Dalton Quizzes Flashcards
401K Plan distributions are subject to:
- ) Distributions from 401(k) plans are subject to qualified plan distribution rules.
- ) 401(k) plans often allow participants to make in-service withdrawals (with-drawals before termination of employment).
- ) 401(k) accounts based on elective deferrals cannot be distributed before occur-rence of one of the following events: a.) Retirement b.) Death c.) Disability d.) Separation from service with the employer e.) Attainment of age 591⁄2 by the participant f.) Plan termination g.) Hardship
- ) Many preretirement distributions will not only be taxable but may also be sub-ject to the 10% early withdrawal penalty tax.
401k : A hardship withdrawal must meet the following tests.
- ) Financial needs test: The hardship must be due to an immediate and heavy financial need of the participant-employee.
- ) Resources test: The participant must not have other financial sources sufficient to satisfy the need.
- ) In addition to meeting both of these tests, the money may only be withdrawn for the following reasons:
a. ) Payment of unreimbursed medical expenses for employee, spouse, or dependents
b. ) Purchase of a primary residence or repair of casualty loss damages of a pri-mary residence
c. ) Payment for up to the next 12 months of higher education expenses for the participant, the participant’s spouse, or dependent children
d. ) Payment necessary to prevent foreclosure on the participant’s primary residence
e. ) Burial or funeral expenses for an employee’s deceased parents, spouse, children, and dependents
f. ) Safe harbor: Plan may identify a distribution to satisfy a financial need without the requirement that all other employee resources be exhausted if certain requirements are met. - ) When a hardship withdrawal is taken, the participant’s right to make elective deferrals must be suspended. 5.) Finally, if a hardship withdrawal is approved and made, the distribution is tax-able, and a possible 10% penalty applies.
What’s the basis of transferred property from a divorce?
Transfers between divorcing spouses ALWAYS transfer their basis and their holding period, regardless of FMV at date of transfer.
secular trust?
secular trust calls for an irrevocable contribution from the employer to finance promises under a nonqualified plan, and funds held within the trust cannot be reached by the employer’s creditors.
According to ERISA, what are required to be distributed annually to defined benefit plan participants or beneficiaries?
Individual Benefit Statements are not required annually for defined benefit plans. They are however, required at least once every three years. Alternatively, defined benefit plans can satisfy this requierment if at least once each year the administrator provides notice of the availability of the pension benefit statement and the ways to obtain such statement. In addition, the plan administrator of a defined benefit plan must furnish a benefit statement to a participant or beneficiary upon written request, limited to one request during any 12-month period. There are no individual accounts in a defined benefit plan, so a specific listing of invested assets is not required.
Generally, younger entrants are favored in which of the following plans?
Cash Balance and Money Purchase Pension Plans favor younger entrants. Defined Benefit and Target Benefit Pension Plans favor older age entrants with less time to accumulate, and therefore, require higher funding levels.
5112Question 19 of 25Retirement and EE Benefits Quiz 5
Which of the following are common actuarial assumptions used in determining the plan contributions needed to fund the benefits of a defined benefit plan?
I. Investment performance.
II. Employee turnover rate.
III. Salary levels.
IV. Ratio of single to married participants.
A)I, II and III only. Rationale The correct answer is "A." The number of married employees is irrelevant because the benefits paid to a single employee are actuarially equivalent to benefits paid to a married couple. Investment performance has an inverse relationship to contribution levels (higher investment returns = lower contribution requirement.) Employee turnover rate affects contributions due to forfeitures. Salary scale affects funding levels because increases in the salary scale of an employee increases the required funding. B)I and III only. C)II and IV only. D)IV only.
Which retirement plan has loan provision?
- Any type of qualified plan or 403(b) plan may permit loans; however, usually only 401(k) and 403(b) plans have loan provisions.
- All loans must be repaid within five years (except loans used to acquire a principal residence) and include interest. a. Loans for the purpose of acquiring a principal residence must be repaid over a reasonable period. b. The plan document will generally set forth the repayment for these loans. c. Plan loans must be available to all participants on a reasonably equivalent basis and must not be available to highly compensated employees in an amount greater than the amount made available to other employees. 1.) Plan loans are available to participants who are also self-employed owners or partners. d. Plan loans must: 1.) be adequately secured; 2.) be made in accordance with specific plan provisions; and 3.) bear a reasonable (market) rate of interest.
- Generally, loans are limited to one-half the present value of the participant’s nonforfeitable accrued benefit or vested account balance and cannot exceed $50,000. However, when a participant’s vested account balance is less than $20,000, exceptions to the 50% limit may be made, as illustrated as follows. a. When account balances are $10,000 or less, the vested account balance is available for loan. b. When account balances are less than $20,000, loans up to $10,000 are available. c. Loans must be amortized on a level basis with payments made by the participant-borrower at least quarterly
- The maximum loan amount may be further reduced by any loan balance the participant had in the one-year period preceding the loan. If it weren’t for this reduction, participants could abuse the five-year repayment rule by repaying the loan on the last possible date and then immediately taking out the loan again.
- Generally, loans must be repaid in full upon separation from service; if not, the outstanding balance at the time of separation is treated as a taxable distribution and possibly subject to the 10% early distribution penalty.
- Interest paid on plan loans secured by elective deferrals is nondeductible.
- Starting in 2020, retirement loans cannot be offered using a credit card or similar arrangements.
Which of the following is/are reason(s) employers sponsor pension plans?
