Retirement Planning & Employee Benefits Review Questions Flashcards

Question

Which of the following statements is/are correct regarding TSAs and 457 deferred compensation plans? 1. Both plans require contracts between an employer and an employee. 2. Participation in either a TSA or a 457 plan will cause an individual to be considered an “active participant” for purposes of phasing out the deductibility of traditional IRA contributions. 3. Both plans allow 10-year forward averaging tax treatment for lump-sum distributions. 4. Both plans must meet minimum distribution requirements that apply to qualified plans. a) 1 only. b) 1 and 4. c) 2, 3, and 4. d) 1, 2, and 4

Answer 1

b) 1 and 4. - Statements 1 and 4 are correct. Statement 2 is incorrect because a 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an “active participant.” Statement 3 is incorrect because 10-year forward averaging is not permitted from either plan.

Answer 2

c) 1 and 2. - TSA (TDA) funds can only invest in annuity contracts (Statement 1) and mutual funds (Statement 2). No self-directed brokerage accounts are permitted.

Answer 3

c) $19,000. | - The final 3-year catch-up is $19,000 for 2019.

Answer 4

b) 2 and 4. | - Rabbi trusts do not provide security against employer bankruptcy or a current tax deduction for the employer.

Answer 5

c) 1, 2, and 4. - Secular trusts are similar to rabbi trusts except that participants do not have a substantial risk of forfeiture and thus, do not provide the employee with tax deferral. Secular trusts provide the employer with a current income tax deduction for contributions. Secular trusts protect the participant from employer unwillingness to pay because they are funded, and they protect from bankruptcy because there is no risk of forfeiture.

Answer 6

a) Upon exercise Roger will have no regular income for tax purposes. - Roger does not have income at the date of exercise. Roger’s adjusted basis will be $18. The AMT will be the difference between the fair market value and the exercise price ($39 - $18 = $21).

Answer 7

c) 1 and 2. - The employee does not actually receive stock in a phantom plan. Instead, the employee receives credits for the stock and the benefits are later paid in cash.

Answer 8

c) 1 and 3. | - Statement 2 is incorrect because only the gain in excess of the W-2 income will be capital gain.

Answer 9

b) Devon has a long-term capital loss of $2,000. - In the year of sale, Devon will have a long-term capital loss of $2,000 ($14,000 - $12,000) because his right to the stock vested. Losses are permitted when 83(b) is elected after the right to the stock has vested.

Answer 10

b) Marni will have W-2 income equal to $12,000. - At the exercise of a SAR, the employee receives the difference between the fair market value and the exercise price as W-2 income. Thus, Marni has W-2 income equal to $12,000 [($34 - $22) x 1,000].

Answer 11

c) All discounts taken by officers (30%) are includable in their gross income because the plan is discriminatory. - The plan is discriminatory to non-highly compensated employees; therefore, all discounts actually taken by officers are includable in the officers’ income, not just the excess of what is available to the nonofficers. Any discount taken by a nonofficer would be excluded from the employee’s gross income.

Answer 12

a) $0. | - Angela is over 13 years old and, therefore, does not qualify for the dependent care assistance program.

Answer 13

I and V only. - In Statement "II," be careful of "always"! In Statement "III," if held longer than one year, they receive capital gains treatment. In Statement "IV," under most circumstances, the bargain element is deductible. There are exceptions when certain qualifications have not been met for deductibility, such as time employed, time to exercise in excess of rules, etc.

Answer 14

The company wants to provide the NQSOs to assist the individual in purchasing the ISOs. - When both ISOs and NQSOs are available in the same year the individual can exercise and sell the unfavored NQSOs to generate enough cash to purchase and hold the favored ISOs. It would also be valuable to have both if they issued over $100,000 in options exercisable in the same year because there is a $100,000 limit on ISOs.

Answer 15

$0 - In the case of NQS Options, the option is not taxed at the grant if the exercise price is equal to or greater than the fair market value of the stock.

Answer 16

The adoption of a cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand than a traditional defined benefit plan, and as a plan that has more predictable costs associated with its funding. - Cash balance plans are defined benefit plans due to the guaranteed investment returns and benefit formula, not simply a contribution amount. While cash balance plans provide guaranteed rates of return, they are not 100% guaranteed by the PBGC (PBGC has coverage limits). Cash balance plans use 3-year cliff vesting only. Choice d is correct.

Answer 17

26. 25% - The maximum disparity using the excess method is the lesser of the formula amount (40 years × 1.5%) or 26.25% (35 years × .75%). 35 years and .75% are the maximums that can be used under the excess method. Note: This level of knowledge is probably not tested on a regular basis, however, because it is part of the board’s topic list this question was added to ensure that you could answer it if it came up on the test.

Answer 18

$9,333 - Wade is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 6% (4% + 2%). Wade is also limited by the 415(c) limit of $56,000. Since the company contributes $42,000 (20% of $190,000 + $4,000 of forfeiture allocations), he only has $14,000 to split between the deferral and the match. Thus, he contributes $9,333* and the match is $4,667, which when added to the $42,000 totals $56,000. 6% of his salary of $190,000 is $11,400. However, he cannot defer this amount due to the 415(c) limit.

Answer 19

$1,500 - For a profit sharing plan the contribution is limited to the lesser of $56,000 (2019) or covered compensation. Since the plan is top heavy, the plan must provide a benefit to all non-key employees of at least 3%, therefore; 50,000 × 3% = $1,500.

Answer 20

403(b) plan. - A 403(b) plan is a tax-advantaged plan (tax qualified), not a qualified retirement plan. All of the others are qualified plans subject to ERISA rules.

