CFP NOV 2024 Prep > Retire Ch 3 Qualified Plan Overview > Flashcards
Retire Ch 3 Qualified Plan Overview Flashcards
Pension plans are more common than profit-sharing plans because individual workers remain longer with one employer and, therefore, can receive more benefits.
a. True b. False
b. False
All pension plans are defined benefit plans.
a. True b. False
b. False
Contributions to qualified retirement plans follow the IRC matching principle of the inclusion of income and the deduction of the expense at the same time.
a. True b. False
b. False
The employer and employee are each responsible for their share of payroll taxes on the employee’s compensation.
a. True b. False
a. True
Distributions from a qualified retirement plan are generally taxable as ordinary income.
a. True b. False
a. True
ERISA protects qualified plan assets from all creditors.
a. True b. False
b. False
One disadvantage of a qualified plan is that it does not protect the employee from the employer’s wrong doings.
a. True b. False
b. False
A lump-sum distribution from a qualified retirement plan may be eligible for special income tax treatment.
a. True b. False
a. True
Using the standard eligibility rules, an employee must be allowed to enter a qualified plan on the day after they attain the age of 21 and have completed one year of service.
a. True b. False
b. False
If a company elects the two-year eligibility rule, it can still require the employee to attain the age of 21 before being eligible for participation in the qualified retirement plan.
a. True b. False
a. True
Tax-exempt educational institutions can require participants to attain the age of 26 before being eligible to participate in the qualified retirement plan.
a. True b. False
a. True
XYZ sponsors a 401(k) plan for its employees. It can include a two-year service period for employees entering the plan.
a. True b. False
b. False
Qualified plans can exclude employees who are nonresident aliens that do not perform services in the U.S.
a. True b. False
a. True
A qualified plan can exclude (as a class) all women from the plan.
a. True b. False
b. False
A person who earns $120,000 during 2023 is highly compensated for the 2024 plan year.
a. True b. False
b. False
Bobby’s grandfather is the majority owner of Apex Inc. and its CEO. He gave Bobby 6% of Apex and a job in the mail room making $23,000 last year. Bobby should be classified as a nonhighly compensated employee due to his income.
a. True b. False
b. False
If Andrea’s compensation is $200,000, then she will always be classified as a highly compensated employee.
a. True b. False
b. False
A retirement plan is established effective January 1, 2023. Sam was a 3% owner of the plan sponsor during calendar year 2022 and a 7% owner during 2023. Sam is an HCE for the 2023 plan.
a. True b. False
a. True
A plan must pass the general safe harbor, the ratio percentage test, and the average benefits test.
a. True b. False
b. False
The average benefits test is comprised of two tests and at least one of them must be passed.
a. True b. False
b. False
Defined benefit pension plans must pass the 50/40 test in addition to at least one of the other coverage tests.
a. True b. False
a. True
Employee contributions to a qualified retirement plan are always 100% vested. a.
True b. False
True
Employees who attain the normal retirement age as defined by their qualified retirement plan must be fully vested in that retirement plan.
a. True b. False
a. True
An employee who works 1,000 hours in the first six months attains one year of service upon completion of the 1,000 hours.
a. True b. False
b. False
The standard vesting schedule for a cash balance plan is the 3-year cliff method.
a. True b. False
a. True
Jacques works for Hiral Industries, which sponsors a 401(k) plan with a 50% match and a 2-to-6 year graded vesting schedule. Jacques defers $30,000 over the last three years and has received $15,000 in matching contributions over that same time. If he leaves today after three years with Hiral, and the balance in the account is $60,000, then he will forfeit $12,000 of the match and associated earnings.
a. True b. False.
a. True
An officer with compensation of $150,000 is a key employee.
a. True b. False
b. False
Qualified defined benefit plans that are considered top-heavy must use a 3-to-6-year graduated vesting schedule or a 3-year cliff vesting schedule. \
a. True b. False
b. False
The covered compensation limit for 2023 is $330,000.
a. True b. False
a. True
The defined benefit plan limit is $265,000 for 2023.
a. True b. False
a. True
The defined contribution plan limit per participant is the lesser of 25% of compensation or $66,000 for 2023.
a. True
b. False
Which of the following is not an example of a qualified retirement plan?
a. ESOP.
b. Age-based profit-sharing plan.
c. ESPP.
d. 401(k) plan.
