Retire Ch 8 Installtion/ Admin/ Term. of Qualified Plans

Question 1

Plan selection should only focus on the needs of the company and should never focus on the needs of the small business owner as this would be a conflict of interest.

a. True b. False

Answer 1

b. False

Question 2

While an employee census is generally essential, it may not be critical if the only objective is to provide a savings vehicle for employee contributions.

a. True b. False

Answer 2

a. True

Question 3

An employer with fluctuating cash flows will generally choose a pension plan.

a. True b. False

Answer 3

b. False

Question 4

To take a deduction for contributions for a particular year, the qualified plan must be adopted by the due date of the tax return for the plan year including extensions.

a. True b. False

Answer 4

a. True

Question 5

Notification of the adoption of a qualified plan may be made in person, via e-mail, or by posting notice at the place of business.

a. True b. False

Answer 5

a. True

Question 6

If the plan sponsor shifts the investment responsibility to the plan participants, then the sponsor no longer has any fiduciary responsibility.

a. True b. False

Answer 6

b. False

Question 7

Defined benefit plans must make quarterly installment payments of the required contributions.

a. True b. False

Answer 7

a. True

Question 8

Defined benefit plans may use forfeitures to reduce plan costs or reallocate them to plan participants.

a. True b. False

Answer 8

b. False

Question 9

If a prohibited transaction occurs in a qualified plan, a 100% penalty may be assessed if not timely corrected.

a. True b. False

Answer 9

a. True

Question 10

Qualified plans are often amended to maximize benefits to key employees.

a. True b. False

Answer 10

a. True

Question 11

Qualified plan amendments are difficult and require approval by ERISA.

a. True b. False

Answer 11

b. False

Question 12

Qualified plans may never terminate without losing their qualified status retroactively to inception.

a. True b. False

Answer 12

b. False

Question 13

Generally, which of the following are contributory plans?

a. 401(k) and money purchase pension plans.
b. 401(k) and thrift plans.
c. Thrift plans and ESOPs.
d. Money purchase pension plans and profit-sharing plans.

Answer 13

The correct answer is b.

Employers generally contribute to money purchase pension plans, ESOPs, and profit-sharing plans.

Employees contribute (thus contributory plans) to 401(k)s and thrift plans.

Question 14

Which of the following generally contribute to defined benefit plans, profit-sharing plans, and money purchase pension plans?

a. Employees only.
b. Employer only.
c. Both employer and employees.
d. Employer, employees, and government.

Answer 14

The correct answer is b.

Employees contribute to 401(k) plans and thrift plans.

The government does not make contributions to plans, except when it is the employer.

Question 15

Who generally makes elective deferrals to a 401(k) plan?

a. Employees only.
b. Employer only.
c. Employees and employer.
d. Employees, employers, and forfeitures.

Answer 15

The correct answer is a.

Generally, 401(k) plans are funded from both employee elective deferrals and employer matching contributions and nonelective deferrals, but the elective deferrals come from the employee

Question 16

Plans that require mandatory funding are generally funded by?

a. The employee.
b. The employer.
c. The employee and the employer.
d. For PBGC insured plans, the employee and the employer

Answer 16

The correct answer is b.

Plans that have mandatory funding features (defined benefit pension plans, cash balance pension plans, target benefit pension plans, money purchase pension plans) are generally funded by the employer.

Question 17

The target benefit pension plan and the money purchase pension plan provide some employee/ participant investment diversification protections by limiting the investment amount in employer stock to less than or equal to:

a. 5%.
b. 10%.
c. 20%.
d. 100%.

Answer 17

The correct answer is b.

Defined benefit, cash balance, target benefit, and money purchase pension plans limit contributions of company stock to 10%.

Question 18

Generally, which of the following are contributory plans?

401(k) and money purchase pension plans.
401(k) and thrift plans.
Thrift plans and ESOPs.
Money purchase pension plans and profit sharing plans.

Answer 18

401(k) and thrift plans.