Answer 21

Compensation exceeding $280,000. - Option "A" - $56,000 is the maximum contribution. Option "C" - Defined contribution plans do not have defined benefits. Option "D" - Bonuses are includible as compensation if the plan so provides.

Answer 22

The safe harbor 401(k) plan has more liberal (better for employees) vesting for employer matching contributions as compared to 401(k) plans with a qualified automatic contribution arrangement. - Safe harbor plans require 100% vesting, while 401(k) plans with QACAs require two year 100% vesting. The matching contributions are different for the plans. Employees are not required to participate in either plan. Both plans eliminate the need for ADP testing, which means that they eliminate the need for qualified matching contributions and corrective distributions.

Answer 23

It is indeterminable from the information given. - Read the question carefully. The question asks “what is the maximum contribution that can be made.” Remember that for a defined pension plan the contribution must be whatever the actuary determines needs to be made to the plan.

Answer 24

I only. - Statement "II" is incorrect because there is no 25% of covered payroll limitation in a DB plan. Statement "III" is incorrect because there is no minimum funding standard for profit sharing plans.

Answer 25

$7,000 - The maximum annual addition to qualified plan accounts is $56,000. If Reviews Are Us contributes $35,000 ($175,000 × 20%) to the profit sharing plan and Lisa receives $5,000 of forfeitures, she may only defer $16,000 ($56,000 - $35,000 - $5,000) before reaching the $56,000 limit (2019). However, she will also be limited by the ADP of the non-highly employees because she is highly compensated (compensation greater than $125,000). If the non-highly employees are deferring 2% then the highly compensated employees can defer 4% (2×2=4). Therefore, she is limited to a deferral of $7,000 ($175,000 × 4%).

Answer 26

Traditional defined benefit plans define an employee's benefit as a series of monthly payments for life to begin at retirement, but the cash balance plan defines the benefit in terms of a stated account balance. - Answer "A" is incorrect because Cash Benefit Plans are required to offer payment of an employee's benefit in the form of a series of payments for life. Answer "C" is incorrect, because neither plan shows actual gains or losses allocable to the account. Answer "D" is incorrect and stated exactly opposite of how it is in fact.

Answer 27

$10,000 - The maximum annual addition to qualified plan accounts is $56,000. If Reviews Are Us contributes $36,000 ($200,000 × 18%) to the profit sharing plan and Lisa receives $7,000 of forfeitures, she may only defer $13,000 ($56,000 - $36,000 - $7,000) before reaching the $56,000 limit. However, she will also be limited by the ADP of the non-highly employees because she is highly compensated (compensation greater than $125,000). If the non-highly employees are deferring 1% then the highly compensated employees can defer 2% (1×2=2). Therefore, she is limited to a deferral of $4,000 (200,000 x 2%). Since she is 50 or older she can also defer the catch-up amount of $6,000 which is not subject to the ADP limitation. Therefore, her maximum deferral is $10,000.

Answer 28

I and II only. - His base rate is 6% and the social security maximum disparity is 5.7% for 11.7% as the top of his range. Statement "III" is incorrect because integration does not affect voluntary deferrals by employees. Statement "IV" is incorrect because, done properly, integration is NOT considered discriminatory.

Answer 29

After-tax employee contributions cannot exceed the lesser of 100% of compensation or $56,000. - This correctly describes the Section 415(c) limits on maximum contributions permitted by law. Participants do not have to be given the right to direct their investments. Employees make after-tax contributions to a thrift; employers don't make contributions. Answer "C" is incorrect because only 401(k) plans have statutory hardship withdrawal requirements, not thrift/savings plans.

Answer 30

IV only. - 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.

Answer 31

I and II. | - Statement "I" lists advantages of choosing stock ownership plans and ESOPs. Statement "II" lists the disadvantages.

Answer 32

I, II and III only - As a result of the PPA 2006, a profit sharing plan must vest at least as rapidly as a 3-year cliff or 2 to 6 year graduated schedule without regard to the plan’s top-heavy status. The profit sharing plan can follow any vesting schedule that provides a more generous vesting schedule.

Answer 33

II and IV only. - Defined contribution pension plans must have a definite allocation formula based upon salary and/or age or any other qualifying factor. Contributions may be made without regard to company profits and, because it is a pension plan, are fixed by the funding formula and must be made annually.

Answer 34

Cannot be determined by the information given. - Read the question carefully. The question asks “what is the maximum retirement benefit that can be paid to him.” Remember that for a profit sharing plan the contribution to an employer is limited to the lesser of $56,000 (2019) or covered compensation however, the actual retirement benefit will be whatever is in the account balance at the time of retirement.

Answer 35

A company which adopts a profit-sharing plan is required to make annual contributions to the plan. - The employer is not required to make any particular percentage of profits. Though contributions must be substantial and recurring, the plan concerns itself more with allocation requirements rather than with contributions. As long as contributions are recurring, they need not be made in a year where the employer has not made a profit.

Answer 36

$181,250 - Since the plan is a defined contribution plan the maximum deductible contribution is 25% of the total covered compensation. The max covered compensation of all employees is $725,000. Thus the maximum deductible limit is $181,250 ($725,000 × 25%). Remember to limit employee 1 to the $280,000 (2019) covered compensation limit. The actuarial table amount is irrelevant because this a defined contribution plan.

