Retire Ch 5 Profit Sharing Plans Flashcards
1
Q
A profit-sharing plan is a plan established and maintained by an employer to provide participation in the profits of the company solely for officers and shareholders.
a. True b. False
A
b. False
2
Q
A pension plan can be funded using 100% employer securities.
a. True b. False
A
b. False
3
Q
Profit-sharing plans must be established by, and contributions made by, the due date of the tax return including extensions for the tax year for which the employer wants to make contributions.
a. True b. False
A
a. True
4
Q
Permitted disparity is a method of allocating plan contributions that allows the employer to make contributions only to highly compensated individuals because they do not receive Social Security.
a. True b. False
A
b. False
5
Q
Age-based profit-sharing plans use both age and compensation as the basis for allocating contributions to employee accounts.
a. True b. False
A
a. True
6
Q
New comparability plans are flexible plans that allow the employer to allocate all benefits to the owner(s).
a. True b. False
A
b. False
7
Q
A profit-sharing plan can require the participants to wait three years before entering the plan, but all contributions must then be 100% vested.
a. True b. False
A
b. False
8
Q
Profit-sharing plans must use a 5-year cliff vesting schedule or a 3-to-7-year graduated vesting schedule.
a. True b. False
A
b. False
9
Q
Profit-sharing plans may permit in-service withdrawals after a participant has attained two years of service in the plan.
a. True b. False
A
a. True
10
Q
A tax-exempt organization cannot establish a 401(k) plan.
a. True b. False
A
b. False
11
Q
Employers can establish 401(k) plans with minimal expense.
a. True b. False
A
a. True
12
Q
Governmental entities cannot establish 401(k) plans today.
a. True b. False
A
a. True
13
Q
The 401(k) eligibility rules are not the same as profit-sharing plans.
a. True b. False
A
a. True
14
Q
A 401(k) must have at least four entrance dates.
a. True b. False
A
b. False
15
Q
The employee 401(k) plan deferral limit is indexed for inflation after 2006.
a. True b. False
A
a. True
16
Q
Employee deferral contributions to 401(k) plans are subject to payroll taxes at the time of contribution.
a. True b. False
A
a. True
17
Q
An employer is not required to deposit the employee’s 401(k) plan deferral contributions until the 15th day of the month following the deferral.
a. True b. False
A
b. False
18
Q
As a maximum, an individual age 50 or older can defer $30,000 in 2023 to a 401(k) plan.
a. True b. False
A
a. True
19
Q
A negative election is an election the employee can make that states that they want to participate in the plan.
a. True b. False
A
b. False
20
Q
A catch-up contribution can allow an eligible employee to defer more than the annual additions limit of $66,000 for 2023.
a. True b. False
A
a. True
21
Q
The elective deferrals of the highly compensated employees may be limited based on the elective deferrals of the non-highly compensated employees
. a. True b. False
A
. a. True
22
Q
All eligible employees (age 21 and one year of service) are included in the calculations for the ADP test including those employees who elect not to defer.
a. True b. False
A
. a. True
23
Q
If a CODA plan fails the ADP test, the plan will be terminated.
a. True b. False
A
b. False
24
Q
Which of the following vesting schedules may a top-heavy profit sharing plan not 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.
A
4-year cliff.
Rationale
The vesting schedule must be at least as generous as the statutory 3-year cliff or 2-to-6-year graduated schedule.
The only choice that is not possible is a 4-year cliff, since 3-year cliff is the standard for a DC plan.
Top heavy is irrelevant with DC plans after PPA 2006.
25
Which of the following entities is unable to establish a 401(k) plan?
Government entity.
LLC.
Partnership.
Tax-exempt entity.
Government entity.
Rationale
A government entity can no longer establish a 401(k) plan. The remaining entities may establish a 401(k) plan.
