Retire Ch 10 - Simple, 403b, 457

Question 1

SIMPLE plans may operate on a calendar or fiscal year basis.

a. True b. False

Answer 1

b. False

Question 2

SIMPLE IRA plans are permitted for tax-exempt employers and governmental entities.

a. True b. False

Answer 2

a. True

Question 3

SIMPLE plans can only be established for businesses that employ 100 or fewer employees.

a. True b. False

Answer 3

a. True

Question 4

Employers who sponsor a SIMPLE IRA must make either matching contributions or nonelective contributions.

a. True b. False

Answer 4

a. True

Question 5

Distributions from non-Roth SIMPLE IRAs are generally taxed like traditional IRAs.

a. True b. False

Answer 5

a. True

Question 6

Employers that sponsor SIMPLE 401(k) plans must allow for catch-up contributions for participants age 50 and older.

a. True b. False

Answer 6

b. False

Question 7

Employers or individuals can establish a 403(b) plan.

a. True b. False

Answer 7

b. False

Question 8

403(b) plans may be covered under ERISA.

a. True b. False

Answer 8

a. True

Question 9

Additional catch-up contributions to a 403(b) plan may be after-tax contributions from the employee.

a. True b.a. True

Answer 9

a. True

Question 10

For 403(b) plans the “most recent year of service” is always based on a calendar year of service.

a. True b. False

Answer 10

b. False

Question 11

Funds within a 403(b) plan may only be invested in annuity contracts, mutual funds, or collective investment trusts.

a. True b. False

Answer 11

a. True

Question 12

403(b) plans generally provide for 100% immediate vesting of contributions.

a. True b. False

Answer 12

a. True

Question 13

Churches may establish 457 plans.

a. True b. False

Answer 13

b. False

Question 14

A 457 plan may accept after-tax contributions from employees.

a. True b. False

Answer 14

b. False

Question 15

The 457 deferral limit for 2023 is $22,500.

a. True b. False

Answer 15

a. True

Question 16

457 plans have a special final three-year catch-up provision that allows employees to contribute up to 100% of their compensation in the last three years.

a. True b. False

Answer 16

b. False

Question 17

For 2023, an employer can contribute an additional $22,500 to a 457 plan in addition to the employee deferral contribution of $22,500.

a. True b. False

Answer 17

b. False

Question 18

Distributions from a 457 plan may be subject to the 10% penalty for early withdrawal prior to age 591⁄2.

a. True b. False

Answer 18

a. True

Question 19

Monique, age 42, earns $350,000 annually as an employee for CTM, Inc. Her employer sponsors a SIMPLE IRA retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to 3% of compensation.
What is the maximum contribution (employer and employee) that can be made to Monique’s SIMPLE account in 2023?

a. $19,800.
b. $21,000.
c. $26,000.
d. $31,000.

Answer 19

The correct answer is c.

The maximum total contribution is $26,000. ($15,500 maximum employee contribution for 2023 +$10,500 employer match).

The maximum employee contribution for 2023 is $15,500. 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 $10,500 ($350,000 compensation x 3%). Note that the annual compensation limit of $330,000 (2023) does not apply with the SIMPLE IRA match (but does
apply with a nonelective contribution)

Question 20

Which of the following is/are correct regarding SIMPLE plans?

1. A SIMPLE plan does not require annual testing.
2. A SIMPLE IRA must follow a 3-year cliff vesting schedule if the plan is top-heavy.
3. A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in a SIMPLE plan.
4. The maximum elective deferral contribution to a SIMPLE 401(k) plan is $22,500 for 2023 and $30,000 for 2023 for an employee who has attained the age of 50.

a. 3 only.
b. 1 and 3.
c. 1, 2, and 3.
d. 2, 3, and 4

Answer 20

The correct answer is b.

Statement 1 is correct.

Statement 2 is incorrect. A SIMPLE plan is not subject to vesting rules, and contributions are always a 100% vested.

Statement 3 is correct. The early withdrawal penalty is 25% for
distributions taken within the first two years of participation.

Statement 4 is incorrect. The maximum deferral to a SIMPLE plan is $15,500 for 2023. Employees who have attained age 50 by the end of the tax year will also be eligible to make a catch-up contribution ($3,500 for 2023).

Question 21

All of the following statements is/are correct regarding tax-sheltered annuities (403(b) plans) except?

