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
George, age 62, has worked for the Green Rivers Irrigation District for the last 16 years. He began participating in the 457 plan lately. This year, he will be eligible for the final three-year catch-up. What is his maximum deferral for 2024?
A)
$46,000
B)
$23,000
C)
$53,500
D)
$30,500
A
George’s 2024 maximum is twice the regular deferral limit for the year, $46,000. He cannot take advantage of the age 50 catch-up in his final three-year period if he chooses to double his annual amount.
LO 4.3.2
What is the maximum amount possible that may be contributed to a simplified employee pension (SEP) on behalf of a participant for 2024?
A)
$16,000
B)
$30,500
C)
$23,000
D)
$69,000
D
Think of it more like a mini-pension instead of a modified IRA. It’s sort of like, instead of contributing any amount, you can contribute $69,000 (or a lot more than with most retirement plans). Only problem is, it has to be for every employee equally.
For 2024, the maximum contribution possible on behalf of a participant to a SEP is the lesser of 25% of employee covered compensation or $69,000.
LO 4.2.2
Paul, age 64, is retiring next year. He participates in an eligible Section 457 plan through his governmental employer. His employer’s plan has a normal retirement age of 65. Which of these statements regarding Paul’s governmental Section 457 plan is false?
A)
During the last three years of employment before the plan’s normal retirement age, Paul’s elective deferral may be increased up to $46,000 (2024).
B)
Because he is over age 50 and within the last three years of employment before retirement, Paul can defer the maximum amount under a special catch-up provision and an additional amount under the over-age-50 catch-up provision this year.
C)
A lump-sum distribution from a governmental Section 457 plan may be rolled over to a qualified plan.
D)
Section 457 plan distributions are not eligible for net unrealized appreciation treatment.
B
True facts:
457 no NUA
457 lump sum can be rolled into Qualified Plan
457 can use double the contribution limit during three years before retirement
A participant in a governmental Section 457 plan may not use both the special catch-up allowance and the over-age-50 catch-up allowance in the same tax year.
LO 4.3.2
Sally, age 37, works for two employers, ABC Corporation and XYZ Corporation, both of which maintain Section 401(k) plans. If Sally defers $6,000 to ABC’s Section 401(k) plan in 2024, how much can she defer into XYZ’s 401(k) in 2024?
A)
$69,000
B)
$23,000
C)
$46,000
D)
$17,000
d
The maximum allowable elective deferral for someone under age 50 for 2024 is $23,000. If Sally contributes $6,000 to ABC’s plan in 2024, then she can only contribute up to $17,000 to XYZ’s plan ($23,000 − $6,000 = $17,000).
LO 4.4.1
For tax-exempt employers who do not want to implement a Section 457 plan and desire a plan funded strictly by employee elective deferrals, a good alternative would be
A)
a SIMPLE.
B)
a SEP plan.
C)
a SARSEP plan.
D)
a Section 403(b) plan.
d
The Section 403(b) plan, like the Section 457 plan, can be used as an employee deferred contribution plan. Certain tax-exempt employers can implement Section 403(b) plans. A SEP plan is funded by employer contributions. A new SARSEP can no longer be established. A SIMPLE requires mandatory employer contributions.
LO 4.3.1
Mark, age 40, earns $400,000 annually and participates in his employer’s SIMPLE IRA retirement plan. His employer matches 100% of employee contributions to the plan for up to 3% of employee compensation. Mark defers the maximum allowed to his SIMPLE IRA. What is the maximum combined employee and employer contribution that may be made to Mark’s SIMPLE IRA in 2024?
A)
$69,000
B)
$25,400
C)
$28,000
D)
$16,000
c
The maximum contribution that may be made on Mark’s behalf is $28,000 ($16,000 of employee elective deferrals and $12,000 of employer contributions). Notice that the employer contribution was based on his entire $400,000. SIMPLE IRAs with a 3% match are the only employer retirement plan that can consider compensation over $345,000 in 2024.
LO 4.2.1
Which of the following statements regarding tax-sheltered annuities (TSAs) is CORRECT?
An employee who participates in a Section 403(b) plan is not considered an active participant for purposes of determining the deductibility of traditional IRA contributions.
Active employees who make withdrawals from TSAs before age 59½ may incur a 10% early withdrawal penalty.
In-service withdrawals may be permitted.
If an employee has at least 15 years of service with an eligible employer, an additional catch-up contribution may be allowed.
A)
I and IV
B)
I and II
C)
I, II, and III
D)
II, III, and IV
d
Statement I is incorrect. An employee who participates in a Section 403(b) plan is considered an active participant for purposes of determining the deductibility of traditional IRA contributions. Statements II, III, and IV are correct.
LO 4.3.1
If an employer had the objective of maximizing discretionary retirement contributions from any source, which plan would be most appropriate?