The correct answer is c.
An ESPP, Employee Stock Purchase Plan, is not a qualified retirement plan. The ESPP will be discussed in
detail in Chapter 14. All of the other plans listed are qualified retirement plans.
Stevie has a qualified plan with an account balance of $2,000,000. In which of the following circumstances would a third party be able to alienate the assets within Stevie’s qualified plan?
- A QDRO in favor of a former spouse.
- A federal tax levy.
- Creditors in a personal bankruptcy.
a. 3 only.
b. 1 and 2.
c. 1 and 3.
d. 1, 2, and 3.
The correct answer is b.
Because a qualified plan is designed to provide individuals with income at their retirement, ERISA provides an anti-alienation protection over all assets within a qualified plan. This anti-alienation
protection prohibits the plan assets from being assigned, garnished, levied, or subject to bankruptcy proceedings while the assets remain in the plan so that the individual has income at their retirement.
Qualified plan assets are not protected from alienation due to a qualified domestic relations order, a federal tax levy, or from a judgment or settlement rendered upon an individual for a criminal act involving the otherwise protected qualified plan.
Which of the following people would be considered a highly compensated employee for 2023?
- Tiana, a 1% owner whose salary last year was $160,000.
- Ariel, a 6% owner whose salary was $42,000 last year.
- Belle, an officer, who earned $105,000 last year and is the 29th highest paid employee of 96 employees.
- Jasmine, who earned $152,000 last year and is in the top 20% of paid employees
. a. 1 and 4.
b. 1, 2, and 4.
c. 1, 3, and 4.
d. 1, 2, 3, and 4
The correct answer is b.
Tiana and Jasmine are HC due to compensation being greater than $150,000.
Ariel is HC because she is a > 5% owner.
Belle is not highly compensated because she does not have compensation greater than $150,000.
Cheque Company has 100 eligible employees and sponsors a defined benefit pension plan. The company is unsure if they are meeting all of their testing requirements.
How many employees (the minimum) must be covered by Cheque Company’s defined benefit pension plan for the plan to conform with ERISA?
a. 40.
b. 50.
c. 70.
d. 100.
The correct answer is a.
The 50/40 rule requires that defined-benefit plans cover the lesser of 50 employees or 40% of all eligible employees.
In this example, 40% of 100, or 40 employees, would be the lesser of these two amounts.
Qualified plans have many benefits to the employee and the employer. However they must satisfy many tests and comply with many limits to maintain their qualified status.
Which of the following is correct regarding coverage tests?
Profit sharing plans must satisfy only the three coverage tests.
Defined benefit plans must satisfy any two of the four coverage tests.
Coverage testing can include leased employees as part of the calculation.
Employees who do not meet the eligibility requirements are still included in the determination of at least one of the coverage tests.
Coverage testing can include leased employees as part of the calculation.
Rationale
Options a, b, and d are incorrect. Qualified plans must satisfy one of the three coverage tests and DB plans must pass one of the three coverage tests and the 50/40 test.
The 50/40 test is based on total employees, not necessarily non-highly compensated employees.
However, all coverage tests exclude non-eligible employees from the calculation.
Any person who provides services to the employer and is not an employee will be considered a leased employee if the following criteria are met: the services provided are pursuant to an agreement between the employer and a leasing organization; such person has performed services for the employer on a substantially full-time basis for a period of at least one year; and such services are performed under the primary control of employer.
Josh, age 30, and his spouse, who is active-duty military, recently moved to Killeen, TX due to a military permanent change of station (PCS). In August of the current year, Josh will begin his new job working for a small employer who offers a defined contribution profit-sharing plan. The plan follows the standard eligibility rules with a three-year cliff vesting schedule and has amended the plan to follow the new SECURE 2.0 Act rules for accelerated eligibility and vesting for military spouses.
If Josh’s new employer makes a four percent profit-sharing contribution to all eligible employees in the current year, what amount will be contributed to Josh’s account, and what amount will be vested?
Josh will not have met the eligibility rules and will not receive an employer contribution for the current year.
Josh will receive an employer contribution of two percent (half of the amount received by other eligible employees), none of which will be vested.
Josh will receive an employer contribution of four percent, 20 percent of which will be vested.
Josh will receive an employer contribution of four percent and will be fully vested.