1. The non-age-based catch-up provision is available to employees of all 501(c)(3) organization employers that sponsor a TSA.
2. Active employees who take withdrawals from TSAs prior to age 591⁄2 are subject to a 10% penalty tax.
3. TSAs are available to all employees of 501(c)(3) organizations who adopt such a plan.
4. If an employee has had at least 15 years of service with an eligible employer, an additional catch-up contribution may be allowed.

a. 1 only.
b. 1 and 2.
c. 1, 2, and 3.
d. 2, 3, and 4.

Answer 21

The correct answer is a.

Statement 1 is incorrect. T

he catch-up provision requires specified service and the correct kind of
employer. Statements 2, 3, and 4 are correct

Question 22

Which of the following statements is/are correct regarding TSAs and 457(b) deferred compensation plans?

1. Both plans require contracts between an employer and an employee.
2. Participation in either a TSA or a 457 plan will cause an individual to be considered an “active participant” for purposes of phasing out the deductibility of traditional IRA contributions.
3. Both plans allow a special “final 3-year” catch-up contribution.
4. Both plans must meet minimum distribution requirements that apply to qualified plans.

a. 1 only.
b. 1 and 4.
c. 2, 3, and 4.
d. 1, 2, and 4

Answer 22

The correct answer is b.

Statements 1 and 4 are correct.

Statement 2 is incorrect because a 457 plan is a deferred compensation
arrangement that will not cause a participant to be considered an “active participant.”

Statement 3 is incorrect. Only 457(b) plans allow a “final 3-year” catch-up contribution. TSAs have a different special catch-up contribution for employees with at least 15 years of service.

Question 23

Rex works for New Orleans Museum of Art, which sponsors a 403(b) plan.
If Rex is 45 years old and has worked at the museum for the last 20 years, what is his maximum elective deferral for 2023?

a. $22,500.
b. $25,500.
c. $30,000.
d. $33,000.

Answer 23

The correct answer is a.

The salary reduction for 2023 is $22,500. An additional catch-up contribution of $7,500 is allowed for individuals who have attained age 50.

The other type of catch-up contribution is not available to
employees of employers such as museums

Question 24

Which of the following statements is/are correct regarding TSAs and 457(b) deferred compensation plans?

1. Both plans require contracts between an employer and an employee.
2. Participation in either a TSA or a 457 plan will cause an individual to be considered an “active participant” for purposes of phasing out the deductibility of Traditional IRA contributions.
3. Both plans allow a special “final 3-year” catch-up contribution.
4. Both plans must meet minimum distribution requirements that apply to qualified plans.

1 only.
1 and 4.
2, 3, and 4.
1, 2, and 4.

Answer 24

1 and 4.
Rationale

Statements 1 and 4 are correct.

Statement 2 is incorrect because a 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an “active participant.”

Statement 3 is incorrect. Only 457(b) plans allow a “final 3-year” catch-up contribution. TSAs have a different special catch-up contribution for employees with at least 15 years of service.

Question 25

Which term or phrase best completes the following sentence:
“Employee contributions in 403(b) plans are ______.”

Never matched.
Never fully vested.
Always fully vested.
Vested based on age and years of service.

Answer 25

Always fully vested.

Rationale

Employee contributions in 403(b) plans are always fully vested, whereas employer contributions may be subject to a vesting schedule according to plan documents

Question 26

Dr. Wood has taught accounting at FSU (Florida Sate University) for the last 30 years and is expected to retire in a few years, at age 65. FSU sponsors a 403(b) plan and a 457(b) governmental plan. Both plans have Roth accounts available. She has been diligent and always contributed the maximum amounts to the traditional accounts in each of the plans. She is also a partner in an equipment business that has lost money the last several years and she has a net operating loss carry forward.
Which of the following statements is true?

Dr. Wood is able to rollover amounts in the traditional deferral account for the 457 plan into the Roth account without terminating employment.

Dr. Wood may receive forfeiture allocations to the Roth account in the 457 plan from employees terminating before full vesting.

The investment options available for both plans includes mutual funds, annuities and individual securities.

The assets in the 403(b) plan are protected in a trust, but that is not the case with the funds in the 457 plan.

Answer 26

Dr. Wood is able to rollover amounts in the traditional deferral account for the 457 plan into the Roth account without terminating employment.
Rationale

Option b is not correct as forfeitures cannot go into a 457 plan.

Also, it is unlikely there are any forfeitures.

Option c is not correct as 403(b) plans cannot be invested in individual securities.

Option d is incorrect as the assets in a public 457 plan are protected by trust.

Question 27

Which of the following are permitted investments in a 403(b) TSA (TDA) plan?

