Module 1 Qualified Plans Requirements and Regulatory Plan Considerations Flashcards
Susan makes 400k $ working for Great Grapes Inc. She defers 4% into the 401(k) and receives the 4% match. How much will go into her account in 2023?
A)
$56,400
B)
$32,000
C)
$26,400
D)
$22,500
C $26,400
Only the first $330,000 of compensation may be used to determine contributions to qualified retirement plans in 2023. Thus, she contributes 4% of $330,000 in 2023. This amount is MATCHED, so that ups the total percentage contributed to 8% (of $330k) and she gets $26,400 in her 401(k) that year.
Qualified retirement plans have which of the following characteristics?
They are subject to ERISA requirements.
They offer tax deferred earnings to employees
They can discriminate in favor of highly compensated employees
They provide tax deduction for the employer only when the employee is income taxed on the money
I and II
B)
III and IV
C)
I, II, III, and IV
D)
I, II, and III
Statements I and II are correct.
Qualified retirement plans are subject to ERISA requirements.
Qualified retirement plans offer tax-deferred earnings to employees. Example of this 401(k), you’re not taxed on your contributions (or earnings) until you take it out. Then you’re taxed on it at an income level I think.
Qualified retirement plans are subject to ERISA requirements and provide tax deferral on investment earnings for employees. While qualified plans in general can provide different levels of benefits to different classes of employees, qualified plans cannot “discriminate in favor of highly compensated employees” in the sense that there is a legal limit to the amount of the difference. As long as the difference is inside the legal limits, the plan is not discriminatory (by definition). Qualified retirement plans provide an immediate tax deduction on employer contributions.
Which of the following are included in the annual additions limit for defined contribution plans?
Investment gain
Employee elective deferral contributions
Employer contributions
Forfeitures reallocated to the remaining participants in the plan
A)
II, III, and IV
B)
II and III
C)
I and IV
D)
I, II, III, and IV
II III IV.
Which statement regarding qualified retirement plans is CORRECT? Qualified plans…
A)
are subject to ERISA requirements.
B)
offer taxable earnings to employees each year.
C)
provide a deferred tax deduction for employer funding.
D)
can discriminate in favor of highly compensated employees.
Qualified plans are subject to ERISA requirements.
They provide tax deferral on investment earnings for employees. While qualified plans in general can provide different levels of benefits to different classes of employees, qualified plans cannot discriminate in favor of highly compensated employees.
ERISA requirements for qualified plans include:
A)
all of these.
B)
reporting and disclosure.
C)
participation and fiduciary requirements.
D)
coverage and vesting.
All of these
Which of these individuals are “key employees” as defined by the internal revenue code?
A more than 5% owner of the employer company
An employee who received compensation of more than $150k from the employer (for 2023)
An officer of the employer who received compensation of more than $215,000 in 2023
A 1% owner of the employer with an annual compensation from the employer of more than $147,000
A)
I and III
B)
II, III, and IV
C)
II and IV
D)
I and II
I and III
A more than 5% owner of the company
An officer of employer who earned more than $215k (2023)
Option II is one definition of a “highly compensated employee”.
Both II and IV are incorrect because they do not fall within one of the following definitions of a key employee:
-An officer whose annual compensation from the employer exceeds 215k (2023)
-A more than 5% owner of the employer company
-A more than 1% owner of the employer company having annual compensation from the employer in excess of $150k
If a defined contribution plan is top heavy, the required minimum contribution is usually equal to what percentage of each non key participant’s compensation?
If a defined contribution plan is top heavy, the min contribution to the plan is 3% per year unless thee key employees are receiving less than 3%. If the key employees are getting less than 3% contributions, then the non key employees must at least get what the key employees are getting
Which of the following does NOT meet the definition of active participation in a retirement plan for the purposes of determining the deductibility of IRA contributions?
A)
Kerry has benefits accrued for him under his employer’s defined benefit pension plan.
B)
Matt makes contributions to his employer’s qualified plan.
C)
An employee is eligible to defer salary to his employer’s Section 401(k) plan.
D)
Betty has employee forfeitures reallocated to her account by her employer but makes no elective deferrals in the same plan year.
C.
If you got it wrong - note that the question asks about IRA contribution, and C tells you about 401(k) contributions. Paragraph below says this: you don’t have to contribute to be considered active for 401(k), BUT for an IRA you have to contribute to be considered active.
