Practice Exam 1

Question 1

(LO 5-3)

Question 1 of 80

Ted and Margaret Atwood plan to contribute $11,000 to their IRAs for the current tax year. They are both employed and file a joint tax return. Ted is an active participant in his employer’s qualified retirement plan, but Margaret is not eligible for her employer’s plan. Their AGI for the current tax year is $106,000. What amount, if any, can they deduct for their IRA contributions?

$0

$3,000

$5,500 (Margaret’s contribution only)

$8,800

$11,000

Answer 1

$8,800

Since Ted is an “active participant” and their AGI falls within the phaseout range for married joint filers ($98,000–$118,000), their $11,000 IRA contribution will be only partially deductible.

The upper AGI limit of $118,000 minus their AGI of $106,000 equals $12,000. $12,000 ÷ $20,000 = .60.

And .60 × $5,500 (the maximum contribution) = $3,300 for Ted + $5,500 for Margaret’s spousal IRA.

Question 2

(LO 9-4)

Question 2 of 80

Which one of the following is not a characteristic of an IRC Section 125 cafeteria plan?

a. The plan offers one or more nontaxable benefits and a cash benefit taxable to the employee.
b. Generally, retirement or deferred compensation benefits may not be included.
c. The plan may include 401(k) (salary reduction) contributions, 401(m) (after-tax) contributions, and employer matching contributions.
d. The plan may provide reimbursements for educational expenses, commuter expenses, and LTC insurance premiums.
e. The plan may provide dental expense reimbursements and child care expense reimbursements.

Answer 2

d. The plan may provide reimbursements for educational expenses, commuter expenses, and LTC insurance premiums.

Cafeteria plans are prohibited from offering reimbursement programs for educational expenses and commuter expenses, as well as for non-cash fringe benefits and employee discounts and LTC insurance.

Retirement plans and deferred compensation plans generally are not allowed, with the exception of 401(k) and 401(m) contributions, which are allowed.

Question 3

Question 3 of 80

What is the significance of an investment in life insurance for an IRA?

a. may be recommended to generate high returns, but cannot represent more than 25% of the total account value
b. may be recommended to generate high returns, but cannot represent more than 50% of the total account value
c. not recommended for an IRA owner over age 50 because the cash value of the policy may not build to a sufficient level by the time of the owner’s retirement
d. not recommended because an investment in life insurance may be considered a prohibited transaction, resulting in loss of IRA status for the account
e. not recommended because IRA investment vehicles are required to be liquid

Answer 3

d. not recommended because an investment in life insurance may be considered a prohibited transaction, resulting in loss of IRA status for the account

IRAs are not permitted to invest in life insurance or loans; such an investment is generally a prohibited transaction and would result in the account losing its IRA status. (LO 5-2)

Question 4

Question 6 of 80

All of the following correctly describe a concept related to non-qualified deferred compensation or stock plans except

a. Unlike ISOs, ESPPs can be offered at a discount.
b. If an employee makes a Section 83 election upon the grant of restricted stock, they will not be taxed when the restricted stock becomes vested.
c. A disqualifying disposition with an ISO will result in ordinary income taxes, as well as FICA and FUTA taxes.
d. Non-qualified stock options are taxed upon exercise, regardless of whether the stock is sold or not.

Answer 4

c. A disqualifying disposition with an ISO will result in ordinary income taxes, as well as FICA and FUTA taxes.

Incentive stock options, when there is a disqualifying disposition, are subject to ordinary income taxes, but they are not subject to FICA (payroll taxes) or FUTA taxes.

(LO 7-7, 8-5, 8-6)

Question 5

(LO 2-8)

Question 7 of 80

The following information relates to Elizabeth Chen and her business, Chen Cards Ltd.

Elizabeth, age 48, started her company 15 years ago and does not plan to retire until age 70.

The other Chen Cards Ltd. employees range in age from 45 to 63 and have from one year to eight years of service.

Elizabeth would like to install a qualified plan that would both favor her and reward long-term employees before they retire.

Which one of the following is an advantage to Elizabeth of installing a defined benefit plan with a unit-benefit formula?

a. It could maximize Elizabeth’s benefits and give employees incentive to work harder as units of profit are allocated to their accounts.
b. It could use a higher integration level than other plan types to maximize the owner’s benefits.
c. It could reward older employees hired in their 50s or 60s and nearer to retirement.
d. It will provide the largest contribution to Elizabeth’s account since she has the most years of service.
e. It could both maximize Elizabeth’s benefits and reward long-term employees because benefits are based in part on length of service.

Answer 5

e. It could both maximize Elizabeth’s benefits and reward long-term employees because benefits are based in part on length of service.

A unit-benefit formula in a defined benefit pension plan will favor employees who have accrued many years of service with the company—in this case, primarily Elizabeth and the long-term employees she would like to reward. Note that d. is incorrect because there are employees who are older than Elizabeth and who may, depending upon other factors, require higher funding amounts to support their retirement benefits than are required to support Elizabeth’s benefit.

Question 6

(LO 9-7)

Question 8 of 80

Which one of the following describes a basic provision of a Health Savings Account (HSA)?

a. Employers may not make contributions into an HSA for the benefit of employees.
b. A participant may make a pre-tax contribution to an HSA under a cafeteria plan, and take a current-year tax deduction for those contributions.
c. To qualify for an HSA, an individual must have health insurance coverage under a high-deductible plan.
d. Annual contributions to an HSA are limited to 100% of the annual health coverage out-of-pocket amount.

Answer 6

c. To qualify for an HSA, an individual must have health insurance coverage under a high-deductible plan.

HSA eligibility hinges, in part, on participating in a high-deductible health plan.

An individual who is covered (as an individual, spouse, or dependent) under another health insurance plan that is not a high-deductible plan will not normally be considered eligible for an HSA.

An employer can make contributions to an employee’s HSA.

If an HSA is included in a cafeteria plan, the employee cannot take a tax deduction for any pre-tax contributions.

Contributions to an HSA are limited to an indexed amount each year.

Contribution limits are not equal to the annual out-of-pocket amount.

Question 7

(LO 5-2)

Question 9 of 80

Al and Susan Graham, both age 42, are married and file a joint income tax return. Al earned $153 this year, and Susan earned $50,000. Susan is an active participant in an employer-sponsored qualified plan. Susan contributed $1,500 to her IRA for this year.

How much, if any, can be deducted for a maximum contribution to a spousal IRA for Al?

$0

$153

$200

$5,500

$6,500

Answer 7

$5,500

The maximum deductible contribution for a spousal IRA for Al is $5,500.

Question 8

(LO 5-2)

Question 10 of 80

Stewart and Abby Delfause, both age 35, plan to contribute a total of $11,000 to their IRAs for this tax year. They both work outside the home, and they file a joint income tax return. Stewart is a teacher at the local high school and participates in a 403(b) plan. Abby’s employer does not provide a retirement plan. They expect that their adjusted gross earnings for the year will be $120,000.

What amount, if any, can they deduct for their IRA contributions?

$0

$2,900

$5,500

$6,500

$11,000

Answer 8

$5,500

An individual is not denied a deduction for his or her IRA contribution simply because of the other spouse’s active participation, unless the couple’s combined AGI exceeds $184,000 (2016).

Based on their AGI, Abby will be able to deduct a contribution of up to $5,500 to an IRA.

Since their combined AGI is too high for Stewart to make a deductible IRA contribution, he should consider contributing to a Roth IRA.

Question 9

(LO 5-7)

Question 11 of 80

Which one of the following requirements is a possible disadvantage of a simplified employee pension (SEP) for an employer?

a. The SEP’s trustee is subject to ERISA’s prohibited transaction excise tax penalties.
b. A SEP must have a fixed contribution formula that is nondiscriminatory.
c. The vesting requirements for a SEP prohibit forfeitures.
d. Employer contributions to a SEP are subject to payroll taxes.

Answer 9

c. The vesting requirements for a SEP prohibit forfeitures.

SEP contributions must be 100% vested (i.e., nonforfeitable at all times). SEPs consist of individual IRAs; there is no trustee for a SEP plan.

The contribution formula of a SEP is not required to be fixed.

Employer contributions to a SEP are not subject to payroll taxes.

Question 10

(LO 9-3)

Question 12 of 80

Which one of the following is not a correct statement regarding the tax implications of group permanent life insurance coverage?

a. The employer can deduct the premiums if the employee’s right to the insurance is non-forfeitable when paid.
b. The employee is subject to taxation on premiums paid by the employer if the employee designated the beneficiary.
c. The employee can reduce the taxable amount by the amount of employee-paid premiums.
d. The employee is subject to taxation only on premiums paid by the employer for coverage exceeding $50,000.
e. The employer cannot deduct the premiums if the employer is the beneficiary.

Answer 10

d. The employee is subject to taxation only on premiums paid by the employer for coverage exceeding $50,000.

The employee’s exemption for the employer’s cost of the first $50,000 of group life insurance coverage applies only to group term life insurance, not to group permanent life insurance.

