Ch. 20 Section 401(k)

Question 1

Section 401(k)

Answer 1

profit sharing or stock bonus plan that gives plan participants the option to:
put money in the plan OR
receive the same amount as taxable cash compensation

Question 2

What types of 402k’s are there?

Answer 2

traditional, roth, simple, and safe harbor

Question 3

What are 401k’s sometimes called?

Answer 3

CODA

Question 4

What type of employer cannot use a 401k?

Answer 4

governmental employers

Question 5

What testing is used for elective deferrals?

Answer 5

ADP

Question 6

5 advantages

Answer 6

1. tax deferred savings
2. gives employees a choice
3. employer can contribute and deduct up to 25%
4. employees can contribute via salary reductions
5. in-service withdrawals for certain hardships may be permitted

Question 7

4 disadvantages

Answer 7

1. acct balance may be inadequate at retirement
2. limited employee pre-tax salary reduction
3. costly and complex
4. employee bears risk

Question 8

What is the employee’s annual pre-tax reduction limit?

Answer 8

$16,500 and $5,500 catch up provision for employees 50+

Question 9

When must an employee elect the salary reduction?

Answer 9

BEFORE compensation is earned

Question 10

Participant is ___ vested

Answer 10

100%

Question 11

How is the balance usually distributed?

Answer 11

lump sum at retirement

Question 12

Can they make contributions to a deemed IRA?

Answer 12

yes

Question 13

For lower-income taxpayers, what can contributions count toward?

Answer 13

a nonrefundable savers credit

Question 14

4 ways for employer contributions

Answer 14

1. formula matching
2. discretionary matching
3. pure discretionary or profit sharing
4. formula contributions

Question 15

Formula matching

Answer 15

the employer matches employee salary reductions, either dollar for dollar or under another formula

Question 16

Discretionary matching

Answer 16

the employer has discretion to make a contribution to the plan each year.
The employer contribution is allocated to each account in proportion to the amount elected in salary reduction

Question 17

What kind of 401k plans permit in-service withdrawals for elective deferrals?

Answer 17

traditional, simple, and safe harbor

Question 18

What exceptions allow elective deferrals not have a penalty?

Answer 18

1. retirement, death, or disability
2. termination
3. employee reaches age 59 1/2
4. hardships

Question 19

What two conditions must be met in order for something to be considered a hardship?

Answer 19

1. the distribution must be necessary in light of immediate and heavy financial needs of the employee
2. funds must not be reasonably available from other resources of the employee

Question 20

What withdrawals are exempt from 10% penalty?

Answer 20

1. employee reaches age 59 1/2
2. employee death or disability
3. part of a series of substantially equal periodic pmts following the separation from service
4. is paid to the employee after separation from service and attains age 55
5. does not exceed the amount of medical expenses that are deductible as itemized expenses

Question 21

Is consumer interest deductible for tax purposes?

Answer 21

no