For the Section 401(k) retirement plan, an employee is considered covered as long as he or she is eligible to defer part of his compensation; he or she does not have to actually make contributions. Note, however, that active participation for purposes of determining deductibility of IRA contributions differs from being covered under a qualified plan for nondiscrimination testing. Specifically, an employee must be contributing to the plan, having employer contributions to the plan, forfeitures reallocated on his or her behalf, or accruing a defined benefit before he or she is considered an active participant in a qualified plan for IRA purposes. Plan earnings alone do not make someone an active participant. Also, receiving retirement plan benefits do not make someone an active participant.
Which of the following types of retirement plans allow integration with Social Security?
Defined benefit pension plan
Simplified employee pension (SEP) plan
Savings incentive match plan for employees (SIMPLE)
Employee stock ownership plan (ESOP)
A)
II and III
B)
I, II, III, and IV
C)
I only
D)
I and II
I and II.
Defined benefit pension plans and Simplified employee pension plans (SEP) can be integrated with social security.
ESOPS and SIMPLE plans cannot be integrated with social security.
If a qualified contribution retirement plan is found to meet the requirements under the Employee Retirement Income Security Act of 1974 (ERISA) and the IRS regulations, which of these statements is correct?
A)
Employees are not taxed on plan contributions or earnings attributed to plan contributions as long as a plan distribution does not occur.
B)
The employer is permitted to require three years of service eligibility as long as employer contributions are immediately 100% vested to participants.
C)
The participating employees must petition the IRS for acceptance of the plan.
D)
The PBGC will provide coverage to the plan.
A. Employees are not taxed on plan contributions or earnings attributed to plan contributions as long as a plan distribution does not occur.
A “two years of service” eligibility requirement is permitted if 100% immediate vesting is also used. Employees do not petition the IRS for acceptance of the plan. No defined contribution plans are eligible for PBGC coverage.
Which of the following are minimum coverage tests for qualified retirement plans?
Minimum allowed discrimination
Average benefits percentage test
Ratio test
Maximum compensation test
A)
II, III, and IV
B)
I, II, and III
C)
II and III
D)
I and II
II and III
The two minimum coverage tests for qualified retirement plans are the average benefits percentage test and the ratio test. To be qualified, a retirement plan must meet at least tests if the plan does not meet the percentage (safe harbor) test.
Claire is the HR director for major marketing inc. she wants to implement a new qualified retirement plan for the company. there are numerous fed guidelines with which the company must comply. Which of the following fed agencies is tasked with supervising the creation of new qualified retirement plans?
IRS
DOL
PBGC
ERISA
IRS
Which are agencies that administer and ensure compliance with fed laws that apply to qualified retirement plans?
Department of Labor (DOL)
Employee Retirement Income Security Agency (ERISA)
IRS
Pension Benefit Guaranty Corporation (PBGC)
A)
II and IV
B)
I, II, and III
C)
I and III
D)
I, III, and IV
I III IV
Under the reporting and disclosure requirements of the “Employee Retirement Income Security ACT of 1974 (ERISA)”, annual reports and summary plan descriptions are filed with the IRS (which provides copies to the DOL). An annual premium payment form is filed with the PBGC. If the defined benefit plan is not in compliance with funding requirements, the PBGC can terminate the plan.
Dorban products inc, has an annual payroll of $800k. John, the president, wishes to make the maximum contribution to the integrated profit sharing plan this year. What is the amount?
A)
$80,000
B)
25% of base compensation plus 30.7% of excess compensation totaling $245,600
C)
$200,000
D)
$120,000
C
The max contribution is 25% of covered payroll, or $200,000
ERISA requires reporting and disclosure of plan information to all of the following except:
DOL
SEC
IRS
Plan participants
SEC. Why would they care?
RQZ company employs 200 nonexcludible employees, 20 of whom are highly compensated. 16 of these 20 and 125 of the non-highly compensated employees benefit from the RQZ qualified pension plan. The average benefits accrued fro the highly compensated is 8%. The ratio test for the plan just listed is:
A)
86.8%.
B)
80.0%.
C)
69.4%.
D)
70.0%.
A.
20 of the 200 are highly compensated and 16 of those 20 are on the pension plan. 16/20 = 80%
180 of the 200 are non highly compensated. And 125 of those are on the pension plan. 125/180 = 69.44%
69.44% / 80& = 86.8%
The passing percentage for the ratio coverage test is 70%, so it passes.
Which is Correct in describing the integration of a 5% money purchase plan?
A)
The maximum excess contribution percentage is 10.0%.