To be allowed to deduct employer-paid premiums, the employer must not be the beneficiary of the policy and the employees must have non-forfeitable rights to the insurance.

The employee who designates the beneficiary of the permanent policy is taxed on the employer-paid premiums, less any premiums paid by the employee.

Question 11

(LO 1-6)

Question 13 of 80

Glenn Hightower opened his architectural consulting firm 40 years ago at age 26. After working as a sole proprietor for his entire career, Glenn sold his firm to a professional corporation and retired this year. He will receive five annual payments of $50,000 each from the sale of the business. His Social Security full retirement age is 66.

Is Glenn eligible for Social Security retirement benefits this year, and why or why not?

a. yes, because he operated his firm as a sole proprietorship and not as a professional corporation
b. no, because architecture is a profession and therefore is not covered by the Social Security retirement program
c. yes, because he is a fully insured professional and meets the age requirement to receive retirement payments
d. no, because he sold his firm to a professional corporation and will get too much income from the sale to receive Social Security payments
e. no, because consulting businesses are not covered by the Social Security retirement program

Answer 11

c. yes, because he is a fully insured professional and meets the age requirement to receive retirement payments

Self-employed sole proprietors are covered under Social Security; the installment sale payments are not earned income, so they would not affect Glenn’s Social Security benefits.

Question 12

Question 14 of 80

All of the following are characteristics of an owner/employee’s participation in a Keogh plan except which one of the following?

a. the employer contribution to the owner/employee’s account is based on net earnings (with required modifications) rather than on compensation
b. lump-sum distribution treatment is not available to an owner/employee who is under age 59½ and separates from service
c. the owner/employee may not borrow funds from the plan because of qualified plan loan rules
d. lump-sum distribution treatment may be available to the owner/employee if the distribution is due to the owner/employee’s death or disability
e. lump-sum distribution treatment may be available to the owner/employee if the distribution is due to the owner/employee’s attaining age 591⁄2

Answer 12

c. the owner/employee may not borrow funds from the plan because of qualified plan loan rules

Common-law employees, an owner/employee in a sole proprietorship, a partner in a partnership, or a shareholder/employee in an S corporation may borrow from their plan accounts, in accordance with plan provisions.

Question 13

(LO 3-3)

Question 15 of 80

The following information relates to Bill Mitchell, a senior geologist with Major Mines, a large corporation.

Bill, age 57, is paid $75,000 annually as a senior geologist.

The 48-year-old controlling shareholder of Major Mines recently has become company president in an attempt to reduce the high turnover rate and to increase the profitability of company operations.

A target benefit plan has just been installed. It was designed to provide the maximum contribution for the 48-year-old president.

Which one of the following is a disadvantage to Bill Mitchell regarding the target benefit plan?

a. Bill does not know the amount of annual retirement benefit to expect.
b. Bill’s salary reduction contributions to the plan are not available for plan loans.
c. Employer contributions are limited to 15% of covered payroll.
d. Contribution flexibility allows the employer to lower its contribution if profits go down.
e. Bill will receive a reduced benefit if he retires at age 65 because he will not have 10 years of plan participation at that time.

Answer 13

a. Bill does not know the amount of annual retirement benefit to expect.

A target benefit plan would be advantageous to Bill because it would skew contribution allocations in his (and other older employees’) favor.

The uncertainty of the amount of retirement benefit, however, is a disadvantage to Bill (and to other participants).

Target benefit plans do not allow 401(k) elective deferrals, and employer contributions are limited to 25%—not 15%—of covered payroll.

Question 14

(LO 6-6)

Question 16 of 80

A parent-subsidiary group exists if the parent owns what percentage of the voting stock in another corporation?

a. at least 50%
b. more than 50%
c. at least 80%
d. more than 80%

Answer 14

c. at least 80%

A parent-subsidiary group exists if the parent owns at least 80% of the stock in another corporation.

Question 15

(LO 3-3, 3-7, 7-7)

Question 17 of 80

Which one of the following types of plan formulas should be considered by a relatively new business with a fluctuating cash flow and key employees who are significantly older than the rank-and-file employees?

a. cash balance
b. service based
c. target benefit
d. age weighted

Answer 15

d. age weighted

An age-weighted formula can be used by a profit sharing plan.

This arrangement will work best for a business with a fluctuating cash flow and key employees who are older than the other employees.

Pension plans (i.e., cash balance plans and target plans) are subject to minimum funding requirements and may create a problem for a business with a fluctuating cash flow, even though they will maximize contributions for older employees.

A service-based formula will favor employees who have many years of service with the business.

Question 16

(LO 7-2)

Question 18 of 80

Use the information below about Ted Ridge to answer the question that follows.

Ted is age 54 and married. He and his wife, Beth, have a college-age daughter named Meredith. Ted has been making salary reduction contributions to his employer-sponsored 401(k) plan for the last four years. Ted is considered a highly compensated employee.
The current 401(k) account balance (nonforfeitable accrued benefit) is $21,500. This total includes account earnings of $3,500. The plan allows for both hardship withdrawals and plan loans. Plan loans are available to all plan participants on an equal basis. Meredith is just starting college, and Ted needs to use some of his plan assets to pay college tuition.

Which one of the following is a correct statement about how Ted could meet Meredith’s college expenses?

a. The maximum plan loan Ted could take is $10,750.
b. Ted could withdraw the full $21,500 from his 401(k) account if he made a withdrawal under the hardship provisions.
c. Ted is not allowed to take a loan from the plan since he is a highly compensated employee.
d. Ted would not have to pay a premature distribution penalty tax if he made the maximum hardship withdrawal.
e. Ted could not withdraw funds under the hardship provisions because his need does not meet the “immediate and heavy financial need” criterion.

Answer 16

a. The maximum plan loan Ted could take is $10,750.

The maximum loan amount is the lesser of $50,000 or one-half of the nonforfeitable accrued benefit of $21,500—i.e., $10,750.

Answer b. is wrong because plan earnings are not available for hardship withdrawal; thus, only $18,000 is available (i.e., $21,500 less $3,500).

Answer c. is incorrect because as long as loans are available to all employees on an equal basis, highly compensated employees may take loans.

Answer d. is wrong because hardship withdrawals from 401(k) plans are subject to the 10% premature distribution tax.

Answer e. is wrong because Ted will use the funds for college tuition, and such a purpose is “an immediate and heavy financial need.”

Question 17

(LO 5-6)

Question 19 of 80

Which one of the following describes a basic provision of a SIMPLE IRA?

a. Only employers that average fewer than 20 employees can establish a SIMPLE IRA.
b. An employer may add a SIMPLE IRA plan to an existing defined benefit plan to allow employees to make elective deferrals.
c. 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.
d. A SIMPLE IRA must satisfy both the ADP and ACP nondiscrimination tests.
e. One contribution formula an employer can use under a SIMPLE IRA is to make a 2% non-elective contribution on behalf of each eligible employee with at least $5,000 in current compensation.

Answer 17

e. One contribution formula an employer can use under a SIMPLE IRA is to make a 2% non-elective contribution on behalf of each eligible employee with at least $5,000 in current compensation.

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% non-elective contribution for each employee with current-year compensation of $5,000 or more.

Question 18

(LO 2-1, 2-2)

Question 20 of 80

Which one of the following describes a basic provision of qualified retirement plan contribution or benefit calculations?

a. A career-pay provision generally results in a plan benefit that reflects the impact of inflation.
b. A final-pay provision generally results in a higher benefit for the employee.
c. The plan must define its normal retirement age as the Social Security retirement age.
d. Compensation is limited to $210,000 in 2016, an amount that is indexed.

Answer 18

b. A final-pay provision generally results in a higher benefit for the employee.

A defined benefit plan can base the retirement benefit on the employee’s average pay over the employee’s career or over the final three or five years.

The final-pay provision is generally a higher amount, reflecting the impact of inflation in recent years. The plan’s normal retirement age is not necessarily the Social Security retirement age.

The compensation limit is indexed, and is $265,000 in 2016.

Question 19

(LO 8-2)

Question 21 of 80

Larry Patton, age 55, is an employee of the Binder Box Co. Larry began work for Binder in 2009 as an executive in charge of the production department. As part of Larry’s employment contract, Binder contributes to a separate account for Larry’s benefit an amount equaling 10% of his salary each year. The terms of this non-qualified plan state that the contribution of these amounts will cease and Larry will have no rights to the income if he fails to complete 10 years of substantial service with Binder Box Co. Otherwise, Larry is entitled to receive the deferred cash amounts upon completing 10 years of substantial service with his employer. This non-qualified deferred compensation plan segregates property for the benefit of Larry.

Which one of the following is an income tax implication of this plan for Larry, and why?

a. The employer contributions to the plan are tax-exempt for Larry because they were made after August 1, 1969.
b. The employer contributions to the plan are not currently taxable to Larry because they are subject to a substantial risk of forfeiture.
c. The employer contributions to the plan are tax-exempt for Larry because they are less than 25% of salary.
d. The employer contributions to the plan are taxable to Larry currently because a separate account was established for his benefit.
e. The employer contributions to the plan are tax-exempt for Larry because his receipt of payments from the plan is contingent upon his continued employment with Binder Box Co.

