Retirement

Question 1

When determining the allowable annual additions per ppt to a defined-contribution pension plan, of the choices what would an employer not include?

The lesser of 100% of income or $58,000 (indexed).
Compensation exceeding $290,000.
Compensation exceeding the defined-benefit limitation in effect for that year.
Bonuses.

Answer 1

First, notice that this questions states a defined contribution plan so db limitation doesn’t apply.

The answer is that comp cant exceed 290K for the year.

58,000 as we know is the max contribution but it’s the lesser of 100% of income bc you can’t receive more than what you make.

If the plan provides it, bonuses are includible

Question 2

Note: Add more to this card

Give me some stats on a profit sharing plan integrated with soc security?

Answer 2

The max social security benefit is 0% to 11.7% as the top of the range?

Question 3

Difference between cash balance plan and traditional db plans

Answer 3

Db plans will base payments on lifetime when an employee reaches retirement. For a cash balance plan the accumulated cash balance defines the benefit in terms of stated account balance

Question 4

Hot Dog Moving Company (HDM) sponsors a 401(k) profit sharing plan. In the current year, HDM contributed 20% of each employee’s compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC is 2.5%. Alex, who is age 57, earns $177,778 and owns 7.5% of the company stock. What is the maximum amount that he may defer into the 401(k) plan for this year?

Answer 4

The answer will be 14,500

Remember we must use the ADP chart to figure out contribution bc Alex is a HCE given the stock ownership. Based on the chart we know that if the NHC ADP is 2-8% then the HC can only contribute 2%+NHC rate. So for this example we take 4.5% and put that against the salary of 177,778. Bc alex is over 50 we are allowed an additional contribution of 6,500

Summary: 8K from salary can be deferred and 6.5K from the catch is allowed = 14,500

Question 5

Calculate the maximum contribution that could be contributed for an employee, age 41, earning $140,000 annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary.

Answer 5

36,300

So this question sucks because for each of these you need to look at the wording. It’s asking the max contribution FOR this employee. Different answers can be provided if it says “on behalf of the employee”, “for the employee”

So for this, the max 401k for an employee under age 50 is 19,500

The money purchase plan said that will contribute 12% of salary so that is 16,800

Question 6

Timothy is covered under his employer’s Defined Benefit Pension Plan. He earns $500,000 per year. The Defined Benefit Plan uses a funding formula of Years of Service × Average of Three Highest Years of Compensation × 2%. He has been with the employer for 25 years. What is the maximum contribution that can be made to the plan on his behalf?

Answer 6

READ READ READ. Retirement will be the death of me. It says what is the max contribution that can be made to the plan on his behalf?

For a DB you won’t know the contribution to THE PLAN bc that is set by the actuary. SO the answer is can’t determine

Question 7

What is the maximum excess rate?

Answer 7

The maximum excess rate is 2 times the contribution rate limited to a disparity of 5.7%.

An example would be if a plan makes a 10% contribution, what is the max excess rate? 15.7% would be the answer bc we can’t use the 2*10% due to the limit. So it would be 10%+5.7%

Question 8

Before we get into the question, tell me what an annual addition is?

In a money purchase plan that utilizes plan forfeitures to reduce future employer plan contributions, which of the following components must be factored into the calculation of the maximum annual addition limit?

Forfeitures that otherwise would have been reallocated.
Annual earnings on all employer and employee contributions.
Rollover contributions for the year.
Employer and employee contributions to all defined contribution plans.

Answer 8

An annual addition is the new money being contributed into an EE account

Forfeitures would not be included bc this lower the contribution required from an ER. They are not added directly to an EE account. Also, earnings and rollovers are not new money ADDED so discount those options

Only answer that applies would be EE and ER contributions to all DC plans

Question 9

List the formulas provided for DB plans

Answer 9

Unit benefit (a.k.a. percentage of earnings per year of service) formula.
Flat-percentage formula.
Flat-amount formula.

Question 10

Explain the provisions of loans in a 403b plan.

Answer 10

Max loan amount is the lesser of 50% of the account value of 50,000.

The loan must be paid back with 5 years, using quarterly payments (can be more but it can’t be less frequent)

If used for home purchase I believe it can be paid back in 30 years but will confirm when you read this card.

Question 11

What companies are eligible for the long service catch up

Answer 11

This is found in a 403b(TSA) plan.

Remember HER

Health
Education
Religious

Question 12

Who is not a fiduciary to a plan?

