3 - Keogh and Small Employer Plans

Question 1

The following eligibility conditions must be met in order for a Keogh/HR-10 plan to be established:

• Only a sole proprietor (not a _________) or a partnership (not an individual partner) may establish a Keogh plan.
• If an owner-employee wishes to establish and participate in a Keogh plan, he or she must cover all employees who are at least ___ years of age and have ______ of service with the employer. A two-year waiting period can be used if the plan provides 100% ______ after the two-year period.
• Keogh plans must meet the same _______ coverage and ________ requirements as other qualified plans.

Answer 1

• common-law employee
• 21 / one year
• vesting
• nondiscrimination / participation

Question 2

A Keogh plan can be designed as either a ________ or ________ plan.

Answer 2

defined benefit

defined contribution

Question 3

• If a defined benefit Keogh plan is used, the same limit applies as for a defined benefit corporate pension plan; that is, the limit is the lesser of 100% of the average of the participant’s highest ____ consecutive calendar years of earnings or $______ in 2013 (an indexed limit).
• For defined contribution Keogh plans, the maximum annual contribution is the lesser of 100% of the participant’s compensation or $______ in 2013 (an indexed limit). For the self-employed person, defined contribution plan “compensation” is the self-employed person’s “earned income from self-employment” less one-half of the ______ (not to exceed $______ in 2013).

Answer 3

• three
• $205,000
• $51,000
• self-employment tax
• $255,000

Question 4

The owner’s deduction for contributions for himself or herself is based on the owner’s _______________, which takes into account the deduction for one-half the self- employment tax and the deduction for contributions to the plan on the owner’s own behalf.

Answer 4

earned income from self-employment

Question 5

Are loans permitted from:

• Keogh?
• SEP?
• SIMPLE?

Answer 5

• Yes
• No
• No

Question 6

Can the assets in a Keogh plan be rolled over into other tax-deferred retirement savings vehicles?

Answer 6

Yes

Question 7

The SEP must be a formally adopted program having the following characteristics:

1. It must be ______ and must specify the requirements for employee participation. Further, it must specify when the employee makes contributions and how each eligible employee’s contribution will be ______.
2. The employer must make contributions to the SEP for any employee who is at least 21 years of age, has worked for the employer during at least __________, and has received at least $____ in 2013, indexed for cost-of-living increases, in compensation from the employer for the year.
3. Employer contributions may not discriminate in favor of any __________.
4. Employer contributions may be discretionary from year to year. However, the plan document must specify a ___________.
5. Each employee must be ________ in his or her account balance at all times.
6. The program may not restrict the employee’s rights to _______ contributed to his or her SEP at any time
7. The employer may not require that an employee leave some or all of the contributions in the SEP as a condition for receiving ___________.

Answer 7

1. in writing / computed
2. three of the last five years / $550
3. highly compensated employee (HCE)
4. definite allocation formula
5. fully vested
6. withdraw funds
7. future employer contributions

Question 8

For an IRA funded by employer contributions to be treated as a SEP, the employer must contribute to the SEP of each ________. As long as the employee satisfies the criteria mentioned earlier, the employer must make contributions on the employee’s behalf.

Answer 8

eligible employee

Question 9

The maximum contribution limit to a SEP is ____% of income up to $______ in 2013. If the employer contribution to the SEP in any year is less than the normal IRA limit applicable for that year, the employee may contribute the difference up to the allowable applicable annual limit. The employee contribution may be made either to the SEP or to one or more IRAs of the employee’s choice.

Answer 9

25%

$51,000

Question 10

• SEP -

In the case of self-employed individuals (proprietors and partners), the 25% contribution limitation will be on the basis of ________ as that term is defined in the law.

This means that the contribution will be determined with reference to earned income after having subtracted the amount of the contribution and _______. The result is that the 25% contribution limit, as it is applied to these individuals, is ___% of net income before subtracting the amount of the contribution but after subtracting half of the tax.

Answer 10

“earned income”

half of the self-employment tax

20%

Question 11

The employer’s deduction for a SEP contribution may not exceed the actual contribution made to the SEP to the extent that the contributions for each employee do not exceed the 25% and/or ______ limits. If the employer contributes more than the amount deductible, the employer can carry over the excess deduction to succeeding taxable years. A ____% excise tax is applied on nondeductible contributions.