Answer 19

b. The employer contributions to the plan are not currently taxable to Larry because they are subject to a substantial risk of forfeiture.

The plan has established substantial risk of forfeiture conditions—Larry will receive the deferred amounts when he completes 10 years of substantial service with his employer.

Choice d is incorrect because separate accounts can be created for each employee as long as those accounts are held as a general asset of the employer subject to the claims of creditors.

Question 20

(LO 2-3)

Question 22 of 80

Worthy Tools Inc. is designing a money purchase pension plan for eligible employees. The following information relates to Worthy Tools Inc.:

The seven key employees, all with more than eight years of service, will be eligible for the plan.
Of the 24 full-time rank-and-file employees, ranging in age from 19 to 61 years old, 22 will be eligible for the plan.

Turnover is high; the rank-and-file employees’ average tenure is 20 months. Although occasionally a non-key employee stays at the company for over two years, none has ever completed more than 2.5 years of service.

The key employees’ compensation totals $650,000; the plan’s covered payroll will total $1 million.
The company is installing the plan primarily to provide for its officers’ retirement benefits and is not particularly concerned about employee turnover or about providing retirement benefits for employees. In fact, the company would prefer to minimize the benefits available to rank-and-file employees.

Based on the information about Worthy Tools, which one of the following vesting schedules would be appropriate for the company pension plan?

3-year cliff

5-year cliff

2- to 6-year graded

3- to 7-year graded

Answer 20

3-year cliff

The plan will be top-heavy since the pay of key employees is 65% of the total pay of all plan participants.

(Employer contributions to a money purchase plan are allocated to participants’ accounts based on relative pay.)

The maximum vesting schedules available to a defined contribution plan are 3-year cliff and 2- to 6-year graded; 3-year cliff would be the best choice for minimizing benefits to rank-and-file employees, who have historically stayed a maximum of two years with the company.

Question 21

(LO 1-5)

Question 23 of 80

Which one of the following is a correct statement about the amount of Social Security retirement benefits available when a fully insured worker’s retirement benefit begins at “full retirement age” (FRA)?

a. The worker will receive 80% of his or her primary insurance amount (PIA).
b. A 63-year-old spouse of the retired worker will receive 50% of the worker’s PIA.
c. At full retirement age, the worker’s spouse will receive 50% of the worker’s PIA.
d. If the full retirement age (FRA) spouse also is entitled to benefits on his or her earning record, the benefit is the lesser of 100% of the spouse’s own PIA or 50% of the worker’s PIA.

Answer 21

c. At full retirement age, the worker’s spouse will receive 50% of the worker’s PIA.

The spouse, at his or her full retirement age, will receive 50% of the worker’s PIA unless the spouse’s Social Security benefit is higher based on his or her own earnings.

Answer a. is wrong because at full retirement age the worker will receive 100% of her PIA. The worker who retires at age 62 would receive 80% (less 5/12 of 1% for each month in excess of 36 months prior to FRA) of PIA.

Answer b. is incorrect because the spousal benefit would be less than 50%. The 50% of PIA is reduced by 25/36 of 1% for each of the first 36 months (plus 5/12 of 1% for each month in excess of 36 months prior to FRA) the spouse is under full retirement age (FRA) when benefits begin.

Answer d. is wrong because the spouse would receive the higher of 100% of his PIA or 50% of her PIA.

Question 22

(LO 1-8)

Question 24 of 80

Which one of the following is a gap in Medicare’s Part A coverage that a patient must pay?

a. costs for a hospital stay beyond 150 days
b. the annual deductible for doctor’s services
c. all costs above the hospital deductible for a 30-day stay in a hospital
d. the approved costs of care in a skilled nursing facility for the first 10 days

Answer 22

a. costs for a hospital stay beyond 150 days

The patient must pay all costs related to a hospital stay beyond 150 days.

Answer b. is wrong because it describes a gap in Medicare Part B coverage, not Part A.

Answer c. is incorrect because it does not describe a gap; Medicare pays for the cost of the first 60 days in a hospital, but the patient must pay the Part A deductible.

Answer d. is wrong because Medicare will pay the approved charges for the first 20 days in a skilled nursing facility. The gap results from the cost of care that exceeds 20 days (the patient pays the per day co-payment) or the need for custodial care.

Question 23

(LO 1-8)

Question 25 of 80

Which one of the following individuals will be eligible for Medicare coverage?

a 68-year-old farmer

a 55-year-old corporate director, in the capacity of director

a 62-year-old federal government employee who was hired in 1987

a 65-year-old business owner who has always received only dividend income from the business

Answer 23

a. 68-year-old farmer

The farmer is in a covered occupation and is over age 65.

Thus, he or she would receive benefits if fully insured.

Answer b. is incorrect because although this individual is in a covered occupation for Social Security purposes, he or she must be age 65 to be eligible for Medicare benefits.

Answer c. is wrong because although this person is employed in a covered occupation, he or she must be age 65.

Answer d. is wrong because although this person is age 65, he or she is not in a covered occupation for Social Security purposes.

Question 24

Question 26 of 80

Harvey Winkler is age 52 and has been employed as an administrator for the MidWest Consortium on the Arts for 27 years. His salary this year is $120,000. He is concerned about his ability to retire in 13 years and wants to begin participating in the tax-sheltered annuity (TSA) plan offered by his employer.

Which of the following statements apply to Harvey’s contributions to the TSA?

I. Harvey can contribute up to $18,000 this year, plus any catch-ups for which he may be eligible.

II. Harvey can contribute an additional $6,000 this year under the age 50 catch-up.

III. Harvey cannot take advantage of the catch-up provision available to employees with 15 years of service.

IV. Harvey can take advantage of the long service catch-up provision that allows the participant to increase the salary deferral limit by up to $3,000 per year.

I and II only

I and IV only

II and III only

I, II, and III only

I, II, and IV only

Answer 24

I, II, and III only

In 2016, the $18,000 salary reduction limit will apply plus the age 50 catch-up, making the total $24,000.

Harvey is not an employee of a health, education, or church organization, and therefore is not eligible for the long service catch-up.

He therefore cannot use the catch-up that allows an increase to the deferral limit.

Since Harvey is 52, the $6,000 age 50 catch-up allows him to increase his total deferral to $24,000.

Question 25

(LO 2-5)

Question 27 of 80

Which one of the following statements correctly describes the effects of actuarial methods or assumptions on contributions to a defined benefit pension plan?

a. The higher the interest rate assumed by the actuary, the higher the required employer contribution for the year.
b. The higher the projected investment earnings on plan assets over the life of the plan, the lower the required employer contribution for the year.
c. The higher the turnover rate assumed by the actuary, the lower the required employer contribution for the year.
d. Using salary scales tends to reduce the cost for funding younger employees’ benefits.

Answer 25

c. The higher the turnover rate assumed by the actuary, the lower the required employer contribution for the year.

Because defined benefit plans must apply forfeitures to reduce the employer contribution, an actuarial assumption of high turnover in a plan year will result in a lower required employer contribution.

Question 26

(LO 3-10)

Question 28 of 80

Which one of the following statements correctly describes the integration of a 5% money purchase plan?

a. The permitted disparity is 5.7%.
b. The maximum excess contribution percentage is 10%.
c. The maximum excess contribution percentage is 15.7%.
d. The offset integration method may be used.

Answer 26

b. The maximum excess contribution percentage is 10%.

A money purchase plan with a base contribution percentage of 5% will have a 5% permitted disparity (lesser of the 5% base or 5.7%); therefore, the excess contribution percentage will be 10% (5% base + 5% permitted disparity).

Question 27

(LO 3-1, 7-7)

Question 29 of 80

Which of the following statements is not correct regarding the various limits that apply to retirement plans?

a. The maximum annual employee deferral amount for 401(k) plans, 403(b) plans, and Section 457 plans is $18,000 in 2016.
b. The maximum annual employee deferral amount for SIMPLE plans is $12,500 in 2016.
c. The age 50 catch-up available for 401(k) plans, 403(b) plans, Section 457 plans, and SARSEP plans is $6,000 in 2016.
d. The maximum amount that is allowed to be contributed to a defined contribution plan in 2016, counting both employee and employer contributions, is $53,000 or 100% of compensation, whichever is greater.

Answer 27

d. The maximum amount that is allowed to be contributed to a defined contribution plan in 2016, counting both employee and employer contributions, is $53,000 or 100% of compensation, whichever is greater.

The Section 415 maximum contribution amount in 2016 is $53,000 or 100% of compensation, whichever is less.

Question 28

(LO 9-10)

Question 30 of 80

Which one of the following statements is a basic principle underlying the workers’ compensation laws?

a. Indemnity is temporary, not final.
b. A lump-sum payment is available at the recipient’s request.
c. The employer’s purchase of workers’ compensation insurance is optional, as specified under state law.
d. Liability may not be determined by negligence.