Answer 37

Employees that join the plan must be provided with a summary plan description. - Answer c is correct as employees must be given a summary plan description, which provides basic information about the operation of the plan. Answer a is not correct as some 401(k) plans may have the asset managed by an investment manager. However, most 401(k) plans will provide for employee self directing of their 401(k) balances. Answer d is not correct as there is no requirement for an annual audit of a 401(k) plan.

Answer 38

The amount of annual contributions needed to fund single life annuities for the participants at retirement. - Statement "A" is incorrect because it deals with a lump sum, NOT annual contributions. Statement "C" is incorrect because DB plans deal with present value calculations, not future values. Statement "D" is incorrect because DB plans deal with life annuities, NOT period certain annuities.

Answer 39

$56,000 - The section 415 limit is applied to all annual additions. The lesser of 100% of income or $56,000 (2019) is the restriction. This amount includes all company contributions and salary deferral maximums.

Answer 40

$52,600 - For the purposes of this calculation, the compensation exceeding $280,000 is not recognized. The employer is contributing 12% of $280,000 (or $33,600) for the money purchase plan and the employee may contribute up to $19,000 in 2019 to the 401(k) plan. This totals $52,600.

Answer 41

Money purchase plan. - Defined benefit plan and cash balance plan (Answer "D") contributions are determined by age, as well as salary. Answer "A" doesn't require annual contributions. Answer "C" has employer contributions determined by the amount of employee deferrals.

Answer 42

I and II only. - Both plans are pension plans, therefore Statements "I" and "II" apply. Statement "III" applies only to the target benefit plan (because it is a DC plan) NOT the DB plan. Statement "IV" applies only to the DB plan NOT the target benefit plan.

Answer 43

Flat-percentage formula. - The unit credit formula rewards many years of service. The flat percentage formula will work well, as long as the Doctor has ten years of service. The maximum benefits under IRC 415(b) are reduced for participation less than 10 years. The flat amount would provide higher benefits for Nurse Nancy compared to Dr. DJ on comparative basis. A new comparability plan is a profit sharing plan.

Answer 44

$27,400 An individual can defer up to $19,000 (2019) plus an additional $6,000 catch up for all of their 401(k) and 403(b) plans combined. Since he is 50 or older he can contribute the 19,000 + 6,000 = $25,000. Since he already contributed $5,000 into his employer plan he can still defer $20,000 ($25,000 - $5,000) into the solo plan. The employer contributions in this question are in addition to the employee deferral limit. Employer contribution into the solo plan: ``` self-employment income $40,000 less 1/2 SE tax $3,000 Net $37,000 X 20% employer contribution $7,400 Total contribution to the solo plan = $20,000 + $7,400 ```

Answer 45

Benefit payments under an employer-paid plan are tax exempt to the employee. - Premiums under an employer-paid plan are deductible to the employer when paid to the insurance company. The employee must claim the benefits from the employer-paid policy as taxable income. If employees pay for the premium on an after-tax basis, benefits are tax exempt. Premiums paid by the employee are deductible only though a Section 125 cafeteria plan, then benefits are taxable. Definitions of disability are much more liberal under short-term disability than under long-term disability.

Answer 46

I, II, III and IV. | - All of these expenses are eligible under health savings plans.

Answer 47

III and IV only. - Statement "I" applies to group term life. Statement "II" is false. Usually the employee is required to pay part or all of the premium cost of group universal life insurance. Statement "V" applies to a group whole life program.

Answer 48

Excludable from the taxable income of all covered employees. | - Dues and licenses are excluded from taxable income if directly related to the employee's job.

Answer 49

II only. - Statement "I" is incorrect because only 25% of the total benefits can accrue to key employees. Statement "III" is incorrect because deferrals are allowed only through a 401(k) plan. Statement "IV" is incorrect because mid-year changes in reductions are allowed only for qualified changes in status.

Answer 50

The balance in an employee's FSA can be carried forward or exchanged for cash if unused for eligible expenses incurred during the plan year. - Cafeteria plans have a "use-it-or-lose-it" provision which requires any funds not used to pay qualified claims during the plan year be forfeited back to the plan sponsor. Forfeited funds cannot be rebated back to the individual employee who forfeited the funds. Answer "B" is correct because a cafeteria plan must have only two benefits, one taxable (salary) and one pre-tax (FSA). Answers "C" and "D" are also true.

Answer 51

After 36 months, the maximum period for continuation of coverage terminates. - Employers must provide COBRA if they have 20 or more employees. A change in benefit status will trigger COBRA eligibility. COBRA non-compliance carries a penalty of $100 per day per participant.

Answer 52

Her employer is permitted to deduct the premiums paid on the entire amount of coverage. - The employer is permitted to deduct 100% of the premiums, but Jane is subject to taxation on the amount in excess of $50,000.

Answer 53

II and III only. - Statement "I" is incorrect. The benefit would actually be $32,500 ($65,000 × 50%). Statement "IV" is incorrect because the death benefits are generally free from income tax. (For exceptions review the transfer for value rules.) Statements "II" and "III" are correct. The survivor income would be allocated between cost basis (cumulative premiums paid on an after-tax basis divided by the projected number of payments).

Answer 54

I is true, but II is false. - The de minimis exemption is not subject to a non-discrimination requirement because the amounts are too small to make it worthwhile to account for the items.

Answer 55

If stockholder/employees of a closely held C corporation are covered as employees, the premiums are fully deductible. - 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.

Answer 56

III, IV and V only. - Statement "I" is incorrect because the employer can always deduct the premiums. Statement "II" - The highly compensated employees may be required to pay taxes on all or part of the reimbursements.

