Retirement Flashcards
For tax year 2024, what is the maximum permissible contribution amount to a defined benefit plan?
The amount of the permissible annual contribution to a defined benefit plan is actuarially determined. The benefit can only be based on compensation up to $345,000 (2024)
If Ed’s employer’s pension plan provides a life annuity equal to 1.5% of earnings up to 30 years of service, how much could Ed ($150,000 highest three years’ average annual compensation) receive as annual pension after 20 years of service?
½% x 20 years x $150,000 = $45,000. The benefit is for 20 full years of service.
For many years, ABC, Inc. has funded a defined benefit plan for its employees. Due to a reversal of fortune, the company cannot afford any type of pension plan. What should ABC, Inc. do?
The company can no longer afford any type of pension plan.
If forfeitures are not reallocated to remaining money purchase plan participants, what effect would that have on employer contributions?
Employer contributions would decrease.
If the forfeiture in a money purchase plan is not reallocated to the remaining participants, then they must be used to reduce company contributions.
On what is the maximum deductible contribution in a target benefit plan based?
A maximum of 25% of the aggregate eligible compensation of all covered participants
Cynthia’s final-average monthly salary is $4,800. To arrive at her benefit, multiply 1.25% by the $4,800 final-average monthly salary by 25 (the number of years of service). Cynthia’s monthly retirement benefit will be equal to $1,500 paid in the form of a life annuity. This is an example of what type of defined benefit formula?
Unit-Benefit
Also known as percentage-of-earnings-per-year of service
What is the maximum amount of retirement benefit for a participant in a target benefit plan in 2024?
The retirement benefit is based on the account value when benefits begin.
Hello Deli, a specialty delicatessen, maintains a SIMPLE plan. It would like to provide more retirement benefits to employees. Which plan can they adopt in addition to the SIMPLE plan?
Having a SIMPLE precludes Hello Deli from having another plan.
Which of the following investment vehicles may not be used to fund a TSA?
A. Open-end investment management companies
B. Mutual funds
C. Annuities with incidental life insurance
D. Blue chip stock in a domestic corporation (cannot be passive)
Answer A is a different name for Answer B. Any type of annuity is an acceptable investment for a TSA plan. Incidental life insurance within the annuity is also acceptable. A TSA cannot be funded with common stock.
Mr. Pope, age 55, operates his management consulting business as a sole proprietor. He wants to establish an uncomplicated retirement plan and contribute the maximum allowable amount per year. He has no employees, and his annual net profit always exceeds $300,000. Which type of plan should he adopt?
A. SIMPLE 401(k)
B. Profit-sharing
C. SIMPLE
D. SEP
E. uni-401(k)
With the uni-401(k) Mr. Pope can defer $23,000 plus add employer profit-sharing contributions to a cap of $69,000 plus a catch-up contribution of $7,500. The SIMPLE and SIMPLE 401(k) would only allow for $16,000 to be deferred plus 3% of compensation as a matching contribution. The profit-sharing and SEP would allow Mr. Pope to contribute $69,000 but no catch-up contribution is available.
What entity or regulation imposes extensive reporting and disclosure requirements on a defined benefit plan?
A defined benefit plan is subject to all the ERISA requirements for qualified plans (participation, funding, vesting, etc.) and the ERISA reporting and disclosure requirements. This information is disclosed to the plan participants and/or filed with the IRS or the Department of Labor. PBGC is not per se a reporting agency.
Apex, Inc. wants to reward its employees but does not have cash to contribute for year-end. The company feels it will be in a very profitable position during the year 2024. What would you suggest Apex do?
A. Adopt a profit-sharing plan and, in lieu of a cash contribution, provide the plan with a promissory note.
B. Adopt a profit-sharing plan and borrow the necessary cash for the contributions from a bank.
C. Adopt an ESOP and fund the contribution with company stock.
D. Do not start the plan until the next calendar year.
This option allows Apex to put money in the plan now and get a tax deduction now. Answer C is a good answer, but there is no indication in the question that Apex is interested in using company stock. This is the best answer though answer D could work as well (subjective).
Quick Manufacturing, Inc. always maintains a top-heavy profit-sharing plan because of employee turnover due to layoffs. Which vesting schedule should they adopt if the company feels this will be an ongoing situation?
3-year cliff
The employees will be eligible after one year, but unless they stay three years, the employees will forfeit all employer contributions made to the plan. The forfeitures will be allocated to the long-term employees (probably the HCEs) allowing them to potentially receive 2024 annual additions of up to 100% of compensation or $69,000. There is no indication the company wants to retain employees (2-6 year graded). The 100% vested plan (2-year eligibility) is not an advantage over the 3-year cliff vesting schedule.
Assume that an 8% money purchase plan is to be integrated with Social Security. What is the plan’s maximum permitted disparity?
The question is about for permitted disparity (5.7%) not base contribution or excess contribution percentage (13.7%). Because the information does not specify that the integration level is below the taxable wage base, so 5.7% must be used.
Dale works for a company that provides an integrated profit-sharing plan. She will earn $180,000 this year. The plan’s integration level is $168,600 with a base contribution of 10% and an excess contribution of 15.7%. What amount will be contributed to her account this year?
$168,600 @ 10# = $16,860.00
($180,000 - $168,600) @ 15.7% = +1,789.80
$18,649.80
Tom, age 55, has an annual salary of $140,000 (HCE). His company offers a 401(k) plan in which Tom does not participate at this time. His company also has a money purchase pension plan (12%). Tom is considering contributing to the 401(k) plan. Under the best circumstances, what is the maximum amount Tom is allowed to contribute in 2024 including catch-up considering ADP/ACP testing if the NHCEs are contributing 4%?
