Retirement Q&A from Text Flashcards

Question

Which of the following factors least affects a defined contribution plan participant's account balance? A. Investment return C. Employer contributions B. Inflation D. Life expectancy

Answer 1

D Inflation will affect salary levels and investment returns. At retirement, the employee will only get the account balance. Life expectancy affects defined benefit plans.

Answer 2

B $660,000 FV, 7i, 10n = $47,769 PMT (end) Remember, the maximum contribution is the lesser of 100% of $100,000 or $52,000. $47,769 is less than $52,000, so it is the correct answer.

Answer 3

D $770,000 FV, 7i, 10n = $55,731 PMT (end) Although the target benefit formula requires an annual contribution of $55,731, the most the employer could contribute is $52,000 (2014). This is the 100% rule with no calculation, concept only.

Answer 4

B For a profit-sharing plan to remain viable, contributions must be substantial and recurring. Contributions are discretionary, not predictable. Contributions are generally pooled for investment purposes and then allocated to each individual participant's account. The plan favors younger employees who have substantial time to accumulate retirement savings.

Answer 5

C Although Answer A is true, forfeitures are normally allocated to the employee account balances. Answer B is false because employee deferrals are subject to FICA [see 401(k) below]. Answer D is also true, but Answer C is the biggest disadvantage. The employer could contribute nothing or small amounts.

Answer 6

A The deferral amount can be supplemented by direct employer contributions up to the lesser of 100% of compensation or $52,000, but the deferral is $17,500.

Answer 7

B Partnerships may offer other types of qualified plans, but they cannot have stock bonus or ESOP plans because partnerships do not issue stock. Any business established as a corporation may establish ESOPs.

Answer 8

C Answer A is wrong because profit-sharing plans can invest in a limited amount of employer stock normally 10% of total plan assets, but they may go beyond unless the plan document states otherwise (could be more or less than 10% depending on plan language). Answer B is wrong because stock bonus and ESOP plans do not need to be based on company profits. Answer D is wrong because stock bonus and ESOP plans do not require participants to take distributions in employer stock; it is an option. Employer contributions in a stock bonus or ESOP plan are typically in the form of cash (not stock). The plan then uses the cash to purchase shares from the company, thereby funding company operations.

Answer 9

D - All makes Answer D wrong (false). ESOPs cannot be cross-tested. Self-employed persons who adopt qualified plans (Keogh type plans) can use a cross- tested design. Keogh plans are qualified plans.

Answer 10

C 30 years times 3% is 90%. 90% x $255,000 (not 90% of $280,000) = $252,000 Remember: The salary cap is $260,000, but the benefit cap is $210,000.

Answer 11

A - The unit-benefit formula factors both service and salary in determining the participant's pension benefits. The formula can give him credit for prior service he has been with the company 20 years, other employees have only been with the company for a few. Answer B relates solely to salary. Answer C treats all employees alike. Answer D uses compensation at retirement.

Answer 12

B - Answer B is also known as the unit-benefit formula. Answer A is related solely to service but does not reflect an employee's salary. Answer C is related solely to salary and does not reflect an employee's service. Answer D is not a DB formula; it represents the amount of an employee's gross income that will be replaced under the benefit formula.

Answer 13

B - All of the other answers are DB plan characteristics. The employer assumes the risk of pre-retirement inflation in a DB plan. DB plan contributions are not earmarked to specified employees.

Answer 14

A The benefits to the employee are known. It is the employer who assumes responsibility for pre- retirement inflation and investments results, not the employee. The employer makes up any deficiency.

Answer 15

C - The ratio is 2.2% x 30 = 66%. Although most employers generally choose an income replacement of between 40 and 60% of final-average salary for employees, higher income replacement ratios may be offered.

Answer 16

1-A, 2-B, 3-C, 4-B Employees who stay fewer than one year are normally never in the plan (one year of eligibility). If inflation is low, the stock market (investments) should rise. Increased earnings decrease company contributions. If the plan uses an acturial assumption of 6% and the plan actually makes 12%, the plan has excess funding and contributions can be decreased. Lower inflation means salaries should remain constant rather than increasing.