Answer 28

d. Liability may not be determined by negligence.

The employer has absolute liability for employee injuries, regardless of who may have been negligent.

Question 29

(LO 5-7)

Question 31 of 80

Which of the following are characteristics that simplified employee pensions (SEPs) share with qualified profit sharing plans?

I. limitation on employer contributions
II. application of controlled group rules
III. nondiscrimination requirements
IV. statutory eligibility requirements (age 21, one year of service)

I and II only

II and IV only

I, II, and III only

I, III, and IV only

II, III, and IV only

Answer 29

I, II, and III only

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.

Question 30

(LO 4-7, 7-2)

Question 32 of 80

Which of the statements below describe one or more characteristics of hardship withdrawals from Section 401(k) plans?

I. Hardship withdrawals may be taken from elective deferral amounts and the investment income from such deferrals.

II. The participant must demonstrate “immediate and heavy financial need” and not have any other resources that are “reasonably available.”

III. A hardship withdrawal is exempt from the 10% early withdrawal penalty if the participant is below age 59½.

IV. Hardship conditions must be established for hardship withdrawals from profit sharing or stock bonus 401(k) plans.

I only

I and II only

II and III only

II and IV only

II, III, and IV only

Answer 30

II and IV only

Hardship withdrawals from profit sharing or stock bonus Section 401(k) plans require that hardship conditions (“immediate and heavy financial need” and other resources not “reasonably available”) be demonstrated. Only elective deferral amounts—not the associated earnings—are available for hardship withdrawals.

Question 31

(LO 9-5, 9-9)

Question 33 of 80

Susan Shaw is employed by All Round Tires, Inc., which provides an employee benefits plan for its employees. Susan’s current salary is $30,000. Susan’s benefits are summarized below:

long-term disability plan:

benefits: After a 60-day waiting period beginning at the onset of disability, a monthly benefit of 60% of salary will be paid.
cost: The cost of the coverage is paid by All Round Tires Inc.; the employee is not currently taxed on the cost of this coverage.

group term life insurance policy:

benefits: Proceeds amounting to two times salary will be paid.
cost: The cost of the coverage is paid by All Round Tires Inc.
beneficiary: Susan has designated her spouse, William, as beneficiary of the policy.

medical reimbursement plan:

benefits: Benefits are paid per the policy booklet.
cost: The cost of the coverage is paid by All Round Tires Inc.

Assume that Susan becomes disabled on October 1 of this year and remains disabled through the end of the year. Her disability qualifies her for payments from the group long-term disability policy. Which of the following statements apply to her situation?

I. Susan will receive disability income payments totaling $1,500 this year.

II. Susan will receive disability income payments totaling $4,500 this year.

III. The disability income payments are not taxable to Susan because the cost of coverage is not taxable to employees.

IV. The disability income payments are taxable to Susan because the employer paid the premiums on the policy and Susan has not previously paid tax on these amounts.

III only

IV only

I and III only

I and IV only

II and IV only

Answer 31

I and IV only

Susan’s employer pays the premiums on the long-term disability policy, and employees are not taxed on the value of these premiums.

Therefore, the benefits that Susan receives during a disability are taxable.

The policy requires a 60-day elimination period; Susan’s disability began on October 1, so the elimination period would extend over the months of October and November.

Susan thus would receive benefits only for the month of December this year—60% of her $30,000 annual salary for one month amounts to $1,500.

Question 32

(LO 9-6)

Question 34 of 80

Susan Shaw is employed by All Round Tires Inc., which provides an employee benefits plan for its employees. Susan’s current salary is $30,000. Susan’s benefits are summarized below:

long-term disability plan:

benefits: After a 60-day waiting period beginning at the onset of disability, a monthly benefit of 60% of salary will be paid.
cost: The cost of the coverage is paid by All Round Tires Inc.; the employee is not currently taxed on the cost of this coverage.

group term life insurance policy:

benefits: Proceeds amounting to two times salary will be paid.
cost: The cost of the coverage is paid by All Round Tires Inc.
beneficiary: Susan has designated her spouse, William, as beneficiary of the policy.

medical reimbursement plan:

benefits: Benefits are paid per the policy booklet.
cost: The cost of the coverage is paid by All Round Tires Inc.

Assume that Susan received payments totaling $635 from the health insurance policy this year. Which of the following statements correctly describe conditions that would lead to all or a portion of the payment being taxable?

I. Susan is a highly compensated employee and received a higher benefit payment from the self-insured plan than a non highly compensated employee who entered a claim for the same procedure.

II. Susan had deducted the cost of the medical expense on her income tax return in a previous year.

III. The payment exceeded the amount of the actual medical expenses.

IV. The medical expense plan is self-insured; therefore, the employer-funded reimbursements are considered wages and are subject to income taxation.

II only

III only

I and III only

II and IV only

I, II, and III only

Answer 32

I, II, and III only

Generally, payments received from a health insurance policy are not taxable.

However, under the following conditions, such payments are subject to tax: discriminatory payments, reimbursements for amounts deducted in a prior year, or payments in excess of the actual medical expenses.

Question 33

(LO 6-5)

Question 35 of 80

An employer must comply with restrictions on the use of more than one qualified retirement plan where employees participate in both plans. Which of the following are correct statements about some of these limitations?

I. If a target benefit plan is a fully insured plan and covered under PBGC, then the target benefit plan is not taken into account in applying the overall limit on deductions.

II. When an employer has more than one plan, the overall contribution limit will be the lesser of 25% of total participants’ compensation or the amount required to meet the minimum funding standard of the defined benefit plan. This limit applies only to the extent that the employer contribution to the defined contribution plan or plans is greater than 6%.

III. If an employer sponsors both a defined benefit and a defined contribution plan (and the defined benefit plan is exempt from PBGC), the overall employer limit is the amount necessary to meet the minimum funding requirement of the defined benefit plan. A contribution of up to 6% of compensation is also allowed into the defined contribution plan.

IV. Under current law, if a defined benefit plan is covered under PBGC, then the defined benefit plan is not taken into account in applying the overall limit on employer deductions.

I only

II only

III only

III and IV only

II and IV only

Answer 33

III and IV only

One exception to the overall deduction limit is for defined benefit plans that are covered by PBGC.

Under current law, if a defined benefit plan is covered under PBGC, then the defined benefit plan is not taken into account in applying the overall limit on employer deductions.

Question 34

(LO 6-6)

Question 36 of 80

Which of the following correctly describe characteristics of unrelated business taxable income (UBTI) in qualified plan trusts?

I. A qualified plan trust that incurs UBTI will be disqualified by the IRS.

II. UBTI generally will result from a qualified plan trust’s directly operating a business that is not related to the purpose of the trust.

III. Common stock that is purchased through the use of debt results in UBTI.

IV. Real property that is purchased through the use of debt results in UBTI.

I only

I and II only

II and III only

II and IV only

II, III, and IV only

Answer 34

II and III only

The rules regarding UBTI reflect the need for a qualified plan trust to focus on providing retirement benefits, not on operating an unrelated business.

Generally, the trust is prohibited from incurring debt; thus, common stock purchased on margin will result in UBTI on the associated dividends and/or gains.

(Real estate is the exception; debt-financed real estate generally is not subject to UBTI.)

Question 35

(LO 1-5)

Question 37 of 80

Which of the following correctly describe the earnings limitation on Social Security benefits?

I. Retirement or survivor benefits may be reduced $1 for every $2 earned over the specified limit by recipients who are age 62 through the year just prior to the year they attain full retirement age (FRA).

II. Retirement or survivor benefits may be reduced $1 for every $3 earned over the specified limit by recipients who are at FRA.

III. Recipients who have attained their full retirement age may earn any amount without any reduction in their Social Security benefits.

IV. One-half of unearned (investment) income may be considered in the reduction of Social Security benefits.

I only

I and II only

I and III only

I, II, and III only

I, II, and IV only

Answer 35

I and III only

Earnings limitations apply to Social Security benefit recipients who are age 62 through the year just prior to the year containing their full retirement age (FRA); no reductions are imposed on recipients who have attained their FRA.

Investment income is not considered in determining the earnings reduction.

Question 36

Question 38 of 80

Kim Devoe, age 44, has been a participant in her employer’s profit sharing plan for seven years. This year, she withdraws $16,000 (20% of her account balance) from the plan to cover her son’s first year in college.

Which of the statements below correctly describe the consequences of this withdrawal?

I. The amount withdrawn will be subject to a 10% early withdrawal penalty.

II. The amount withdrawn will be subject to ordinary income taxation.

III. The distribution is exempt from the 10% penalty since it is for higher education.

IV. The distribution is considered a hardship withdrawal and is exempt from any penalty.

(LO 7-2)

IV only

I and II only

II and III only

II and IV only

III and IV only

Answer 36

I and II only

A withdrawal prior to age 591⁄2 is considered an early withdrawal and is subject to the 10% penalty and income taxation.