I. Recruit quality employees.
II. Show stability of the company to lenders.
III. Fight/discourage collective bargaining.
IV. Provide working capital for the company.
A)I only. B)I and II only. C)I and III only. Rationale The correct answer is "C." Pensions do not demonstrate stability to a lender. In fact, if there is a mandatory contribution to the plan, this may affect company cash flow and credit worthiness. The sponsoring company cannot use pension assets for working capital. This would be a prohibited transaction (self-dealing). D)I, II and IV only.
Corey 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 5% contribution on behalf of all employees. What is the company’s contribution for him?
A)$14,250 Rationale The correct answer is "A." For a profit sharing plan the contribution is limited to the lesser of $57,000 (2020) or covered compensation. In this case the contribution will be limited by the covered compensation limit of $285,000. $285,000 x 5% = 14,250. The fact that the plan is top heavy is irrelevant since all employees are receiving a contribution greater than 3%. B)$25,000 C)$57,000 D)$285,000
What kind of plans are belong to the employers’ contribution?
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.
How to accurately describe a qualified group life insurance plan?
I. The plan must benefit 70% of all employees, or a group consisting of 85% non-key employees, or a non-discriminatory class, or meet the non-discrimination rules of Section 125.
II. Employees who can be excluded are: those with fewer than 3 years service, part-time / seasonal, non-resident aliens, or those covered under a collective bargaining unit.
III. A qualified group life insurance plan, if using a non-discriminatory classification, will have a bottom tier with benefits no less than 10% of the top tier and no more than 250% increase between tiers.
IV. The minimum group size is 10.
Which one favors older employees? target benefit pension plan or money purchase plan?
target benefit plan: the employee’s bear the investment risk and favors older employees .
An age based profit sharing plan is not a pension plan - it is a profit sharing plan.
The employer bears the risk on the cash balance plan. The money purchase plan favors younger employees.
Which of the conditions would prevent a deductible IRA contribution from being made by a company?
An active participant is an employee who has benefited under one of the following plans through a contribution or an accrued benefit during the year:
- qualified plan (401K and others);
- annuity plan;
- tax sheltered annuity (403(b) plan);
- certain government plans (does not included 457 plans);
- SEPs; or
- SIMPLEs.
Statement I is a non-qualified deferred comp plan (not one of the plans listed above) and therefore not to be taken into consideration for active participation status. Statement II & V are on the list above. For a defined benefit plan, an individual who is eligible for the plan is automatically considered an active participant. Statement “III” is not active participation, rather it is retirement, and Statement “IV” as described without contributions or forfeitures is not “active participation,” but a change in conditions regarding employer contributions or forfeitures could stem deductibility of IRA contributions.
If you are considered to be an active participant in a company plan, and your income is above certain limits, then you cannot take a tax deduction for your traditional IRA contribution
pertinent
adj. 中肯的；相关的；切题的；恰当的
What are the qualified plan tests for eligibility?
A)Ratio percentage test - Plan must cover a percentage of non-highly compensated employees that is at least 70% of the percentage of highly compensated employees covered.
B)Average benefits test - Plan must benefit a non-discriminatory employee class with benefits of at least 70% of the benefit provided highly compensated .
C)50/40 test - 50 employees or 40% of employees with a minimum of 2 out of 3 employees (unless there is only one employee in which case only 1 participant is required).
D)Plans cannot require more than 1 year of service, and an age higher than 21. The plan can require a 2-year waiting period if there is immediate 100% vesting in the plan.
What are the common characteristics for the traditional defined contribution plan and SEP-IRA?
- Requires a definite, written, non-discriminatory contribution allocation formula.
- Contributions cannot discriminate in favor of highly compensated employees.
- Affiliated service group rules apply.
Defined contribution plans have an employer deductibility limit of 25% of covered payroll. All defined contribution plans must have a written allocation formula so assets can be distributed in the mandated individual accounts. Employer contributions must bear uniform resemblance to compensation and cannot discriminate in favor of highly compensated. Employer contributions are not subject to any payroll related taxes. Top-heavy rules do apply to both. Both plans can integrate with Social Security (sometimes called permissible disparity). (Note: 5305-SEP does not allow permissible disparity.)
Permissible disparity or integration
允许的差异或整合
Substituted basis
Substituted basis is a more general term that can refer to either transferred basis or exchanged basis.
Substitute basis is the fair market value of an asset, reduced by gain realized, but not recognized.
Which of plan is required to make contributions each year?
It’s the pension plan.
A profit sharing plan is not required to make contribution each year.
1)Profit sharing plans fall under the broad category of defined contribution plans.
2)Profit sharing plans are best suited for companies that have unstable earnings.
3)The maximum tax deductible employer contribution to a profit sharing plan is 25% of covered compensation.
What is Top-Heavy Status?
If your plan is top heavy (meaning 60% or greater of the account balances in the plan are in key employees’ accounts) and one of these key employees has deferred into the plan, you more than likely will be required to make a 3% top-heavy contribution into your plan.
SELF-EMPLOYED (KEOGH) PLANS
- loans are available to owners and employees alike, if each has equal right and terms of the loans.
- Contributions for owners are based on net earnings rather than wages.
- Lump-sum distribution tax treatment allowed for employees, but not for owners, except in the case of disability.
- Contributions for employees must do a conversion [EE contr rate ÷ (1+ EE contr rate)] e.g., .15 ÷ (1+.15) = .13043 so owner’s contribution as a percentage of profits is lower than the employees’ percentage of wages earned.