26
A hardship distribution can be taken from a 401(k) plan for an amount equal to the employee’s total elective contribution, QNECs, QMCs, and earnings on these amounts, less the value of any previous hardship distributions.
a. True b. False
a. True
27
which of the following is not true regarding profit-sharing plans?
a. Profit-sharing plans are established and maintained by the individual employee.
b. Profit-sharing plans allow employees to derive benefit from profits of the company.
c. Profit-sharing plans cannot discriminate in favor of officers and shareholders.
d. Profit-sharing plans provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan
a. Profit-sharing plans are established and maintained by the individual employee.
28
Which of the following statements is true?
a. Profit-sharing plans may not offer in-service withdrawals.
b. Pension and profit-sharing plans are subject to mandatory annual funding requirements.
c. Profit-sharing plans allow annual employer contributions up to 25 percent of the employer’s covered compensation.
d. The legal promise of a profit-sharing plan is to pay a pension at retirement.
The correct answer is c.
Option c is the only true statement. Profit-sharing plans allow annual contributions of up to 25 percent of covered compensation.
Option a is false because profit-sharing plans can allow in-service withdrawals.
Option b is false because while pension plans are subject to mandatory funding standards, profit-sharing
plans are not.
Option d is false because the legal promise of a profit-sharing plan is the deferral of compensation and the legal promise of a pension plan is to a pay a pension at retirement.
29
Andi, the 100 percent owner of Andi’s Day Care, a C-corporation, would like to establish a profit-sharing plan. Andi’s Day Care’s tax year ends July 31 to coincide with the school year. What is the latest day Andi can establish and contribute to the plan?
a. Andi must establish and contribute to the plan by December 31 of the year in which she would like to establish the plan.
b. Andi must establish the plan and make the contribution by May 15 of the following year assuming she filed the appropriate extensions.
c. Andi must establish the plan by July 31 of the year in which she would like to establish the plan and contribute by December 31.
d. Andi must establish the plan by December 31 of the year in which she would like to establish the plan and contribute to the plan by April 15 of the following year.
The correct answer is b.
Andi must establish the plan and make the contribution to the plan by the due date of the tax return, including extensions.
The tax return for a C-corporation operating on a fiscal year ending July 31 is due November 15th of the same year, but can be extended for 6 months, to May 15 of the following year, assuming she filed all of the appropriate extensions.
30
Which of the following statements is true regarding CODAs?
a. A 401(k) plan must be established in such a way that employers are required to contribute to the plan.
b. A CODA is allowed with a profit-sharing plan, stock bonus plan, and a cash balance pension plan.
c. Contributions can only be made after-tax.
d. CODAs are employee self-reliant plans.
The correct answer is d.
401(k) plans are not required to have employer contributions; however, they often do have matching or profit-sharing contributions.
401(k) plans can be established so that only the employees contribute to the plan.
A CODA is not allowed with a cash balance pension plan (other than the special DB(k) plan).
Contributions can be made on a pre-tax or Roth basis or can be after-tax contributions (if the plan allows).
31
All of the following are advantages of a 401(k) plan except:
a. Employees are permitted to shelter current income from taxation in a 401(k) plan.
b. Employers can sponsor 401(k) safe harbor plans without committing to annual contributions and without creating a deferred liability.
c. Earnings grow tax-deferred until distributed.
d. Employers can establish 401(k) plans with minimal expense.
The correct answer is b.
Option b is false, and thus not an advantage of 401(k) safe harbor plans.
Employers are generally required under the safe harbor rules to make either a matching contribution or a contribution to all
employee’s eligible for the plan whether they contribute or not.
32
Which of the following is true regarding negative elections?
1. A negative election is a device where the employee is deemed to have elected a specific deferral unless the employee specifically elects out of such election in writing.
2. Negative elections are no longer approved by the IRS.
3. Negative elections are only available for employees who enter the plan when it is first established and are not available for new employees.
1 only.
Rationale
Negative elections are approved by the IRS and they are available for both current and future employees. Qualified automatic contribution arrangements use negative elections. However, not all plans that employ a negative election will qualify as a qualified automatic contribution arrangement.
33
JJ is a Marine, who served our country for the last 25 years. He has $250,000 in his U.S. Government Thrift Savings Plan. Which of the following plans is JJ’s Thrift Plan most similar to?
Defined benefit plan.
Cash balance plan.