1. An annuity contract from an insurance company.
2. An international gold stock mutual fund.
3. A self-directed brokerage account consisting solely of U.S. stocks, bonds and mutual funds.

1 only.
2 only.
1 and 2.
1, 2, and 3.

Answer 27

1 and 2.

Rationale

TSA (TDA) funds can only invest in annuity contracts (Statement 1), mutual funds (Statement 2), or collective investment trusts (added by SECURE 2.0 Act, effective December 30, 2022). No self-directed brokerage accounts are permitted.

Question 28

UPDATED FOR 2024:

Ren, age 63 in 2024, is planning for retirement at normal retirement age of 65 from the Salt Lake City coroner’s office, which has a 457(b) plan. Ren has an unused deferral amount of $9,000. He has compensation of $128,000 per year as a mortician/autopsy specialist.

Ren wants to know the maximum amount he can defer in 2024 in the 457(b) plan.

$23,000.
$30,500.
$32,000.
$39,500.

Answer 28

32,000.
Rationale

Ren can defer $23,000 + $9,000, the unused deferral, for a total of $32,000.

He cannot combine the three-year rule and the age 50 and over rule.

Question 29

Which of the following types of 457 plans permit employees to defer recognition of income without any risk of forfeiture?

1. Public 457(b) plans
2. 457(f) plans
3. Private 457(b) plans

1 only.
2 only.
1 and 3.
1, 2, and 3.

Answer 29

1 only.

Rationale

Assets in 457(f) plans and private 457(b) plans must be subject to a substantial risk of forfeiture.

Question 30

Which of the following statements is/are correct regarding 403(b) plans?

1. 403(b) plans are eligible for rollover treatment to IRAs, qualified plans, and other 403(b) plans.
2. Investments in stocks, bonds, and money markets are available.
3. Assets in a 403(b) plan are generally 100% vested.

1 only.
2 only.
1 and 3.
1, 2, and 3.

Answer 30

1 and 3.

Rationale

Statements 1 and 3 are correct.

Statement 2 is incorrect because investments are limited to insurance annuities, mutual funds, and collective investment trusts (added by SECURE 2.0 Act, effective December 30, 2022).

Question 31

Which of the following characteristics accurately describes a 403(b) plan?

1. A self-reliant employee elective deferral plan.
2. The retirement benefit is dependent on the investment results.
3. The plan generally permits loans.

1 only.
2 only.
1 and 2.
1, 2, and 3.

Answer 31

1, 2, and 3.
Rationale

All of the features described are common to 403(b) plans.

Question 32

UPDATED FOR 2024:
Dr. Means has taught accounting at FAU for the last 30 years and is expected to retire next year, at age 65. FAU sponsors a 403(b) plan and a 457(b) governmental plan. She has been diligent and has always contributed the maximum amounts to each of the plans.

If her salary is $100,000, how much can she contribute in total to both plans in 2024?

$30,500.
$61,000.
$64,000.
$79,500.

Answer 32

$61,000.

Rationale

She can defer the maximum of $23,000 to each plan and the additional age 50 or over catch up of $7,500 for both plans, which totals $61,000. She cannot use the other catch up provisions for 403(b) plans or 457 plans since she has maximized her deferrals all prior years.

Question 33

UPDATED FOR 2024:

Rex works for New Orleans Museum of Art, which sponsors a 403(b) plan. If Rex is 45 years old and has worked at the museum for the last 20 years, what is his maximum elective deferral for 2024?

$23,000.
$26,000.
$30,500.
$33,500.

Answer 33

$23,000.

Rationale

The salary reduction for 2024 is $23,000. An additional catch-up contribution of $7,500 is allowed for individuals who have attained age 50. The other type of catch-up contribution is not available to employees of employers such as museums.

Question 34

UPDATED FOR 2024:
Which of the following are true concerning 457 plans?

1. Contributions to 457(b) plans may be either pre-tax or Roth.
2. An employee may contribute the maximum amount to a 401(k) plan, 403(b) plan, SARSEP, or SIMPLE IRA, in addition to the deferral limits for 457(b)s.
3. An employee in 2024 may contribute up to $23,000 to a 457(b) plan and up to $23,000 to a 403(b) or 401(k) plan if available.
4. Deferrals to the 457 plan of one employer are not aggregated with deferrals to the 457 plan of a different employer.

1 and 2.
1 and 3.
1, 2, and 3.
2, 3, and 4

Answer 34

1, 2, and 3.