Answer 12

Accountants, printers, or really anyone that provides services where they do not have control of the assets/funds

Question 13

How does life Insurance work in a qualified plan

Answer 13

Tired so taking the from the bank for now:

The premiums paid for the life insurance policy within the qualified plan will trigger a taxable event for the participant at the time of payment.

Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer’s aggregate contributions to the participant’s account. If a whole life policy other than universal life is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer’s aggregate contributions to the participant’s account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income at or before retirement.

Every year the plan participant pays income tax on the dollar value of the actual insurance protection – approximately equal to the term insurance cost. This is commonly called the PS58 cost. The sum of all those costs is the participant’s basis.

Question 14

Provide me with some details on the earnings test for OASDHI

Answer 14

1. Earnings test does not apply at, or after normal retirement age
2. The monthly exempt amount is 4,187.50 (50,520) for those months in the year of normal retirement age before you actually reach normal retirement age.
3. Test is based on earned income only

Question 15

When is PBGC coverage not required for a DB plan?

Answer 15

When it is a professional firm with 25 or fewer EEs.

Question 16

For pension plans, detail the anti cutback rules for benefits have been accrued to date

Answer 16

The law states that you can not change the formula to impact current employee benefits that have already accrued.

Examples:

You have a current benefit accrual for the DB plan at 3% but you want to change it to 2% per year for future years. This would be allowed bc it would only affect the future benefits. Same case if you have a money purchase plan with a contribution formula change from 6% to 3% for future years.

Decreasing the max benefit under the DB plan from 70% to 50% for all future retirees. This WOULD NOT be allowed bc you are changing the formula for current employees that have not yet retired but already have benefits accrued

Question 17

What is a determination letter?

Answer 17

They are issues 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.

Question 18

In retirement planning, what sources are statutory and what are regulatory?

Internal Revenue Code
Labor Department
U. S. Tax Court
Private Letter Rulings
ERISA

Answer 18

The IRC and ERISA are laws or statutes passed by Congress. The Labor Department and Private Letter rulings are sources of regulatory law. Of course, the U.S. Tax Court only interprets statutory and regulatory law (theoretically), and is not a source of laws.

Question 19

Describe how eligibility works with the secure act for part time employees

Answer 19

If you are part time, you will be eligible for the plan if you have obtained age 21 AND you work for atleast 500 hours per year for a consecutive 3 years. This starts on 1/1/21 so the first part time employee will be eligible in 2024

Question 20

According to ERISA, which of the following is/are required to be distributed annually to defined benefit plan participants or beneficiaries?

Individual Benefit Statement.
The plan’s summary annual report.
A detailed descriptive list of investments in the plan’s fund.
Terminating employee’s benefit statement.

Answer 20

Plan summary report and terminating EE benefit statement.

The individual statement is not required annually for DB plans. This would be required once every 3 years. But this can be avoided if the sponsor provides a notice of the availability of the pension benefit pension statement and the ways to obtain it each year.

In addition, the plan administrator of a defined benefit plan must furnish a benefit statement to a participant or beneficiary upon written request, limited to one request during any 12-month period. There are no individual accounts in a defined benefit plan, so a specific listing of invested assets is not required.

Question 21

Tara is a participant in Kean Co.’s defined benefit plan and standard 401(k) plan. Tara, who is a mid-level manager, is 44 years old and earns $100,000. She has five years of service for purposes of the plans and has worked at Kean for five years. The plan provides a benefit of 2% for each year of service. Both plans have the least generous graduated vesting schedule possible. Almost eighty percent of the accrued benefits in the defined benefit plan are attributable to the rank and file employees, and not the owners. According to the actuary, Tara’s accrued benefit in the defined benefit plan is $10,000. Over the last five years, Tara has deferred a total of $30,000 from her salary, which has grown to $40,000. In addition, Kean has matched these contributions with $15,000, which is now worth $20,000. If Tara were to leave today, how much could she rollover into a new employer’s plan?

Answer 21

The DB plan is not top heavy. Therefore, the vesting for the DB plan is a 7 year graded schedule and he is 60% vested in the $10,000. She is 100% vested in the $40,000, but only 80% vested in the employer matching contribution.

This question requires you to know the vesting schedules, which are not provided on the exam.

For DB either 5 year cliff or 7 year graded, for DC 3 year cliff or 6 year graded.