Profit-sharing plan.
401(k) plan.
401(k) plan.
Rationale
The U.S. Government Thrift Savings Plan is very similar to a 401(k) plan. It allows for the same employee deferral limits and maximum contribution limits as a 401(k) plan. The other choices are not correct.
34
Which of the following is not true regarding profit-sharing plans?
Profit-sharing plans are established and maintained by the individual employee.
Profit-sharing plans allow employees to derive benefit from profits of the company.
Profit-sharing plans cannot discriminate in favor of officers and shareholders.
Profit-sharing plans provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan.
Profit-sharing plans are established and maintained by the individual employee.\
Rationale
Option a is not true regarding profit-sharing plans. A profit-sharing plan is established and maintained by the employer. The remaining options are true statements
35
Skatium, the city’s most popular roller-skating rink, has a profit-sharing plan for their employees. Skatium has the following employee information:
Employee Age Length of Service
Brett 62 14 years
Greer 57 14 years
Jennifer 32 6 months
Hiral 22 2 years
Karen 19 2 years
Mike 17 6 months
Craig 16 1 year
The plan requires the standard eligibility and the least generous graduated vesting schedule available. The plan is not top-heavy. All of the following statements are correct except:
Hiral and Karen are 20 percent vested in their benefits.
Brett and Greer became 100 percent vested when they had been employed for six years.
Three of the seven people are eligible to participate in the plan.
Craig is not eligible for the plan
Hiral and Karen are 20 percent vested in their benefits.
Rationale
The standard vesting schedule requires individuals to be 21 years of age and have one year of service before becoming eligible for the plan.
Brett, Greer, and Hiral are the only individuals that meet that criteria. The least generous vesting schedules are 3-year cliff and 2-to-6-year graduated vesting.
The facts say they use the least generous graduated vesting.
Therefore, Hiral is 20% vested and Greer and Brett became 100% vested in the 6th year.
Craig is not eligible because he is 16 years old.
Karen is not vested because she is not eligible due to her age.
36
Which of the following statements is true?
Profit-sharing plans may not offer in-service withdrawals.
Pension and profit-sharing plans are both subject to mandatory funding requirements.
Profit-sharing plans allow annual employer contributions up to 25 percent of the employee’s covered compensation.
The legal promise of a profit-sharing plan is to pay a pension at retirement.
Profit-sharing plans allow annual employer contributions up to 25 percent of the employee’s covered compensation.
Rationale
Option c is the only true statement. Profit-sharing plans allow annual contributions of up to 25 percent of covered compensation. Option a is false because profit-sharing plans can allow in-service withdrawals. Option b is false because while pension plans are subject to mandatory funding standards, profit-sharing plans are not. Option d is false because the legal promise of a profit-sharing plan is the deferral of compensation and the legal promise of a pension plan is to a pay a pension at retirement.
37
Which of the following statements is true regarding CODAs?
A 401(k) plan must be established in such a way that employers are required to contribute to the plan permitting only employee contributions to the plan.
A CODA is allowed with a profit-sharing plan, stock bonus plan, and a cash balance pension plan.
Contributions can only be made after-tax.
CODAs are employee self-reliant plans.
CODAs are employee self-reliant plans.
Rationale
401(k) plans are not required to have employer contributions; however, they often do have matching or profit-sharing contributions.
401(k) plans can be established so that only the employees contribute to the plan.
A CODA is not allowed with a cash balance pension plan (other than the special DB(k) plan). Contributions can be made pre- and post-tax.
38
Mikael opened a fabulous restaurant ten years ago. The food is so exceptional that the restaurant has become one of the top spots in the city. Mikael, age 55, is the sole owner with compensation of $345,000. Mikael’s son Jamel, age 28, is the master chef with compensation of $200,000. Jamel has been with the restaurant full time since he turned 18. Mikael also employs 15 other individuals whose ages range between 25 and 40 and have an average compensation of $60,000 per year.
Mikael wants to establish a profit-sharing plan. Which of the following statements is true?
If Mikael selected the standard allocation method and the plan contributes 10 percent per individual, the plan will contribute $69,000 to Mikael’s account.