A)
SEP IRA
B)
Traditional IRA
C)
SIMPLE IRA
D)
Roth IRA
a
Employers can make discretionary contributions to a SEP IRA of up to $69,000 in 2024. An additional consideration is that the contribution to a SEP is limited to 25% for employees. There are special adjustments for self-employed workers. On the other hand, SIMPLEs have a lower contribution limit, but it is based on 100% of the worker’s compensation. Thus, a SIMPLE IRA allows a higher total contribution until the worker’s compensation goes over around $100,000 for those under 50 and $120,000 for those age 50 and older. Employees cannot contribute to a SEP IRA. Employers cannot make discretionary contributions to a Traditional IRA or Roth IRA. The normal salary deferral limit in a SIMPLE IRA is $16,000. An employer can make either a 3% matching contribution or 2% nonelective contribution to a SIMPLE IRA. No other types of contributions may be made to a SIMPLE IRA.
LO 4.2.2
Margaret wants to establish a retirement plan for her small but profitable business. She wants the plan to allow employees to contribute for their own retirement but keep the employer contributions low. She is interested in an IRA plan form. Which of these plans would satisfy Margaret’s requirement?
SIMPLE IRA plan
SEP plan
A)
Neither I nor II
B)
Both I and II
C)
I only
D)
II only
c
sep = no ee conts
A SIMPLE IRA will allow for employee elective deferrals as a percentage of compensation of up to $16,000 (2024) annually. The plan would require the employer to match dollar for dollar up to 3% of the employee’s compensation or a 2% of compensation nonelective contribution for each eligible employee. A SEP plan does not allow employee deferrals. According to SECURE 2.0, for 2023 and following, most defined contribution plans like SEPs and SIMPLE 401(k)s may offer their workers a chance to treat some or all of the employer’s contribution as a Roth contribution. A SIMPLE IRA does not allow a worker to elect to treat an employer contribution as a Roth contribution. SIMPLEs (both SIMPLE 401[k]s and SIMPLE IRAs) may accept worker Roth contributions.
LO 4.2.1
Because a simplified employee pension (SEP) plan is not a qualified plan, it is not subject to all the same rules as qualified plans; however, it is subject to many of the same rules. Which of these statements when comparing or contrasting a SEP plan to a qualified plan is CORRECT?
A)
SEP plans and qualified plans have different funding deadlines.
B)
SEP plans and qualified plans do not have the same protection from creditors.
C)
SEP plans and qualified plans have different nondiscriminatory and top-heavy rules.
D)
The maximum contribution possible on behalf of an individual participant is the same for both types of plans.
d
The answer is the maximum contribution possible on behalf of an individual participant is the same for both types of plans ($69,000 for 2024). Both SEP plans and qualified plans can be funded as late as the due date of the return plus extensions. Qualified plans are protected under ERISA and federal bankruptcy law. SEPs share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules.
LO 4.2.2
What is the maximum elective deferral limit for a Section 403(b)/TSA plan in 2024, assuming no catch-up provisions apply?
A)
$16,000
B)
$23,000
C)
$69,000
D)
$3,000
b
The maximum elective deferral limit in a Section 403(b) plan for 2024 is $23,000, assuming no catch-up provisions apply.
LO 4.3.1
Assume an employer implements a SIMPLE IRA with a 3% employer-matching contribution. What is the effective includible compensation limit for employees younger than age 50 for a SIMPLE IRA for 2024?
A)
$275,000
B)
$69,000
C)
$533,333
D)
$345,000
c
If an employer decides to elect the 3% matching contribution for a SIMPLE IRA, the includible compensation limit in 2024 is effectively $533,333, or $16,000 ÷ 0.03. For a SIMPLE 401(k), it is the same includible compensation amount ($345,000) in 2024 as for other qualified retirement plans. If a SIMPLE IRA has the 2% mandatory employer contribution, the 2% stops at $345,000 in 2024. Notice that the law is designed to encourage a higher total contribution. It allows the owner to get more of a contribution with a match than with a mandatory annual employer contribution. Many people would not contribute without the match, so their retirement savings rate would be 2%. The same people will often do the 3% worker contribution to get the match, so their effective savings rate becomes 6%—thus, allowing the owner to save a little bit more ends up tripling the retirement savings account for many workers.
LO 4.2.1
What is the maximum salary reduction contribution someone age 45 with 10 years of service could make to a 403(b) for 2024?
A)
$16,000
B)
$7,000
C)
$30,500
D)
$23,000
d
The maximum elective deferral into a 403(b) for someone under age 50 with less than 15 years of service is $23,000 in 2024.
LO 4.3.1
All of these statements regarding the basic provisions of a Section 457 plan are correct except
A)
the contribution limit is doubled in the three years before the plan’s normal retirement age.
B)
in 2024, an individual who has attained age 50 may make additional catch-up contributions of up to $7,500.
C)
a Section 457 plan is a qualified plan of governmental units or agencies, and non-church-controlled, tax-exempt organizations.