Rationale

Employers generally contribute to money purchase pension plans, ESOPs, and profit-sharing plans. Employees contribute (thus contributory plans) to 401(k)s and thrift plans.

Question 19

Florence, age 55, is an attorney who is self employed. Her assistant, Joy, has worked with her for five years. Florence is establishing a SEP for this year and is willing to make a contribution of 10 percent of Joy’s salary to the SEP.

If Florence earns $90,000 after paying Joy, her expenses, and the contribution to Joy’s SEP, what is the most that she can contribute to the SEP on her behalf for 2024?

$7,026.
$7,604.
$8,182.
$16,728

Answer 19

7,604.

Rationale

$90,000 Schedule C Net Income
$6,358 Minus:1/2 self-employment tax $90,000 x 92.35% x 15.3% x 1/2
$83,642 Equals: Net self-employment income

x 9.09% Multiply: (10%/1.10)

$7,604 Equals: SEP Contribution Limit for Florence

Florence is limited to the same percentage contribution as her employee. However, because she is self employed, the 10% is based on earned income. The short-cut is to use 9.09% (10% / 1.10)

Question 20

Westgate Inc. recently adopted a profit-sharing plan. Westgate has two offices, the North Westgate office and the South Westgate office. There are 10 employees in the North Westgate office, 5 of which are eligible for the plan; and 15 employees in the South Westgate office that are all eligible for the plan. Which of the following statements is true?

If Westgate decides to notify the employees about the plan via mail, the letters must be mailed at least 30 days before mailing the determination letter to the IRS.

A Summary Plan Description must be furnished to each participant within 120 days of plan establishment.

If Westgate adopted a prototype plan then they will use a single trust or custodial account that has been adopted by all employers using that prototype plan.

Westgate only needs to notify the employees that are eligible for the plan that the company has adopted a qualified plan.

Answer 20

A Summary Plan Description must be furnished to each participant within 120 days of plan establishment.

Rationale

Option a is incorrect because the employees must be notified by mail between 10 and 24 days before mailing the determination letter. Option c describes a master plan. Option d is incorrect because all employees must be notified if they work in an office where an eligible employee works

Question 21

A distress termination of a qualified retirement plan occurs when:

1. The PBGC initiates a termination because the plan was determined to be unable to pay benefits from the plan.
2. An employer is in financial difficulty and is unable to continue with the plan financially. Generally, this occurs when the company has filed for bankruptcy, either Chapter 7 liquidation or Chapter 11 reorganization.
3. The employer has sufficient assets to pay all benefits vested at the time, but is distressed about it.
4. When the PBGC notifies the employer that it wishes to change the plan due to the increasing unfunded risk.

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

Answer 21

2 only.
Rationale

Statement 2 is the definition of a distress termination. Statement 3 describes a standard termination. Statement 1 describes an involuntary termination. Statement 4 is simply false.

Question 22

Qualified retirement plans that permit the employer unlimited investment in sponsor company stock are:

1. 401(k) plans
2. Stock bonus plans
3. Profit sharing plans
4. ESOPs

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

Answer 22

1, 2, 3, and 4.
Rationale

All of the listed plans permit 100% stock in the plans. The 401(k) plan is organized as a profit sharing or stock bonus plan.

Question 23

Which of the following generally contribute to defined benefit plans, profit-sharing plans, and money purchase pension plans?

Employees only.
Employer only.
Both employer and employees.
Employer, employees, and government.
Confidence of your answer

Answer 23

Employer only.

Rationale

Employees contribute to 401(k) plans and thrift plans. The government does not make contributions to plans, except when it is the employer.

Question 24

Which of the following qualified plans require mandatory funding?

1. Defined benefit pension plans
2. 401(k) plans with an employer match organized as a profit sharing plan
3. Cash balance pension plans
4. Money purchase pension plans

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

Answer 24

1, 3, and 4.

Rationale

401(k) plans do not require mandatory funding. The other three require mandatory funding.