What are the three most common types of qualified plans adopted by the self-employed?
profit-sharing, money purchase pension, and target benefit pension plans, all of which are defined contribution plans.
The three most common types of qualified plans adopted by the self-employed are
Section 457 plan
- Non-qualified plan
- Benefits taken as periodic payments are treated as ordinary income for taxation.
- Deferred amounts are subject to Social Security and Medicare taxes at the later of: performance of services or employee becomes vested in the benefits.
- Cannot exceed the smaller of $19,500 or 100% includible compensation.
- Section 457 plans are nonqualified, unfunded deferred compensation plans established by state and local government and tax-exempt employers.
- An attendant feature of section 457 plans is that they may provide less security to participants than do qualified plans.
money-purchase pension plan
In a money-purchase pension plan the investment risk is on the employees and thus an increase or decrease in the investments has no impact on contributions.
If the company gave everyone a raise then that would increase the company’s contributions.
If a key employee retired and two employees left that would decrease the company’s contributions.
Since the forfeiture allocations were allocated to the participants they would have no effect of the company’s contributions.
What’re the limits to SEP-IRA (SIMPLIFIED EMPLOYEE PENSION (SEP) PLAN)?
- The limits for contributions are the lesser of the following:
a. 25% of compensation [covered compensation is limited to $285,000 (2020)]
b. $57,000 (2020) - The SARSEP plan salary reduction contribution limit for 2020 is $19,500 (the same as the limit for 401(k) plans).
a. Individuals who have attained age 50 may make additional catch-up contributions.
b. The additional catch-up amount is $6,500 (2020
Which of the following accurately describes the similarities between a traditional Individual Retirement Account and a SEP-IRA?
I. Individual ownership of the account.
II. All contributions into the account are fully owned by participant.
III. Subject to early withdrawal penalties and minimum distribution regulations.
IV. All distributions from plan taxed as ordinary income.
A)I and III only.
B)II and IV only.
C)II, III and IV only.
D)I, II, III and IV.
Rationale
The correct answer is “D.” All of these characteristics are shared by traditional IRAs and SEP-IRAs. Any non-deductible contribution to an IRA are taxed as a pro-rata distribution.
Shane’s Rib Shack has a Target Benefit Plan. They have 10 employees with the following compensations: Employee Compensation
1- $300,000
2- $100,000
3- $75,000
4- $50,000
5- $50,000
6- $50,000
7- $50,000
8- $25,000
9- $25,000
10- $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?
A)$182,500 Rationale The correct answer is "A." 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 $730,000. Thus the maximum deductible limit is $182,500 ($730,000 x 25%). Remember to limit employee 1 to the $285,000 (2020) covered compensation limit. The actuarial table amount is irrelevant because this a defined contribution plan. B)$186,250 C)$195,000 D)$210,000
Why life insurance in qualified plans is subject to income?
When life insurance is purchased in a qualified account, the premium is paid with pretax dollars. Consequently, the participant must recognize the economic benefit received as taxable income. … The remaining cash value can remain in the plan or be taxed as a qualified plan distribution.
Which of the following is correct about the life insurance in a qualified plan?
- The policy will be included in his gross estate if he were to die while still working.
- Part of the proceeds could be taxable to his beneficiary if it is a cash value policy.
- When he distributes the policy from his plan at retirement, he can convert it to an annuity within 60 days to avoid taxation.
George, age 35, works for XZY Brothers, Inc., which is installing a new SIMPLE IRA plan in the current year with the maximum match for this year. George makes $30,000 per year and is eligible to participate in the plan. Which of the following is true?
George can put in 100% of salary up to $13,500 (2020). XZY will match dollar for dollar up to 3% of salary ($30,000 x .03 = $900). So a total of $14,400 will be placed into the account.
SIMPLE IRA: Savings incentive match plan for employees.
An employer-sponsored individual retirement account or individual retirement annuity arrangement that is similar from a contribution perspective to a qualified profit-sharing plan
- A SEP plan must cover all employees who are at least age 21 and who have worked for the employer during three of the preceding five calendar years.
To retain its qualified status, a retirement plan must:
I. Have pre-death and post-death distributions.
II. Stipulate rules under what circumstances employee contributions are forfeited.
III. Be intended to be permanent.
IV. Be established by the employer.
A)I and II only. B)II, III and IV only. C)I, III and IV only. Rationale The correct answer is "C." Employee contributions must be vested and cannot be required to be forfeited. D)I, II, III and IV.
Cafeteria plans have which of the following characteristics?
I. Must offer a choice between at least one qualified “pre-tax” benefit and one non-qualified “cash” benefit.
II. Medical Flexible Spending Accounts (FSAs) can reimburse medical expenses not covered by insurance for the participant and all dependents.
III. Changes in election amount during the plan year can only occur with a “qualifying change in family status.”
IV. Salary reductions are not subject to income taxes but payroll taxes apply.
A)I, II and IV only.
B)II, III and IV only.
C)I, II and III only.
Rationale
The correct answer is “C.” Cafeteria Plans (Section 125) allow salary reductions which are taken from an employee’s salary before Federal and State withholding tax as well as Social Security and Medicare taxes (FICA).
At least one taxable and non-taxable benefit must be offered under a plan.
Medical FSAs allow reimbursement for eligible medical expenses for the employee and any dependents.
A qualifying change in status is required to make a mid-year change in elections.
D)I, II, III and IV.
what’s the difference between payroll taxes and income taxes
Payroll tax is a percentage of an employee’s pay. Income tax is made up of federal, state, and local income taxes. … Income tax amounts are based on a number of factors, such as an employee’s Form W-4 and filing status.