D)
distributions from a Section 457 plan are not usually subject to an early withdrawal penalty.
c
A Section 457 plan is not a qualified plan. This plan is a deferred compensation plan that may be established by governmental units or agencies and non-church-controlled, tax-exempt organizations. Section 457 plans have special catch-up rules. Withdrawals from a 457 plan are not subject to the 10% EWP unless money is rolled into the plan. That outside money and the earnings on it are subject to the 10% EWP. That is why 457 plans that allow rollovers must account for the rollover money separately.
LO 4.3.2
Claudia’s SEP plan balance is $60,000. She wants to know her options for taking a loan from her SEP plan to pay some college expenses for her daughter, Caroline. Which of the following statements is CORRECT?
A)
Claudia may borrow up to 50% of her SEP account balance to pay for Caroline’s college expenses because she is 100% vested in the account contributions.
B)
Claudia may not make a loan from her SEP plan account.
C)
SEP plan loan repayments must be in level installments, payable at least quarterly over a five-year period.
D)
Because Claudia is 100% vested in the SEP plan, she may borrow up to $50,000 from the plan.
b
A SEP plan is a type of IRA. A participant is not permitted to borrow from a SEP plan.
LO 4.2.2
Assume that Mike, age 38, earns $62,000 at his job with the state and qualifies for participation in a Section 457 plan. He also works part time with a firm that offers a SIMPLE IRA. Mike will be contributing the maximum into the SIMPLE IRA in 2024. How much can Mike contribute to the Section 457 plan?
A)
$7,500
B)
$16,000
C)
$23,000
D)
$7,000
c
Mike could contribute $23,000 to the Section 457 plan in addition to the $16,000 contributed to the SIMPLE plan in 2024. Since the 457 plan is not aggregated with other plans, a participant could contribute $23,000 to a 457 plan and, if also participating in a SIMPLE plan, contribute an additional $16,000 to that plan, or, if participating in a 403(b) or 401(k), contribute up to $23,000 to one of those plans.
LO 4.3.2
Generally, for SIMPLE contributions,
A)
employer contributions are not deductible business expenses.
B)
only the first $3,000 contributed is tax deferred.
C)
contributions to the account are after-tax dollars for the employee.
D)
earnings within the account are tax deferred.
d
Earnings within the account are tax deferred. Contributions by the employee are made with pretax dollars, and the employer may deduct its contributions as an ordinary business expense. 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 contributions, such as SEPs, as Roth contributions.
LO 4.2.1
A simplified employee pension (SEP) plan
A)
can deny participation to any employee 21 years of age or older based on age.
B)
cannot be integrated with Social Security.
C)
imposes mandatory employer contributions.
D)
requires employer contributions on a nondiscriminatory basis.
d
The answer is simplified employee pension (SEP) plan requires employer contributions on a nondiscriminatory basis. 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. On the other hand, a SEP does not allow workers to contribute, so a SIMPLE IRA is another great choice for small employers. However, when the small business owner makes more than around $100,000 if younger than 50 and more than $120,000 for owners 50 and older, then a SEP will allow a larger contribution than a SIMPLE. These numbers do not include the enhanced contribution limits for SIMPLEs for 2024 and following. Finally, SEPs essentially require a business owner to have the same contribution rate for all eligible workers. Thus, a SIMPLE IRA is better for the self-employed owner because it requires a far lower contribution for the workers while still allowing a sizable contribution for the owner.
LO 4.2.2
Which of the following items are permitted investments in a Section 403(b) plan?
Annuity contract from insurance company
Growth stock mutual fund
A self-directed brokerage account invested in U.S. stocks and bonds
Gold coins minted in the United States
A)
I, II, and III
B)
I and II
C)
I only
D)
II and IV
b
TSA funding is limited to annuity contracts and mutual funds.
LO 4.3.1
Jean, age 38, earns $200,000 annually as an employee for Waste Distributors. Her employer has 76 workers and sponsors a SIMPLE IRA with a 3% match. What is the maximum contribution (employer and employee) that can be made to Jean’s SIMPLE account in 2024 if her employer’s plan does not allow the additional contribution options available for SIMPLEs starting in 2024 under SECURE 2.0.?
A)
$16,000
B)
$23,000
C)
$69,000
D)
$22,000
d
SIMPLE max contribution EE side: 16000
SIMPLE % match cont ER side: .03*200k = 6000
Total contribution = 22000
The maximum total contribution is $22,000 ($16,000 maximum employee contribution for 2024 + $6,000 employer match). The employer has chosen to make matching contributions up to 3% of compensation (the SIMPLE maximum). Therefore, the employer can make a contribution of up to $6,000 ($200,000 compensation × 3%). 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 contributions, such as SEPs, 401(k), etc. as Roth contributions. SIMPLE IRAs do not offer the worker the option to treat employer contributions as Roth contributions. Starting in 2024, employers may make additional non-elective contributions of 10% of pay. This additional contribution is limited to $5,000/year (meaning the first $50,000 gets the extra 10% employer contribution. Finally, the annual deferral limits for SIMPLE plans (both SIMPLE IRAs and SIMPLE 401[k]s) will be increased 10% from what it would normally be in 2024 for eligible firms with 25 or fewer employees. An eligible firm has not had a qualified retirement plan in the last three tax years. Employers with 26-100 employees will qualify for the higher limit if they have a 4% match instead of the normal 3% match, or if their non-elective contribution is 3% instead of the normal 2%. This is why SECURE 2.0 can be thought of as the “Retirement Plans Formerly Known as SIMPLEs Act.” The CFP Final is not expected to get to this degree of depth.