Question 37

(LO 6-1, 6-7)

Question 39 of 80

Gary Trapp is employed by the city of Great Rapids, and his sister, Julie, teaches first grade in the Great Rapids public school system. They each participate in deferred compensation retirement plans through their employers: Gary participates in a 457 plan and Julie participates in a TSA.

Which of the following statements correctly indicate how their respective plans compare to each other?

I. Both plans are based on contracts with the employer.

II. Both plans are subject to a $18,000 limit on salary deferrals in 2016.

III. Neither plan is able to use forward-averaging tax treatment for distributions.

IV. Both plans are subject to the minimum distribution requirements that apply to qualified plans.

I only

I and II only

I and III only

I, II, and IV only

I, II, III, and IV

Answer 37

I, II, III, and IV

Both the Section 403(b) plan (TSA) and the Section 457 plan are based on contracts with the employer (the salary deferral agreement).

Deferrals are limited to $18,000 in 2016 plus catch-ups, if applicable, and distributions from both of these plans are subject to ordinary income taxation, not forward-averaging treatment.

Both plans are also subject to the minimum distribution requirements that apply to qualified plans.

Question 38

(LO 3-6)

Question 44 of 80

Which of the following legal requirements apply to employee stock ownership plans (ESOPs)?

I. ESOPs must permit participants who have reached age 55 and have at least 10 years of service the opportunity to diversify their accounts.

II. ESOPs cannot be integrated with Social Security.

III. An employer’s deduction for ESOP contributions and amounts made to repay interest on an ESOP’s debt cannot exceed 25% of the participants’ payroll.

IV. The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP.

I and II only

II and III only

I, II, and III only

I, II, and IV only

II, III, and IV only

Answer 38

I, II, and IV only

Options I and II correctly state the diversification rule and the rule that prohibits integrated ESOPs.

There is no limit on amounts used to pay interest on ESOP debt.

ESOP distributions of employer stock only are not subject to the 20% income tax withholding requirement.

Question 39

(LO 7-4)

Question 45 of 80

Jim Anderson is a single person and expects to begin distributions from his IRA at age 75. Which of the following statements are accurate as implications of a distribution made at that time?

I. Recalculation of life expectancy is automatic when using the Uniform Table since the table is reentered each year at the attained age for that year.

II. If Jim dies after the required beginning date without a designated beneficiary, the required minimum distribution for the year of death is determined by entering the RMD Single Life Table at his attained age in the year of death. Life expectancy is reduced by one year for each subsequent year.

III. Assume Jim is married and his wife is his beneficiary, if Jim dies after beginning distributions, remaining benefits may be paid over his wife’s life expectancy, beginning in the year following the year of his death, determined by reentering the RMD Single Life Table each year with her attained age for that year.

IV. A distribution penalty of 50% will apply on amounts that were not distributed but should have been.

IV only

I and II only

III and IV only

I, II, and III only

I, II, III, and IV

Answer 39

I, II, III, and IV

All the statements are true.

Question 40

(LO 5-1)

Question 46 of 80

Which of the following statements describe basic provisions regarding contributions to an IRA?

I. Eligibility is limited to an individual who has earned income (or is the spouse of someone with earned income) and who did not reach age 70½ in the tax year.

II. Contributions must be made by the individual’s federal income tax filing deadline, including extensions.

III. The IRA owner may designate any portion of an IRA contribution as nondeductible, even if it could have been deducted.

IV. IRA contributions of up to $5,500 in 2016 may be made for both spouses—including a homemaker who does not work outside of the home—if the combined compensation of both spouses is at least equal to the contributed amount.

I and II only

III and IV only

I, II, and IV only

I, III, and IV only

Answer 40

I, III, and IV only

The rules for spousal IRAs are given in statement IV.

Although SEPs are permitted to make contributions up to an extension filing date, IRA contributions must be made by April 15.

Question 41

(LO 3-5, 3-6)

Question 47 of 80

Which of the following are provisions of qualified stock bonus plans?

I. Taxation of the capital gain on stock held in the plan may be deferred beyond the distribution date.

II. Like profit sharing plans, stock bonus plans allow for flexible employer contributions.

III. Social Security integration generally is not allowed in stock bonus plans.

IV. Participants must be allowed to receive their distributions in shares of employer stock that is publicly traded.

V. If the employer’s securities are not readily tradable on an established market, a participant who separates from service must be provided a put option that will be available for at least 60 days after distribution of the stock.

I and III only

II and IV only

I, II, and III only

I, II, and IV only

I, II, IV, and V only

Answer 41

I, II, IV, and V only

The unrealized gain in the value of the stock is not taxed until the stock is sold. Stock bonus and profit sharing plans both have the flexible employer contribution characteristics.

Participants have the option to take the employer’s stock under either. When the employer’s securities are not readily tradable on an established market, a participant who separates from service must be provided the right to have the employer—not the plan—repurchase the employer securities under a fair valuation formula—i.e., a put option.

Although Social Security integration is allowed in stock bonus plans, it is not permitted in ESOPs.

Question 42

(LO 3-2)

Question 48 of 80

Which of the following statements describe basic provisions of a money purchase pension plan?

I. As a defined contribution plan, a money purchase plan is not subject to the minimum funding standard.

II. The employer may deduct for a plan contribution up to a maximum of 25% of covered payroll.

III. The employer contribution generally is allocated based on relative compensation.

IV. Forfeitures from nonvested participants’ accounts must be applied to reduce the employer contribution.

I and II only

II and III only

III and IV only

I, II, and IV only

Answer 42

II and III only

The employer deduction limit for a money purchase plan is 25% of covered payroll, and employer contributions generally are allocated based on relative compensation.

A money purchase plan is a “pension” plan and thus is subject to the minimum funding requirements.

As in any defined contribution plan, the plan may provide for forfeitures either to be reallocated to remaining participants’ accounts or applied to reduce the employer contribution.

Question 43

(LO 8-1)

Question 49 of 80

Which of the following are characteristics of unfunded nonqualified deferred compensation plans?

I. The employee has no secured rights in the benefits to be paid.

II. These plans are often referred to as top hat plans because they are provided to top executives of the company.

III. The salary deferral plan must establish substantial risk of forfeiture provisions to assure tax deferral.

IV. The plan is subject to most of the ERISA non tax requirements.

I and II only

III and IV only

I, II, and III only

II, III, and IV only

Answer 43

I and II only

Unfunded non-qualified deferred compensation plans, also known as top hat plans, provide no security to the employee.

The employee has nothing more than the employer’s promise to pay future benefits.

These plans generally are subject only to the reporting and disclosure requirements of ERISA.

Substantial risk of forfeiture provisions generally are not necessary in unfunded plans.

Question 44

(LO 2-1, 2-3)

Question 50 of 80

Which of the following are factors that would be expected to reduce the amount of the retirement benefit from a defined benefit pension plan? (Assume that the plan meets the minimum funding requirements each year.)

I. less than 10 years of plan participation

II. investment earnings that are lower than expected

III. use of a flat-benefit formula, rather than a unit-benefit formula

IV. participant’s retirement before age 62

I and II only

I and IV only

II and III only

I, II, and IV only

Answer 44

I and IV only

Retiring before age 62 or with less than 10 years of plan participation generally will reduce a participant’s retirement benefit from a defined benefit plan.

The employer is obligated to provide the plan-specified benefit, regardless of whether investments perform as expected.

The benefit formula—flat benefit or unit benefit—does not result in a generally lower or higher benefit, as it will depend on the individual participant’s circumstances.

Question 45

Question 51 of 80

Velvet Lawns Inc. employs 26 full-time workers and provides a money purchase pension plan for eligible employees. All 26 employees are plan participants this year. Jack Fields, the owner of the company, has an account balance of $134,000. The total of the account balances of all plan participants amounts to $215,000.

Which of the following statements apply to this plan?

I. The plan would not pass the required coverage test and is therefore discriminatory.

II. The plan is top-heavy.

III. The plan may use either a 5-year cliff or 3- to 7-year graded vesting schedule.

IV. The plan must comply with requirements for minimum contributions to non-key employees.

(LO 4-2)

I and III only

II and IV only

I, II, and IV only

II, III, and IV only

Answer 45

II and IV only

If all 26 employees are participating in the plan, the coverage and nondiscrimination tests would be passed.

The plan would, however, be top-heavy (Jack’s $134,000 account balance is 62% of the $215,000 total of all account balances).

Top-heavy plans must comply with minimum contribution requirements for non-key employees and use a top-heavy vesting schedule.

All defined contribution plans are now required to vest no less rapidly than three-year cliff or two to six-year graded.

Question 46

(LO 3-11)

Question 52 of 80

Johnson Services Inc. has been in operation for eight years and has been profitable for the past three years. Due to competitive pressures, the company will undergo an expansion of its workforce over the next five years—from the current 17 employees to a projected 36 employees. Tim Johnson, the owner, is interested in installing a qualified retirement plan to attract employees and reduce the company’s tax burden. Tim is 38 years of age, and his financial advisor has recommended that he save 10% of his salary each year for a retirement fund.