The difference between payroll tax and income tax also comes down to what the taxes fund. Whereas income taxes go to a general government fund, payroll taxes specifically go to Social Security and Medicare funds.
Who are favored under a defined benefit plan?
Long-term employees are favored under a defined benefit plan
dues to business-related organizations provided as a fringe benefit are:
A)Includable in taxable income of all covered employees.
B)Includable in the taxable income of key employees only.
C)Excludable from the taxable income of all covered employees.
Rationale
The correct answer is “C.” Dues and licenses are excluded from taxable income if directly related to the employee’s job.
D)Excludable from the taxable income of non-highly compensated employees only.
Dues
n. 会费
what’s the group term life insurance coverage?
group term life insurance coverage is $50,000.
what is the maximum excess rate for integrated stock bonus plan?
The maximum excess rate is 2 times the contribution rate limited to a disparity of 5.7%
Which of the following is a correct statement about the income tax implications of employer premium payments for group health insurance?
A)An S Corporation can only deduct 70% of the premiums for all employees.
B)In a sole proprietorship, the premiums for both the owner and the non-owner are fully deductible.
C)If stockholder/employees of a closely held C corporation are covered as employees, the premiums are fully deductible.
Rationale
The correct answer is “C.” S Corporations and proprietorships cannot deduct any premiums for group health insurance for owners. Non-owner employee health premiums are fully deductible to both entities. Answer “D” is incorrect because partners are able to deduct 100% of the health insurance premium on their individual tax returns.
D)Premium costs paid by a partnership are passed through to the partner, who can deduct 70% of the costs on their individual tax returns
group term life
The contract has a master group policy.
group whole life program
The coverage is based on a combination of decreasing units of group term and accumulating units of single premium whole life
group universal life insurance?
- Expenses are often lower than for individual universal life policies.
- These policies offer the potential for higher returns than whole life policies.
Which employee fringe benefits would be taxable to the employees?
Monthly dues to a health club paid by the employer.
must be provided “on the employer premises.”
Minimum funding requirements apply to?
Minimum funding requirements apply to pension plans, not profit sharing plans.
Forfeitures in profit sharing plans are usually allocated to the remaining participants’ individual accounts.
“use-it-or-lose-it” provision
Cafeteria plans have a “use-it-or-lose-it” provision which requires any funds not used to pay qualified claims during the plan year be forfeited back to the plan sponsor. Forfeited funds cannot be rebated back to the individual employee who forfeited the funds.
1) A separate FSA salary reduction must be made for each type of eligible benefit.
2) A salary reduction for an FSA will lower an employee’s income for social security tax purposes if the employee earns less than the social security wage base.
3) An FSA is technically a cafeteria plan benefit that can be used by itself or as part of a broader cafeteria plan.
What is TSA plan?
A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. … Salary contributed to a Roth account is taxed currently, but is tax-free (including earnings) when distributed
Which funding vehicles are eligible (approved) for TSAs?
TSA can be invested in annuities and mutual funds.
I. Fixed Annuity Contracts.
II. Mutual funds.
III. Variable annuity contracts.
Describe a short-term disability plan
- Premiums under an employer-paid plan are deductible to the employer when paid to the insurance company.
- The employee must claim the benefits from the employer-paid policy as taxable income.
- If employees pay for the premium on an after-tax basis, benefits are tax exempt.
- Premiums paid by the employee are deductible only though a Section 125 cafeteria plan, then benefits are taxable.
- Definitions of disability are much more liberal under short-term disability than under long-term disability.
Group term life insurance
- A low-cost,
- tax-advantaged policy
- may be either contributory or non-contributory
- does not require a medical examination
Group paid-up life insurance
It combines both term life insurance and whole life insurance
Group ordinary life insurance
It contains the cash value
What are two methods that Defined benefit pension plans have by which they can be integrated with Social Security?
the excess method and the offset method.
a. Excess method—The plan defines a level of compensation, called the integration level, and then provides a higher rate of contribution and benefits for compensation above the integration level.
b. Offset method—A fixed amount or a formula amount that is designed to represent the existence of Social Security benefits reduces the plan formula
c. The Money Purchase Pension plan is a Defined Contribution Plan and must use the excess method. Simple’s and ESOPs cannot be integrated with Social Security.
Describe group universal life insurance plan
A)It allows employees to borrow or withdraw cash.
B)It provides an opportunity to continue coverage after retirement.
C)The entire premium cost is paid by the employee.
the employee is required to pay part or all of the premium cost of group universal life insurance.
D)It provides flexibility in designing coverage to best meet individual needs.
Lodging is only excluded in taxable income of all covered employees.
Lodging is only excluded if :
(1) it is furnished on the business premises (the place of work),
(2) it is furnished for the employER’s convenience, and (3) the employee accepts it as a condition of employment.
A vacation stay does not meet any of the these criteria so it is fully taxable for all covered employees.
Match the following statement with the type of retirement plan that it most completely describes: " A defined benefit plan that has the appearance of a defined contribution plan" is a... A)Profit sharing plan. B)Money purchase plan. C)SIMPLE IRA. D)Cash balance plan.
Rationale
The correct answer is “D” - Cash balance plan. Answers “A” and “C” are incorrect since they are not defined benefit plans. Answer “B” - Money purchase plan is a “pension plan” but it does not provide employees with a defined benefit, only a defined contribution. Answer “D” - Cash balance plan provides a defined benefit (returns are guaranteed by the employer) and the employee receives an “account” to see how much they have.