Rationale

The only incorrect statement is # 4. Deferrals to the 457 plan of one employer are aggregated with deferrals to the 457 plan of a different employer to determine the maximum annual contribution to a 457 plan for any individual.

Question 35

Which of the following are true regarding 457(f) plans?

1. IRC Sec. 457(f) plans are referred to as ineligible plans.
2. 457(f) plans are nonqualified deferred compensation plans for state and local governmental employers and for tax exempt employers.
3. 457(f) plans are also called “top-hat” plans.
4. There is no limit on the amount of deferral with 457(f) plans.

1 and 4.
2 and 3.
1, 3, and 4.
1, 2, 3, and 4.

Answer 35

1, 2, 3, and 4.

Rationale

All four of the statements are true.

Question 36

Which of the following plans permit employers to match employee elective deferral contributions or make non-elective contributions?

1. 457(b) plan.
2. 401(k) plan.
3. 403(b) plan.

2 only.
3 only.
2 and 3.
1, 2, and 3.

Answer 36

1, 2, and 3.

Rationale

All three plans permit employer matching and non-elective contributions. The 457 employer contribution goes against the annual deferral limit, whereas employer contributions do not go against the annual deferral limit for 401(k) and 403(b) plans.

Question 37

Which of the following are correct?

1. SIMPLEs provide incentives to small employers to adopt retirement plans for employees with less administrative costs and fewer set-up procedures than qualified plans.
2. SIMPLE IRAs can permit loans to employees.
3. SIMPLE IRAs require the employer either to match the employee contributions of those who participate or to provide nonelective contributions to all eligible employees.

3 only.
1 and 2.
1 and 3.
All of the above.

Answer 37

1 and 3.

Rationale

Statement 2 is false.

Loans are not permitted from any IRA.

Statements 1 and 2 are correct.

Question 38

Monique, age 42, earns $350,000 annually as an employee for CTM, Inc., a non-electing large employer. Her employer sponsors a SIMPLE retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to three percent of compensation. What is the maximum contribution (employer and employee) that can be made to Monique’s SIMPLE account in 2024?

$20,700.
$21,000.
$26,500.

Answer 38

$26,500.
Rationale

The maximum total contribution is $26,500. ($16,000 maximum employee contribution for 2024 + $10,500 employer match). The maximum employee contribution for 2024 is $16,000. The employer has chosen to make matching contributions up to 3% of compensation (the SIMPLE maximum for a non-electing large employer). Therefore, the employer can make a contribution of up to $10,500 ($350,000 compensation x 3%). Note that the annual compensation limit of $345,000 (2024) does not apply with the SIMPLE IRA match (but does apply with a nonelective contribution).

Question 39

Individual accounts in 403(b) plans may not be in one of the following forms?

A contract provided through an insurance company called an annuity contract.

An account invested in individual stocks in companies in the S&P 500.

An account for church employees that is a retirement income account, which invests in either annuities or mutual funds.

An account invested in mutual funds only, which is referred to as a custodial account.

Answer 39

An account invested in individual stocks in companies in the S&P 500.
Rationale

Individual accounts in 403(b) plans must be options a, c, or d, or a group trust which satisfies the requirements of Rev. Rul. 81-100 (collective investment trust; added by SECURE 2.0 Act), and thus, investing in individual stocks in S&P 500 companies is not allowed. Such stock may be owned through mutual funds only

Question 40

Taylor, age 25, works for Swim America. Swim America adopted a SIMPLE plan six months ago. Taylor made an elective deferral contribution to the plan of $8,000, and Swim America made a matching contribution of $2,400. Taylor did not elect employee or employer Roth contributions.
Which of the following statements is/are correct?

1. Taylor can withdraw his entire account balance without terminating employment.
2. Taylor can roll his SIMPLE IRA into his traditional IRA.
3. Taylor will be subject to ordinary income taxes on withdrawals from the SIMPLE.
4. Taylor may be subject to a 25% early withdrawal penalty on amounts withdrawn from the SIMPLE.

1 and 2.
1 and 3.
2, 3, and 4.
1, 3, and 4.

Answer 40

1, 3, and 4.

Rationale

Statement 1 is correct. A participant can take a distribution from a SIMPLE at any time without separating from service. SIMPLEs must provide 100% immediate vesting of employer contributions. The entire balance is available for withdrawal.

Statement 2 is incorrect. A SIMPLE IRA cannot be rolled in to a traditional IRA until the participant has been in the SIMPLE IRA for two years. Tyler has only been in the SIMPLE for six months.

Statement 3 is correct. The entire withdrawal will be subject to ordinary income tax in the year of withdrawal.