Question 25

Investment portfolio risk is generally borne by the participant/employee in all of the listed qualified plans, except:

1. Defined benefit pension plan
2. Cash balance pension plan
3. 401(k) plan
4. Profit sharing plan

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

Answer 25

1 and 2.
Rationale

In defined benefit and cash balance pension plans, the employer bears the investment risk.

Question 26

Which of the following statements are correct regarding assets reverting back to the sponsor or a qualified plan?

1. Under a merger, assets from a qualified plan can revert back to the plan sponsor without regard to the relationship between the value of the plan assets compared to the value of the obligations under the plan.
2. Any reversion of plan assets will always be subject to a 20% penalty.

1 only.
2 only.
Both 1 and 2.
Neither 1 nor 2.

Answer 26

Neither 1 nor 2.

Rationale

Statement 1 is incorrect because the assets must exceed the plan liabilities.

Statement 2 is incorrect because the penalty may be 20 percent or 50 percent.

Question 27

The target benefit pension plan and the money purchase pension plan provide some employee/participant investment diversification protections by limiting the investment amount in employer stock to less than or equal to:

5%.
10%.
20%.
100%.

Answer 27

10%.

Rationale

Defined benefit, cash balance, target benefit, and money purchase pension plans limit contributions of company stock to 10%.

Question 28

Company A, a C corporation, has been capitalized by MJBJ Vulture Capital, a venture capital company. Company A’s cash flows are expected to fluctuate significantly from year to year, due to phenomenal growth. They expect to go public within three years.

Which of the following would be the best qualified plan for them to consider adopting?

Profit-sharing plan.
New comparability plan.
401(k) plan with a match.
Stock bonus plan.

Answer 28

Stock bonus plan.

Rationale

A stock bonus plan will allow equity participation without the use of cash flows and the public offering will eventually provide liquidity.

Question 29

Marie, the sole shareholder in Marie’s Pastries, is contemplating establishing a qualified plan. The corporation’s employee census is as follows:

Marie’s Pastries Employee Census
Employee Age Compensation Ownership Length of Service
Marie 55 $200,000 100% 30 Years
Cheryl 38 $45,000 0 20 years
Jeff 42 $28,000 0 14 Years
Ruby 34 $24,000 0 11 Years
Total $297,000 100%
The company experiences very low turnover.

Marie, a long-time widow, has always treated the employees like her family and the company has experienced very low turnover. She would like to use the retirement plan to assist her in transferring ownership interest to the employees as she is ready to retire. She has a strong preference for avoiding and deferring taxes.
She is opposed to mandatory funding and indifferent to integration.

Which plan would be appropriate for Marie?

Stock bonus plan.
Money purchase pension plan.
Defined benefit plan.
Employee stock ownership plan.

Answer 29

Employee stock ownership plan.

Rationale

An ESOP would be the most appropriate plan to meet Marie’s objectives. The stock bonus plan would allow Marie to transfer stock, but would not assist her immediately in her retirement plans. The defined benefit and money purchase pension plan would require mandatory funding.

The ESOP would provide her with tax benefits, the ability to sell the business all at once (via a LESOP), and the ability to create a diversified portfolio with the proceeds from the sale.

Question 30

Tracy, age 46, is a self-employed financial planner and has Schedule C income from self-employment of $56,000. He has failed to save for retirement until now. Therefore, he would like to make the maximum contribution to his profit-sharing plan.

How much can he contribute to his profit-sharing plan account for 2023?

$9,464.
$10,409.
$11,200.
$14,000.

Answer 30

$10,409.

Rationale

$56,000 Schedule C net income
- 3,956 Minus: 1/2 self-employment taxes at 15.3% x 0.9235
$52,044 Equals: Net self-employment income
x 0.20 Multiply: (0.25 ÷ 1.25)

$10,409 Equals: Keogh profit sharing contribution amount

Question 31

Who generally makes elective deferrals to a 401(k) plan?