LO 4.2.1
Which one of the following describes a basic provision of a savings incentive match plan for employees (SIMPLE) IRA?
A)
SIMPLE IRA plans can be arranged to allow for in-service loans for up to 50% of the account balance, but not to exceed $50,000.
B)
One contribution formula an employer can use under a SIMPLE IRA is to make a 2% nonelective contribution on behalf of each eligible employee with at least $5,000 in current compensation.
C)
An employer may add a SIMPLE IRA plan to an existing defined benefit plan to allow employees to make elective deferrals.
D)
Only employers that average fewer than 20 employees can establish a SIMPLE IRA.
B
SIMPLE IRA plans are available to employers with 100 or fewer employees and with no other qualified retirement plan. The employer contribution requirement may be satisfied by either a 3% matching contribution formula or a 2% nonelective contribution for each employee with current-year compensation of $5,000 or more.
LO 4.2.1
Dorothy is a 36-year-old jewelry designer who owns her own small gallery. For most of the year, she works alone, handling the designing and sales herself. However, during the busy holiday season, she hires Yvonne and Mirabelle, two part-time sales clerks to help her. Each of these employees works approximately 300 hours, earning an average salary of $4,000. Dorothy would like to establish a retirement plan that would allow her to save for her own retirement, but not require her to cover the part-time employees. She also doesn’t want to pay expensive administrative costs. Which one of the following plans would be most appropriate for Dorothy?
A)
Traditional Section 401(k) plan
B)
SIMPLE IRA
C)
Section 457 plan
D)
SEP plan
b
A SEP plan would not be appropriate because it would require coverage of Dorothy’s part-time employees. A traditional Section 401(k) is not appropriate because it would involve special nondiscrimination testing and annual filing of the Form 5500 series. A Section 457 plan is not appropriate because it is available only for certain, private tax-exempt organizations. A SIMPLE IRA would be the most appropriate plan because it involves little administrative costs and would meet Dorothy’s retirement planning goals.
LO 4.2.1
Which of the following can provide Section 403(b) plans (TSAs) for their employees?
Chambers of commerce
Public schools
Public universities
Humane societies
A)
II, III, and IV
B)
I, II, and III
C)
I, II, III, and IV
D)
I and II
c
All of these institutions may provide Section 403(b) plans. Tax-exempt organizations are those qualifying under Section 501(c)(3) of the Internal Revenue Code. Other prospects for a Section 403(b) plan include hospitals, private nonprofit schools, charities, civic leagues, and tax-exempt organizations.
LO 4.3.1
George, age 55, earns $250,000 and participates in his employer’s SIMPLE IRA. The employer match is on a dollar-for-dollar basis, up to 3% of each participating employee’s compensation for the year. What is the maximum amount of employee and employer contributions that can be contributed to George’s account in 2024 if the employer does not amend the plan for the additional contributions allowed in 2024 and following?
A)
$27,000
B)
$23,000
C)
$16,000
D)
$19,500
A
DOES THIS MEAN SOMETHING?
“If the employer does not amend the plan for the additional contributions allowed in 2024 and following?”
Does this have something to do with the $3500 50+ catch up amount? The following explanation doesn’t elaborate, and ChatGPT is down.
The total of the employee and employer contributions that may be made to George’s account in 2024 is $27,000.
$16,000 employee contribution
+ $7,500 employer contribution ($250,000 × 0.03)
+ $3,500 employee age-50-and-over catch-up contribution
$27,000
LO 4.2.1
Which of these retirement plans, maintained by an employer, if any, would also permit the employer to establish a savings incentive match plan for employees (SIMPLE)?
A)
Section 403(b) plan
B)
Simplified employee pension (SEP)
C)
Cash balance plan
D)
Section 457 plan
D
To establish a SIMPLE, an employer cannot maintain another qualified or tax-advantaged plan. However, a Section 457 plan is a nonqualified deferred compensation plan and, therefore, does not constitute a prohibited plan for purposes of also establishing a SIMPLE. A union plan is another exception. A union plan would not stop an employer from establishing a SIMPLE plan for their non-union workers. However, for test purposes, a statement like, “A SIMPLE precludes the employer from having another type of retirement plan” is true unless either of these two exceptions are included in the scenario. The point is that SIMPLEs are supposed to be the only active retirement plan for the employer, and these two exceptions are very minor.
LO 4.2.1
Gary, age 50, participates in an eligible Section 457 plan through his non-church-controlled, private, tax-exempt employer. Which of these statements regarding Gary’s nongovernmental plan is CORRECT?