Statement 4 is correct be cause the early withdrawal penalty for a SIMPLE is 25% for withdrawals occurring within the first two years of participation.

Question 41

An employer may reduce the three percent matching contribution requirement for a calendar year in a SIMPLE, IRA, but only under which of the following circumstances?

1. The limit is reduced to no less than one percent.
2. The limit is not reduced for more than two years out of the five year period that ends with (and includes) the year for which the election is effective.
3. Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period for a salary reduction agreement.

1 and 2.
1 and 3.
2 and 3.
All of the above must be present.

Answer 41

All of the above must be present.
Rationale

All of the circumstances listed must be present to permit the employer to reduce the three percent matching contribution requirement for a calendar year in a SIMPLE IRA according to IRC Section 408(p)(2)(C)(ii).

Question 42

Which of the following is/are correct regarding SIMPLE plans?

1. A SIMPLE plan does not require annual testing.
2. A SIMPLE IRA must follow a 3-year cliff vesting schedule if the plan is top-heavy.
3. A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in a SIMPLE plan.
4. The maximum elective deferral contribution to a SIMPLE 401(k) plan is $23,000 for 2024 and $30,500 for 2024 for an employee who has attained the age of 50.

3 only.
1 and 3.
1, 2, and 3.
2, 3, and 4.

Answer 42

1 and 3.

Rationale

Statement 1 is correct.

Statement 2 is incorrect. A SIMPLE plan is not subject to vesting rules, and contributions are always a 100% vested.

Statement 3 is correct. The early withdrawal penalty is 25% for distributions taken within the first two years of participation.

Statement 4 is incorrect. The maximum deferral to a SIMPLE plan is $16,000 for 2024. Employees who have attained age 50 by the end of the tax year will also be eligible for a catch-up adjustment ($3,500 for 2024).

Question 43

All of the following statements is/are correct regarding tax-sheltered annuities (403(b) plans) except?

1. The non-age-based catch-up provision is available to employees of all 501(c)(3) organization employers that sponsor a TSA.
2. Active employees who take withdrawals from TSAs prior to 59½ are subject to a 10% penalty tax.
3. TSAs are available to all employees of 501(c)(3) organizations who adopt such a plan.
4. If an employee has had at least 15 years of service with an eligible employer, an additional catch-up contribution may be allowed.

1 only.
1 and 2.
1, 2, and 3.
2, 3, and 4.

Answer 43

1 only.

Rationale

Statement 1 is incorrect.

The catch-up provision requires specified service and the correct kind of employer.

Statements 2, 3, and 4 are correct.

Question 44

Henrietta, age 57, has compensation of $72,000. The normal retirement age for her 457(b) plan is age 62. Henrietta has unused deferrals totaling $23,500 as of January 1, 2024.

How much can Henrietta defer into her 457(b) public plan for 2024?

$23,000.
$30,500.
$46,000.
$53,500.

Answer 44

$30,500.
Rationale

Henrietta is not within three years of the plan’s normal retirement age and therefore can only defer the normal $23,000 available plus the $7,500 (in 2024) catch-up for those participants age 50 and over.

Question 45

Jovi, age 58, has compensation of $150,000 and wants to defer the maximum to his public 457(b) plan. The normal retirement age for his plan is age 60.

How much can Jovi defer in 2024 if he has an unused deferral amount of $60,000 from age 40 to age 49?

$23,000.
$30,500.
$46,000.
$53,500.

Answer 45

$46,000.
Rationale

He can contribute $46,000 (2 x $23,000). He must be within three years of retirement and have unused deferral.

Note that since he used the final 3-year catch-up, Jovi cannot use the age 50 and over catch-up.

Question 46

UPDATED FOR 2024:

What is the maximum elective deferral contribution, for an employee who is not in the final three years before normal retirement age, to an eligible governmental 457(b) plan for 2024?

$16,000.
$19,500.
$23,000.
$30,500.

Answer 46

30,500.

Rationale

The maximum deferral is $23,000 for 2024. The maximum catch-up contribution is $7,500 for those participants age 50 and over. Therefore, the maximum elective deferral contribution including the catch-up is $30,500.

Question 47

Roger has a small convenience store with three employees. Each of the employees earns $10 per hour and they each work approximately 1,500 hours per year. His business is very successful. He recently considered adopting a defined benefit plan, but felt it was too expensive. He looked into a 401(k) plan, but thought it was too complicated. Finally, a few of his friends recommended a SIMPLE plan and told him about the basics of the plan.
Which of the following statements from his friends is the most incorrect?