Josh will receive an employer contribution of four percent and will be fully vested.
Rationale
Under the SECURE 2.0 Act, small employers offering a defined contribution plan receive a tax credit to help offset the additional cost of offering accelerated eligibility and vesting to military spouses.
To qualify, the military spouse must be eligible to participate within two months after their date of hire and must be immediately vested in all employer contributions to the plan. The military spouse is immediately eligible to receive employer contributions equal to those available to other employees after two years of service.
SK owns SK Ltd, which is a professional firm with five employees that sponsors both a defined benefit plan and a profit-sharing plan with a cash or deferred arrangement.
The covered compensation for SK Ltd is $600,000.
Salary deferrals total $30,000.
If the required funding for the defined benefit plan is $120,000, then how much can be contributed to the profit-sharing plan?
$0.
$30,000.
$36,000.
$36,000.
Rationale
Salary deferrals are not taken into consideration for the multi-plan limits. Since the plan is not subject to PBGC (professional firm with less than 25 employees), the combined limits will apply unless the defined contribution does not exceed 6%.
The funding for the defined contribution plan is the greater of the remaining 25 percent limit after taking into consideration the defined benefit funding (25% x $600,000 - $120,000 = $30,000)
or six percent (6% x $600,000 = $36,000).
Therefore, $36,000 can be contributed to the defined contribution plan since it is greater than $30,000.
Mouse Emporium sponsors a single-employer defined benefit pension plan that is covered by the PBGC and a qualified profit sharing plan.
Mouse’s annual covered compensation is $2,000,000 and the actuary has determined that a $600,000 contribution must be made to the defined benefit plan for the year.
If Mouse would like to contribute the maximum to their defined contribution plan, how much could Mouse contribute to the defined contribution plan in 2024?
$0.
$69,000.
$120,000.
$500,000.
$500,000.
Rationale
Because Mouse’s defined benefit plan is covered by PBGC, it is not taken into account for the overall contribution limitation for the defined contribution plan as a result of PPA 2006.
Therefore, Mouse can contribute $600,000 to its defined benefit plan and still contribute 25% of its covered compensation (or $500,000) to its defined contribution plan.
Aztec clay distributor is a family owned business that is owned by Kaley, Pierson, Jabari and Zion. Zion is not an employee, rather a silent or somewhat silent partner. Kaley and Pierson are married and Jabari is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. The employee census information is in the chart below.
Employee Ownership Salary Deferral Plan Balance Status
Kaley 30% $370,000 $20,000 $400,000 Officer
Pierson 3% $210,000 $20,000 $600,000
Jabari 4% $80,000 $10,000 $150,000
Dave 0% $180,000 $15,000 $150,000 Officer
Erin 0% $155,000 $15,000 $100,000
Tibbs 0% $50,000 $8,000 $50,000
Ginger 0% $40,000 $0 $10,000
Haley 0% $30,000 $2,000 $30,000
Irish 0% $20,000 $1,000 $10,000
Jen 0% $20,000 $0 $5,000
$1,155,000 $91,000 $1,505,000
What is the most that could be contributed to a profit sharing plan and deducted by Aztec if they set up a profit-sharing plan (ignoring any issues with salary deferrals)?
Kaley and Pierson.
Kaley, Pierson, Dave, and Erin.
Kaley, Pierson, Jabari, and Dave.
Kaley, Pierson, Jabari, Dave, and Erin
Kaley, Pierson, Jabari, Dave, and Erin.
Rationale
Kaley, Pierson, Jabari, Dave, and Erin are all highly compensated.
Jabari is deemed to own stock from his parents.
The others have income at or above the 2024 annual limit of $155,000.
Sebastian, age 26, has worked part-time (600 hours per year) for Bash’s Vegan Express for the past five years. Bash’s offers a 401(k) plan with a dollar-for-dollar match on employee contributions up to four percent of compensation for all nonexcludable employees who meet the standard eligibility rules. Which of the following best describes Sebastian’s ability to participate in the 401(k) plan in 2024?
Sebastian may participate by making employee contributions to the plan; however, Bash’s is not required to match his contributions.
Sebastian may participate by making employee contributions to the plan, and Bash’s is required to match his contributions at the same rate as other participants.
Sebastian may not participate by making employee contributions to the plan; however, if Bash’s makes a profit-sharing contribution,
Sebastian must be included as a participant.
