Retirement Planning & Employee Benefits | Lesson 1: Intro To Qualified Plans Flashcards
Sawyer Outboards, a C Corporation, has four employees. The company sponsors a profit sharing plan and
contributed 10 percent of employee compensation for the current year to the plan. The company has the fol-
lowing employee information. There is no state income tax and federal withholding is 15% of gross pay.
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Which of the following statements is true?
a) Sawyer Outboards will not be able to take a deduction for the contribution to the profit sharing plan.
b) After payroll taxes and withholding, Davis will only receive $38,675 in take home salary.
c) Sawyer Outboards will pay total payroll taxes of $11,781.
d) Lou must include the $4,000 contribution to the profit sharing plan made on her behalf in her gross
income for the current year.
Answer: B
Davis will be responsible for payroll taxes on the $50,000 he receives in salary. A Profit Sharing plan is employee-only contributions. His payroll will be reduced by 7.65 percent of $50,000 plus $7,500 withholding. Thus he will receive $38,675. Sawyer Outboards may deduct the contribution to the profit-sharing plan. Sawyer Outboards will only pay payroll taxes of $10,710 (7.65% of $140,000, the total salary paid). Amounts contributed to the profit-sharing plan are not subject to payroll taxes. Contributions to profit sharing plans are not included in the employee’s gross income at the contribution date but will be subject to income tax at the date of distribution.
Which of the following statements concerning accrued benefits in qualified plans is (are) correct?
- In a defined benefit plan, the participant’s accrued benefit at any point is the participant’s current account balance. The accrual for the specific year is the amount contributed to the plan on the employee’s behalf for that year.
- In a defined contribution plan, the accrued benefit is the benefit earned to date, using current salary and years of service. The accrued benefit earned for the year is the additional benefit that has been earned based upon the current year’s salary and service.
a) 1 only.
b) 2 only.
c) Both 1 and 2.
d) Neither 1 nor 2.
Answer: D
Neither Statement 1 nor Statement 2 is correct because the plan names have been switched. Statement 1 describes a defined CONTRIBUTION plan, and Statement 2 describes a defined BENEFIT plan.
Marshall has a qualified plan with an account balance of $2,000,000. In which of the following circumstances would a third party be able to alienate the assets within Marshall’s qualified plan?
1. A QDRO in favor of a former spouse.
2. A federal tax levy.
3. Creditors in personal bankruptcy.
a) 3 only.
b) I and 3.
c) 1 and 2.
d) 1, 2, and 3
Answer: C
Because a qualified plan is designed to provide individuals with income at retirement, ERISA provides anti-alienation protection over all assets within a qualified plan. This anti-alienation protection prohibits the plan assets from being assigned, garnished, levied, or subject to bankruptcy proceedings. In contrast, the assets remain in the plan so that the individual has income at their retirement. Qualified plan assets are not protected from alienation due to a qualified domestic relations order, a federal tax levy, or from a judgment or settlement rendered upon an individual for a criminal act involving the otherwise protected qualified plan.
IT’s Stereos sponsors a qualified profit sharing plan. The plan requires employees to complete one year of service and be 21 years old before entering the plan. The plan has two entrance dates per year, January Ist and July Ist. Assuming that today is December 15, 20×2 and JT’s has the following employee information, which of the following statements is correct?
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a Two people have entered the plan.
b) The qualified plan must provide participants with 100 percent vesting upon entering the plan because of the eligibility requirements of the plan.
c Dan has not yet entered the plan.
d) Jessica entered the plan on July 1, 20×2.
Answer: C
Dan is not yet in the plan. He met the age and service requirement in August but must wait until the January entrance date to enter the plan. Only one person has entered the plan, Ben. Jessica has not met the age requirement; therefore, she is not eligible for the plan. Kylie has not met the service requirement. The plan has the standard vesting, which does not have a 100 percent vesting requirement. See the graphical depiction below.
Which people would be considered highly compensated employees for 2022?
1. Lucy, a one percent owner whose salary last year was $138,000.
2. Drew, a six percent owner whose salary was $48,000 last year.
3. Cameron, an officer, earned $80,000 last year and is the 29th highest-paid employee of 96.
4. Helen earned $135,000 last year and is in the top 20 percent of paid employees.
a) 1 and 4.
b) 1, 2, and 4.
c) 1,3, and 4.
d) 1,2, 3, and 4.
Answer: B
Lucy and Helen are HC because compensation is more significant than $135,000. Drew is HC because she owns more than five percent of the business. Cameron is not HC because she has no compensation over $135,000.