SIMPLEs can be established by most small businesses but cannot be established if the business has more than 500 employees.

SIMPLEs can be established by an employer that previously had a qualified plan.

SIMPLEs consider employees who are age 21 or older and who earned at least $5,000 during any two prior years and are expected to earn at least $5,000 in the current year eligible for the plan.

Employers that sponsor SIMPLEs must provide a matching contribution to employees who defer money into the SIMPLE.

Answer 47

Employers that sponsor SIMPLEs must provide a matching contribution to employees who defer money into the SIMPLE.

Rationale

Option a is true. The limit is 100, not 500, but the statement is correct.

Option b is true. SIMPLEs cannot be established if the company is maintaining another qualified plan or SEP.

Option c is true. While SIMPLEs do not have an age requirement, the statement is true.

Option d is false. Employers must offer a match or a non-elective contribution.

Question 48

Roger has a small convenience store with three employees. Each of the employees earns $10 per hour and they each work approximately 1,500 hours per year. His business is very successful. He recently considered adopting a defined benefit plan, but felt it was too expensive. He looked into a 401(k) plan, but thought it was too complicated. Finally, a few of his friends recommended a SIMPLE plan and told him about the basics of the plan.
Which of the following statements from his friends is the most correct in 2024?

If Roger’s salary is $600,000 and the SIMPLE used a match, then his match would generally equal $17,600.

If Roger established a SIMPLE, he would have to select between graduated and cliff vesting.

If Roger established a SIMPLE using a non-elective contribution, then the other employees would each receive a contribution of $450.

Considering the size of his business, he cannot establish a SIMPLE 401(k

Answer 48

If Roger’s salary is $600,000 and the SIMPLE used a match, then his match would generally equal $17,600.

Rationale

Option a is correct - the compensation limit for qualified plans is not considered if the SIMPLE has a matching contribution. Thus, 3% times $600,000 equals $18,000, but the match is generally limited to the annual limit of $16,000 (2024). However, beginning in 2024, an increased limit applies if the employer is a small employer (with 25 or fewer employees who earn at least $5,000 per year) or an electing large employer. Since the business is a small employer, the maximum deferral and match is increased by 10% to $17,600 in 2024.

Option b is false - SIMPLEs have 100% vesting.

Option c is false - a nonelective benefit equals 2% in 2024. Thus, the employees would receive $300 each ($15,000 x 2%).

Option d is false - He could establish a SIMPLE 401(k), but most often a SIMPLE IRA is established.

Question 49

Which of the following statements is correct regarding SIMPLE plans in 2024?

All employee and employer contributions to the plan must be pretax contributions.

The maximum contribution to the SIMPLE plan of an employer with greater than 25 employees is increased by 10% if the employer offers a dollar-for-dollar match on 4% of compensation deferred into the plan.

The maximum catch-up contribution for an employee age 65 is 150% of the age 50 and older contribution limit.

An employee of a non-electing large employer can contribute up to 110% of the regular contribution limit.

Answer 49

The maximum contribution to the SIMPLE plan of an employer with greater than 25 employees is increased by 10% if the employer offers a dollar-for-dollar match on 4% of compensation deferred into the plan.

Rationale

Option a is incorrect because, under the SECURE 2.0 Act, SIMPLE plans are permitted to offer a Roth election for both employee and employer contributions, beginning in 2023.
Beginning in 2025, the catch-up contribution limit for employees who turn age 60, 61, 62, or 63 during the year is the lesser of 150% of the age 50+ catch-up limit or $5,000.

Option c is incorrect because the increased catch-up for ages 60-63 is not available in 2024 and it does not apply to employees who are age 65.

Option d is incorrect because employees of non-electing large employers are not permitted the 10% increase to the contribution limit. This increase is only available to small employers with 25 or fewer employees who earn at least $5,000 and to electing large employers (those who agree to increase the employer match from 3% to 4% or to increase the nonelective employer contribution from 2% to 3%).

Question 50

IN 2023, Wilhelm earned $50,000 working at Independent Law Firm, which offers a 401(k) plan, and earned $160,000 working at State University, which offers a 403(b) plan. In 2024, Wilhelm will be age 50 and would like to make a catch-up contribution to one of the plans. Which of the following statements is correct regarding his catch-up contribution? (For purposes of this question, ignore IRS Notice 2023-62 regarding delayed implementation of Section 603 of the SECURE 2.0 Act.)

A catch-up contribution to either plan must be a Roth contribution.