Which of the following statements describe a key factor that affects the selection of a qualified retirement plan—in this case, making a defined contribution plan more appropriate than a defined benefit plan?

I. Tim’s interest in attracting employees to the company

II. the uncertainty of future cash available for plan contributions, given the planned growth of the company

III. Tim’s age

IV. Tim’s retirement savings need

I and II only

II and III only

I, III, and IV only

I, II, III, and IV

Answer 46

I, II, III, and IV

Either a defined contribution plan or a defined benefit plan could be attractive to potential employees.

However, Tim’s interest in attracting employees to the company, the uncertain cash flow outlook, Tim’s young age, and his retirement savings need of only 10%, all point in the direction of defined contribution plans.

Question 47

(LO 6-6)

Question 53 of 80

Which of the following statements accurately describe the rules for incidental benefits from qualified pension or profit sharing plans?

I. In a defined benefit plan, life insurance benefits are considered incidental if the cost of the benefits for a participant is less than 75% of the cost of the retirement benefit for that participant.

II. In a defined benefit plan, life insurance benefits are considered incidental if the benefit for a participant is 100 times the participant’s expected monthly pension benefit or less.

III. In a defined contribution plan, ordinary life insurance benefits are considered incidental if the cost for a participant is less than 50% of the cost of all plan benefits for that participant.

IV. In a defined contribution plan, term life insurance benefits are considered incidental if the cost for a participant is less than 50% of the cost of all plan benefits for that participant.

I and II only

II and III only

I, II, and IV only

II, III, and IV only

Answer 47

II and III only

Benefits are considered incidental in a defined contribution plan if the cost of pure (term) life insurance protection is less than 25% of the cost of all plan benefits; whole life insurance is assumed to consist of half pure insurance, so for these purposes the cost of whole life must be less than 50% of the cost of all plan benefits.

In a defined benefit plan, benefits are considered incidental if the benefit is 100 times the expected monthly pension benefit or less.

Question 48

(LO 9-2)

Question 54 of 80

Which of the following statements accurately describe the tax consequences of a group term life insurance policy?

I. Coverage over $50,000 is taxable income to the employee.

II. The employer may deduct premiums paid for coverage up to $50,000 only.

III. The employee is subject to tax on the cost of coverage above $50,000.

IV. The employer may deduct the full amount of premiums paid if the employer is not the beneficiary of the policy.

I and II only

I and IV only

II and III only

III and IV only

Answer 48

III and IV only

As long as the employer is not the beneficiary of the policy, the employer may deduct the entire premium paid for group term life insurance.

The employee is taxed on the cost of coverage in excess of $50,000, not on the amount of coverage itself.

Question 49

(LO 9-8)

Question 55 of 80

Which of the following fringe benefits result in taxable income to the employee?

I. season tickets
II. personal use of a company-provided automobile
III. qualified employee discounts
IV. de minimis fringe benefits

I and II only

II and III only

III and IV only

I, II, and IV only

Answer 49

I and II only

Season tickets and personal use of a company car are the only two benefits listed that would be taxable income to the employee.

Qualified employee discounts are available to all employees on a nondiscriminatory basis, so such discounts are not taxable; de minimis fringe benefits are of minimal value.

Question 50

(LO 1-8)

Question 56 of 80

Which of the following statements accurately describe basic provisions of Medicare Part B?

I. Coverage includes benefits for physicians’ services.

II. Individuals who are eligible for Part A are automatically enrolled in Part B, but may choose to opt out.

III. Coverage includes benefits for inpatient hospital services.

IV. Participants pay a monthly premium.

I and II only

III and IV only

I, II, and III only

I, II, and IV only

Answer 50

I, II, and IV only

Medicare Part B includes coverage for physicians’ services; Part A covers hospital charges.

Part A is provided to eligible individuals at no charge, but participants must pay a premium for Part B.

Individuals who are eligible for Part A are automatically enrolled in Part B, but they may choose to opt out of the coverage.

Question 51

(LO 5-4, 7-3)

Question 57 of 80

John Ablemann has been contributing to his IRA for 17 years because his former employer did not offer a retirement plan. If his new employer offers a TSA, SEP, or 457 plan, into which of these could he potentially roll his IRA?

I. another IRA
II. his TSA
III. a SEP
IV. a 457 plan

I only

I and II only

II and III only

I, II, III, and IV

Answer 51

I, II, III, and IV

An IRA may be rolled to another IRA, TSA, SEP, qualified plan, or governmental 457 plan that accounts for such rollovers separately.

Question 52

(LO 5-4, 7-3)

Question 58 of 80

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 deferral in 2016?

$18,000

$24,000

$27,000

$53,000

Answer 52

$27,000

Sharon can defer the basic $18,000 allowed in 2016 plus $6,000 for the age 50 catch-up and $3,000 for the long service catch-up.

Question 53

(LO 2-8, 3-11)

Question 59 of 80

George Elliot, age 45, owns a successful company whose earnings fluctuate significantly from year to year. His salary is $125,000 and he wants to begin saving for retirement using the qualified plan that is not overly expensive to operate with the least cost for participants and the maximum benefit for him. The annual payroll is $780,000, all employees earn less than $30,000 per year, and their average age is 27. Which plan should he install?

a. defined benefit
b. money purchase
c. integrated target
d. integrated cash balance plan
e. age-weighted safe harbor 401(k)

Answer 53

e. age-weighted safe harbor 401(k)

His company should not install a plan with a minimum funding requirement because the company’s earnings fluctuate from year to year.

The integrated profit sharing plan would work, but the age-weighted safe harbor 401(k) plan would allocate more of the non-elective contributions to his account in the good years and allow him to defer up to the maximum in the lean years with minimum employee cost.

Question 54

(LO 3-1)

Question 60 of 80

Dorban Products Inc. has an annual payroll of $800,000. John Dorban, the president, wishes to make the maximum contribution to the integrated profit sharing plan this year. What is the amount?

$80,000

$120,000

$200,000

25% of base compensation plus 30.7% of excess compensation totaling $245,600

Answer 54

$200,000

The maximum contribution is 25% of covered payroll or $200,000.

Question 55

(LO 6-7)

Question 61 of 80

George Borgas, 62, has worked for the Green Rivers Irrigation District for the last 16 years. He began participating in the 457 plan as soon as he was eligible and has deferred to the plan a total of $102,000 out of a possible $126,000 over the years. This year he will be eligible for the final three-year catch-up. What is his maximum deferral for 2016?

$18,000

$24,000

$36,000

$40,000

Answer 55

$36,000

George’s 2016 maximum is twice the regular deferral limit for the year, $36,000.

He cannot take advantage of the age 50 catch-up in his final three-year period.

Question 56

(LO 3-11)

Question 62 of 80

Use the following information about Kathleen Williams, president and 100% owner of Security Properties Inc. to answer the question below.

Kathleen is 40 years old and hopes to retire at age 60.

Kathleen is paid $120,000 in salary plus bonuses by the corporation.

Security Properties Inc. employs five rank-and-file employees with annual salaries ranging from $20,000 to $50,000 and an average of $38,000.

While rank-and-file employees range in age from 21 to 46, the average age is 34; turnover among these employees is low.

Cash flow for Security Properties Inc. has been increasing for the past five years and is expected to increase in the future.

Kathleen would like to implement a qualified plan that will maximize her retirement benefits and minimize corporate income taxes.

Which of the following are advantages of installing a profit sharing plan?

I. This plan will permit the corporation to take the maximum deduction allowed by law and offer contribution flexibility.

II. Kathleen will benefit as much as the other employees from continuous contributions, investment growth, and compounding of earnings.

III. The plan can be integrated to give Kathleen an even greater share.

IV. A plan that provides a contribution equal to 25% of compensation will maximize benefits for Kathleen.

I and III only

I and IV only

II and IV only

I, III, and IV only

II, III, and IV only

Answer 56

I, III, and IV only

The profit sharing plan will maximize benefits for Kathleen and will also maximize deductions for the corporation.

A defined benefit plan will not achieve the same deductible contribution or benefit results because of Kathleen’s age and the average age of the rank-and-file employees.

Kathleen will not benefit from compounding returns for as long as the younger employees; therefore, the plan’s investment growth will benefit the younger employees more than Kathleen.

The plan can be integrated to give Kathleen an even larger portion of the contribution.

The defined contribution plan will maximize benefits for Kathleen.

Question 57

(LO 4-1, 4-4)

Question 63 of 80

Which of the following are basic provisions of an IRC Section 401(k) plan?

I. Employee elective deferrals are exempt from income tax withholding and FICA and FUTA taxes.

II. An employer’s deduction for a vested contribution to a Section 401(k) plan cannot exceed 25% of covered payroll, which is not reduced by the employees’ elective deferrals.

III. A Section 401(k) plan cannot require as a condition of participation that an employee complete a period of service longer than one year.

IV. Employee elective deferrals may be made from salary or bonuses.

I and III only

I and IV only

II and IV only

I, III, and IV only

II, III, and IV only

Answer 57

II, III, and IV only

Options II, III, and IV correctly describe the 25% employer deduction limitation, eligibility requirement, and potential sources of employee elective deferrals for Section 401(k) plans.