Answer 17

C Contributions are designed by formula. Only defined benefit plans can provide for past service. All of the other answers are DC plan characteristics.

Answer 18

C - A cash balance plan provides a hypothetical individual account for each participant. These accounts are funded by the employer once a year with interest credit" (the guarantee). The actual return can therefore lower or increase employer contributions.

Answer 19

C The plan has a minimum rate of return.

Answer 20

B - In a cash balance plan LLM, Inc. has to guarantee the return. In a target benefit plan contribution are based on age, compensation and other factors. It is not a level percentage for each employee and is not simple to explain. Profit sharing and 401(k) SIMPLE are not pension plans.

Answer 21

C - Although she was told that the plan was designed to provide a benefit, she will get the account balance which could provide more or less than 30% of her final salary.

Answer 22

A - 30% of $100,000 is $30,000 per year or $2,500 per month. Answer D could be true in some situations but Ralph's age is not given and he should be around 60 years old or older.

Answer 23

D The employer guarantees not only the contribution level but also a minimum rate of return. If the company fails, the PBGC takes over the guarantees.

Answer 24

A - Two requirements must be met: one full year of service and at least 1,000 hours of service during the year. Answer B is wrong because fewer than 1,000 hours were worked in a 12-month period. Answer C is wrong because only one of the two requirements has been met. This employee would become eligible to participate after completing 12 months of service. Answer D is wrong because the employee has not worked a full 12 months (just a few days shy).

Answer 25

A - Two requirements must be met: one full year of service and at least 1,000 hours of service during the year.

Answer 26

Answer B is wrong because fewer than 1,000 hours were worked in a 12-month period. Answer C is wrong because only one of the two requirements has been met. This employee would become eligible to participate after completing 12 months of service. Answer D is wrong because the employee has not worked a full 12 months (just a few days shy). not more than 65%. Answer A is a more likely answer for the exam than Answer D. Answer A uses the 70% concept.

Answer 27

C An HCE is an employee who made more than $115,000 last year (2013) or an employee who was more than a 5% employee owner last year or this year. Someone who made exactly $115,000 last year is not an HCE. Answer A is wrong because it does not indicate John is an employee. He is retired. Picky. Answer B is wrong because she would have had to make over $115,000 last year to be an HCE. Answer D is wrong because Jean did not work for ABC in the look-back year; therefore, her income for that year is deemed to be $0. Answer C is for sure a HCE.

Answer 28

B - Answer B identifies a HCE, not a key employee.

Answer 29

C A 7-year graded vesting schedule can be converted to either a 3-year cliff or a 2- through-6-year graded schedule. A 5-year cliff vesting schedule can be converted to either a 3-year cliff or a 2-through-6-year graded schedule. C A 7-year graded vesting schedule can be converted to either a 3-year cliff or a 2- through-6-year graded schedule. A 5-year cliff vesting schedule can be converted to either a 3-year cliff or a 2-through-6-year graded schedule.

Answer 30

C - You must ignore the first year of salary. To solve, add contributions for years 2, 3, 4, and 5 ($142,000). $142,000 at 7-1/2% is $10,650. She is 80% vested.($10,650 x 80% = $8,520) C - You must ignore the first year of salary. To solve, add contributions for years 2, 3, 4, and 5 ($142,000). $142,000 at 7-1/2% is $10,650. She is 80% vested.($10,650 x 80% = $8,520)

Answer 31

D - Deferrals are always vested.

Answer 32

A - The question is asking about the most stringent service requirement. All the other answers have a one year or less" service requirement. Only answer A can have a two-year service requirement. All the other answers have a one-year service requirement. Do not confuse this with the most stringent vesting requirement.