If Gary has elected the three-year catch-up provision, he may also use the regular age-50-and-over catch-up provision in the same tax year.
He must pay income tax on distributions when there is no longer a substantial risk of forfeiture, which may be earlier than when the distribution is actually paid.
During the last three years of employment before the plan’s normal retirement age, Gary’s elective deferral may be increased to up to $46,000 in 2024.
Section 457 plan distributions are not eligible for net unrealized appreciation treatment.
A)
I, II, and III
B)
II, III, and IV
C)
I, III, and IV
D)
II and III
B
Reminder: It’s way early, but 457b is a non-qualified plan, which means there is a substantial risk of forfeiture. Meaning it’s not taxable so long as you may lose fuckin all of it.
Only Statement I is incorrect. Gary is not eligible for the regular age-50-and-over catch-up provision because he is a participant in a nongovernmental plan and has elected the three-year special catch-up provision.
LO 4.3.2
Mark’s financial planner has recommended a retirement plan for implementation at Mark’s business. He tells Mark that the plan must cover all employees who are at least age 21 and have worked for Mark for three of the last five years (part-time counts). Contributions must be made for employees who earned at least $750 (2024) in the prior year. The plan can exclude union members if they have their own retirement plan.
Which type of plan has Mark’s planner recommended?
A)
SIMPLE IRA plan
B)
Simplified employee pension (SEP) plan
C)
SARSEP plan
D)
Profit-sharing plan
B
SEP requirements apparently:
21 y/o + must be covered
3 of the last 5 years, including part time covered
Contributions are mandatory for people who earned >=$750 in the past year
Union members can be excluded if they have their own retirement plan
$750 is a 2024 number for this, I’m assuming it will probably change to $800ish in 2025
The requirements listed are elements of a SEP plan.
LO 4.2.2
Susan participates in a Section 403(b) plan at work that includes loan provisions. Susan has recently enrolled in college and has inquired about the possible consequences of borrowing from the Section 403(b) plan to help pay for her education. As her financial planner, what is your advice to her?
A)
The loan is not being made for reasons of an unforeseeable emergency and, thus, is not possible.
B)
The Section 403(b) plan cannot make loans to participants as loans are only available from a qualified plan.
C)
The loan must usually be repayable within five years at a reasonable rate of interest.
D)
The loan will statutorily be treated as a taxable distribution from the plan.
C
For a loan not to be treated as a taxable distribution for tax purposes, it must usually be repayable within five years at a reasonable rate of interest. Disaster loans can get a one year extension and loans to purchase a home have no legal time limit. However, most plan documents limit loans used to buy a principal residence to 10 years. A Section 403(b) may include loan provisions similar to that of a qualified plan.
LO 4.3.1
Jill has decided to offer a retirement plan to her employees. She wants to implement a SIMPLE and is trying to decide between a SIMPLE IRA and a SIMPLE 401(k). All of these statements apply to both types of savings incentive match plan for employees (SIMPLE) plans except
A)
there is a 25% penalty for early distributions from a participant’s account within two years of entry into the plan.
B)
employer contributions are not subject to payroll taxes (FICA and FUTA).
C)
SIMPLE assets may only be rolled over into another SIMPLE within the first two years of initial participation in the plan by a participant.
D)
SIMPLEs are not subject to the top-heavy rules that apply to qualified plans.
A
Only the SIMPLE IRA screws you hard if you take out money within the first two years.
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 tax.
LO 4.2.1
Special catch-up provisions allow participants in Section 403(b) plans to make additional contributions if they have worked for a qualifying employer for at least
A)
10 years.
B)
5 years.
C)
3 years.
D)
15 years.
D
Section 403(b) plans (tax-sheltered annuities) allow employees who have worked for a qualifying employer for at least 15 years to make special catch-up contributions. These are in addition to the catch-up contributions that apply to employees who are age 50 or older.
LO 4.3.1
Life insurance may be a suitable investment for all of the following retirement plans except
A)
money purchase plans.
B)
simplified employee pension (SEP) plans.
C)
traditional defined benefit plans.
D)
age-weighted profit-sharing plans.
Life insurance cannot be held in any type of IRA, including SEPs and SIMPLE IRAs. Qualified retirement plans can purchase life insurance if they comply with the incidental benefit rules.
LO 4.2.2
Which type of investment cannot be held in an IRA?
Federally Minted Gold Coins
Life Insurance with a Face Value of more than $500
ETFs
Mutual Funds
Life insurance cannot be held in an IRA
A government employer would choose to establish a Section 457 plan for all of these reasons except
A)
tax deductibility of contributions.
B)
no early withdrawal penalty on distributions.
C)
income tax credit for certain taxpayers regarding elective contributions.
D)
tax-deferred growth.
A
Can’t deduct from taxes if you’re exempt from taxes to begin with.
Because Section 457 plans are sponsored by tax-exempt entities, deductibility of plan contributions is not an issue.