Sebastian is not eligible to participate in the plan in any capacity because he does not meet the standard eligibility criteria of age 21 and one year of service in which he worked at least 1,000 hours.
Sebastian may participate by making employee contributions to the plan; however, Bash’s is not required to match his contributions.
Rationale
The SECURE Act, passed in December 2019, amended the eligibility requirements to allow long-term part-time employees (those who are age 21 or older and worked at least 500 hours per year for the employer for three consecutive years) to participate in the employer’s 401(k) plan by making employee contributions to the plan, effective for plan years beginning after December 31, 2020.
For purposes of determining eligibility to participate, employers are permitted to disregard twelve-month periods worked prior to January 1, 2021; therefore, when employers adopt the most restrictive definition of eligibility, the first year in which long-term part-time employees will be eligible to participate is 2024.
The employer has the option of including or excluding these employees from receiving any employer matching or other employer contributions, even if employer contributions are made to other eligible employees.
Dole Electronics, a C Corporation, has 4 employees. The company sponsors a profit sharing plan and contributed 10% of employee compensation for the current year to the plan. The company has the following employee information. There is no state income tax and federal withholding is 15% of gross pay.
Employee Gross Salary Profit Sharing
Contribution
Andy $50,000 $5,000
Candy $40,000 $4,000
Mandy $30,000 $3,000
Sandy $20,000 $2,000
Which of the following statements is true?
Dole Electronics will not be able to take a deduction for the contribution to the profit sharing plan.
After payroll taxes and withholding, Andy will only receive $38,675 in take home salary.
Dole electronics will pay FICA payroll taxes of $11,781.
Candy must include the $4,000 contribution to the profit sharing plan made on her behalf in her gross income for the current year.
After payroll taxes and withholding, Andy will only receive $38,675 in take home salary.
Rationale
Andy will be responsible for payroll taxes on the $50,000 he receives in salary. His payroll will be 7.65% of $50,000 plus $7,500 withholding, thus he will receive $38,675.
Dole may deduct the contribution to the profit sharing plan. Dole will only pay payroll taxes of $10,710 (7.65% of $140,000, the total salary paid).
Amounts contributed to the profit sharing plan are not subject to payroll taxes.
Contributions to profit sharing plans are not included in the employee’s gross income at the date of contribution but will be subject to income tax at the date of distribution.
Barry’s Graphic Arts Studio sponsors a qualified profit-sharing plan. The plan requires employees to complete one year of service and be 21 years old before entering the plan. The plan has two entrance dates per year, January 1st and July 1st. Assuming that today is December 15, 2025, and the Studio has the following employee information, which of the following statements is correct?
Employee Age Start Date
Barry 35 1/1/2024
Del 34 8/1/2024
Karen 24 6/1/2025
Jenn 18 5/1/2024
Two people have entered the plan.
The qualified plan must provide participants with 100% vesting upon entering the plan because of the eligibility requirements of the plan.
Del has not yet entered the plan.
Jenn entered the plan on July 1, 2025.
Del has not yet entered the plan.
Rationale
Del is not yet in the plan. He met the age and service requirement in August but must wait until the January entrance date to enter the plan.
Only one person has entered the plan, Barry.
Jenn has not met the age requirement; therefore, she is not eligible for the plan.
Karen has not met the service requirement.
The plan has the standard vesting, which does not have a 100% vesting requirement.
Stevie has a qualified plan with an account balance of $2,000,000. In which of the following circumstances would a third party be able to alienate the assets within Stevie’s qualified plan?
- A QDRO in favor of a former spouse
- A federal tax levy
- Creditors in a personal bankruptcy
3 only.
1 and 2.
1 and 3.
1, 2, and 3.
1 and 2.
Rationale
Because a qualified plan is designed to provide individuals with income at their retirement, ERISA provides an anti-alienation protection over all assets within a qualified plan.
This anti-alienation protection prohibits the plan assets from being assigned, garnished, levied, or subject to bankruptcy proceedings while the assets remain in the plan so that the individual has income at their retirement.
Qualified plan assets are not protected from alienation due to a qualified domestic relations order, a federal tax levy, or from a judgment or settlement rendered upon an individual for a criminal act involving the otherwise protected qualified plan.
Which of the following people would be considered a highly compensated employee for 2024?