Answer 57

I, II and III only. - Cafeteria Plans (Section 125) allow salary reductions which are taken from an employee's salary before Federal and State withholding tax as well as Social Security and Medicare taxes (FICA). At least one taxable and non-taxable benefit must be offered under a plan. Medical FSAs allow reimbursement for eligible medical expenses for the employee and any dependents. A qualifying change in status is required to make a mid-year change in elections.

Answer 58

I, II and III only. - All three statements are true. If you have a pre-existing condition that can be excluded from your plan coverage, then there is a limit to the pre-existing condition exclusion period that can be applied. HIPAA limits the pre-existing condition exclusion period for most people to 12 months (18 months if you enroll late), although some plans may have a shorter time period or none at all. In addition, some people with a history of prior health coverage will be able to reduce the exclusion period even further using "creditable coverage." People with a history of prior health coverage will be able to reduce the exclusion period even further using "creditable coverage."

Answer 59

I and III only. - Statement "II" is incorrect because the employer is unable to deduct any contributions to a non-qualified plan until the employee actually takes constructive receipt. In the traditional split-dollar arrangement, the employer has an interest in the cash values of the split-dollar policy equal to the amount of premiums paid, and therefore, there is never a deduction for premiums paid. Statement "III" - Because no tax deductions are taken for any premiums paid on the policy, the death benefits are tax-free. Statement "IV" - The employee is required to pay the Table 1 cost each year, without regard to premiums paid in previous years.

Answer 60

A funded deferred compensation plan. - If the employee has a non-forfeitable beneficial interest in a deferred compensation account, the IRS considers the plan "funded" and subject to current income tax due because the employee has constructive receipt of the assets.

Answer 61

I only. - Statement "II" is incorrect because payroll taxes are due on deferred compensation at the time the compensation is earned and deferred, not at the date of distribution. Statement "I" is a correct statement.

Answer 62

I only. - Payments under a "golden parachute" are considered ordinary income. Additionally, any amounts under the Social Security cap will be subject to the OASDI tax. All amounts will be subject to Medicare tax. "Golden parachute" payments are also subject to an additional 20% excise tax. Because these are non-qualified plans, no lump sum treatment or IRA rollover options apply.

Answer 63

Under both the funded plan and an informally funded plan, the IRS may likely rule that the employee is in constructive receipt of income unless there is a substantial risk of loss or forfeiture. - Employer contributions into a non-qualified plan are not tax deductible to the employer until the employee has constructive receipt and is taxed on the income. Most non-qualified plans are designed to avoid constructive receipt by the employee until retirement. In an informally funded plan (Rabbi trust), the employee has the segregated assets as security of the agreement, assuming the employer remains solvent and the assets are not taken by the employer's creditors. This risk of having creditors take the assets inside a "Rabbi trust" is what constitutes a substantial risk of loss or forfeiture and keeps the employee from being considered in "constructive receipt" of the formally funded assets.

Answer 64

Timing of employee taxability. - The timing of employee taxation on properly executed non-qualified and qualified plans are the same. Non-qualified plans can be split dollar plans, executive bonus plans, etc.

Answer 65

Funded non-qualified retirement plans do not incur constructive receipt if the agreement was executed prior to the performance of services. - Generally, funded plans result in constructive receipt because the employee has control of the assets and there is no substantial risk of forfeiture. Keep in mind, the question is looking for the false answer.

Answer 66

I and III only. - Statement "II" is incorrect because any funded plan is taxable unless a Rabbi trust is utilized. Statement "IV" in incorrect because the NPV of the guaranteed future income will be included in the gross estate of the deceased participant.

Answer 67

SIMPLE IRA. - Answers "B" and "D" do not permit employee elective deferrals. The profit sharing plan "A" with 401(k) provisions do not require an employer match.The SIMPLE plan has a mandatory match.

Answer 68

SIMPLE IRA. - The match for a profit sharing plan with 401(k) provisions can vary every year and there is no required percentage. However, a SIMPLE can vary the match in only 2 of 5 years.

Answer 69

401(k) plan. - A 401(k) plan is the only option which allows voluntary employee elective deferral contributions, as desired by the two assistants.

Answer 70

Establish a 401(k) plan. - She will be able to defer $56,000 plus the catch up of $6,000 to the 401(k) plan, where she can only contribute $56,000 to the target benefit plan and the SEP. She cannot set up a deferred compensation plan and defer tax.

Answer 71

Profit sharing plan. - Answers "B," "C" and "D" all require minimum contribution levels. Answer "A" - Profit sharing plan only requires that contributions be "substantial and recurring." More specifically, an age-based profit sharing plan would be correct.

Answer 72

Defined Benefit Pension Plan - He should establish the Defined Benefit Pension Plan. Only defined benefit plans can use the offset method. The Money Purchase Pension plan is a Defined Contribution Plan and must use the excess method. Simple’s and ESOPs cannot be integrated.

Answer 73

SEP - Neither a SIMPLE nor a 401(k) plan will work because he is already deferring $18,200 (6.5% (4.5% + 2%) times $280,000) to his 401(k) plan. Therefore, the choices are a 412(e) plan, which is a defined benefit plan funded with insurance products or a SEP, which is extremely easy to set up and one that he can contribute around $11,000 to annually.

Answer 74

George can have a maximum of $13,900 placed into his account this year. - George can put in 100% of salary up to $13,000 (2019). XZY will match dollar for dollar up to 3% of salary ($30,000 × .03 = $900). So a total of $13,900 will be placed into the account. All other statements are false.