LO 4.3.2
Which one of these statements is CORRECT regarding a savings incentive match plan for employees (SIMPLE)?
A)
State and local governments are not allowed to establish a SIMPLE IRA.
B)
Employers can provide either a nonelective or a matching contribution.
C)
In a SIMPLE IRA, employees can defer the lesser of 25% of compensation or $23,000 in 2024.
D)
To be eligible to offer a SIMPLE plan, employers cannot have more than 50 employees earning $5,000 or more.
B
Simple plans can have one of two possible contributions from ER.
SIMPLE plans can have either a 2% nonelective contribution or a 3% match. 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 contributions, such as SEPs, 401(k)s, 403bs, and SIMPLE 401(k)s, but not SIMPLE IRAs, as Roth contributions. So workers can make Roth contributions to a SIMPLE IRA, but they are not allowed to elect to treat employer contributions as Roth contributions.
LO 4.2.1
Tom, a sole proprietor, is interested in implementing a retirement plan. He may have employees in the future. He also wants a plan that is easily understood, where the employees bear the investment risk, does not favor older participants, and allows elective deferrals. Which of the following plans is best suited to Tom’s goals?
A)
Age-weighted profit-sharing plan
B)
Target benefit plan
C)
SEP plan
D)
SIMPLE IRA
Tom’s goals describe attributes of a SIMPLE IRA. The SEP plan and the target benefit plan do not allow worker contributions. The age-weighted profit-sharing plan is not as easily understood. Also, the target benefit plan and the age-weighted profit-sharing plan favor older employees.
LO 4.2.1
Does a SEP IRA allow elective deferrals?
No. Elective deferral is fancy talk for “employee contribution”
Does a target benefit plan allow elective deferrals?
No. Employees cannot contribute to a SEP IRA.
What does SIMPLE in SIMPLE IRA stand for?
Savings Incentive Match Plan for Employees. SIMPLE. It’s weird to think of an IRA from an employer perspective rather than from a personal perspective, but remember, SEPs are also IRAs and those are employer based.
Which of the following describe features of a Section 403(b) plan (TSA)?
Two different catch-up contribution provisions may apply for certain participants.
In general, the nondiscrimination rules that apply to qualified plans also apply.
The investment risk is borne by plan participants.
Loans are never allowed.
A)
I, II, and III
B)
I and II
C)
III and IV
D)
II and III
A
For eligible participants with 15 years of service with the sponsor-employer and who have attained age 50, two types of catch-up allowances may be available. In general, the nondiscrimination rules that apply to qualified plans also apply to Section 403(b) plans, and the plan can be designed to allow loans. Individual accounts allow employees to direct their own investments. As such, they bear the investment risk. Loans may be permissible, but are plan specific.
LO 4.3.1
Employee participants in 403(b) plans are _______________ vested in their elective deferrals and all plan earnings that result from those reductions.
A)
usually 100%
B)
always 100%
C)
always gradually
D)
usually gradually
B
Reminder: this is talking about the EMPLOYEE’s contribution. In any employer retirement plan, you are always entitled (100% vested) in the money you put in, no matter the time frame.
Participants in every type of employer retirement plan are always 100% vested in their elective deferrals and the earnings from those contributions.
LO 4.3.1
Christopher works for the Ex-March Company, a small business with 75 employees. Ex-March has decided to establish a SIMPLE IRA plan for all of its employees and will make a 2% nonelective contribution for each of its eligible employees. Christopher’s annual salary is $40,000, and he has determined that he cannot afford to make an elective deferral to his SIMPLE IRA. Which of the following statements regarding Christopher’s SIMPLE IRA contribution is CORRECT?
A)
Christopher must make a 2% minimum contribution this year.
B)
Ex-March is not required to make a contribution for Christopher.
C)
Ex-March must make a nonelective contribution of $1,200 for Christopher.
D)
Ex-March Company must make a nonelective contribution of $800 for Christopher.
D
The “Non-elective” is referring to the ER side. Meaning they don’t have a choice, and will HAVE to contribute whether they want to or not. This is instead of contributing 3% as a match (Required if the employee contributes).
Ex-March must make a nonelective contribution of $800 for Christopher. Though Christopher does not make a contribution this year, Ex-March must make a nonelective contribution of $800 (2% × $40,000) on his behalf. Under the employer contribution election Ex-March has selected, even if an eligible employee does not contribute to the SIMPLE IRA, that employee would still receive an employer nonelective contribution to his SIMPLE IRA equal to 2% of compensation.
LO 4.2.1
Which of these are characteristics of a savings incentive match plan for employees (SIMPLE)?
Employees are permitted to make after-tax contributions to the SIMPLE.
The ACP test is not required for a SIMPLE.
Distributions from a SIMPLE IRA used to pay higher education costs are exempt from the early withdrawal penalty.
An employer can combine a SIMPLE 401(k) with a money purchase plan to maximize the employer’s income tax deduction.