Employees only.
Employer only.
Employees and employer.
Employees, employers, and forfeitures.

Answer 31

Employees only.

Rationale

Generally, 401(k) plans are funded from both employee elective deferrals and employer matching contributions and non-elective deferrals, but the elective deferrals come from the employee.

Question 32

Employees generally contribute to which of the following plans?

1. 401(k) plans
2. Thrift plans
3. Cash balance pension plans
4. Defined benefit pension plans

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

Answer 32

1 and 2.

Rationale

Cash balance pension plans and defined benefit pension plans are almost always exclusively funded by the employer (noncontributory). 401(k) plans and thrift plans allow employee contributions

Question 33

Plans that require mandatory funding are generally funded by?

The employee.
The employer.
The employee and the employer.
For PBGC insured plans, the employee and the employer.

Answer 33

The employer.

Rationale

Plans that have mandatory funding features (defined benefit pension plans, cash balance pension plans, target benefit pension plans, money purchase pension plans) are generally funded by the employer.

Question 34

Kareem is self-employed as a marketing consultant. He works primarily with start-up internet companies helping to develop corporate brand programs.
Several years ago, he established a 401(k) profit-sharing plan and has accumulated $385,000 in the plan.
Which of the following forms should Kareem file to meet his compliance requirements?

Form 5500 EZ.
Form 5500 SF.
Form 5500.
He does not need to file a Form 5500 of any type

Answer 34

Form 5500 EZ.

Rationale

Kareem must file Form 5500 EZ since it is a one-participant plan and total assets exceed $250,000. If assets were below this threshold, he would not have to file the form.

Question 35

Generally, older age entrants are favored in which of the following plans?

1. Defined benefit pension plans
2. Cash balance pension plans
3. Target benefit pension plans
4. Money purchase pension plans

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

Answer 35

1 and 3.

Rationale

Cash balance and money purchase pension plans generally favor younger age entrants. While defined benefit and target benefit pension plans favor older age entrants with less time to accumulate and require higher funding levels.

Question 36

Christine has been the owner of Chris’ Antique Dolls for the past 15 years. She decided to establish a retirement plan for her corporation. She wants to make all initial contributions to the plan using company stock and she may integrate with social security. Which of the following would be the best qualified plan for them to consider adopting?

A. Defined benefit pension plan
B. New comparability plan
C. 401(k) plan with a match
D. Profit sharing plan

Answer 36

Solution: The correct answer is D.

A profit sharing plan will allow a stock contribution and integration with social security.

A stock bonus plan would also be an appropriate, but it’s not one of the choices.

Question 37

A distress termination of a qualified retirement plan occurs when:

The PBGC initiates a termination because the plan was determined to be unable to pay benefits from the plan.

An employer is in financial difficulty and is unable to continue with the plan financially. Generally, this occurs when the company has filed for bankruptcy, either Chapter 7 liquidation or Chapter 11 reorganization.

The employer has sufficient assets to pay all benefits vested at the time, but is distressed about it.

When the PBGC notifies the employer that it wishes to change the plan due to the increasing unfunded risk.

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

Answer 37

Solution: The correct answer is A.

Statement 2 is the definition of a distress termination. Statement 3 is standard termination. Statement 1 describes an involuntary termination. Statement 4 is simply false.

Question 38

Perry operates In-N-Out Pharmacy, a sole proprietorship. In-N-Out sponsors a profit sharing plan. Perry had net income of $205,000 and paid self employment taxes of $20,184 (assumed) during the year. If Perry makes a 15% of salary contribution on behalf of all of his employees to the profit sharing plan, how much is the contribution to the profit sharing plan on behalf of Perry?

$24,100
$25,416
$38,980
$48,726

Answer 38

The correct answer is B.

$205,000 Net Income

($10,092) Less 1/2 SE Tax

$194,908 Net SE Income

× 0.1304 = ( 0.15/1.15 )

$25,416