The deferral is limited to 6% under ADP/ACP testing (4% + 2%) of Tom’s salary ($8,400) plus the $7,500 catch-up contribution. Note: The catch up is not an employer contribution; it is an additional amount of employee deferral. The 6% is a plan limitation. The total of employer contributions, employee contributions, and forfeitures to the two plans cannot exceed $69,000 (415 limits).
Walter Workaholic works for two related employers. Each employer provides a 401(k) plan. With one employer he earns $50,000, and with the second employer he earns $60,000. If both plans allow for a 6% deferral and a 3% match, how much can he defer in 2024?
6% of the total of $110,000 = $6,600. The plan only allows for a 6% deferral. He cannot defer $23,000.
Nate, a sole proprietor, is going to contribute to a SEP. His net income is $50,000. What is the maximum amount that he can contribute for the current tax year?
25% short-cut method
$50,000 x 18.59% = $9,295
He is self-employed.
Which of the following qualified plan distributions is exempt from the 10% early withdrawal penalty?
A. A hardship withdrawal
B. A distribution due to a husband and wife in conjunction with a legal separation
C. A distribution for the purchase of the participant’s principal residence
D. A distribution due to separation from service at age 55
B. A distribution due to a husband and wife in conjunction with a legal separation
Legal separation, even divorce, does not prevent the penalty. A QDRO is necessary to avoid the 10% early withdrawal penalty. Principal residence distributions are not exempt from the penalty. For IRAs, it is first home not primary residence.
Which of the following qualified plan distributions would be exempt from the 10% early withdrawal penalty?
A. Distributions following a separation from service
B. Distributions for a temporary, partial disability
C. A qualified plan loan
D. A distribution for higher education cost for a participant’s child
C. A qualified plan loan
Distributions following separation from service must give a year (e.g., age 55). Higher education costs are exempt under IRA rules only. Total, long-term disability is exempt; partial and/or temporary disability does not qualify for the exemption. Plan loans are available at any age tax-free. There is no 59½ rule with plan loans.
Esther is eligible to participate in her company’s money purchase plan. She is married to Jim. She has two children: Danny and Suzi. Whom can she name as a beneficiary?
A. Anyone she wishes
B. Her estate
C. Jim
D. Danny
E. Suzi
C. Jim
The participant, Esther, can only name another beneficiary if Jim consents. The question must say “he waived his right” to choose for the other answers to be correct. Applies to pension plans only (DB, CB, MP and TB) not profit-sharing.
Jane divorced Bill. She is age 42. Per the divorce agreement (QDRO), she receives a direct distribution of Bill’s qualified plan account balance ($1,000,000) now. If she receives one half of the account, what will be the amount of her check from the plan administrator?
A. $500,000
B. $500,000 (less 10%)
C. $500,000 (less 20%)
D. $500,000 (less 30%)
E. $250,000
C. $500,000 (less 20%)
There is no 10% early penalty (QDRO), but the plan will deduct 20% (withholding) when a direct distribution is paid.
Todd wants to defer his pension distributions as long as possible. He works for RJ, Inc. RJ wants him to continue to work. If he works beyond age 70, when is the latest he can take a distribution and not be penalized?
A. 73
B. By April 1st of the year after he turns 73
C. When he retires
D. By April 1st of the year after he retires
There is no indication that he owns stock in RJ, Inc. Therefore, the best answer is “by April 1st of the year after he retires.”
Which of the following statements are true concerning a rabbi trust?
I. The rabbi trust provides complete protection for the deferred compensation.
II. The rabbi trust is informally funded.
III. The employer may fund the rabbi trust from the general assets of the company.
IV. Employer contributions to the rabbi trust are not subject to payroll taxes until they are distributed to the employee.
V. The rabbi trust assets may be used for purposes other than discharging the obligations to the employee.
B. II, III, IV, V
The assets held in a rabbi trust are always subject to the employer’s creditors. The employer may fund the trust from general assets. Contributions are not subject to payroll taxes, but ultimately distributions are subject to withholding and FICA. The rabbi trust offers no protection in case of bankruptcy or financial obligations of the company.
John, a high-performing sales manager for ABC Auto Parts, is unhappy with the company’s 401(k) program. The $345,000 compensation cap and the ADP test are limiting contributions. In an effort to retain John, which of the following opportunities should ABC make available to him?
A. A salary continuation plan invested in a variable annuity policy
B. An increase in company contributions to the 401(k)
C. A secular trust
D. A split-dollar policy
E. A pure deferred compensation arrangement using a VUL policy
E. A pure deferred compensation arrangement using a VUL policy
A salary continuation plan is funded entirely by employer contributions. Pure deferred compensation uses a portion of the employee’s current compensation. Nothing indicates a need for life insurance (Answers D and E). A secular trust contribution would be currently taxable to John and limits his ability to use the funds until the end of the term of the agreement.
A large financial services corporation wants to hire Tom. Currently, Tom is a successful financial planner with a large practice. To entice Tom, the company is proposing a large nonqualified stock grant. The grant will be based on Tom’s ability to build the financial planning division over the next five years. When will the grant be taxable to Tom?
The grant will be taxable in five years when the substantial risk of forfeiture expires.
The grant will be taxable now.
The grant will be taxable when Tom can freely transfer the stock.
The grant of restrictive stock will not be taxable until Tom sells the stock.
I, III
The two major determinants of the taxation of non-qualified employer stock granted to an employee are the following:
the free transferability of the employee’s interest and
the presence of a “substantial risk of forfeiture”