Wilhelm can make a pretax catch-up contribution to the 403(b) plan, but any catch-up contribution to the 401(k) plan must be a Roth contribution.

All catch-up contributions must be pretax contributions.

Wilhelm can make a pretax catch-up contribution to the 401(k) plan, but the catch-up contribution to the 403(b) plan must be a Roth contribution.

Answer 50

The correct answer is d
Wilhelm can make a pretax catch-up contribution to the 401(k) plan, but the catch-up contribution to the 403(b) plan must be a Roth contribution.

Rationale

The correct answer is d. Under the SECURE 2.0 Act, for taxable years beginning after December 31, 2023, employees whose wages from the sponsoring employer in the preceding year exceed $145,000 (to be indexed for inflation annually beginning in 2025) will no longer be permitted to make pre-tax catch-up contributions. This rule applies to 401(k), 403(b), and 457(b) plans. Catch-up contributions to the plan of the employer for which wages exceed the threshold must be Roth contributions; however, if there are two employers, the wage threshold is determined separately for each employer. Since Wilhelm’s wages at Independent Law Firm are below $145,000 (in 2024), he can still make pretax catch-up contributions to their 401(k) plan. If Wilhelm makes a catch-up contribution to the 403(b) plan at State University, it must be a Roth contribution because his income at State University is over the threshold amount.

Note: On August 25, 2023, the IRS announced in Notice 2023-62 a two-year administrative transition period for the new Roth catch-up contribution requirement. For taxable years prior to January 1, 2026, employees whose wages exceed the threshold may continue to make pre-tax catch-up contributions, and plans are not required to offer Roth catch-up contributions.

Question 51

What is the maximum catch-up contribution for 2024 under the 457(b) plan “Final 3-Year” rule?

$3,500.
$7,500.
$23,000.
$30,500.

Answer 51

$23,000.
Rationale

The final 3-year catch-up is $23,000 for 2024. The final 3-year catch-up cannot be combined with the age 50 or over catch-up.

Question 52

Distributions may be paid from a 403(b) account after:

Employee death or disability.
Employee turns age 59½.
Employee is separated from service.
All of the above.

Answer 52

All of the above.
Rationale

The other event not listed was, for salary reduction contributions, the employee endures a severe hardship according to IRC Section 403(b)(11). Distributions will also be available for the payment of certified long-term care insurance premiums, effective for distributions made after December 29, 2025. IRC §403(b)(11), as amended by SECURE 2.0 Act Sec. 334.

Question 53

Which of the following entities cannot establish 457(b) plans?

Churches.
Private Hospitals.
Farmers’ Cooperatives.
Labor Unions.

Answer 53

Churches

Question 54

Justine became eligible to participate in her employer’s SIMPLE IRA plan in 2023 and contributed 5% of her $100,000 salary to the plan. The company provided a dollar-for-dollar match on the first 3% of salary deferred, and the account balance, with earnings, was $9,000 when the company terminated the SIMPLE plan in 2024 and replaced it with a safe harbor 401(k) plan. Which of the following best describes the tax consequences if Justine rolls all of the funds in her SIMPLE IRA to the new 401(k)?

The full $9,000 rolled to the 401(k) will be subject a 25% penalty but will not be taxable.

$1,000 will be subject to both tax and a 25% penalty.

$1,000 will be subject to a 10% penalty but will not be taxable.

The entire $9,000 rolled to the 401(k) will be tax free and will not be subject to any penalty.

Answer 54

The entire $9,000 rolled to the 401(k) will be tax free and will not be subject to any penalty.

Rationale

If a distribution is taken from a SIMPLE IRA or SIMPLE Roth IRA plan during the first two years of an employee’s participation in the plan and if the distribution is subject to the early withdrawal penalty (i.e. no penalty exception applies), the penalty tax increases from ten percent to 25 percent

. For plan years beginning after December 31, 2023, an employer sponsoring a SIMPLE IRA plan (or SIMPLE Roth IRA) may elect at any time during the plan year to terminate the SIMPLE IRA and immediately replace it with a SIMPLE 401(k), safe harbor 401(k), QACA, or starter 401(k). In the case of funds rolled over from the SIMPLE IRA to the new 401(k) during the first two years of participation, the 25 percent penalty is waived.

Question 55

Which of the following accurately describes a 403(b) plan?

A. A 403(b) plan is a noncontributory qualified profit sharing plan.

B. Because of catch-up provisions, the investment risk of the assets within a 403(b) plan is borne equally by the plan sponsor and the participant.