DB	DC
Yr 1	0%	0%
Yr 2	0%	20%
Yr 3	20%	40%
Yr 4	40%	60%
Yr 5	60%	80%
Yr 6	80%	100%
Yr 7	100%	--
DB plan has 10,000 and is 60% vested = 6,000

DC Employee contribution is $40,000 (100% vested)

DC Employer match is 20,000 and is 80% vested = 16,000

Total vested is $62,000

Question 22

A supplemental deferred compensation plan providing retirement benefits above the company’s qualified plan AND without regard to Section 415 limits is known as

Answer 22

SERP supplements the pension plan without regard to limits imposed upon salary levels (i.e., maximum salary of $290,000 in 2021) or the maximum funding levels of Section 415. Do not confuse with an excess benefit plan which extends the benefits of a company’s qualified plan above the Section 415 limits but still adheres to maximum salary limitations.

Question 23

Carleen has a vested 401(k) plan balance with her employer in the amount of $420,000. Eight months ago, Carleen borrowed $30,000 from the plan. She paid back the outstanding loan balance last month. What is the maximum loan Carleen can take from the plan today?

Answer 23

Would be eligible to the full 50K expect the EE already took a loan this year. You would deduct the limit by the outstanding balance of the previous loan so we are able to take 30K

Question 24

Jane P. Lane is a clerical worker who has been with her employer for the last 20 years. Last year, she got married in the Swiss Alps, which was quite out of character for her.

She participates in an employer-paid group term life plan and selected term insurance in the amount of $200,000, which is three times her salary.

She has named her spouse as the beneficiary of the policy.

What is the tax consequence of this policy?

Her employer is permitted to deduct the premiums paid on the entire amount of coverage.
Her employer is permitted to deduct the premiums paid on the first $50,000 of coverage.
Jane is subject to tax on the entire benefit.
Jane is subject to tax on the amount which exceeds three times her annual salary or $50,000, whichever is less.

Answer 24

Look at the question, it’s employer paid. So they get to deduct 100% of the contributions.

For Jane, the taxation starts once we hit the excess of 50K

Question 25

Give me some details on cafeteria plans

Answer 25

Family benefit needs are rarely homogenous, but vary from family to family. These unique family needs are met though a cafeteria plan because each family can tailor their benefit package to best meet those needs. Cafeteria plans, by law, must offer at least one taxable “cash” benefit, and one “pre-tax” benefit. The only tax deferral option allowed under Section 125 cafeteria plan is a 401(k). This is a statutory restriction.

Question 26

Jacinth is an executive at Papers Unlimited. As part of her compensation she has a restricted stock plan that allows her to receive 2,000 shares of stock after she completes of 5 years of service. At the time of grant the stock was trading at $4 per share. She did not make the 83b election. She met the vesting requirement 8 months ago when the stock was trading at $28. She has decided to sell her stock. All of the following are true, except:

If she sells the stock today for $3 per share she would have an ordinary loss of $50,000.
If she sells the stock today for $15 per share she will recognize a capital loss of $26,000.
If she sells the stock today for $28 per share then she will not recognize any gain or loss.
If she sells the stock today for $38 per share then she will recognize $20,000 in short term capital gains.

Answer 26

When she met the vesting period she would have recognized W-2 income of $56,000 (2,000 × $28).

A is the false statement: If she sold the stock at $3 then she would recognize a capital loss of $50,000 ($56,000 basis - $6,000 sale price). Loss from an investment must be netted against gain. If the loss exceeds the capital gain, $3,000 can be taken against ordinary income, not the full amount.

If she sold the stock at $15 then she would recognize a capital loss of $26,000 ($56,000 basis - $30,000 sale price).

If she sold the stock at $28 then she would not recognize any gain or loss ($56,000 sale price - $56,000 basis).

If she sold the stock at $38 then she would recognize a short term gain of $20,000 ($76,000 sale price - $56,000 basis).

Question 27

A supplemental deferred compensation plan that pays retirement benefits on salary, above the Section 415 limits, at the same level as the underlying retirement plan is known as:

A Supplemental Executive Retirement Plan (SERP).
A funded deferred compensation plan.
An excess benefit plan.
A Rabbi trust.

Answer 27

An excess benefit plan extends the same benefits to employees whose contributions to the plan are limited by Section 415 (e.g., employee earns $290,000 yet receives $58,000 contribution instead of $70,000 contribution due to Section 415 limitation on a 25% money purchase plan). An excess benefit plan would put additional $12,000 into non-qualified retirement plan. Do not confuse with a SERP which provides benefits in excess of the Section 415 limits AND ignores the covered compensation limits (i.e., $290,000 in 2021) applied to qualified plans.