SIMPLE IRA
requires an employer match and is not a qualified plan
A Money purchase plan and A Defined benefit plan
are all pension plans
a pension plan has the following characteristics:
A)Benefits must be definitely determinable under a formula for employer contribution or a formula for retirement benefits.
B)Benefits may not be withdrawn prior to termination of employment or retirement.
C)Contributions and benefits are determined in the long run by the profits of the employer.
Rationale
The correct answer is “C.” Employer contributions may be made without regard to company profits or retained earnings. Answers “A”, “B” and “D” are requirements for all qualified plans.
D)Generally pays retirement benefits over a period of years.
tax withholding
预扣税
Like-kind properties
Like-kind properties must be traded in the US for the industrial use and are real estate assets of a similar nature that can be exchanged without incurring any tax liability under Section 1031 of the Internal Tax Code. Properties must be held for business or investment purposes but do not need to be similar in grade or quality.
Individual Retirement Accounts (IRA)?
I. Distributions to the IRA owner must begin by April 1 of the year following the year in which the owner reaches age 70 1/2 (if by 12/31/2019) or age 72 (if 70 1/2 after 12/31/2019).
II. After the owner’s death, the entire amount remaining in the IRA is included in the owner’s gross estate for federal estate tax purposes.
funds distributed from an IRA are always treated as ordinary income, regardless of source and 5 year forward averaging is no longer available for any distribution.
all distributions from an IRA not meeting the statutory exemptions are subject to the premature distribution penalty, regardless of source.
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.
A)I and II only.
Rationale
The correct answer is “A.” 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.
B)I, II and IV only.
C)II only.
D)I, II, III and IV.
457 Plan
457 plans are IRS-sanctioned, tax-advantaged employee retirement plans. They are offered by state, local government and some nonprofit employers. Participants are allowed to contribute up to 100% of their salary, provided it does not exceed the applicable dollar limit for the year.
Which of the following statements accurately describes the requirements for a plan established under Section 457 to be qualified?
I. Distributions are NOT permitted until age 70 1/2 or termination of employment if before 59 1/2.
II. To avoid constructive receipt, the agreement must be signed during the same month the services are rendered and prior to receipt of the paycheck.
III. Eligible participants include employees of agencies, instrumentalities, and subdivisions of a state, as well as Section 501 tax-exempt organizations.
IV. The maximum employee elective deferral excluding catch-ups is limited to $19,500 (2020) (as indexed), or 100% of includible compensation.
A)I and II only. B)I and III only. C)II and IV only. D)III and IV only. Rationale The correct answer is "D." Statement "II" is incorrect because the agreement must be signed PRIOR to the month the services are rendered. Statement "I" is incorrect because distributions are permitted at termination or normal retirement age as stated in plan document (not 70 1/2). The maximum elective deferral including the catch-up is $39,000 for 2020, excluding the catch-up is $19,500 for 2020.
money purchase plan
defined contribution limit of $57,000. (25% of $230,000 is $57,500 but the single employer limit applies and is $57,000 for 2020).
A hybrid plan that uses a discretionary contribution but adjusts for age is a form of a: A)Profit sharing plan. B)Money purchase plan. C)Cash balance plan. D)Defined benefit plan.
A)Profit sharing plan. Rationale The correct answer is "A." Answers "B," "C" and "D" all require minimum contribution levels. Answer "A" - Profit sharing plan only requires that contributions be "substantial and recurring." More specifically, an age-based profit sharing plan would be correct. B)Money purchase plan. C)Cash balance plan. D)Defined benefit plan.
Your client, a 35% owner of a regular C corporation, wants to take out a loan from the company sponsored profit-sharing plan. In order for the loan not be a prohibited transaction, which of the following conditions must apply:
I. Loans are available to all participant/beneficiaries on a reasonably equivalent basis.
II. Have a reasonable rate of interest.
III. Made in accordance with specific plan provisions.
IV. Must be adequately secured.
A)II only.
B)I, II and IV only.
C)None of the above.
D)All of the above.
Rationale
The correct answer is “D.” This is an owner of a regular corporation (C Corporation.) Owners of C Corporations are eligible for loans as long as the safe-harbor rules are maintained. The items listed in Statements “I,” “II,” “III,” and “IV” are the safe-harbor rules.
Sherman, age 52, works as an employee for Cupcakes Etc, a local bakery. Cupcakes sponsors a 401(k) plan. Sherman earns $50,000 and makes a 10% deferral into his 401(k) plan. His employer matches the first 3% deferral at 100% and they also made a 5% profit sharing contribution to his plan. Sherman also owns his own landscaping business and has adopted a solo 401(k) plan. His landscaping business earned $40,000 for the current year. What is the most that Sherman can contribute in the solo plan, assuming his self-employment taxes are $6,000? A)$19,500 B)$21,000 C)$26,000 D)$28,400
Rationale
The correct answer is “D.” An individual can defer up to $19,500 (2020) plus an additional $6,500 catch up for all of their 401(k) and 403(b) plans combined. Since he is 50 or older he can contribute the 19,500 + 6,500 = $26,000. Since he already contributed $5,000 into his employer plan he can still defer $21,000 ($26,000 - $5,000) into the solo plan. The employer contributions in this question are in addition to the employee deferral limit.