- Tiana, a 1% owner whose salary last year was $160,000.
- Ariel, a 6% owner whose salary was $42,000 last year.
- Belle, an officer, who earned $105,000 last year and is the 29th highest paid employee of 96 employees.
- Jasmine, who earned $161,000 last year and is in the top 20% of paid employees.
1 and 3.
3 and 4.
1, 2, and 4.
1, 2, 3, and 4.
1, 2, and 4.
Rationale
Tiana and Jasmine are HC due to compensation being greater than $150,000 (in 2023). Ariel is HC because she is a >5% owner.
Belle is not highly compensated because she does not have compensation greater than $150,000.
UPDATED FOR 2024:
SJ, Inc. covered the following employees under a qualified plan.
- Joan, a 9% owner and employee with compensation of $30,000.
- Lind, a commissioned salesperson with compensation of $260,000 last year (the highest paid employee).
- Reilly, the chief operating officer, who had compensation of $170,000 last year but was not in the top 20% of paid employees.
- Garner, the president, who was in the top 20% of paid employees with compensation of $250,000.
Assuming the company made the 20% election when determining who is highly compensated, which of the following statements is correct?
Exactly three people are key employees.
Exactly two people are highly compensated.
Lind is a key employee but is not highly compensated.
Reilly is neither highly compensated nor a key employee.
Reilly is neither highly compensated nor a key employee.
Rationale
For 2024, a key employee is an employee who at any time during the plan year or prior year met one of the following definitions:
- A greater than 5% owner;
- A greater than 1% owner with compensation > $150,000 (not indexed); or
- An officer with compensation in excess of $220,000.
For 2024, highly compensated employees are employees that are:
* A more than 5 percent owner at any time during the plan year or preceding plan year, or
* An employee with compensation in excess of $155,000 for the prior plan year, and if elected, is in the top 20% of paid employees ranked as to compensation.
Which of the following vesting schedules may a top-heavy defined benefit plan use?
Years of
Service (Option A) (Option B) (Option C) (Option D)
1 5% 10% 0 0
2 10% 20% 0 0
3 15% 45% 0 20%
4 20% 65% 100% 40%
5 60% 100% 100% 60%
6 100% 100% 100% 80%
7 100% 100% 100% 100%
Option B.
Rationale
A top-heavy plan must use a vesting schedule that provides the employees with a vested benefit at least as rapidly as a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule.
Option b is the only schedule depicted that meets this requirement. Option a does not meet the requirement as it does not provide a greater vested benefit in each year as compared to the required 2 to 6 year graduated vesting schedule. Option c is a 4-year cliff vesting schedule and option d is a 3 to 7 year graduated schedule. Neither provide a vested benefit as rapid as a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule.
Billy’s company sponsors a 401(k) profit sharing plan with no employer match, but the company did make noncontributory employer contributions because the plan was top-heavy. Billy quit today after six years with the company and has come to you to determine how much of his retirement balance he can take with him. The plan uses the least generous graduated vesting schedule available.
What is Billy’s vested account balance?
Employer Employee
Contribution s $2,000 $2,000
Earnings $600 $600
$2,600.
$4,160.
$4,680.
$5,200.
$5,200.
Rationale
Billy is entitled to 100% of his contributions and the earnings on those contributions.
The employer contributions, which were not matching contributions, will follow the least generous graduated vesting schedule for a top-heavy plan.
The least generous graduated vesting schedule is a 2 to 6 year graduated vesting schedule for a 401(k) plan.
At six years, Billy would be 100% vested in the employer contributions and the earnings on the employer contributions.
Thus, Billy’s vested account balance is $5,200.
Chip earns $400,000 per year at Home Cleaning Services, Inc. where he has been employed for the last ten years.
Home Cleaning Services sponsors a defined benefit plan that provides its employees with a benefit equal to 1.5% per year of service of the employees final compensation.
At the current time, what is Chip’s retirement benefit payable from the defined benefit plan?
$51,750.
$60,000.
$275,000.
$345,000.
$51,750.
Rationale
Chip’s current projected benefit from the defined benefit plan is $51,750.
For the calculation of the benefit the employer cannot consider compensation in excess of $345,000 for 2024. 1.5% x 10 years x $345,000 = $51,750.