A)
II and III
B)
II, III, and IV
C)
I and IV
D)
I and II
A
After-tax contributions are not permitted with a SIMPLE. However, 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 contributions, such as SEPs, as Roth contributions. While a Roth contribution is like an after-tax contribution because neither gets an immediate income tax deduction, Roth contributions are a different category from after-tax contributions. After-tax contributions are similar to nondeductible IRA contributions and Roth contributions to a SEP or SIMPLE are like Roth IRA contributions in many ways. Nondeductible IRAs are covered in Module 5.The ACP test is not required with SIMPLEs. Distributions for higher education expenses from a SIMPLE IRA (or any IRA) are exempt from the early withdrawal penalty. An employer sponsoring a SIMPLE cannot also maintain a qualified plan.
LO 4.2.1
In which of these plans would you typically find a lump sum distribution that may qualify for favorable income tax treatment?
A)
A profit sharing plan
B)
A SEP plan
C)
A traditional defined benefit plan
D)
A Section 403(b) plan
A
Somehow it’s not the pension plan.. WTF
The possibility of favorable income tax treatment for a lump sum distribution (like NUA treatment) is available only for qualified (versus tax-advantaged) plans. In addition, the lump sum distribution option is typically available only in a defined contribution type of plan, such as a profit sharing plan.
LO 4.1.1
What is the maximum contribution an employer may make to a SEP plan account in 2024 for an employee whose compensation is $345,000?
A)
$23,000
B)
$69,000
C)
$16,000
D)
$86,250
B
SEP is like a mini pension plan. Employers can put in more.
The limits for SEP contributions are higher than those of traditional IRAs and are similar to those of the qualified plans. Specifically, SEP contributions are limited to the lesser of 25% of employee compensation (limited to the includible compensation amount of $345,000 for 2024); or $69,000 (2024).
For an employee with a compensation of $345,000, the limit would be the lesser of $86,250 (25% × $345,000), or $69,000 in 2024.
LO 4.2.2
What’s the maximum that an employer can put into a SEP IRA?
A)
$23,000
B)
$69,000
C)
$16,000
D)
$86,250
B
$69,000
Because it’s a mini (tax advantaged, not qualified) pension plan they can put in more.
Which of these statements regarding simplified employee pension (SEP) plans is CORRECT?
A)
Workers are allowed to have employer SEP contributions treated as Roth contributions.
B)
SEPs can offer retirement plan loans.
C)
Workers can decide how much they will contribute to a SEP.
D)
Contributions must be made for all employees who have attained age 21 and who have performed services for the employer for at least two of the last five years.
A
The answer is workers are allowed to have employer SEP contributions treated as Roth contributions. This started in 2023 according to SECURE 2.0.
LO 4.2.2
Which of these employers might be eligible to maintain a SIMPLE?
A)
An employer that also maintains a Section 403(b) plan
B)
An employer that also maintains a Section 401(k) plan
C)
An employer that also maintains a SEP plan
D)
An employer that also maintains a Section 457 plan
D
If you have a SIMPLE, employer can’t have any of these alongside it: Qualified plans, SEP IRA, SARSEP, 403(b). You can have tax advantaged plan that’s not listed or a non-qualified plan (457 in this case).
An employer cannot maintain a SIMPLE if it maintains any other qualified retirement plan, SEP plan, SARSEP plan, or Section 403(b) plan. However, an employer that maintains a Section 457 plan can also maintain a SIMPLE. The same is true for a union plan.
LO 4.2.1
Which of these statements is CORRECT in describing a SIMPLE IRA?
A)
SIMPLE IRAs may include loan provisions for participants who have satisfied a two-year participation period.
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)
Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% penalty tax.
D
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
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
Get it right next time dumbass
Claudia’s SEP plan balance is $60,000. She wants to know her options for taking a loan from her SEP plan to pay some college expenses for her daughter, Caroline. Which of the following statements is CORRECT?
A)
Claudia may not make a loan from her SEP plan account.
B)
SEP plan loan repayments must be in level installments, payable at least quarterly over a five-year period.
C)
Claudia may borrow up to 50% of her SEP account balance to pay for Caroline’s college expenses because she is 100% vested in the account contributions.
D)
Because Claudia is 100% vested in the SEP plan, she may borrow up to $50,000 from the plan.
A
A SEP plan is a type of IRA. A participant is not permitted to borrow from a SEP plan.
LO 4.2.2
Because a simplified employee pension (SEP) plan is not a qualified plan, it is not subject to all the same rules as qualified plans; however, it is subject to many of the same rules. Which of these statements when comparing or contrasting a SEP plan to a qualified plan is CORRECT?
A)
SEP plans and qualified plans have different nondiscriminatory and top-heavy rules.
B)
SEP plans and qualified plans have different funding deadlines.
C)
The maximum contribution possible on behalf of an individual participant is the same for both types of plans.
D)
SEP plans and qualified plans do not have the same protection from creditors.