Employer contribution into the solo plan:
i) self-employment income $40,000
ii) less 1/2 SE tax $3,000
iii) Net $37,000
iv) X 20%
v) employer contribution $7,400
Total contribution to the solo plan = $21,000 + $7,400
This plan can provide for voluntary participant contributions which must be matched by the employer.”
SIMPLE IRA
Which plans don’t permit employee elective deferrals?
Money purchase plan.
Defined benefit plan.
Which plan doesn’t require an employer match?
Profit sharing plan with a 401(k) component.
Section 121
IRC section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale. A taxpayer can claim the full exclusion only once every two years. A reduced exclusion is available to anyone who does not meet these requirements because of a change in place of employment, health or certain unforeseen circumstances.
standard deduction?
standard deduction is $24,800.
They are not age 65 or older so they don’t receive an additional standard deduction. They do not receive an additional standard deduction for Marie’s blindness because additional standard deductions for age and blindness are allowed only for the taxpayer and spouse, and not for their dependents. ————–> taxable income is equal to their gross income less deductions for adjusted gross income less the greater of the standard deduction or itemized deductions, and less personal and dependency exemptions. —————————-> Ursula must use the Single filing status. In addition, she is entitled to one additional standard deduction because of her blindness. Therefore, her standard deduction for the current year is $14,050 ($12,400 + $1,650).
Cafeteria plan:
A cafeteria plan must offer at least one taxable benefit, usually cash, and one qualified nontaxable benefit. —–>.Childcare provided under a cafeteria plan is not eligible for the dependent care credit.——>Cafeteria plans (Section 125) a. The employer offers the employee the choice between cash or selected nontaxable benefits. b. If the employee chooses the benefit, it remains nontaxable. c. If the employee chooses cash equal to the cost of the benefit, the cash is included in income. d. This can also give employees the opportunity to buy certain benefits with after-tax contributions.
passive activity in rental:
a. Unless excepted by the Code, all rental activities are deemed passive. 1.) Rental activities occur when payments are received for the use of tangible property. 2.) If an activity is an exception in the Tax Code, it still must pass the material par-ticipation test to be considered active. b. An activity is not considered a rental under any of the following six conditions: 1.) The average customer use is seven days or less. 2.) The average customer use is more than seven days but not over 30 days, and the owner provides significant personal services. 3.) The owner also provides extraordinary services (rental period is irrelevant). 4.) The rental activity is incidental to a nonrental activity of taxpayer (investment or trade/business). 5.) The property is customarily made available during business hours for nonexclu-sive use by customers (e.g., golf course). 6.) The property is used in a nonrental activity conducted by a partnership, S cor-poration, or joint venture, where the owner has an interest.
Which of the following is true concerning IRA contributions?
A)An employee who makes voluntary contributions to a 401(k) plan is not considered an active participant.
B)An employee who receives no contributions or forfeiture allocations in their employer’s profit sharing plan is not considered an active participant.
C)An employee who makes no voluntary contributions to a thrift plan yet receives forfeiture allocations to a profit sharing plan is not considered an active participant.
D)An employee participating in a Section 457 plan is considered an active participant if employee pretax deferrals are elected.
B)An employee who receives no contributions or forfeiture allocations in their employer’s profit sharing plan is not considered an active participant.
Rationale
The correct answer is “B.” Answers “A” and “C” are conditions of being considered an active participant. Answer “D” is incorrect because 457 plan participants are not considered active participants for IRA contribution purposes.
Which of the following tasks are the primary responsibilities of a plan trustee?
I. Determining which employees are eligible for participation in the plan, vesting schedule, and plan benefits.
II. Preparing, distributing, and filing reports and records as required by ERISA.
III. Investing the plan assets in a “prudent” manner.
IV. Monitoring and reviewing the performance of plan assets.
A)I and III only.
B)I and II only.
C)II and IV only.
D)III and IV only.
Rationale
The correct answer is “D.” The duties explained in Statements “I” and “II” are responsibilities of the plan administrator.
Does the profit sharing plan require the certain percentage of the match?
The match for a profit sharing plan with 401(k) provisions can vary every year and there is no required percentage. However, a SIMPLE can vary the match in only 2 of 5 years.
In order for a group term life insurance plan to be non-discriminatory, which of the following is true?
A)At least 80% of all employees must benefit from the plan.
B)At least 85% of the participants must be non-highly compensated employees.
C)If the plan is part of a cafeteria plan, the plan must comply with the non-discrimination rules of Section 125.
D)The bottom band of benefits must be no less than 10% of the top band with no more than a 2 times differential between bands.
Rationale
The correct answer is “C.” A plan must benefit 70% of all employees or a group of which at least 85% are not key employees.
If the plan is part of a cafeteria plan, it must comply with Section 125 rules. The difference between the bands in “D” must be no greater than 2.5 times the next smaller band with the bottom band being equal to no less than 10% of the top band.
What does the benefit of employer-provided short-term disability plan offer?
- Short-term disability benefits usually start the eighth day of an illness (first day for an accident); and
- Generally last no more than six months. (not one year)
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.
A)I only.
B)I and II only.
C)II and III only.
D)I, II and III.
Rationale
The correct answer is “A.” 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.
Defined benefit pension plans increase the funding costs associated with the plan if :
If turnover is reduced, then funding will increase. If the retirement age is reduced, funding will increase as more years will need to be funded. If the rate of return increases, then funding will decrease. If wages increase, then funding will increase.
What are the AGI limitation for Traditional IRA and a Roth IRA (2020)?
