified plans, SEP plans, and SIMPLEs make contributions to either a trust, an insurance contract, or an individual retirement account depending on the type of plan.
A)
Neither I nor II
B)
I only
C)
II only
D)
Both I and II
d
Statements I and II are both correct. For 2023 and following, SECURE 2.0 allows workers to make Roth contributions to SIMPLEs (both SIMPLE IRAs and SIMPLE 401[k]s). Additionally, workers are allowed to treat employer contributions to many defined contribution plans, such as SEPs and 401(k)s, as Roth contributions.
LO 4.1.1
A simplified employee pension plan (SEP)
A)
provides for mandatory funding.
B)
allows employers to make contributions to one general account.
C)
can be established by any type of employer.
D)
is a very complex retirement plan for employees.
c
A SEP plan is a very simple retirement plan that provides for flexible funding and allows employers to make contributions directly to participants’ individual IRAs and can be established by any type of employer. The percentage contributed by the employer can fluctuate each year as long as it is the same for every employee. Up to 25% of an employee’s covered compensation is allowable for the tax benefit, up to a maximum of $69,000 (2024).
LO 4.2.2
Which of the following statements regarding eligible Section 457 plans is CORRECT?
Rollovers from an eligible Section 457 plan are permitted into Section 401(k) and Section 403(b) plans.
Because an eligible Section 457 plan is a nonqualified deferred compensation plan, participant pretax contributions are not permitted.
A)
Both I and II
B)
Neither I nor II
C)
I only
D)
II only
I only
Statement II is incorrect. Pretax contributions by participants are permitted in an eligible Section 457 plan.
LO 4.3.2
Which of these statements is CORRECT in describing a Section 457 catch-up provision?
A)
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 $7,500 (in 2024) in all but the last three years before retirement if they use the final three-year catch-up.
B)
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 $69,000. The other catch-up is for those who have attained age 50. They can increase their deferrals by $7,500 (in 2024) in all but the last three years before retirement.
C)
During the final three years before the plan document normal retirement date, an employee can double the usual age 50 catch-up of $7,500 in 2024. The point is that the ability to double the normal basic contribution is in the last three ways before the plan document normal retirement age, not the last three years before someone retires. How would someone know for sure when their last three years would be?
D)
The final three-year catch-up provision allows all participants of a Section 457 plan to contribute an additional $23,000 during the three years preceding retirement, regardless of previous contributions. The other catch-up is for those who have attained age 50. They can increase their deferrals by $7,500 (in 2024) in all but the last three years before retirement.
A
B is wrong bc you can’t just plop in 69,000 on your own.
C is wrong bc there’s a straight up question in it.
D is wrong because of this phrase: REGARDLESS OF PREVIOUS CONTRIBUTIONS.
-The ability to double up for the last three years comes from UNUSED contributions. Meaning if you put in $16,000 out of $23,000, you missed out on $7,000. Do that for ten years, and you’re at $70,000 of unused contributions. You can use UP TO THAT AMOUNT of unused contributions to “double up”.
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 $7,500 (in 2024) in all but the last three years before retirement if they are using the final three-year catch-up.
LO 4.3.2
Which of these statements is CORRECT regarding Section 403(b) plans?
It is possible that a Section 403(b) participant age 50 or older with 15 years of service can contribute $33,500 in 2024.
If an employee is eligible for both the age-50-and-older catch-up and the special catch-up, catch-up deferrals will first be considered special catch-up deferrals (until the lifetime maximum is exhausted) before applying a catch-up deferral as an age-50-and-older catch-up deferral.
A)
Both I and II
B)
Neither I nor II
C)
II only
D)
I only
A
I have no idea wtf this is on about.
Both statements are correct. Congress passed the long-service catch-up in 1986, but it did not specify which catch-up provision was used first between the 15 years of service catch-up and the age 50+ catch-up. Thus, the IRS had to make that decision and notice what they chose. Finally, the 15 years of service catch-up was much more substantial in 1986 than today. At 3% inflation, it would take in the high $40,000s today. On the other hand, Congress has raised the contribution limit for all workers over the years.
LO 4.3.1
Which of the following statements regarding both a SEP plan and a qualified profit-sharing plan is CORRECT?
A)
The investment risk is borne by the employer.
B)
Annual employer contributions are mandatory.
C)
Immediate 100% vesting of all contributions is required.
D)
The employer’s tax-deductible contributions are limited to 25% of aggregate covered compensation.
D
SEP plans and qualified profit-sharing plans are both subject to 25% of the aggregate covered compensation limit on annual employer deductions. Neither plan requires an annual mandatory employer contributions, nor is investment risk borne by the employer. Immediate 100% vesting is required in SEP plans but not in profit-sharing plans.
LO 4.2.2
Which of these statements regarding the disadvantages for employees participating in SEP plans is false?
A)
If an employer maintains a SEP plan and a qualified plan, contributions to the SEP plan reduce the amount that may be deducted for contributions to the qualified plan.
B)
The employer bears the investment risk under the plan.
C)
The special rule for calculating deductible contributions on behalf of an owner-employee also applies to a SEP plan.
D)
Employees cannot rely on a SEP plan alone to provide an adequate retirement benefit.
B
The employee bears the investment risk under the plan, which is a disadvantage to the employee. All of the other choices are disadvantages of a SEP plan.
LO 4.2.2
What is the maximum annual amount that may be contributed to a simplified employee pension (SEP) plan on behalf of an employee during 2024?
A)
The lesser of 25% of compensation, or $69,000 annually
B)
$23,000
C)
$16,000
D)
The lesser of 100% of compensation, or $345,000 annually
A
The maximum annual contribution that may be contributed to a SEP plan on behalf of an employee is the lesser of 25% of compensation, or $69,000 annually (2024).
LO 4.2.2