Question 28

Which of the following is a correct statement about the income tax implications of employer premium payments for group health insurance?

An S Corporation can only deduct 70% of the premiums for all employees.
In a sole proprietorship, the premiums for both the owner and the non-owner are fully deductible.
If stockholder/employees of a closely held C corporation are covered as employees, the premiums are fully deductible.
Premium costs paid by a partnership are passed through to the partner, who can deduct 70% of the costs on their individual tax returns.

Answer 28

S Corporations and proprietorships cannot deduct any premiums for group health insurance for owners. Non-owner employee health premiums are fully deductible to both entities. Answer “D” is incorrect because partners are able to deduct 100% of the health insurance premium on their individual tax returns.

Question 29

Daniel, age 55, just took a $12,000 withdrawal from his traditional IRA. Immediately before the distribution, the value of the traditional IRA was $210,000, and Daniel had a basis of $60,000. The amount of the early withdrawal penalty on this distribution is:

A. $0.

B. $343.

C. $857.

D. $1,200.

Answer 29

When there is basis in an IRA, it means there were contributions made that were not deductible. Those non-deductible contributions will come out tax free. When there is basis, the distributions will be a pro-rata amount of basis and taxable amounts. The early withdrawal penalty is based on the taxable portion of the distribution. The taxable portion of the IRA distribution is calculated as follows:

Tax-free portion of distribution = (Basis / Fair Market Value) x Distribution

Tax-free portion of distribution = ($60,000/$210,000) x $12,000

Tax-free portion of distribution = $3,429

Taxable portion of distribution = Total Distribution – Tax-Free Portion

Taxable portion of distribution = $12,000 - $3,429

Taxable portion of distribution = $8,571

The penalty is 10% of the taxable distribution, or $857.

Question 30

In addition to long-term care insurance, which of the following would cover the cost of a hospital stay in excess of 100 days?

A. Medicare.

B. Medicaid.

C. Indemnity insurance policy.

D. Medicare supplement.

Answer 30

Individuals have three methods to pay for stays after the 100th day:

1. Long-term care insurance
2. Individual savings
3. Medicaid

Question 31

Sam Davis, age 47, earning $100,000 per year, wants to establish a defined benefit plan. He employs 4 people whose combined salaries are $50,000 and range in age from 22-27. The average employment period is 3.5 years. Which vesting schedule is best suited for Sam’s plan?

A. 3-year cliff.

B. 3-7 year graded.

C. 100% immediate vesting.

D. 2-6 year graded.

Answer 31

This plan will be top heavy, based upon the disparity between Sam’s compensation and that of his employees.

A is incorrect. Although a 3-year cliff vesting schedule would be permitted, it would allow his employees to be fully vested if they separated from service after the 3.5-year average employment period. B is incorrect. Since the plan will be top heavy, a 3-7-year graded vesting schedule would not be permitted. C is incorrect. Although a full and immediate vesting schedule would be permitted, it would allow his employees to be fully vested if they separated from service after the 3.5-year average employment period.

Additional information:

If 4 employees make a combined total of 50k, an educated guess says each cannot make over 20k (12,500 if we split evenly). It also states he wants to set up the plan and has 4 employees. This all indicates he owns the business and would be HCE and Key Employee based on ownership.

To further illustrate (dropping ownership):

100k x 2% x 3.5 years of service = $7,000

12,500 x 2% x 3.5 = $875

He is getting 88.9% of the benefits using 3.5 years of service. I will guess the owner has more than 3.5 years of service, making his benefit even more disproportionate.

Question 32

For the SIMPLE IRA what is the early penalty for taking a distribution

Answer 32

25%

But this is only based on the first 2 year period of being in the plan. After two years all is back to normal

Question 33

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

Answer 33

At least 80%

This is important because parent-subsidiary companies must have substantially equal benefits or cover employees of all subsidiary companies under the same plan.

Question 34

Safe harbor requirements to exclude leased employees from an employer’s retirement plan include all but the following:

The leasing company must maintain a money-purchase plan with a contribution rate of 10%.
The retirement plan of the leasing company may be integrated.
The leasing company’s plan must provide immediate vesting.
Safe harbor can be used until leased employees constitute 20% of the non-highly compensated work force

Answer 34

Under the safe-harbor leasing rules the plan must provide a 10%, non-integrated money purchase plan with immediate vesting. No more than 20% of the employer’s non-highly compensated employees may be leased to qualify for the safe harbor rules.