Answer 11

Section 415

10%

Question 12

The following list details the major characteristics of SIMPLE plans:

1. These plans may be created by employers with ____ or fewer employees who received at least $_____ in compensation from the employer in the preceding year.
2. A SIMPLE plan may be established either as an ___ or as a ____ plan.
3. Employees can make elective contributions of up to $_____ per year in 2013 (indexed). Catch-up provisions are available for employees aged ___ and older.
4. Employers make matching contributions or ________ contributions to a SIMPLE plan.
5. Employers have certain __________ requirements to employees.
6. Nonelective contributions are subject to the $________ compensation cap in 2013 (indexed) prescribed by Section 401(a)(17) of the IRC, whereas ________ are not subject to this limitation.
7. An employer electing to create a SIMPLE plan may not maintain another ________ in which contributions were made or benefits accrued for service in the period beginning with the year the SIMPLE plan was created.
8. All contributions to a SIMPLE account are fully vested and _________.
9. To participate in a SIMPLE plan, an employee must have received at least $_______ in compensation in any two prior years from the employer and the employee must be reasonably expected to receive that amount in compensation from the employer during the year.
10. There is no stipulation that a certain number of employees ______ in a SIMPLE plan in order for an employer to offer such a plan.
11. Employers eligible to offer SIMPLE plans are determined on a __________ basis taking businesses under common control and affiliated service groups into consideration.
12. Self-employed individuals may participate in a SIMPLE plan.
13. Certain nonresident aliens and employees covered under a _______ agreement may be excluded from participation.

Answer 12

1. 100 / $5,000
2. IRA / 401(k)
3. $12,000 / 50
4. nonelective
5. notification
6. $255,000 / matching contributions
7. qualified plan
8. nonforfeitable
9. $5,000
10. participate
11. controlled group
12. _____(none)——
13. collective bargaining

Question 13

SIMPLE PLAN

The required employer matching contribution is either made on a dollar-for-dollar basis up to __% of an employee’s compensation for the year, or the employer could elect to match at a rate lower than 3% but not lower than __%. (This option to match below is available to SIMPLE IRAs but not to ________.)

Answer 13

3%

1%

SIMPLE 401(k)s

Question 14

SIMPLE PLAN

Instead of making a matching contribution, an employer can opt to make a nonelective contribution of __% of compensation for each eligible employee who earned at least $_____ during the year.

Answer 14

2%

$5,000

Question 15

SIMPLE PLAN

To apply the lower matching percentage, employers must notify employees of their intent to apply the lower match within a reasonable time before the ___-day ________ in which employees determine whether they will participate in the plan. If opting to make nonelective contributions, the employer is again required to advise eligible employees of its intention within a reasonable time before employees decide whether to participate in the plan.

Answer 15

60

election period

Question 16

Participants in a SIMPLE IRA who take a distribution before age ____ are subject to the 10% penalty tax on early withdrawals. Employees withdrawing contributions during the two-year period beginning on the date of initial participation are subject to a ___% _______ tax. A distribution from a SIMPLE account may be rolled into an IRA without penalty if the individual has participated in the simple account for ____ years.

Answer 16

• 591⁄2
• 25%
• penalty
• two

Question 17

Employers face the following administrative issues when maintaining a SIMPLE plan:

1. Employers are required to advise employees of their right to make ________ contributions under the plan and of the contribution alternative if elected by the employer.
2. Notification to employees must include a copy of the ___________ prepared by the plan trustee for the employer. This must be provided to the employees before the period in which an employee makes a plan election.
3. Employers must submit employee elective deferrals to their financial institution no later than ____ days after the last day of the month for which the contributions were made.
4. Employer matching contributions are due for deposit by the date that ________ is due, including extensions.
5. An employer makes contributions on behalf of employees to a ____________ or issuer.
6. Plan participants must be notified that SIMPLE plan account balances may be _________ to another individual account or annuity.