Answer 75

$1,900.00 - SIMPLE IRAs require a 25% penalty for early withdraws in the first two years if the participant does not meet any of the early withdrawal exceptions. He does not meet any of the exceptions and the distribution is within the first two years. The breakdown of employee deferrals, employer contributions and earnings is irrelevant. Therefore, his tax and penalty consequence is $1,900 = $4,750 × 40%. The 40% is represented by 15% tax plus 25% penalty.

Answer 76

``` $3,471,896 Salary = 111,000 (150,000* 90%) - 24,000 = 111,000 N = 11 years to retirement I = 4% inflation PV = 111,000 in salary FV = 170,879.40 ``` ``` BEG PMT = 170,879.40 N = 37 104 - 67 I = 3.8462 Inflation adjusted rate of return = [(1.08/1.04) - 1] × 100 Solve for PV Answer = 3,471,896.37 ``` Answer "A" is the wrong payment (150,000 -24,000* 90%) = 113,400. Answer "B" is ordinary annuity (end mode). Answer "D" uses 4% for interest (beg mode).

Answer 77

$12,000 Step 1: Determine amount to be funded $100,000 income today 75% WRR $75,000 needs ($20,000*) less social security & pension. $55,000 amount to be funded Step 2: inflate funds to retirement age PV ($55,000) N 20 i 3.00% Pmt 0 FV $99,336.12 Step 3: PV of retirement annuity Pmt $99,336.12 N 30 i 3.8835% FV - PV ($1,809,946.67) Step 4: Annual funding amount FV $1,809,946.67 N 20 i 7.00% PV ($340,596.44) Pmt ($12,000)

Answer 78

15. 30% - This is an important point to stress as many clients are self-employed and pay both employer and employee portions of the tax.

Answer 79

Medical expenses. - Each of these expenses may increase or decrease during an individual’s retirement, but the most likely expense to increase during retirement is an individual’s medical expenses.

Answer 80

She will have $3,000 of income. - Non qualified distributions from a Roth account are subject to tax on a prorata basis. Her total account is the 15,000 invested and the 5,000 of income for a balance of $20,000. Since 75% (15,000/20,000) of the value in the account consists of basis and the remaining 25% consists of earnings (5,000/20,000), that same ratio of basis to income will apply to the $12,000 distribution. It is not a qualified distribution because she has not held the account for at least five years.

Answer 81

He will include $25,000 in income but will not be subject to the 10% early withdrawal penalty. - Roth distributions are tax free if they are made after 5 years and because of 1)Death, 2)Disability, 3) 59.5 years of age, or 4)First time home purchase. Although he met the 5 year rule, he did not meet one of the four qualifying reasons. His distribution does not received tax free treatment. The treatment for a non-qualifying distribution allows the distributions to be made from contributions first, then conversions, then earnings. In this case the distinction in distribution order is irrelevant since he withdrew the entire account balance. However, his contribution will be tax free, leaving only the $25,000 in earnings as taxable income. The 10% penalty does not apply to this distribution since he qualifies for the higher education exception to the penalty.

Answer 82

457 - IRC Section 457 plans are nonqualified deferred compensation plan, and therefore do not make the employee an "active" participant in a qualified retirement plan. The 401(k) is a qualified plan and the 403(b) and SEP are ‘wannabe’ be plans that would make the employee an "active" participant.

Answer 83

Bud receives a tax deduction for $6,000 and a 6% penalty for over-contribution on the other $6,000. - This question indicates an IRA in only Bud's name. Maximum contribution is $6,000 plus any applicable catch-up provisions. Amounts contributed over that level are considered excess contributions and subject to a 6% penalty until taken out. The 6% penalty could have been avoided if the excess contribution was withdrawn prior to the original filing deadline without extension.

Answer 84

Penalties will always be due on the converted amounts withdrawn for purposes other than the exceptions to 72(t). - (A) Beginning in 2010 there is no AGI phase-out associated with conversions to Roth IRAs so she can rollover as little or as much as she wants. (B) The converted amount will be included in taxable income in the year of conversion. (C) Distributions of any of the converted amounts will always be tax-free; however penalties may be due under certain circumstances. (D) Penalties on converted amounts are applicable within the first 5 years from conversion only.

Answer 85

Taxation on $20,000 from the 401(k) Roth and a penalty on $20,000 from the Roth IRA. - Neither distribution is qualified. Non-qualified distributions from a Roth account consist of basis and earnings on a pro rata basis. Therefore, 60% of the Roth account distribution is return of basis. The remaining 40% or $20,000 is subject to income tax. Because the distribution is from a qualified plan and she has separated after the attainment of age 55, there is no penalty. Non-qualified distributions from a Roth IRA come out in the order of contributions, conversions and then earnings. The first $20,000 is not subject to income tax or penalty because it is from contributions. The second $20,000 is from conversions, which have been subject to taxation. However, because she rolled them over within the last five years, she will have a penalty and there is no exception.

Answer 86

$25,000 of the distribution will be subject to income tax and $85,000 of the distribution will be subject to the 10% early withdrawal penalty. - Roth distributions are tax free if they are made after 5 years and because of 1)Death, 2)Disability, 3) 59.5 years of age, and 4)First time home purchase. He does not meet the five year holding period or one of the exceptions. His distribution does not received tax free treatment. - The treatment for a non-qualifying distribution allows the distributions to be made from basis first, then conversions, then earnings. His basis will be tax free. - The conversion is also tax free since we paid tax at the time of the conversion on those earnings. - The remaining earnings since establishment of the Roth are $25,000 (100,000 - $15,000 in basis - $60,000 in conversions) and will be taxed. - The 10% penalty does apply to this distribution since he does not qualify for any of the exceptions to the penalty. The contributions escapes penalty but the conversions and earnings of $85,000 are subject to the 10% early withdrawal penalty. - Remember that in order for the conversions to escape the 10% early withdrawal penalty the distribution must occur after a 5 year holding period beginning Jan 1 in the year of conversion or meet one of the 10% early withdrawal exceptions.