Option I is incorrect because employee elective deferrals (i.e., salary deferrals) are subject to FICA and FUTA taxes.

Question 58

(LO 4-1, 4-4)

Question 64 of 80

Which of the following legal requirements apply to a profit sharing 401(k) plan?

I. Nonelective employer contributions must be made out of profits.

II. In-service withdrawals generally must satisfy the hardship restrictions.

III. Salary reduction elections must be made before compensation is earned.

IV. Special safe harbor provisions can be used to comply with the ADP tests.

I and II only

II and III only

I, II, and III only

I, II, and IV only

II, III, and IV only

Answer 58

II, III, and IV only

Options II, III, and IV correctly describe the restrictions on hardship withdrawals (very few plans allow an in-service withdrawal for situations other than hardship), the timing of salary reduction elections so as to avoid constructive receipt, and the availability of special provisions (“safe harbors”) to enable a 401(k) plan to comply with the ADP tests.

Option I is incorrect because contributions can be made to a profit sharing plan even if the employer does not have current or accumulated profits.

Question 59

(LO 2-1, 2-2)

Question 65 of 80

Which of the following legal requirements apply to defined benefit pension plans?

I. A separate account must be maintained for each plan participant.

II. The maximum benefit permitted by law is reduced proportionately for each year of participation less than 10.

III. The services of an actuary are needed to demonstrate that the minimum funding standards are satisfied.

IV. A definitely determinable retirement benefit must be provided regardless of employer profits.

I and II only

II and III only

I, II, and III only

I, II, and IV only

II, III, and IV only

Answer 59

II, III, and IV only

Options II, III, and IV correctly state the rules concerning the 10-year participation requirement for the maximum benefit, the need for an actuary to demonstrate adequate funding, and the requirement that the plan’s benefit be definite.

A pension plan’s benefit cannot be conditional upon the employer’s earning profits.

Option I is incorrect because a separate account does not have to be maintained for each participant.

Question 60

(LO 1-5)

Question 66 of 80

John O’Brien will reach his full retirement age (FRA) on November 1st of this year. He is employed part-time at SummerFun Products Inc. where he has worked for the past 22 years. He began receiving his Social Security on January 1st this year and plans to continue working. He and his wife, Angie, own stock and mutual fund investments that generate annual investment income of approximately $8,000. Angie is age 55; she has worked for the Midwestern Railroad Company for 30 years and will be eligible for retirement benefits of approximately $900 per month from her retirement program. John’s Social Security retirement benefits are forecast to be $1,440 per month. John and Angie have three children, all of whom are independent and in good health.

John is concerned about his Social Security, and he is not sure if his plan to continue working is a wise decision. How will his Social Security be affected by his earned income assuming he earns $2,000 per month?

I. He can work increased hours until he reaches age 70, at which time his Social Security retirement benefit will be reduced due to the extra earned income.

II. His Social Security retirement benefit will be reduced since he has earned income prior to reaching full retirement age this year.

III. His earned income will not exceed the $41,880 threshold in the relevant period in 2016, therefore his Social Security retirement benefit will not be reduced.

IV. He can continue his current work schedule until his birthday; at that time he can increase his earnings without any benefit reduction.

I only

I and II only

II and IV only

III and IV only

Answer 60

III and IV only

There is a $1 for $3 reduction in Social Security benefits during the year one reaches full retirement age, but only if earned income exceeds $41,880.

At $2,000 per month, John will only earn $20,000 by November 1st, so he will be well below the $41,880 threshold.

Once he reaches FRA there is no reduction, regardless of the amount he makes.

Question 61

(LO 1-5, 1-8)

Question 67 of 80

John O’Brien will reach his full retirement age (FRA) on November 1st of this year. He is employed part-time at SummerFun Products Inc. where he has worked for the past 22 years. He began receiving his Social Security on January 1st this year and plans to continue working. He and his wife, Angie, own stock and mutual fund investments that generate annual investment income of approximately $8,000. Angie is age 55; she has worked for the Midwestern Railroad Company for 30 years and will be eligible for retirement benefits of approximately $900 per month from her retirement program. John’s Social Security retirement benefits are forecast to be $1,440 per month. John and Angie have three children, all of whom are independent and in good health.

Assume that John dies this year. Which of the following statements describe Angie’s current eligibility for benefits from the Social Security system?

a. She is eligible for the widow’s benefit.
b. She is eligible for Social Security retirement benefits based on her own years of employment.
c. She is eligible for retirement benefits based on John’s years of employment.
d. She is eligible for Medicare benefits.
e. She is eligible for the lump-sum death benefit of $255.

Answer 61

e. She is eligible for the lump-sum death benefit of $255.

Angie, at age 55, is not currently eligible for the widow’s benefit (a.); she will be eligible at age 60.

She is not eligible for Social Security retirement benefits (b.) based on her employment because she has worked for a railroad since age 22 and she is entitled to retirement benefits from the railroad retirement program.

She is not eligible for Social Security retirement benefits based on John’s employment (c.) because she is not age 62.

Eligibility for Medicare (d.) requires attaining age 65. She currently is eligible only for the $255 lump-sum death benefit.

Question 62

(LO 1-6)

Question 68 of 80

John O’Brien will reach his full retirement age (FRA) on November 1st of this year. He is employed part-time at SummerFun Products Inc. where he has worked for the past 22 years. He began receiving his Social Security on January 1st this year and plans to continue working. He and his wife, Angie, own stock and mutual fund investments that generate annual investment income of approximately $8,000. Angie is age 55; she has worked for the Midwestern Railroad Company for 30 years and will be eligible for retirement benefits of approximately $900 per month from her retirement program. John’s Social Security retirement benefits are forecast to be $1,440 per month. John and Angie have three children, all of whom are independent and in good health.

Assume that John dies this year. Which of the following statements describe Angie’s future eligibility for benefits from the Social Security system?

I. She will be eligible for the widow’s benefit when she reaches age 60.

II. She will be eligible for Social Security retirement benefits based on her own years of employment when she reaches age 62.

III. She will be eligible for retirement benefits based on John’s years of employment when she reaches age 62.

IV. She will be eligible for Medicare benefits (through the railroad retirement program) when she reaches age 65.

I and II only

I and III only

II and IV only

I, III, and IV only

Answer 62

I, III, and IV only

Angie will be eligible for the widow’s benefit when she reaches age 60, retirement benefits based on John’s years of employment when she reaches age 62, and Medicare benefits (through the railroad retirement program) when she reaches age 65.

Question 63

(LO 1-6)

Question 69 of 80

Bill Doyle is an age 66 fully insured worker who is currently married to his fourth wife, Sue. They have been married for 2½ years. Bill is planning to retire at age 70. His first wife, Arlene, has not remarried; Arlene and Bill were married for seven years. His second marriage lasted 10 years; Cynthia, his second wife, has not remarried. Margaret, his third wife, divorced him after 15 years of marriage, took everything, and married their neighbor three years ago. At the time, Bill wrote the Social Security Administration and told them to cancel her benefit.

None of Bill’s wives has ever been employed, and all four are age 65. Which of the following statements describes the eligibility of Bill’s four wives for receipt of Social Security retirement benefits attributable to his covered employment?

a. Arlene, Cynthia, Margaret, and Sue all are eligible.
b. Only Cynthia is eligible; Bill must begin receiving his benefit before Sue is eligible.
c. Only Sue, his current wife, is eligible.
d. No spousal benefits are currently available; Bill must retire before any Social Security retirement benefits are available.

Answer 63

b. Only Cynthia is eligible; Bill must begin receiving his benefit before Sue is eligible.

Arlene is not eligible because they were married less than 10 years.

Cynthia is eligible because they were married at least 10 years and she has not remarried.

Although his marriage to Margaret lasted 15 years, she has remarried and therefore is not eligible.

Sue, his current wife, will not be eligible for benefits until he begins to receive benefits.

Question 64

(LO 9-10)

Question 70 of 80

Mark Adams was laid off from the company where he had worked full time for 15 years. His earnings during the base period exceeded the state-required minimum. Which of the following conditions would result in disqualifying him from eligibility to receive unemployment benefits?

I. He is unable to find a new job in six weeks.

II. He took a three-month skiing vacation to Switzerland following his termination.

III. He does not accept a “suitable” job offer.

IV. His earnings exceeded the state maximum.

I and III only

I and IV only

II and III only

I, II, and III only

II, III, and IV only

Answer 64

II and III only

In order to be eligible to receive unemployment benefits, a worker must have

• been covered and unemployment insurance taxes paid on behalf of the worker,
• earned a minimum amount of income during the preceding year,
• continued attachment to the work force and must be willing and able to work, and
• the unemployment must be involuntary.

Since Mark took a three-month skiing vacation to Switzerland following his termination (i.e., he wasn’t actively seeking employment) and turned down a suitable job offer, he fails the last two requirements and thus is ineligible for benefits.