Traditional IRA since she is below the AGI limitation for a single active participant ($65,000 - $75,000) (2020). She can also contribute to a Roth IRA because she is below the AGI limitation of $124,000 - $139,000 (2020)
Is there an age limit for Traditional (SECURE Act 2019) or Roth IRAs.
there is no age limit for Traditional (SECURE Act 2019) or Roth IRAs.
Dr. Woods, age 29, is a new professor at Public University (PU) where he has a salary of $111,000. PU sponsors a 403(b) plan and a 457 plan. Dr. Woods also has a consulting practice called Damage Estimate Claims (DEC). He generates $200,000 of revenue and has $50,000 of expenses for DEC. Assume his self-employment tax is $19,790. What is the most that he could contribute to all of the retirement plans this year assuming he establishes a Keogh plan for DEC? A)$39,000 B)$57,000 C)$67,021 D)$73,521
Rationale
The correct answer is c.
Dr. Woods can contribute $19,500 to each of the 403(b) plan and the 457 plan. In addition, he can establish a Keogh plan and contribute 20% of his net self-employment income after deducting ½ self,-employment taxes.
The 403(b) and 457 can both receive 19,500 (qualified and deferred comp plans).
The Keogh needs to follow self-employment contribution rules - see the retirement pre-study book)
$200,000 of income for DEC
-$50,000 of expenses for DEC
150,000 Net income
-9,895 (Assume his self-employment tax is $19,790, use ½)
140,105
X 20% (contribution rate / (1+contribution rate) = self-employed contribution rate)
28,021
In total 19,500 + 19,500 + 28,021 = 67,021
What is Keogh plan?
A Keogh plan is a tax-deferred retirement plan designed for self-employed people. Keogh plans get their name from the man who created them, Eugene Keogh. He established the Self-Employed Individuals Tax Retirement Act of 1962, also known as the Keogh Act.
Is the statement right “The amount needed for the investment pool to fund period certain annuities for each participant upon retirement.” ?
No. DB plans deal with life annuities, NOT period certain annuities.
What conditions must be met by Loans from a qualified plan?
Limit on loans is the lesser of 50% of the account value or $50,000 for a period of five years, unless for a primary residence.
Which plan should be suitable for wide fluctuations in cash flow?
Wide fluctuation in cash flow call for a profit sharing plan.
Are the Target benefit plans and defined benefit plans pension plans?
Both plans are pension plans
I. Minimum funding standards apply.
II. Qualified joint and survivor annuity requirements apply.
Which plan might be good for “ High investment earnings increase participant retirement benefits?
It applies only to the target benefit plan (because it is a DC plan) NOT the DB plan.
PBGC
Pension Benefit Guaranty Corporation
How to describe the eligible individual accounts?
Eligible individual accounts (usually associated with profit sharing, 401(k) and ESOP) are defined contribution plans, and are not subject to PBGC, nor minimum funding requirements.
How to describe A key employee?
A key employee is an individual who (1) owns more than 5% of the business, (2) is an officer with compensation greater than $185,000 (2020), or (3) owns greater than 1% of the business and has compensation greater than $150,000.
What does “2-6 year graded vesting” mean?
After two years, the employee would be 20% vested, after three years, 40%, with the employee eventually becoming fully vested after six years.
Which year does the only vesting schedules allow?
2-year cliff vesting.
3-year cliff vesting.
and 2-6 year graded vesting
Does a housewife can contribute to her IRA?
Even though she does not have any earned income of her own, she can use Brad’s earnings to qualify for the contribution.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) impacts an employee and employer in which of the following ways:
I. An employee without creditable coverage can generally only be excluded by the group health insurance plan (if offered) for up to twelve months.
II. The waiting period is reduced by the amount of “creditable coverage” at a previous employer.
III. If the employee does not enroll in the group health insurance plan at the first opportunity, an 18-month exclusion period may apply.
A)I and II only.
B)I, II and III only.
C)II and III only.
D)II only.
Rationale
The correct answer is “B.” All three statements are true. If you have a pre-existing condition that can be excluded from your plan coverage, then there is a limit to the pre-existing condition exclusion period that can be applied. HIPAA limits the pre-existing condition exclusion period for most people to 12 months (18 months if you enroll late), although some plans may have a shorter time period or none at all. In addition, some people with a history of prior health coverage will be able to reduce the exclusion period even further using “creditable coverage.” People with a history of prior health coverage will be able to reduce the exclusion period even further using “creditable coverage.”
IRC Section 415(c) applies an “annual addition” limited to certain qualified plans. Which of the following statements is correct?
I. The limit is the lessor of 25% of compensation or $57,000 for the current year.
II. The limit only applies to defined contribution plans.
III. Includable additions include forfeiture reallocations, employer and employee contributions and investment earnings.
IV. Salary deferrals are included as part of the annual additions limit.
A)II only.
B)I and II only.
C)II and III only.
D)II and IV only.
Rationale
The correct answer is “D.” Statement “I” is incorrect as the limit is the lesser of 100% of compensation or the annual limit. Statement “III” is incorrect because investment earnings are never included in the Section 415(c) limit calculation. Statement “IV” is correct as salary deferral contributions by employees is counted against the IRC 415(c) limit.
E)II, III and IV only.
ERISA
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
Which transactions between a disqualified person and a qualified plan would be considered prohibited transactions under ERISA?
I. The employer purchases a mortgage note which is currently in default for more than the fair market value.
II. The employer sells a piece of raw (undeveloped) land to the qualified plan for a price substantially below fair market value.