Answer 87

I and III only. - In 2019, contributions are limited to the lesser of 100% of earned income or $6,000 or $7,000 if age 50 or over. Deductions may be taken even if an active participant, so being a non-participant is not a requirement. The IRA holder must be under age 70 1/2 to make contributions into an IRA. Contributions must be made prior to April 15 (or the mandated filing date for the year.) No extension to make the contribution is allowed after that date, even though an extension to file the return is granted.

Answer 88

$2,500 - Jill is limited to a maximum IRA contribution of $6,000 (2019) or 100% of earned income ($3,500) since their joint AGI is below the Roth IRA phase-out threshold. She has already contributed $1,000 to traditional IRA, so maximum available for the Roth is $2,500 ($3,500 earned less $1,000).

Answer 89

Both $5,000 and $3,077 - On Form 1040 Kyle will report the total distribution of $5,000 and the taxable amount of the distribution of $3,077 calculated as $32,000 ÷ $52,000 × $5,000. - account balance = $52,000 - non-deductible contributions = $20,000 (not taxed at distribution) - $32,000 would be taxable. - Because there is both taxable and non-taxable money, each distribution is a pro-rata distribution of both. - 32k/52k = .6154 - 5,000 × 61.54% = 3,076.92

Answer 90

She can’t contribute to either a Traditional or Roth IRA. - There is no mention of earned income and "her health has prevented her from working." Therefore, she can’t contribute to either one. You cannot assume earned income, and in fact, this question indicates that she hasn’t worked at all for several years. If she did have earned income then she would be over the age limit to contribute to a Traditional IRA (70.5 years) but there is no age limit for Roth IRAs.

Answer 91

$7,000 - Taxpayers who work and have earned income may contribute the lesser of their earned income or $6,000 to an IRA (2019). If the taxpayer is currently covered under an employer's qualified plan, they may still contribute to the plan but (depending on their earnings from the employer with whom they are covered) may render the contributions non-deductible. Since the taxpayer earned in excess of $6,000, he may contribute the full $6,000, and age 50 or over, he may add an additional $1,000, as a catch up for a total of $7,000. His total income is only $34,000, which is much lower than the phaseout limits. Therefore, he can also deduct the $7,000 contribution.

Answer 92

She can contribute $6,000 to a Traditional IRA and deduct $0. - Participating in a SIMPLE plan is considered being an “Active Participant.” She can contribute $6,000 (2019) to a Traditional IRA but cannot deduct any since she is above the AGI limitation for a single active participant ($64,000 - $74,000) (2019). She is unable to contribute to a Roth IRA because she is above the AGI limitation of $122,000 - $137,000 (2019). Because she is not 50 or older she is not allowed to make the $1,000 (2019) catch up contribution.

Answer 93

I and III only. - Statement "II" is incorrect because funds distributed from an IRA are always treated as ordinary income, regardless of source and 5 year forward averaging is no longer available for any distribution. Statement "IV" is incorrect because all distributions from an IRA not meeting the statutory exemptions are subject to the premature distribution penalty, regardless of source.

Answer 94

$6,000 - Since they are not active participants there is no AGI limitation. However, Sean is above 70.5 and therefore is unable to make a contribution to a Traditional IRA. Jaclyn is able to make a $6,000 (2019) deductible contribution. She does not qualify for the catch up because she is not 50 or older.

Answer 95

$8,400 - Daisy is an active participant. She cannot opt out of a defined benefit plan. Reduction = 6,000 × [(115,000-103,000) ÷ 20,000] Reduction = 3,600 $6,000 - $3,600 = $2,400 deductible contribution. Donald is not active in the current year so he is eligible for a spousal IRA of $6,000. $6,000 + $2,400= $8,400 Formula: Contribution × [(your AGI – the bottom of the phase out range) divided by the amount of the range (123,000-103,000 is where the 20k comes from)]

Answer 96

He will include $15,000 in income but will not be subject to the 10% early withdrawal penalty. - Roth distributions are tax free if they are made after 5 years and because of 1) Death, 2) Disability, 3) 59.5 years of age, and 4) First time home purchase. He does meet a qualifying reason because he is over 59.5 in 2019 if he was 58 in 2017. However, he did not meet the 5 year holding period. He only has about 4.5 years. His distribution does not received tax free treatment. The treatment for a non-qualifying distribution allows the distributions to be made from basis first, then conversions, then earnings. His basis will be tax free, leaving only the earnings as taxable income. Since he did not take the entire account balance he will only be subject to tax on the $15,000 of earning withdrawn. The 10% penalty does not apply to this distribution since he qualifies for the 59.5 exception to the penalty.

Answer 97

Distributions may be made over your life expectancy (fixed) beginning by December 31st of the year following death. - Note that for a non-spouse beneficiary, the Single Life Table is entered once in the year following death based on the age of the beneficiary and then that number declines by a factor of 1 each year to determine the divisor for the following distributions. The non-spouse beneficiary could make a direct transfer to an “inherited IRA”. Answer "A" is incorrect because the distributions to the beneficiary are based on the beneficiary’s life expectancy beginning in the year following death. Do point out that the distribution in the year of death is still based on the owner’s life. Answer "B" is incorrect because the five-year rule is NOT the only choice. Answer "C" is incorrect because a non-spouse beneficiary would not receive distributions based on the owner’s life expectancy nor would a post-death non-spouse distribution be recalculated.

Answer 98

Directly from the 401(k) plan | - The 401(k) plan is penalty-free and will not require continued payments if the client goes back to work.

Answer 99