Question 65

(LO 1-5)

Question 71 of 80

Anne Green is age 38 and has three children, ages 7, 11, and 14. Since her husband’s death four years ago, she has been receiving Social Security survivor benefits of $1,972 per month. She receives no other income and has not been employed. She may seek employment in two years. To what extent, if any, are her Social Security benefits taxable?

not taxable

50% taxable

85% taxable

100% taxable

Answer 65

not taxable

Anne has no other sources of income.

The Social Security benefits would only be taxable if her total income ($0) plus half of her Social Security benefits ($11,832) exceed her base amount ($25,000).

Question 66

(LO 9-8)

Question 72 of 80

Which of the following benefits would be taxable to the employee who receives them?

a. providing trade magazines at company expense
b. employee of an airline flying standby from Los Angeles to San Francisco
c. de minimis fringe benefits
d. use of a company car for commuting to work
e. a 10% employee discount on department store merchandise

Answer 66

d. use of a company car for commuting to work

Use of a company car for commuting to work is a taxable item to the employee who receives it.

Question 67

(LO 1-4)

Question 73 of 80

Roger That, age 55, has been an employee of the Seattle division for 30 years, and during this time, has not been eligible for his employer’s retirement plan. Roger has been recently offered a position in another division, which will make him eligible to participate in the company’s 401(k) plan. His objective is to retire at age 65 at $2,000 per month in retirement income, not including Social Security. He wants to assume 30 years in retirement. The company nonqualified plan will provide him with $1,000 per month. There are no matching contributions in the 401(k) plan, but his income is adequate to have the required level of contributions fall within the deferral limits of the 401(k) plan. Contributions and payments are made at the beginning of each month.

Assume the return in the company’s 401(k) plan is 7% and a 10% rate of return after age 65. He plans to pay off his house in eight years. What monthly amount will Roger have to contribute to the plan for 10 years to meet his retirement objective?

$660

$685

$696

$747

$1,113

Answer 67

$660

Set calculator on “Begin” and “12 P/Yr”

Step 1. NQ Plan

N = 30 --> Blue Key --> 360
I = 10
PV = ?
PMT = 1000
FV = 0

PV = -114,900.4101

Step 2. 401k plan

N = 10 --> Blue Key --> 120
I = 7
PV = 0
PMT = 1000
FV = -114,900.4101

PMT = 659.9889

Question 68

(LO 1-4)

Question 74 of 80

James and Hannah Gillespie have determined that they will need a monthly income of $6,000 during retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per month. Over the 12 remaining years of their preretirement period, they expect to generate an average annual after-tax investment return of 8%; during their 25-year retirement period, they want to assume a 6% annual after-tax investment return.

How much do the Gillespies need to save at the end of each month to build the necessary retirement fund?

$1,611

$1,621

$1,653

$1,785

Answer 68

$1,621

The monthly retirement income need is not specified as “today’s dollars,” and no inflation rate specified; therefore, it is assumed that the $2,500 net monthly income need represents retirement dollars, and the retirement period income stream is level.

First, to calculate the lump sum needed at the beginning of retirement, discount the stream of monthly income payments at the investment return rate:

Step 1
Begin
12 P/YR

N = 25 --> 300
I = 6
PV = ?
PMT = 2500
FV = 0

PV = -389,957.2458

Step 2
End
12 P/YR

N = 12 --> 144
I = 8
PV = 0
PMT = ?
FV = -389,957.2458

PMT = 1621.3873

Question 69

(LO 8-5)

Question 75 of 80

Five years ago, Ronald Crantz was granted 2,000 incentive stock options (ISOs) with an exercise price of $30. The stock price was $30 on that date. On February 2nd of this year, he exercised all 2,000 options at $67. Ronald has decided to dispose of the stock he acquired through the exercise of his ISOs early next year. What is the tax impact of this transaction?

a. Ronald will have an AMT income adjustment of $60,000.
b. Ronald will have an AMT income adjustment of $74,000.
c. Ronald will have an AMT income adjustment of $134,000.
d. Ronald will not have any AMT income adjustment.

Answer 69

b. Ronald will have an AMT income adjustment of $74,000.

The bargain element, $67 – $30 = $37, will be an AMT adjustment.

Question 70

(LO 8-5, 8-6)

Question 76 of 80

Five years ago, Ronald Crantz was granted 2,000 non-qualified stock options with an exercise price of $3. The value could not be determined on that date. On February 2nd of this year, he exercised all 2,000 options at $67. What is the tax impact of this transaction?

a. Ronald will have an AMT income adjustment of $6,000.
b. Ronald will have additional income of $128,000 and federal withholding, FICA, and FUTA will not apply.
c. Ronald will have an AMT income adjustment of $80,000.
d. Ronald will have additional ordinary income of $128,000 and federal withholding, FICA, and FUTA will apply.

Answer 70

d. Ronald will have additional ordinary income of $128,000 and federal withholding, FICA, and FUTA will apply.

At the exercise of NQSOs, the difference between the cost of the shares at exercise price and the market value of the shares is taxed as ordinary income, subject to federal withholding, FICA, and FUTA.

Note, if the value of the grant is ascertainable at grant and the exercise price is less than the market value on the date of the grant, the option violates Section 409A and becomes subject to the interest, tax, and penalty associated with 409A violations.

Question 71

(LO 8-6)

Question 77 of 80

Four years ago, Davis Shelby was granted 5,000 incentive stock options with an exercise price of $30. The stock price was $30 on that date. On February 2nd of this year, she exercised all 5,000 options at $67.

Which of the following statements is true?

I. Davis will have additional wages and short-term capital gains if she sells the stock she acquired with the options this year.

II. A portion of Davis’s options cannot be treated as ISOs.

III. Davis will not have an AMT income adjustment if she sells the stock acquired with ISOs in June of this year.

V. A portion of the bargain element will be deductible to the employer and subject to federal withholding, FICA, and FUTA.

I only

I and III only

II and IV only

I, II, III, and IV only

Answer 71

I, II, III, and IV only

I is true, since the NSO bargain element is taxed as wages on exercise and short-term capital gains would apply to these shares held less than one year.

II is true, because the value of ISOs exercised in any year may not exceed $100,000, based on the grant price.

III is true, due to the fact that the early sale (less than one year) is a disqualifying disposition.

IV is true since the exercise of NQSOs (NSOs) creates additional wages subject to FICA and FUTA, federal withholding, and a deduction for the employer.

Question 72

(LO 4-4)

Question 78 of 80

Which one of the following statements is not correct about Roth 401(k) accounts?

a. Unlike traditional Roth IRA accounts that have phaseouts based upon income, there are no income restrictions applicable to participation in a Roth 401(k).
b. Just as with any Roth IRA account, there are no required minimum distributions that must be made from a Roth 401(k) account.
c. Even if a Roth 401(k) participant already has a Roth IRA account, a new five year clock is required for the Roth 401(k).

Answer 72

b. Just as with any Roth IRA account, there are no required minimum distributions that must be made from a Roth 401(k) account.

Roth 401(k) accounts, just as with traditional 401(k) accounts, have required minimum distribution (RMD) rules that apply; meaning that distributions must start in the year the participant reaches age 701⁄2 (unless they are still working).

This can be avoided by rolling the Roth 401(k) over into a Roth IRA since there are no RMDs with Roth IRAs.

There is a new clock that is started for a Roth 401(k) account, even if the participant already has a Roth IRA account.

However, if a participant transfers the Roth 401(k) into a Roth IRA, then the Roth IRA clock will be the one that applies, not the Roth 401(k) clock.

Question 73

(LO 4-2)

Question 79 of 80

Which one of the following would not be an acceptable course of action for a 401(k) plan that has failed the ADP test?

a. re-characterization of a portion of the eligible non highly compensated employees’ deferrals
b. corrective distribution to the eligible highly compensated employees
c. a qualified matching contribution for all eligible non highly compensation employees
d. a qualified non-elective contribution for all eligible non highly compensated employees

Answer 73

a. re-characterization of a portion of the eligible non highly compensated employees’ deferrals

A re-characterization entails re-characterizing a portion of the employee deferrals into after-tax rather than pre-tax dollars.

The ADP test fails when too much is being saved or contributed on behalf of highly compensated employees.

In order to bring the plan into compliance it would be necessary to re-characterize a portion of the highly compensated employee deferrals, not the non highly compensated employee deferrals.

The other three options are stated correctly.

Question 74

(LO 9-8)

Question 80 of 80

Which of the following fringe benefits would be included in the income of a highly compensated employee if the plans were available to only highly compensated employees?

I.	a subsidized parking benefit
II.	a no-additional-cost service
III.	a de minimis benefit
IV.	employee discounts
V.	company-provided dining room for executives

I and III only

III and IV only

II, IV, and V only

I, II, and V only

Answer 74

II, IV, and V only

Employee discounts, company-provided meals and dining facilities, and no-additional-cost services benefits must be nondiscriminatory, otherwise the benefits are included in the compensation of the highly compensated.