If Mikael selected the permitted disparity method and the plan contributes 10 percent per individual, the contribution the company makes for Mikael will be increased.
Considering the needs and wants of Mikael and Jamel, an age-based profit-sharing plan is the best plan for both of them.
A new comparability plan is the least expensive, simplest way to meet both Mikael and Jamel’s retirement needs.
If Mikael selected the permitted disparity method and the plan contributes 10 percent per individual, the contribution the company makes for Mikael will be increased.
Rationale
By using permitted disparity, or integration with Social Security, Mikael can increase the contribution to both him and Jamel.
Option a is false because the covered compensation limit is $345,000 for 2024; thus, the contribution to Mikael’s account using a standard allocation of 10% is $34,500.
Option c is false because an age-based profit sharing is not necessarily in Jamel’s best interest. The facts say that the 15 other employees range from age 25 to age 40, with some of these employees being older than Jamel. In this instance, some employees might be allocated a greater share of the contribution than Jamel.
Option d is false because a new comparability plan is generally more expensive to administer than other plans.
39
The Crawfish Company sponsors an integrated profit-sharing plan with a base contribution of 20%. Landry, who is 60 years old, earns $350,000 per year. Assuming the plan uses the 2024 Social Security wage base as the integration level, how much more will Landry receive because the plan is integrated over a plan that contributes a flat 20% of compensation?
$0.
$8,820.
$10,055.
$10,340.
Confidence
$0.
Rationale
Landry would not get any benefit from integration if the base percent is 20% because 20% of $345,000 (2024 compensation limit) equals $69,000 (2024 annual additions limit).
40
UPDATED FOR 2024:
Rex, age 47, an employee at Water Waste, is considering contributing to a 401(k) plan during 2024. Which of the following statements are true?
Rex can make a $30,500 elective deferral contribution to a 401(k) plan for 2024.
If Rex does make an elective deferral contribution, the amount is not currently subject to income or payroll taxes.
Rex can contribute $23,000 to a 401(k) plan and an additional $23,000 to a 401(k) Roth account in the current year.
Water Waste must deposit Rex’s elective deferral contribution to the plan as soon as reasonably possible.
Water Waste must deposit Rex’s elective deferral contribution to the plan as soon as reasonably possible.
Rationale
Rex can only make a $23,000 contribution for 2024. He would only be able to contribute $30,500 if he were age 50 or over. Employee deferrals are subject to payroll tax but not income tax.
Rex cannot exceed the maximum deferral contribution amount of $23,000 by contributing to both a 401(k) and a 401(k) Roth account.
41
Ansley’s Art Gallery has a profit-sharing plan. The plan requires employees to be employed two years before they can enter the plan. The plan has two entrance dates per year, January and July 1st. Assume today is December 1, 2026 and the Gallery has the following employee information.
Employee Age Start Date
Ansley 42 1/1/2024
Ginny 37 5/1/2024
Max 31 8/12/2024
Alex 29 6/4/2025
Which of the following statements is true?
As of today, three individuals have entered the plan.
Ginny entered the plan on 5/1/2025.
Alex will enter the plan on 1/1/2027.
As of today, three individuals are eligible for the plan.
As of today, three individuals are eligible for the plan.
Rationale
Only three individuals are eligible for the plan, Ansley, Ginny, and Max. Ansley and Ginny are both in the plan, but Max is not yet in the plan because there has not been an entrance date since he became eligible. Max would not enter the plan until 1/1/2027. Alex would enter the plan 7/1/2027.
42
Aztec Clay Distributor is a family-owned business that is owned by Alice, Bill, Chad and Zion. Alice and Bill are over 50. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. Aztec sponsors a 401(k) plan. The employee census information is in the chart below.
Assuming the company did not elect the exception to the definition of highly compensated employees, the average ADP of the highly compensated employees can be no greater than what percent?
7.53%.
Rationale
The non-highly compensated employees are Frank, Ginger, Haley, Irish and Jen.