B)
The maximum excess contribution percentage is 15.7%.
C)
The permitted disparity is 5.7%.
D)
The offset integration method may be used.
A
The max excess contribution percentage is 10%.
A MPP with a base contribution percentage of 5% will have a 5% permitted disparity (lesser of the base (5%) or 5.7%). Therefore the max excess contribution percentage will be 10% (5% base + 5% permitted disparity).
What are the requirements and effect of an eligible investment advice arrangement under the Pension Protection Act?
An eligible investment advice arrangement allows a plan fiduciary to give advice including recommending their own proprietary funds without violating fiduciary rules.
The investment adviser’s fees must be neutral.
An unbiased computer model certified by an independent expert to create a recommended portfolio for the client’s consideration is used.
Investment advisors for IRAs may only use the unbiased computer model option when providing eligible investment advice.
A)
I, III, and IV
B)
I, II, and III
C)
I and II
D)
II and III
I II III
IV is wrong. Investment advisors for IRAs may only use the neutral fee option and not the computer model option when providing eligible investment advice.
Which regarding top heavy plan is correct?
A top heavy defined benefit pension plan must provide accelerated vesting.
A top heavy plan is one that provides more than 50% of its aggregate accrued benefits or account balances to key employees.
A top heavy defined pension benefit plan must provide a min benefit accrual of 2% multiplied by the number of years of service (up to 20%).
For a top-heavy defined contribution plan, the employer must make a minimal contribution of 3% of annual covered compensation for each eligible non-key employee. If the contribution percentage for key employees is less than 3%, the contribution percentage to non-key employees can be equal to the key employees’ percentage.
I III IV
II is wrong, instead of more than 50% it’s MORE THAN 60%. 60% exactly does NOT make a plan top heavy.
Qualified retirement plans should do which of the following?
They must meet specific vesting requirements
They have special tax advantages over nonqualified plans
They must provide definitely determinable benefits
They require an annual profit to allow funding for the plan
I II III
IV is incorrect, annual profit is not required for a qualified plan to be funded.
Which of the following is correct about the permitted (SS integration) rules for DB plans?
A plan that provides a benefit for wages up to the integration level, plus a higher benefit for wages that exceed the integration level, is an integrated defined benefit excess plan.
A plan that provides that an employee’s benefit otherwise computed under the plan formula is reduced by a fixed amount or formula amount in relationship with the person’s Social Security benefit is an integrated defined benefit offset plan.
Covered compensation is the average of the participant’s compensation not in excess of the taxable wage base for the three-consecutive-year period ending with or within the plan year.
The base benefit percentage is determined by calculating the benefits provided by the plan based on compensation below the integration level, and expressing these benefits as a percentage of compensation below the integration level.
I II IV.
III is wrong because covered compensation means the average social security taxable wage base over the last 35 years.
Which of the following fed agencies is tasked with supervising the creation of new qualified retirement plans?
SEC
IRS
DOL
PBGC
IRS
Which of the following statements regarding prohibited transactions by a fiduciary or an individual associated with traditional IRA accounts are CORRECT?
Generally, if an individual or the individual’s beneficiary engages in a prohibited transaction with the individual’s IRA account at any time during the year, it will not be treated as an IRA as of the first day of the year.
If an individual borrows money against an IRA annuity contract, the individual must include in gross income the fair market value of the annuity contract as of the first day of the tax year.
Selling property to an IRA by a fiduciary or an individual owner of the IRA is not prohibited.
A 50% penalty will be assessed against an IRA owner who borrows money against her IRA.
A)
II and III
B)
I, III, and IV
C)
I, II, and III
D)
I and II
Statements I and II correctly describe prohibited transactions. Statement III is incorrect. Selling property to an IRA by a fiduciary or an individual owner of the IRA is a prohibited transaction. Statement IV is incorrect. The individual may have to pay the 10% additional tax on premature distributions. Also, if a person uses an Individual Retirement Account (not an Individual Retirement Annuity) as collateral for a loan, then only the amount of the Individual Retirement Account collateralized will be considered distributed. While this is bad, it is not as bad as the treatment of of a collateralized Individual Retirement Annuity in which the entire collateralized account is deemed to be distributed.
For 2023, the maximum annual contribution under a money purchase pension plan on behalf of a participant is the lesser of 100% of the employee’s covered compensation, or
A)
$265,000.
B)
$66,000.
C)
$330,000.
D)
$22,500.
66k