Aztec clay distributor is a family-owned business that is owned by Kaley, Pierson, Jabari and Zion. Zion is not an employee, rather a silent or somewhat silent partner. Kaley and Pierson are married, and Jabari is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. The employee census information is in the chart below.
Employee Ownership Salary Deferral Plan Balance Status
Kaley 30% $370,000 $20,000 $400,000 Officer
Pierson 3% $210,000 $20,000 $600,000
Jabari 4% $80,000 $10,000 $150,000
Dave 0% $180,000 $15,000 $150,000 Officer
Erin 0% $155,000 $15,000 $100,000
Tibbs 0% $50,000 $8,000 $50,000
Ginger 0% $40,000 $0 $10,000
Haley 0% $30,000 $2,000 $30,000
Irish 0% $20,000 $1,000 $10,000
Jen 0% $20,000 $0 $5,000
$1,155,000 $91,000 $1,505,000
What is the most that could be contributed to a profit-sharing plan and deducted by Aztec in 2024 if they set up a profit-sharing plan (ignoring any issues with salary deferrals)?
$282,500.
Rationale
This question is asking the most that could be contributed.
Since Kaley is over the compensation limit of $345,000 for 2024, her salary has to be reduced by $25,000.
The sum of the covered compensation is $1,130,000. 25% of this is $282,500.
Some may attempt to cap Kaley at $69,000 and take 25% of the rest of the employees. That method is not correct. Even though 25% of $345,000 is over $69,000, it can be contributed. It just cannot be allocated to Kaley. The excess would have to be allocated to other participants.
Organic Inc. sponsors a qualified plan that requires employees to complete one year of service and be 21 years old before entering the plan. The plan also excludes all commissioned sales people and all other allowable exclusions allowed under the code.
Which of the following employees could be excluded?
- Jessie, age 32, who has been a secretary for the company for 11 months.
- Andy, age 20, who works in accounting and has been with the company for 23 months.
- Barbie, a commissioned sales clerk, who works in the Atlanta office. Barbie is 25 years old and has been with the company for four years.
- Woody, age 29, who works in the factory. Woody has been with the company for nine years and is covered under a collective bargaining agreement.
1 only.
1 and 3.
1, 2, and 4.
1, 2, 3, and 4.
1, 2, 3, and 4.
Rationale
Each of these employees can be excluded from the plan.
Jessie does not meet the service requirement.
Andy does not meet the age requirement.
Barbie can be excluded because she is a commissioned salesperson. Woody is excluded because he is covered under a collective bargaining agreement.
WHR, LLC sponsors a defined contribution plan. Vaughn, age 44, has compensation of $160,000 for the year. WHR has made a $25,000 profit sharing plan contribution on Vaughn’s behalf and $5,000 of plan forfeitures were allocated to Vaughn’s profit sharing plan during the year.
How much can Vaughn defer into his CODA plan (401(k)) to maximize his annual contributions to the qualified plan for 2024?
$17,500.
$23,000.
$30,500.
$39,000.
$23,000.
Rationale
The annual additions limit permits $69,000 of contributions to be made on Vaughn’s behalf to qualified plans for the year.
The employee elective deferral limit is $23,000 for 2024 and is included in the $69,000 calculation.
In this problem, Vaughn received a total contribution of $30,000 on his behalf into the plan so his deferral limit is not limited because of the other calculations and Vaughn can defer the maximum, or $23,000, to the plan for 2024.
Andrew is a small business owner and wants to install a qualified plan that has specific requirements.
Which of the following plans meets the following list of requirements?
1. Qualified under IRC Section 401(a)
2. Permits at least 25 percent of employer securities to be invested in the plan
3. Can use forfeitures to reduce plan contributions
4. Does not require a joint and survivor annuity distribution option
Profit sharing plan.
403(b) plan.
Money purchase plan.
Cash balance plan.
Profit sharing plan.
Rationale
Requirement 1 eliminates the 403(b) plan. Requirement 2 and 4 limit the choice to a profit-sharing plan and requirement 3 means that it could be any plan. The only correct answer is profit-sharing plan.
Rationale
Requirement 1 eliminates the 403(b) plan. Requirement 2 and 4 limit the choice to a profit-sharing plan and requirement 3 means that it could be any plan. The only correct answer is profit-sharing plan.