$500 - The minimum distribution is calculated by taking the account value at the beginning of the year ($53,000 in this case) and dividing by the applicable divisor (life expectancy 26.5 years in this example). The resulting figure is the minimum distribution ($2,000). Because the amount distributed was $1,000 less than required under minimum distribution rules, a 50% penalty applies. 50% of the undistributed minimum distribution is $500.

Answer 100

II only. - Statement "I" is incorrect because he is not old enough for ten-year averaging. Statement "II" is correct because the taxable portion of any lump sum distribution may be rolled over into an IRA. Statement "III" is incorrect because he is not old enough to qualify for pre-74 capital gain treatment nor does he even have any actual pre-74 capital gain in the plan as he has only been in the plan for the last 20 years. Statement "IV" is incorrect because five-year averaging was repealed in 1999.

Answer 101

Edward, age 40, takes a $40,000 distribution from his profit-sharing plan to pay for his son’s college tuition. - There is no provision for a distribution without penalty under this circumstance. Edward is only 40 and education withdrawals are allowed in IRAs, not from qualified plans.

Answer 102

III only - Both the plan participant and the nonparticipant spouse must sign the waiver. Statement "III" is correct. Statement "I" is unfounded.

Answer 103

I and II only. - Distributions under a QDRO are not taxable to the taxpayer actually making the disbursement from his/her account. IRC 72(t) allows Substantially Equal Payment Plans (SEPP) to escape the 10% penalty as long as the payments continue for the longer of 5 years or until age 59 1/2. No in-service withdrawals are exempted from the 10% early withdrawal penalty.

Answer 104

Unless the employer has actual knowledge to the contrary, the employer may rely on the written representation of the employee to satisfy the need of heavy financial need. - Answer a is not correct as there must not be another source of funds. Answer b is not correct as they are generally subject to a penalty unless there is an exception under IRC 72(t). Answer c is not correct as a hardship distribution can only be taken from employee deferrals.

Answer 105

David will have ordinary income of $500,000 in year 1 and capital gain of $100,000 in year 2. - NUA treatment is not applicable because David did not take a lump sum distribution of stock from the plan. Therefore, the distribution is treated as ordinary income.

Answer 106

I and IV only. - Limit on loans is the lesser of 50% of the account value or $50,000 for a period of five years, unless for a primary residence.

Answer 107

Taxable as soon as it is exercised. Immediately taxable. - Vested options are taxable based on the value of the option to the extent the Fair Market Value exceeds the option price.

Answer 108

II, III and IV only. - Only Statements "I" and "V" are true. The rest are all false. In Statement "II", be careful of "always"! In Statement "III," if held longer than one year, they receive capital gains treatment. In Statement "IV," the bargain element will be deductible if the sale is a disqualifying disposition.

Answer 109

If she sells the stock today for $3 per share she would have an ordinary loss of $50,000. - When she met the vesting period she would have recognized W-2 income of $56,000 (2,000 × $28). If she sold the stock at $3 then she would recognize a capital loss of $50,000 ($56,000 basis - $6,000 sale price). 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).

Answer 110

If she sells the stock today for $15 per share she will recognize $13,000 in long term capital gain. - When she made the 83b election she would have recognized W-2 income of $2,000 (1,000 × $2). Her holding period would have started at the date of grant. When she met the vesting period she would not have recognized anything since she made the 83b election. If she sold the stock at $1 then she would have had a loss of $1,000 ($2,000 basis - $1,000 sale price). If she sold the stock for $15 then she would have long term capital gain of $13,000 (1,000 × ($15 - $2)). If she sold the stock for $28 then she would have long term capital gain of $26,000 (1,000 × ($28 - $2)). If she sold the stock for $38 then she would have long term capital gain of $36,000 (1,000 × ($38 - $2)).

Answer 111

III and IV only. | - Churches are not qualifying sponsors of 457 plans. In-service distributions are not allowed until age 70 1/2.

Answer 112

I, III and V only. - There are no special tax advantages provided for 457 plans distributed in a lump-sum. Income tax withholding is required once the benefits are constructively received, even if not actually received.

Answer 113

The plan may not cover Randal due to his position in the company, even if Randal meets the eligibility requirements. - Choice a is not correct because the general eligibility is age 21, not 26. Choice c is not correct because a plan could cover part time employees, but will generally not. Choice d is not correct because employees become part of a plan only as early as at the next available entrance date after meeting the eligibility requirements.

Answer 114

$62,000 - 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 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

Answer 115

The company gave all key employees a 5% raise and all non-key employees a 3% raise. - If the company gave everyone a raise then that would increase the company’s contributions. If a key employee retired and two employees left that would decrease the company’s contributions. Since the forfeiture allocations were allocated to the participants they would have no effect of the company’s contributions. In a money-purchase pension plan the investment risk is on the employees and thus an increase or decrease in the investments has no impact on contributions.

Answer 116

III, IV and V only - Statements II and V cannot co-exist. She is not old enough for statement I. She is not subject to 10% penalty because this is a qualified plan and she is over 55 (10% early withdrawal is waived for separation of service after age 55). Distributions from qualified plans are subject to mandatory 20% withholding.

Answer 117

He will be subject to income only if the policy in his qualified plan is a cash value type policy. - Statements b, c, and d are correct. Statement a is false because all life insurance in qualified plans is subject to income when purchased, regardless of the type.