C
Is the 401(k) and exception to this? I’m pretty certain an employer can’t just plop $69,000 into your account like how it’s done in a SEP IRA./
The answer is the maximum contribution possible on behalf of an individual participant is the same for both types of plans ($69,000 for 2024). Both SEP plans and qualified plans can be funded as late as the due date of the return plus extensions. Qualified plans are protected under ERISA and federal bankruptcy law. SEPs share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules.
LO 4.2.2
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, III, and IV
B)
II, III, and IV
C)
I, II, and III
D)
I, II, III, and IV
D
Remember, there are no employEE contributions to a SEP IRA, so all contributions from the employer are apparently immediately vested.
All of the statements are correct.
LO 4.2.2
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, II, and III
B)
III and IV
C)
I and II
D)
I, II, III, and IV
I II
Get ready to read
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
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)
$250.
C)
$500.
D)
$100.
B
Simple IRA, random ass rule, if you withdraw within the first two years, and there’s no exception to the EWP thing, you owe 25% on the withdrawn amount as taxes rather than the standard 10% found on other plans, SIMPLE 401(k) as an example.
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
Which of these are characteristics of a savings incentive match plan for employees (SIMPLE)?
Employees are permitted to make after-tax contributions to the SIMPLE.
The ACP test is not required for a SIMPLE.
Distributions from a SIMPLE IRA used to pay higher education costs are exempt from the early withdrawal penalty.
An employer can combine a SIMPLE 401(k) with a money purchase plan to maximize the employer’s income tax deduction.
A)
I and IV
B)
II, III, and IV
C)
II and III
D)
I and II
II III
After-tax contributions are not permitted with a SIMPLE. However, 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 contributions, such as SEPs, as Roth contributions. While a Roth contribution is like an after-tax contribution because neither gets an immediate income tax deduction, Roth contributions are a different category from after-tax contributions. After-tax contributions are similar to nondeductible IRA contributions and Roth contributions to a SEP or SIMPLE are like Roth IRA contributions in many ways. Nondeductible IRAs are covered in Module 5.The ACP test is not required with SIMPLEs. Distributions for higher education expenses from a SIMPLE IRA (or any IRA) are exempt from the early withdrawal penalty. An employer sponsoring a SIMPLE cannot also maintain a qualified plan.
LO 4.2.1
What is the maximum contribution an employer may make to a SEP plan account in 2024 for an employee whose compensation is $345,000?
A)
$16,000
B)
$69,000
C)
$86,250
D)
$23,000
B
Mark’s financial planner has recommended a retirement plan for implementation at Mark’s business. He tells Mark that the plan must cover all employees who are at least age 21 and have worked for Mark for three of the last five years (part-time counts). Contributions must be made for employees who earned at least $750 (2024) in the prior year. The plan can exclude union members if they have their own retirement plan.
Which type of plan has Mark’s planner recommended?
A)
SIMPLE IRA plan
B)
SARSEP plan
C)
Simplified employee pension (SEP) plan
D)
Profit-sharing plan
SEP SEP SEP SEP SEP
you keep getting this one wrong
there’s no $750 number associated with SIMPLEs
All of these statements regarding the basic provisions of a Section 457 plan are correct except
A)
in 2024, an individual who has attained age 50 may make additional catch-up contributions of up to $7,500.
B)
a Section 457 plan is a qualified plan of governmental units or agencies, and non-church-controlled, tax-exempt organizations.
C)
distributions from a Section 457 plan are not usually subject to an early withdrawal penalty.
D)
the contribution limit is doubled in the three years before the plan’s normal retirement age.
B
A Section 457 plan is not a qualified plan. This plan is a deferred compensation plan that may be established by governmental units or agencies and non-church-controlled, tax-exempt organizations. Section 457 plans have special catch-up rules. Withdrawals from a 457 plan are not subject to the 10% EWP unless money is rolled into the plan. That outside money and the earnings on it are subject to the 10% EWP. That is why 457 plans that allow rollovers must account for the rollover money separately.
LO 4.3.2
Mark, age 40, earns $400,000 annually and participates in his employer’s SIMPLE IRA retirement plan. His employer matches 100% of employee contributions to the plan for up to 3% of employee compensation. Mark defers the maximum allowed to his SIMPLE IRA. What is the maximum combined employee and employer contribution that may be made to Mark’s SIMPLE IRA in 2024?
A)
$28,000
B)
$16,000
C)
$69,000
D)
$25,400
A
The maximum contribution that may be made on Mark’s behalf is $28,000 ($16,000 of employee elective deferrals and $12,000 of employer contributions). Notice that the employer contribution was based on his entire $400,000. SIMPLE IRAs with a 3% match are the only employer retirement plan that can consider compensation over $345,000 in 2024.
4.2.1
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)
Neither I nor II
B)
I only
C)
II only
D)
Both I and II
I only
I hate this one
Statement II is incorrect. Pretax contributions by participants are permitted in an eligible Section 457 plan.
LO 4.3.2