Answer 17

1. salary reduction
2. summary plan description
3. 30
4. the employer’s tax return
5. designated trustee
6. transferred

Question 18

Employers AVOID certain administrative requirements commonly associated with a qualified plan by offering a SIMPLE plan. The following administrative requirements are avoided by offering a SIMPLE plan:

1. Employers are not required to _______.
2. A SIMPLE 401(k) plan is not subject to the _______ and ______ rules generally applicable to regular 401(k) plans. This exempts them from the _______ and __________ where employer matching contributions are involved.
3. Employers also are relieved of fiduciary liability under the ERISA once a participant or beneficiary exercises _________.

Answer 18

1. file annual reports
2. nondiscrimination / top-heavy …… ADP / ACP
3. control over account assets

Question 19

The SIMPLE plan trustee bears certain administrative requirements:

• The trustee must annually provide the employer maintaining the plan with a _______, containing certain required information.
• Each individual participant must be supplied with an ______, detailing account activity and an account balance, within ___ days following the end of the calendar year.
• Trustees must also file a report with the _______. Failure to file any of these documents can result in a _______ penalty until the reporting failure is remedied.

Answer 19

• summary description
• account statement / 30
• secretary of the treasury / $50 a day

Question 20

A _______ plan is simply a 401(k) plan that is offered to a one-person firm, or a two-person firm, usually composed of the owner and her or his spouse that must comply with all of the administrative requirements for 401(k) plans except the filing of ______ annual reports (provided the plan’s assets are $________ or less).

Answer 20

solo 401(k)

5500

$250,000

Question 21

What specific changes by EGTRRA made solo 401(k) plans more attractive for sole proprietors?

• Elective deferrals no longer reduced the ________ for computing employer nonelective contributions.
• Profit-sharing plans used as the underlying base plan in a 401(k) plan could receive an employer nonelective contribution of __% rather than the prior allowable percentage of ___%.
• _________ were increased.
• Employees aged 50 and over could make _____________ to their plans.

Answer 21

• payroll base
• 25% / 15%
• Elective deferral limits
• catch-up elective deferrals

Question 22

if a one-person firm was to hire additional employees, a solo 401(k) plan would likely be viewed as far too expensive because of its generous _____________.

Because a 401(k) plan must be _________, a solo 401(k) plan could not be offered to the owner and his or her spouse without including the other employees.

Answer 22

employer nonelective contributions

nondiscriminatory

Question 23

Under EGTRRA provisions, made permanent by the PPA 2006, small employers with no more than ____ employees receive a tax credit for costs associated with __________.

The credit equals ___% of the costs in connection with _____ or ______ of a new plan.

The credit is limited to $____ annually and may be claimed for qualified plan costs incurred in each of the three years beginning with the tax year in which the plan first becomes effective.

Additionally to encourage the introduction of small employer plans, EGTRRA enacted provisions that exempt a small employer from paying a _______. The law exempts the small employer from fees for any _________ to the Internal Revenue Service with respect to the qualified status of a pension benefit plan that the employer maintains if the request is made within certain timeframes.

Answer 23

• 100
• establishing new retirement plans
• 50%
• creation or maintenance
• $500
• user fee
• determination letter request

Question 24

[SEP]

EGTRRA increased the percentage of compensation allowance for SEPs from 15% of compensation to 25% of compensation beginning in _____. The Section 415 limit was changed by EGTRRA to the lesser of 100% of compensation or $40,000 for 2002. The limit on includable compensation was increased to $200,000 in 2002. Also, the amount allocated or contributed in total by the employer for the employee under a SEP and other qualified pension or profit-sharing plans may not exceed the Section 415 limits. (In 2013 the Section 415 limit had increased to $_____ and the limit on includable compensation to $_______.) In addition, an employee may make a regular contribution to an IRA, and this is not aggregated with the SEP contributions for purposes of the 25% or Section 415 limits.

The top-heavy provisions of the law apply to SEP programs; however, a special provision allows employers to elect to measure aggregate employer contributions, instead of aggregate account balances, to test if the SEP has exceeded the 60% limit.

SEPs cannot permit employees to make ____ since the plans are IRAs.

Answer 24

• 2002
• $51,000 / $255,000
• loans

Question 25

Allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.

Answer 25

A SIMPLE IRA plan (Savings Incentive Match Plan for Employees)

Question 26

A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an ____ set up for each plan participant

Answer 26

IRA