Retirement Planning & Employee Benefits | Lesson 3: Administration Of Qualified Plans Flashcards
How do QUALIFIED plans avoid the 10% penalty? • M • E • S • S
- A
- T
- D
- Q
- Medical expenses
- Equal periodic payments
- Seperation of
- Service
- Age
- Tax levies
- Death
- QDRO
How do IRAs avoid the 10% penalty? • H • I • D • E
- M
- E
- Home, first time
- Insurance, health
- Death & Disability
- Education, higher
• Medical expenses
• Equal periodic payments
(of course age)
Jose Sequential, age 72 in December of 2022, worked for several companies over his lifetime. He has worked for the following companies (A-E) and still has the following qualified plan account balances at those companies.
(See Image)
Jose is currently employed with Company E. What, if any, is his required minimum distribution for the current year from all plans? Life expectancy tables are 27.4 for age 72 and 26.5 for age 73.
a) $0
b) $40,146
c) $41,509
d) $47,445
Answer: B
Jose is required to take a minimum distribution for the years in which he is 72 from each qualified plan, except from his current employer ($1,100,000 ÷ 27.4 = $40,145.98). He can delay the payment until April 1 of next year, but the question asks for the distribution required for the current year.
Which of the following is true regarding QDROs?
a) The court determines how the retirement plan will satisfy the QDRO (i.e., split accounts, separate interest).
b) For a QDRO to be valid, the order must be filed on Form 2932-QDRO provided by ERISA.
c) All QDRO distributions are charged a 10% early withdrawal penalty.
d) A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient’s IA or qualified plan.
Answer: D
The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is needed. Form 2932-QDRO is not a real form. QDRO distributions may be subject to the 10% early withdrawal penalty if the distribution is not deposited into the recipient’s IA or qualified plan.
A distress termination of a qualified retirement plan occurs when:
- The PBGC initiates a termination because the plan could not pay benefits from the program.
- An employer is in financial difficulty and cannot 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: 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.
Nathan, 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?
a) $9,486.
b) $10,409.
c) $11,200.
d) $14,000.
Answer: B $56,000 schedule c net income -3.956 (56,000 x .9235 x .0765)* =$52,044 net self-employment income × 0.20 (0.25 ÷ 1.25) =$10,409 keogh profit sharing contribution amount
- The net income is below the wage base. The full formula would multiply by 92.35%, then 15.3%, then we would take half of that amount. By multiplying by 92.35%, then 7.65% you removed a step and still arrive at the same answer.
Connor will be 72 on November 1, 2022, and must receive a minimum distribution from his qualified plan. The account balance was $473,598 at the end of last year. The distribution period for a 72-year-old is 27.4, and for a 73-year-old, it is 26.5. If Connor takes a $15,000 distribution on April 1st, 2023, what is the minimum distribution tax penalty?
a) $0.
b) $1,147.
c) $1,573.
d) $2,295.
Answer: B
The required minimum distribution for Connor is $17,295.54 ($473,598 divided by 27.4) because he is 72 years old as of December 31 of the current year. Connor only took a distribution of $15,000. Therefore, the minimum distribution penalty (50%) would apply to the $2,295.54 balance. Thus, the minimum distribution penalty is $1, 147.77 (50% of the $2,295.54).
Ella, age 72, on September 2, 2022, had the following account balances in a qualified retirement plan.
12/31/2020 — $500,000
12/31/2021 — $478,000
12/31/2022 — $519,000
12/31/2023 — $600,000
Ella is retired and has never taken a distribution before 2022. She doesn’t need the money right now, so she will delay her first distribution. What is the total amount of the required minimum distribution in 2023? Life expectancy factors, according to the uniform life table, are 27.4 for a 72-year-old and 26.5 for a 73-year-old.
a) $36,945.
b) $37,030.
c) $40,364.
d) $44,564.
Answer: B
For 2022, look back to 2021: $478,000 ÷ 27.4 = $17,445.25
For 2023, look back to 2022: $519,000 ÷ 26.5 = $19,584.90
$17,445.25 † $19,584.90 = $37,030.15
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.
a) 1 and 3.
b) 1, 2, and 3.
c) 1,3, and 4.
d) 1,2,3, and 4.
Answer: C
401(k) plans do not require mandatory funding. The other three require mandatory funding.
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.
a) 1 and 2.
b) 2 and 3.
c) 3 and 4.
d) 1,3, and 4.
Answer: A
In defined benefit and cash balance pension plans, the employer bears the investment risk.