Answer 118

A qualified plan which receives a favorable determination letter from the IRS may still be disqualified at a later date. - Determination letters are issued 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.

Answer 119

II and IV only. - Individual Benefit Statements are not required annually for defined benefit plans. They are however, required at least once every three years. Alternatively, defined benefit plans can satisfy this requierment if at least once each year the administrator provides notice of the availability of the pension benefit statement and the ways to obtain such statement. 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.

Answer 120

Plans cannot require more than 1 year of service, and an age higher than 21. The plan can require a 2-year waiting period if there is immediate 100% vesting in the plan. - Answer "A" should read 70%. Answer "B" should read "highly compensated." Answer "C" is reversed with 50 employees or 40% of employees with a minimum of 2 out of 3 employees (unless there is only one employee in which case only 1 participant is required).

Answer 121

Decreasing the maximum benefit under the defined benefit plan from 70% to 50% for all future retirees. - The anti-cutback rules state that you cannot “cutback” benefits that have been accrued to date. Choice a and b affect future benefits. Choice c will more than likely impact current employees who may have accrued 70% benefits, but who have not yet retired. The change would result in a reduction in benefits and is not permitted. Choice d does is a permitted change and would not result in a reduciton in current vesting.

Answer 122

I, III and IV only. | - Employee contributions must be vested and cannot be required to be forfeited.

Answer 123

Collective bargain covered employee of 2 years. - Maximum exclusions are: age 21, three years of service for a SEP, 2 years of service for all other plans except the 401(k) which has a maximum exclusion period of one year. Employees covered under a pension plan in a collective bargaining agreement can always be excluded from participation in the plan because they are already receiving pension contributions through the union plan.

Answer 124

III and IV only. | - The duties explained in Statements "I" and "II" are responsibilities of the plan administrator.

Answer 125

The retirement plan of the leasing company may be integrated. - 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.

Answer 126

2 years. | - This requires "immediate vesting."

Answer 127

I and IV - Simple must be considered because Complex owns more than 80% and the leased employees must be considered because their leasing company’s is not a pension plan. Universal would not be considered a subsidiary because it is only 55% not more than 80%. The union employees are excluded from testing by the IRC.

Answer 128

I and III only. - Statements "I" and "III" are subject to UBTI because income from any type of leverage or borrowing within a plan is subject to UBTI. Additionally, any business enterprise run by a qualified plan is subject to UBTI. Statement "II" is not subject to UBTI (assuming it is not subject to leverage) due to a statutory exemption for rental income. Statement "IV" - The rental of raw land is also exempt. If the plan actually participated in the development of the oil & gas reserves, there would be UBTI.

Answer 129

II and III only. - Statement "I" is incorrect because the integration levels cannot be higher than the Social Security wage taxable wage base. It may be lower, but cannot be higher. All other statements are accurate

Answer 130

The present value of the accrued benefit from the defined benefit should be preserved in the conversion and you should earn additional benefits under the cash balance plan. - Answer b is correct because his benefits under the defined benefit plan must be preserved. Answer a is not correct as “wearaway” was done away with as it negatively effected employees who were near retirement and resulting in employees not accruing additional benefits after a conversion from a defined benefit plan to a cash balance plan. Answer c is not correct as the PBGC does not fully guarantee benefits. Answer d is not correct as a cash balance plan will have a guaranteed rate of return. Employees do not self-direct their assets in a cash balance plan.

Answer 131

SEPs prohibit forfeitures. - Options "A" and "D" are false. Option "B" is a mandatory characteristic of all qualified defined contribution pension plans but not profit sharing plans.

Answer 132

I, II and III only. - Employees can be excluded up to 3 years or age 21, whichever is longer. Plans can be established and funded up to the date of filing the entity tax return, including extensions. Employee needs to earn only $600 to be included in the plan.

Answer 133

I, II, III and IV. - All of these characteristics are shared by traditional IRAs and SEP-IRAs. Any non-deductible contribution to an IRA are taxed as a pro-rata distribution.

Answer 134

$20,000 - Maximum contribution into a SEP is 25% or $20,000 per employee. The modification for the owner, a self-employed person is, would be: EE contribution % / 1 + EE contribution %. In this case the calculation would be .25 / 1.25 = .2; $100,000 × .2 = $20,000 maximum contribution for the business owner.

Answer 135

III and V only. - He is not eligible for the long service catch-up because the museum is not a Health, Education, Religious (HER) organization. The maximum contribution limits for 2019 are $19,000 plus the age 50+ catch-up of $6,000.

Answer 136

I and III only. - Statement "II" describes a secular trust. Statement "IV" is incorrect because AJCA 2004 does allow springing irrevocability in these circumstances, but not for bankruptcy.

Answer 137

40 | - Harry must have earned 40 quarters of coverage.

Answer 138

III and IV only. | - Persons I and II are too young and do not qualify. The earliest age for social security retirement benefits is 62.

Answer 139

Some part-time work is allowed without the loss of retirement benefits for those under normal age retirement. - The earnings test does not apply at, or after, normal age retirement. The monthly exempt amount is $3,910 ($46,920) in 2019 for those months in the year of normal retirement age BEFORE you actually reach normal retirement age. The test uses only earned income. No passive or portfolio income is used in calculating the earnings.