The ADP for the NHCEs equals 5.53% [[16% + 0% + 6.67% + 5% + 0%] ÷ 5]. Adding 2 percentage points equals 7.53%.
Chad is HC since he is attributed ownership from his parents.
43
Talitha, age 59 in 2024, earns $200,000 working as an interior designer at Exclusive Designs, Inc. (EDI). Unfortunately, Talitha’s recent divorce has resulted in a significant reduction to her retirement assets. Talitha would like to rebuild her retirement account assets as quickly as possible. Assuming a 5% profit sharing contribution is made to her account each year, her salary remains the same each year, and that the average NHCE contribution is 4% each year, which of the following statements is correct regarding Talitha’s upcoming contributions to EDI’s safe harbor 401(k) plan?
(For this question, ignore IRS' issuance of an administrative transition period for implementation of SECURE 2.0 Act Section 603.)
In 2024, Talitha can contribute a maximum of $23,000.
In 2024, Talitha can contribute pretax up to the maximum regular deferral limit, plus a catch-up contribution of the greater of 150% of the regular catch-up contribution limit or $10,000.
In 2025, Talitha can contribute pretax up to the maximum regular deferral limit, plus make a Roth catch-up contribution.
In 2025, Talitha can contribute a maximum of $12,000 pretax plus a Roth catch-up contribution equal to the greater of 150% of the regular catch-up contribution or $10,000.
In 2025, Talitha can contribute pretax up to the maximum regular deferral limit, plus make a Roth catch-up contribution.
Rationale
Option a is incorrect because, in 2024, Talitha can contribute $23,000 plus the $7,500 catch-up contribution for age 50 and over.
Beginning in 2024, catch-up contributions for employees with wages from the sponsoring employer in the prior year in excess of $145,000 must be Roth contributions. Talitha’s wages are over the threshold of $145,000 in 2024, which requires that any catch-up contribution made by Talitha for the 2025 plan year must be a Roth contribution.
Beginning in 2025, the catch-up contribution for employees who attain age 60, 61, 62, or 63 during the taxable year is increased to the greater of: (1) 150% of the regular catch-up limit, or (2) $10,000 (to be indexed for inflation annually beginning in 2026).
Option b is incorrect because the increased catch-up does not begin until 2025, and because her catch-up contribution must be a Roth contribution. Option d is incorrect because the plan is a safe harbor plan; therefore, Talitha’s status as an HCE is irrelevant to the amount she may contribute.
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
44
Nex sponsors a DB(k) plan that provides benefits for all employees. Nex adopted the plan four years ago. Kleen, who is age 55 and earns $100,000, has been employed for the last ten years with Nex. Which of the following statements is correct regarding Kleen’s benefits under Nex’s DB(k) plan?
Kleen will be limited on his deferral to the 401(k) plan because of the required contribution to the DB part of the plan.
If the DB(k) plan provides for a cash balance option, then Kleen should be receiving pay credits of 6% per year.
All benefits provided under the DB(k) plan will be 100 percent vested for Kleen.
Because this plan is a proto-type DB (k) plan, Nex will not have to file a Form 5500.
r
All benefits provided under the DB(k) plan will be 100 percent vested for Kleen.
Rationale
Option a is not correct. He could defer up to the annual limit.
Option b is not correct.
Since Kleen is over age 50, he would be receiving pay credits of 8% per year.
Option d is not correct because DB(k) plans must file a single Form 5500.
45
Padma, age 35, works full time at Benny’s Bakery where she earns $85,000. Padma contributes 7% of her salary to the company’s 401(k) plan and receives a dollar-for-dollar match in 2024. Padma also works part time as a self-employed independent contractor tutoring high school students, earning net self-employment income of $100,000 in 2024. When preparing her 2024 taxes in 2025, Padma’s accountant advises her to establish a solo 401(k) for her tutoring business.
Which of the following statements correctly reflects the amount of the employee contribution Padma may make to the solo 401(k) for the 2024 plan year (for simplicity, assume the employer contribution based on $100,000 of net self-employment income is $18,500)?
$0.
$4,500.
$17,050.
$23,000.
$17,050.