Dessert Factory has 100 nonexcludable employees, 10 of whom are highly compensated. Eight of the 10 highly paid and 63 of the 90 non-highly compensated employees are covered under Dessert’s qualified plan. The average accrued benefits for the highly compensated is four percent, and the average accrued benefit for the non-highly compensated is 1.5 percent. Which of the following statements is true regarding coverage?
1. The plan passes the ratio percentage test.
2. The plan passes the average benefits test.
a) 1 only.
b) 2 only.
c) Both 1 and 2.
d) Neither 1 nor 2.
Answer: A
The ratio percentage test compares the percentage of non-highly compensated to the portion of highly compensated covered. The ratio must be greater than or equal to 70 percent for the plan to pass the ratio percentage test. The calculation for Dessert’s qualified plan is as follows:
NHC = 63/90 = 70%
HC = 8/10 = 80%
70%/80% = 87.5% (pass)
Dessert’s plan passes the ratio percentage test requirement of 70 percent.
The average benefits test requires the average benefit of the non-highly compensated employees to be at least 70 percent of the average benefit of the highly paid. Dessert’s plan does not satisfy the average benefits test because the average benefit of the non-highly compensated compared to the average benefit of the highly compensated is less than 70 percent (1.5% ÷ 4% =37.5%) (fail).
Noah’s company sponsors a 401(k) profit-sharing plan with no employer match, but the company did make non-contributory employer contributions because the plan was top-heavy. Noah quit today after six years with the company and has come to you to determine how much of his retirement balance he can take with him. The plan uses the least generous graduated vesting schedule available. What is Noah’s vested account balance?
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a) $2,600.
b) $4,160.
c) $4,680.
d) $5,200.
Answer: D
Noah is entitled to 100 percent of his contributions and the earnings on those contributions. The employer contributions, which were not matching contributions, will follow the least generous graduated vesting schedule for a top-heavy plan. The least generous graduated vesting schedule is a 2-to-6-year graduated vesting schedule for a 401(k) plan. At six years, Noah would be 100 percent vested in the employer contributions and the earnings on the employer contributions. Thus, Noah’s vested account balance is $5,200.00.
Aidan, age 38, earns $190,000 per year. His employer, Bradshaw Consulting, sponsors a qualified profit-sharing 401(k) plan and allocates all plan forfeitures to remaining participants. If, in the current year, Bradshaw Consulting makes a 20 percent contribution to all employees and assigns $4,000 of forfeitures to Aidan’s profit-sharing plan account, what is the maximum Aidan can defer to the 401(k) plan in 2022? a) $0. b) $19,000. c) $20,500. d) $27,000.
Answer: B
The maximum annual addition to qualified plan accounts on behalf of Aidan is $61,000 for the plan year.
This maximum annual additions limit comprises employer contributions, plan forfeiture allocations, and employee deferrals. If Bradshaw contributes $38,000 (S190,000 × 20%) to the profit-sharing plan account and Aidan receives $4,000 of forfeitures, he may only defer $19,000 ($61,000 - $38,000 - $4,000) before reaching the $61,000 limit.
Of the following employees, who is (are) a key employee(s)?
1. Marsha, age 52, is a five percent owner who earns $45,000. She is not an officer.
2. Jan, age 45, a six percent owner who earns $92,000. She is also an officer.
3. Cindy, age 26, is a one percent owner who earns $205,000. She is also an officer.
a) Marsha.
b) Cindy and Jan.
c) Marsha and Jan.
d) Jan only.
Answer: B
Both Cindy and Jan are essential employees. Jan is more significant than a five percent owner, and Cindy is an officer earning more than $200,000 (2022). Cindy is not a greater than 1 percent owner, so that rule does not apply to her. Marsha did not qualify as a critical employee. She needed more significant than a 5% ownership.
Snikerdy Corporation owns:
- 95% of the stock of Corporation A, 80% of the stock of Corporation B, and
75% of the stock of Corporation C.
In addition, Corporation B owns 90% of Corporation D. Unrelated persons own all unaccounted-for shares.
Snikerdy is the common parent of a parent-subsidiary group consisting of corporations:
a) Aonly.
b) A and B only.
c) A, B, and D only.
d) A, B, C, and D.
Answer: C
In this example, Snikerdy is the common parent of a parent-subsidiary group consisting of Corporations A, B, and D. This is because it owns 80% or more of A and B directly. Since B owns 80% of D, it will also be considered in the controlled group.