III. Loan to a 100% owner/participant on the same basis as every other participant as set forth in the plan documents.
IV. The purchase of employer stock for full and adequate consideration by a 401(k) plan.
A)I and II only.
C)I, II and III only.
D)I, II and IV only.
Rationale
The correct answer is “A.” Any transaction between a disqualified person and the trust is considered a prohibited transaction. In Statement “I,” the employer could purchase the mortgage note at a markup to future market value, thus giving the pension (and consequently his own individual retirement account) a big boost in value, then sell the note to someone else and take a loss on their personal income tax. Thus, in essence making additional contributions to the plan. Statement “II” would accomplish the same purpose. Employer’s individual taxes would be reduced (lower profit on sale to the plan) but would have a dramatic increase in retirement plan assets.
B)II and III only.
The maximum service requirement that a profit sharing plan may impose as a condition of participation is:
A)1 year with semi-annual entry dates (1.5 years).
B)1 year with quarterly entry dates (1.25 years).
C)6 months.
D)2 years.
Rationale
The correct answer is “D.” This requires “immediate vesting.”
Which statement(s) accurately reflect(s) the Tax-Sheltered Annuity (TSA) provisions:
I. Salary reductions into a TSA are exempt from all payroll taxes.
II. The annual elective deferral limit may be increased by up to $3,000 for employees of certain organizations who have completed 15 years of service and meet certain other requirements.
III. Tax sheltered annuities must allow participants to invest in mutual fund, annuities and/or fixed income securities.
IV. To calculate the maximum exclusion allowance for make-up calculation purposes, the participant’s years of service and the amount of total excludable contributions made in the prior three years are needed.
A)I and II only.
B)II only.
C)I, III and IV only.
D)IV only.
Rationale
The correct answer is “B.” Statement “I” is incorrect because deferrals are still subject to Social Security and Medicare taxes. Statement “III” is incorrect because TSAs can only invest in mutual funds or annuities and not any direct investments. Statement “IV” is incorrect because the total excludable contributions must be for all prior years, not just the past three.
Which of the following accurately describes some attributes of non-qualified retirement plans?
I. The employee will pay Table 1 costs each year on an “employer pay all” split dollar life insurance arrangement.
II. The employer can deduct the premiums paid for a split-dollar life insurance arrangement in the year the premiums are paid.
III. Death benefits from a split-dollar arrangement, both the employer and the employee’s beneficiary’s share, are generally tax free.
IV. If the employee’s portion of the life insurance premium is greater than the P.S. 58 cost, the excess premiums “rolls forward” to a future year to accurately reflect the employee’s cost basis.
A)I and III only.
B)II and IV only.
C)I and IV only.
D)I and II only.
Rationale
The correct answer is “A.” Statement “II” is incorrect because the employer is unable to deduct any contributions to a non-qualified plan until the employee actually takes constructive receipt. In the traditional split-dollar arrangement, the employer has an interest in the cash values of the split-dollar policy equal to the amount of premiums paid, and therefore, there is never a deduction for premiums paid. Statement “III” - Because no tax deductions are taken for any premiums paid on the policy, the death benefits are tax-free. Statement “IV” - The employee is required to pay the Table 1 cost each year, without regard to premiums paid in previous years.
Larry and Terry plan to contribute a total of $2,900 to their IRAs for the current year. Larry has contributed $2,000 to his IRA and Terry will contribute $900. They both work outside the home and file a joint income tax return. Larry is a teacher at the local high school. His employer makes contributions into a 403(b) plan for Larry. Terry's employer makes contributions into her stock bonus plan account. Their modified AGI for the current tax year is $105,000. What is the combined maximum amount, if any, they are allowed to deduct for their IRA contribution? A)$-0- B)$2,500 C)$2,000 D)$2,900
Rationale
The correct answer is “D.” Reduction is (($105,000 - $104,000) / $20,000) x $6,000 = $300 (2020). Therefore, the maximum deduction is $6,000 - $300 = $5,700 each. Larry’s contribution of $2,000 and Terry’s contribution of $900 are both fully deductible.
Formula: Contribution x [(your AGI – the bottom of the phase out range) divided by the amount of the range (124,000-104,000 is where the 20k comes from)]
Which of the following is/are accurate of a Section 125 cafeteria plan?
I. 30% of the total benefits can accrue to key employees.
II. There must be at least one cash benefit.
III. Deferral of income is not allowed except through a 403(b).
IV. Salary reductions can be changed at any time during the year.
A)I only.
B)II only.
C)II and III only.
D)I and IV only.
Rationale
The correct answer is “B.” Statement “I” is incorrect because only 25% of the total benefits can accrue to key employees. Statement “III” is incorrect because deferrals are allowed only through a 401(k) plan. Statement “IV” is incorrect because mid-year changes in reductions are allowed only for qualified changes in status.
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) mandates employers provide continuation coverage for former employees except under which of the following circumstances:
I. Employer has fewer than 20 employees.
II. Employee retires at the age of 65.
III. Death of the employee.
IV. Involuntary termination of employment due to gross misconduct.
A)I only.
B)III only.
C)I, III and IV only.
D)I, II and IV only.
Rationale
The correct answer is “D.” Employers must continue medical coverage to pay for final medical expenses after the death of the employee. Statements I, II, and IV are statutory exemptions to the COBRA requirement. (Note: A 65-year-old retiree would be covered under Medicare.)
Note: COBRA applies to all group health plans maintained by private-sector employers with 20 or more employees.