Rationale
The employee deferral limit of $23,000 (in 2024) applies per individual for all 401(k), 403(b), SARSEP, and SIMPLE plans combined (as discussed in Chapter 3).
Since Padma contributed $5,950 to the 401(k) plan at Benny’s Bakery, she is limited to $17,050 ($23,000 - $5,950 = $17,050) as an employee contribution to the solo 401(k).
Prior to the SECURE 2.0 Act, a solo 401(k) established after the end of the plan year but before the due date of the tax return was limited to employer contributions for the first plan year due to the requirement that employee contributions be made before the end of the plan year. The SECURE 2.0 Act expanded the ability of a sole proprietor to make contributions for the first plan year by permitting employee contributions for sole proprietors to be made until the due date of the proprietor’s tax return (without extensions)
46
Tyler’s Bike Shop has a 401(k) plan that offers an employer match of dollar-for-dollar up to four percent of employee compensation. Although the plan provides for the least generous graduated vesting schedule available, it does allow employees to enter the plan on their hire date. The employee census is as follows:
Employee Employee
Age Covered
Compensation Employee
Deferral Years in
Plan
Tyler 57 $150,000 10% 10
Tanya 23 $100,000 Not yet participating
Timmy 37 $80,000 20% 10
Tom 31 $76,000 4% 5
Tyler established the plan ten years ago to benefit him and his only employee, his son Timmy. Since then Tyler hired his other son, Tom, and his new wife Tanya. Tyler wanted to establish the 401(k) plan to encourage his children to save for their future. He also wanted a vesting schedule to ensure that they would learn the responsibility of sticking to their employment commitments. The family has come to you for recommendations to help them maximize their plan contributions. Since both of his sons have shown commitment over the past years, Tyler is willing to make some alterations to the plan in order to increase the retirement savings for all of them.
Which of the following would not be one of your recommendations?
Tyler and Tom should increase their contributions in order to reach the total maximum deferral limit.
Tanya should enter the plan and contribute 25 percent of her salary.
Tom is not 100 percent vested in the employer match, thus he should stay employed at least one more year.
Tyler should consider adding a profit sharing contribution to the plan in order to increase the contributions.
Tanya should enter the plan and contribute 25 percent of her salary.
Rationale
Yes, Tanya should enter the plan, but she would not be able to contribute 25%. Remember that the limit for a 401(k) contribution is $23,000 for 2024. Thus, to reach the limit, Tanya may only contribute 20.90%. Tyler and Tom should both increase their contributions.
Tyler can increase his contribution because he is below the maximum of $23,000 and because of the $7,500 catch-up contribution allowed for his age.
Tom is far from making the maximum contribution and should thus increase his contribution. The least generous graduated vesting schedule for matching contributions is 2-to-6-years. Thus, Tom is not 100% vested in the employee match and should stay an additional year.
Tyler could increase the contribution for all of them by adding a profit-sharing contribution to the plan. This would allow them to reach the annual additions limit of $69,000 for 2024. As you recall, the profit-sharing plan contribution will allow the company to make an additional contribution to increase the employee balances
47
All of the following are advantages of a 401(k) plan except:
Employees are permitted to shelter current income from taxation in a 401(k) plan.
Employers can sponsor 401(k) safe harbor plans without committing to annual contributions and without creating a deferred liability.
Earnings grow tax-deferred until distributed.
Employers can establish 401(k) plans with minimal expense.
Employers can sponsor 401(k) safe harbor plans without committing to annual contributions and without creating a deferred liability.
Rationale
Option b is false, and thus not an advantage of 401(k) safe harbor plans. Employers are generally required under the safe harbor rules to make either a matching contribution or a contribution to all employee’s eligible for the plan whether they contribute or not.
48
ABC Company has three employees: Ann, Brenda, and Curtis. Their compensation is $50,000, $180,000, and $220,000 respectively. ABC is considering establishing a straight 10% profit sharing plan or an integrated profit-sharing plan using a 10% contribution for base compensation and 15.7% for excess compensation. Which of the following statements are correct?
If the integrated plan is selected, then the total contribution for all employees is $70,650.