C. A participant’s contributions will generally vest according to a 3 to 7 year graduated vesting schedule, however, a 5-year cliff vesting schedule may be used.

D. 403(b) plan assets can be invested indirectly in stocks and bonds through annuities or mutual funds.

Answer 55

Solution: The correct answer is D.

Answer D is a correct statement accurately describing a 403(b) plan. Answer A is incorrect as a 403(b) plan is an employee deferral plan and is not a qualified plan. Answer B is incorrect as the investment risk is borne by the employee in all cases. Answer C is incorrect as an employee’s contributions within a 403(b) plan is always 100% vested.

Question 56

Danielle has worked for the City of Buffalo for the last 20 years. She has deferred $23,000 into her 457(b) plan for 2024. She will attain her normal retirement age under the City’s 457(b) plan in 2025. Danielle has prior unused deferral amount of $45,000 as of December 31, 2023.

How much can Danielle contribute as her three-year catch-up contribution in 2024?

A. $0
B. $23,000
C. $43,500
D. $46,000

Answer 56

Solution: The correct answer is B.

Since the plan’s normal retirement age for Danielle is 2025, Danielle would be allowed to defer an additional $23,000 in 2024. This is within the three years of the plan’s normal retirement age and Danielle has sufficient prior unused deferral.

The three year catch up allows a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of:
the elective deferral limit, $23,000 in 2024.
the basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)

Question 57

Kim Cat, age 42, earns $350,000 annually as an employee for CTM, Inc. Her employer sponsors a SIMPLE 401(k) retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to 3% of covered compensation.

What is the maximum contribution (employer and employee) that can be made to Kim’s SIMPLE 401(k) account in 2024?

A. $10,350
B. $10,500
C. $26,000
D. $26,350

Answer 57

Solution: The correct answer is D.

The maximum total contribution is $26,350. ($16,000 maximum employee contribution for 2024 + $10,350 employer match).

The maximum employee contribution for 2024 is $16,000.

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 $10,350 ($345,000 covered compensation for 2024, x 3%), if the plan is a SIMPLE 401(k).

Question 58

Tony Soprano, age 48, earns $580,000 annually as an employee for City Waste Management. His employer sponsors a SIMPLE IRA retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to 3% of compensation.

What is the maximum contribution (employer and employee) that can be made to Tony’s SIMPLE IRA account in 2024?

A. $33,400
B. $17,400
C. $16,000
D. $32,000

Answer 58

Solution: The correct answer is D.

The maximum total contribution is $32,000 ($16,000 maximum employee contribution for 2024 + 3% employer match x $580,000, but limited to $16,000).

An employer cannot match more than was contributed, it is a dollar for dollar match.

Question 59

Which of the following is/are correct regarding SIMPLE plans?

1. A SIMPLE plan does not require annual testing.
2. A SIMPLE IRA must follow a 3-year cliff vesting schedule if the plan is top-heavy.
3. A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in a SIMPLE plan.
4. The maximum elective deferral contribution to a SIMPLE 401(k) plan is $23,000 for 2024 and $30,500 for 2024 for an employee who has attained the age of 50.A. 3 only
   B. 1 and 3
   C. 1, 2, and 3
   D. 2, 3, and 4

Answer 59

Solution: The correct answer is B.

Statement 1 is correct.

Statement 2 is incorrect. A SIMPLE plan is not subject to vesting rules, and contributions are always a 100% vested. Statement 3 is correct. The early withdrawal penalty is 25% for distributions taken within the first two years of participation

Statement 4 is incorrect. The maximum deferral to a SIMPLE plan is $16,000 for 2024. Employees who have attained age 50 by the end of the tax year will also be eligible for a catch-up adjustment ($3,500 for 2024).

Question 60

Which of the following statements is/are correct regarding TSAs and 457 deferred compensation plans?

Both plans require contracts between an employer and an employee.

Participation in either a TSA or a 457 plan will cause an individual to be considered an “active participant” for purposes of phasing out the deductibility of Traditional IRA contributions.

Both plans allow 10-year forward averaging tax treatment for lump-sum distributions.

Both plans must meet minimum distribution requirements that apply to qualified plans.

A. 1 only
B. 1 and 4
C. 2, 3, and 4
D. 1, 2, and 4

Answer 60

Solution: The correct answer is B.

Statements 1 and 4 are correct.

Statement 2 is incorrect because a 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an “active participant.”

Statement 3 is incorrect because 10-year forward averaging is not permitted from either plan.