UPDATED FOR 2024:
Sherice, age 38, earns $220,000 per year. Her employer, Dumaine Consulting, sponsors a qualified profit sharing 401(k) plan and allocates all plan forfeitures to remaining participants. If in the current year, Dumaine Consulting makes a 20% contribution to all employees and allocates $5,000 of forfeitures to Sherice’s profit-sharing plan account,
what is the maximum Sherice can defer to the 401(k) plan in 2024?
$0.
$20,000.
$23,000.
$30,500.
20,000.
Rationale
The maximum annual addition to qualified plan accounts on behalf of Sherice is $69,000 (in 2024) for the plan year.
This maximum annual addition limit is comprised of employer contributions, plan forfeiture allocations, and employee deferrals.
If Dumaine contributes $44,000 ($220,000 x 20%) to the profit-sharing plan account and Sherice receives $5,000 of forfeitures, she may only defer $20,000 ($69,000 - $44,000 - $5,000) before reaching the $69,000 limit.
Cheque Company has 100 eligible employees and sponsors a defined benefit pension plan. The company is unsure if they are meeting all of their testing requirements.
How many employees (the minimum) must be covered by Cheque Company’s defined benefit pension plan for the plan to conform with ERISA?
40.
50.
70.
100
40.
Rationale
The 50/40 rule requires that defined-benefit plans cover the lesser of 50 employees or 40% of all eligible employees.
In this example, 40% of 100, or 40 employees, would be the lesser of these two amounts
Which of the following vesting schedules may a top-heavy qualified cash balance plan use?
1 to 4 year graduated.
35% after 1 year, 70% after 2 years, and 100% after 3 years.
2 to 6 year graduated.
4 year cliff
35% after 1 year, 70% after 2 years, and 100% after 3 years.
Rationale
Cash balance plans must vest at least as fast as a three-year cliff vesting schedule. The only choice that is possible is the one in option b.
Wanka Factory has 100 non-excludable employees, 10 of whom are highly compensated. Eight of the 10 highly compensated and 63 of the 90 non-highly compensated employees are covered under Wanka’s qualified plan. The average accrued benefits for the highly compensated is 4% and the average accrued benefit for the non-highly compensated is 1.5%.
Which of the following statements is true regarding coverage?
- The plan passes the ratio percentage test.
- The plan passes the average benefits test.
1 only.
2 only.
Both 1 and 2.
Neither 1 nor 2
1 only.
Rationale
The ratio percentage test compares the % of nonhighly compensated to the % of highly compensated covered. The ratio must be greater than or equal to 70% for the plan to pass the ratio percentage test. The calculation for Wanka’s qualified plan is as follows:
NHC = 63 ÷ 90 = 70%
HC = 8 ÷ 10 = 80%
70% ÷ 80% = 87.5% (pass)
Wanka’s plan passes the ratio percentage test requirement of 70%.
The average benefits test requires the average benefit of the non-highly compensated employees to be at least 70% of the average benefit of the highly compensated. Wanka’s plan does not satisfy the average benefits test because the average benefit of the non-highly compensated compared to the average benefit of the highly compensated is less than 70% (1.5% ÷ 4% = 37.5%) (fail).
The following statements concerning retirement plan service requirements for most qualified plans are correct EXCEPT:
A. The term “year of service” refers to an employee who has worked at least 1,000 hours during the initial 12-month period after being employed. B. If an employee hired on October 5, 20X1 has worked at least 1,000 hours or more by October 4, 20X2, he has acquired a year of service the day after he worked his 1,000th hour. C. An employer has the option of increasing the one-year of service requirement to 2 years of service. D. Once an employee, who is over the age of 21, attains the service requirement of the plan, the employer cannot make the employee wait more than an additional six months to participate in the plan.
Solution: The correct answer is B.
Option B is incorrect because the employee would NOT acquire a year of service the day after he worked his 1,000th hour, but after twelve months AND 1,000 hours.
Each of the following are requirements imposed by law on qualified tax-advantaged retirement plans EXCEPT:
A. Plan documentation B. Employee vesting C. Selective employee participation D. Employee communications
Solution: The correct answer is C.
Broad employee participation, as opposed to selective participation, is a requirement of a tax-advantaged retirement plan. All of the others are requirements for “qualified” plans.
Packlite company has a defined benefit plan with 200 non-excludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the 50/40 test?