The effect of the integrated plan results in an increase in Brenda’s contribution of $650.
If the integrated plan is selected, the base contribution for all employees is $69,000.
If the integrated plan is selected, Curtis’ total contribution is $34,540.
The effect of the integrated plan results in an increase in Brenda’s contribution of $650.
Rationale
If ABC selected the 10% profit sharing plan, the amount for the employee contributions is $5,000 for Ann, $18,000 for Brenda, and $22,000 for Curtis. Alternatively, if ABC established an integrated plan using a 10% base contribution and a 15.7% excess contribution, more benefit could be allocated to Brenda and Curtis.
See chart below:
49
Simone’s Cheerleading Uniforms has four employees. The company has a profit-sharing plan that has made contributions every year. The plan is designed to maximize the contribution to Simone and has reached Simone’s 415(c) limit each year. The company made a 20 percent contribution yesterday on behalf of all employees. The employee census and account balances are as follows:
Employee Ownership Covered
Compensation Current
Balance Nonvested
Plan Balance Vested Plan
Balance
Simone 100% $345,000 $201,000 $0 $201,000
Douglas 0% $30,000 $15,600 $10,800 $4,800
Gabby 0% $20,000 $8,000 $6,400 $1,600
Nastia 0% $20,000 $8,000 $6,400 $1,600
Total 100% $415,000 $232,600 $23,600 $209,000
Today, after a huge blow up, Simone fired Gabby. Which of the following statements regarding forfeitures is correct (assume the plan meets all necessary testing requirements)?
Given the company census and plan information, the appropriate plan choice for forfeitures is to use them to reduce future plan contributions.
Rationale
The most appropriate plan choice would be to use plan forfeitures (in the amount of $6,400) to reduce plan contributions.
The facts state that the plan is designed to maximize the benefits to Simone. A
llocating the contributions would not maximize the benefit to Simone because Simone has already maximized her contribution to the plan ($345,000 x 20% = $69,000). The plan could not allocate any of the forfeitures to Simone (thus, option a is incorrect).
50
BigCorp, LLC has a 401(k) plan that allows for hardship distributions. Sandra would like to return to school to get a Master's degree. She has $3,000 in her savings account to use but would like to take a hardship distribution from her 401(k) plan for the maximum amount available. Sandra’s program will take two years and cost $7,000 per year. Sandra’s 401(k) account balance is $20,000. Sandra has never made any hardship distributions and her elective contributions to the plan total $10,000.
How much can Sandra withdraw as a hardship distribution?
$4,000.
$7,000.
$10,000.
$20,000
$4,000.
Rationale
A distribution for payment of up to the next 12 months of post-secondary education and room and board expenses is deemed to be on account of an immediate and heavy financial need. Sandra can take a distribution up to the immediate hardship expense less other assets available to pay the hardship expense ($7,000 for one year of tuition - $3,000 in savings)
51
Andi, the 100 percent owner of Andi’s Day Care, a C-corporation, would like to establish a profit-sharing plan. Andi’s Day Care’s tax year ends July 31 to coincide with the school year.
What is the latest day Andi can establish and contribute to the plan?
Andi must establish and contribute to the plan by December 31 of the year in which she would like to establish the plan.
Andi must establish the plan and make the contribution by May 15 of the following year assuming she filed the appropriate extensions.
Andi must establish the plan by July 31 of the year in which she would like to establish the plan and contribute by December 31.
Andi must establish the plan by December 31 of the year in which she would like to establish the plan and contribute to the plan by April 15 of the following year.
Andi must establish the plan and make the contribution by May 15 of the following year assuming she filed the appropriate extensions.
Rationale
Andi must establish the plan and make the contribution to the plan by the due date of the tax return, including extensions. The tax return for a C-corporation operating on a fiscal year ending July 31 is due November 15th of the same year, but can be extended for 6 months, to May 15 of the following year, assuming she filed all of the appropriate extensions.
52
Aztec Clay Distributor is a family-owned business that is owned by Alice, Bill, Chad and Zion. Alice and Bill are over 50. Zion is not an employee, rather a silent or somewhat silent partner. Alice and Bill are married, and Chad is their 25-year-old son who has a degree in Soil Science from Dhaka University in Bangladesh. Aztec sponsors a 401(k) plan. The employee census information is in the chart below.
If Aztec establishes a profit-sharing plan, what is the most that Aztec could contribute for 2023 to the profit-sharing plan?
317,500.
Rationale
Aztec can contribute 25% of covered compensation. The total covered compensation is $1.32 million less the $45,000 of compensation for Alice and the $5,000 compensation for Bill that is above the 2024 limit of $345,000 or $1,270,000.
The contribution equals $317,500.
$1,320,000
($45,000)
($5,000)
$1,270,000
x 25%
$317,500
53
Sew What, the best seamstress shop in town, sponsors a 401(k) plan. The plan provides a dollar-for-dollar match for employee contributions up to six percent and has immediate vesting for all contributions. For ADP purposes, the company has not made the top 20 percent election for the determination of who is highly compensated. The company has the following employee information:
Employee Ownership Compensation Elective
Deferral Deferral
Percentage
Lois 93% $201,000 $14,000 6.97%
Tarik 5% $170,000 $15,861 9.33%
Karen 2% $160,000 $14,400 9.00%
Jeanette - $40,000 $4,000 10.00%
Joyce - $30,000 - 0.00%
Ronnie - $30,000 $1,800 6.00%
Kali - $30,000 - 0.00%
Which of the following statements is correct?
Karen is not highly compensated.
The plan passes the ADP test if Joyce and Kali were not eligible.
Joyce and Kali are not considered when calculating the ADP test because they do not contribute.
The top heavy rules require Sew What to make a 3% contribution for Jeanette, Joyce, Ronnie, and Kali
The plan passes the ADP test if Joyce and Kali were not eligible.
Rationale
Lois, Tarik and Karen are highly compensated employees. Lois is the only one that meets the ownership test of greater than five percent. Lois, Tarik, and Karen meet the earnings test for being highly compensated. The plan fails the ADP test.
The NHC average ADP is 4% [(10% + 0% + 6% + 0%) ÷ 4] while the HC ADP is 8.43% [(6.97% + 9.33% +9.00%) ÷ 3].
Thus, using the test, 2 is added to the NHC ADP of 4% requiring the HC ADP be at or below 6%. Since the HC ADP is 8.43%, the plan fails the ADP test. If Joyce and Kali were not eligible, then the NHC ADP equals 8% and the HC ADP must be at or below 10%, so the plan meets the ADP test.
Option c is not correct and option d is not correct as there is no indication that the plan is top heavy. In addition, top heavy applies to key employees, not highly compensated employees.
54
Sheehan works for Andy Company. His total compensation this year is $600,000. Andy sponsors an integrated profit-sharing plan with a base percentage of 5.5% and a maximum excess percentage.
It uses the current wage base as the integration level. How much will the company contribute for Sheehan for 2024?
$23,000.
$28,677.
$29,029.
$33,000.
$28,677.
Rationale
The excess percentage is 11% (twice the base percentage).
Therefore, Sheehan receives 5.5% from zero to the wage base of $168,600 (2024) and 11% on income above the wage base up to the covered compensation limit of $345,000 (2024).
[[$345,000 - $168,600] x 11% + $168,600 x 5.5%]. $19,404 + $9,273 = $28,677.
55
Jared, age 52, earns $360,000 per year and is a participant in his employer’s 401(k) plan. What is the maximum total contribution amount that Jared will have under the 401(k) plan in 2024, assuming his company contributes using a non-elective deferral in a Safe Harbor Plan?
$30,500
$40,850
$41,300
$69,000
$40,850
The general employee elective deferral limitation for 2024 is $23,000, and Jared can defer an additional $7,500 (2024) as a catch-up contribution because he is over 50. The company match is 3% of $345,000 (covered compensation limit for 2024), giving him an additional $10,350 for a total contribution of $23,000 + $7,500 + $10,350 = $40,850.
You can deduce the company match percentage based on the plan description in the question.