A. 40 B. 50 C. 80 D. 100
Solution: The correct answer is B. 50
The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees.
Here 40% would be 80, so 50 is less than 80.
This would be the absolute minimum number of covered employees.
XYZ has a noncontributory qualified profit sharing plan with 310 employees in total, 180 who are nonexcludable (40 HC and 140 NHC). The plan covers 72 NHC and 29 HC. The NHC receive an average of 4.5% benefit and the HC receive 6.5%. Which of the following statements is (are) correct?
The XYZ company plan meets the ratio percentage test. The XYZ company plan fails the average benefits test. The plan must and does meet the ADP test. A. 1 only B. 2 only C. Both 1 and 2 D. 1, 2, and 3
Solution: The correct answer is C.
The plan does not have to meet the ADP test because it is a noncontributory plan. The plan meets the ratio percentage test and fails the average benefits test.
Safe Harbor = 72 ÷ 140 = 51% = Fail
Ratio % = (72 ÷ 140) ÷ (29 ÷ 40) = 70.9% = Pass
Average Benefit = 4.5 ÷ 6.5 = 69.2% = Fail
Which of the following employees is a key employee for 2024?
- Matt, an officer of the company, who earns $140,000 per year and owns 2% of the company.
- Missy, who earns $13,000 per year and owns 5% of the company.
- Tara, an officer of the company who earns $225,000.
- Julie, a 10% owner of the company who earns $4,000 per year as a secretary.A. 4 only
B. 3 and 4
C. 2 and 3
D. 1, 3, and 4
Solution: The correct answer is B.
Only Tara and Julie are considered key employees.
A key employee is anyone who is any one or more of the following
(1) a greater than five percent owner, or
(2) a greater than one percent owner with compensation in excess of $150,000, or
(3) an officer with compensation in excess of $220,000 (2024).
Which of the following statements is true?
A. Currently, pension plans are more commonly established than profit sharing plans because they promote greater employee retention and allow employees to receive greater benefits. B. The earnings within a qualified plan each year are taxed to the plan sponsor, unless the plan sponsor elects to treat the earnings as employee compensation. C. Payroll taxes are payable on noncontributory plan allocations. D. Distributions from qualified plans are usually subject to ordinary income tax, but some may also be eligible for the reduced capital gains rates.
Solution: The correct answer is D.
Distributions from qualified plans are usually subject to ordinary income tax, but some lump sum distributions may be eligible for capital gains tax treatment.
Statement a is incorrect because profit sharing plans are more commonly established than pension plans. Pension plans are not established because the employer must bear the risk of plan investments. S
tatement b is incorrect as the earnings within a qualified plan are nontaxable. Statement c is incorrect - payroll taxes are not payable on non contributory plan allocations. Payroll taxes are due on employee deferral contributions.
Which of the following statements are reasons to delay eligibility of employees to participate in a retirement plan?
- Employees don’t start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service).
- Since turnover is generally highest for employees in their first few years of employment and for younger employees, it makes sense from an administrative standpoint to delay their eligibility.A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
Solution: The correct answer is C.
Both 1 and 2 are correct.
While most plans have age 21 and 1 year of service as an entry barrier, some plans do allow a two year eligibility as long as 100% vesting is provided.
Which of the following statements regarding determination letters for qualified plans is true?
When a qualified plan is created, the plan sponsor must request a determination letter from the IRS. An employer who adopts a prototype plan must request a determination letter from the IRS. If a qualified plan is amended, the plan sponsor must request a determination letter from the Department of Labor. A qualified plan which receives a favorable determination letter from the IRS may still be disqualified at a later date.
The correct answer is D.
Determination letters are issued by the IRS at the request of the plan sponsor.
The plan sponsor is not required to request a determination letter.
Even if the determination letter is requested and approved, the IRS may still disqualify the plan.
Kellen has compensation of $96,000 from Widgets R’us. Widgets sponsors a 401(k) plan with a 6% dollar for dollar match. Kellen is deferring $7,000 of her compensation this year.
What amount of Kellen’s earnings are subject to payroll tax?
$7,000
$89,000
$96,000
$103,000
The correct answer is C.
Kellen’s full earnings of $96,000 are subject to payroll taxes.
The $7,000 deferral would reduce the amount of compensation subject to federal income tax.
The employer’s matching contributions are not subject to payroll taxes.