Answer 33

C - Since this is a DB plan, it can use the slower schedule. The information says the plan is not top- heavy. Answers I and III do not apply. They are just there to confuse you. $250,000/$430,000* = 58.14% *The total of the 3 officers salaries is $250,000, not each one making $250,000. Since benefits are not given just use salaries to do the calculation. All employees would have the same percentage of salary. NOTE: The calculation was not necessary. It simply justifies why the plan is not top heavy.

Answer 34

C If the plan is top-heavy, he only has a choice of Answer A or C. With Answer C, employees will be convinced that it is economically desirable to delay a job change until they become fully vested. When the word retained" appears use a graded schedule for the exam.

Answer 35

C - Budd is excluded due to age (19), and Davidson is excluded due to service (less than one year).

Answer 36

B - Susan's comp. = ($260,000)* = 47% Eligible comp. $260,000 + 289,000** * $270,000 is $10,000 over the salary cap for 2014. * * Budd's $18,000 and Davidson's $15,000 are not included. Note: Frost is not a key employee. NOTE: The account balances at year end would be 10% of the compensation. To simplify the calculation use compensation to calculate the key employee rule. Frost is a highly compensated employee but not a key employee. B - Susan's comp. = ($260,000)* = 47% Eligible comp. $260,000 + 289,000** * $270,000 is $10,000 over the salary cap for 2014. * * Budd's $18,000 and Davidson's $15,000 are not included. Note: Frost is not a key employee. NOTE: The account balances at year end would be 10% of the compensation. To simplify the calculation use compensation to calculate the key employee rule. Frost is a highly compensated employee but not a key employee.

Answer 37

C Since there is no employer matching, she would probably use the slower schedule to retain employees. All DC plans must use a faster schedule. I think this is the most appropriate schedule for Susan's, Inc. to use. Only non-top heavy defined benefit plans can use Answers B and D.

Answer 38

D - Gus and Mel worked fewer than 1000 hours. Randy is under 21, and Jane has less than one-half year of service. D - Gus and Mel worked fewer than 1000 hours. Randy is under 21, and Jane has less than one-half year of service.

Answer 39

A An individual is considered to own stock in a corporation owned directly or indirectly by his/her spouse (ownership attribution to the wives). $80,000(A) + 80,000(B) + 78,000 (two wives) = 72% $330,000 (from $390,000 ' 60,000*) *Gus, Mel, Randy, and Jane's salaries A An individual is considered to own stock in a corporation owned directly or indirectly by his/her spouse (ownership attribution to the wives). $80,000(A) + 80,000(B) + 78,000 (two wives) = 72% $330,000 (from $390,000 ' 60,000*) *Gus, Mel, Randy, and Jane's salaries

Answer 40

A - Only the faster schedules are available for DC plans. Generally a graded schedule helps keep employees. After three years (cliff) the employee is 100% vested.

Answer 41

B Using test #2, $260,000 x 6% = $15,600 (4% + 2% = 6%).

Answer 42

D - $15,300 plus $5,500 catch-up contribution

Answer 43

B - This is an affiliated service group. It is neither a parent-subsidiary nor a personal service corporation (no mention of a corporation).

Answer 44

A - Land, Inc. (parent company) owns >80% of second company. This is a parent-subsidiary relationship.

Answer 45

C - The permitted disparity is the lesser of the base benefit percentage or 26.25%. 24.25% + 24.25% = 48.50%

Answer 46

A - It is the lesser of the base or 5.7%.

Answer 47

A 5% + 5% = 10%

Answer 48

B Contributions do not need to be allocated on a pro-rata basis and may be skewed to older participants through allocation methods such as Social Security integration, age-weighting, or cross-testing. Answer D is true. Nevertheless, even these methods must not be discriminatory. Answer B is false because the profit-sharing allocation is flexible and is not determined until year end.

Answer 49

A There is nothing to indicate that ABC and XYZ are a controlled group. 1,000 hours a year qualifies her under ERISA as a year of service.

Answer 50

B When the NHCEs do not participate the plan does not meet the coverage percentage (ratio percentage). This is going to trigger ADP/ACP testing. Answers A, C and D are crazy, nonsense answers.

Answer 51

D - First the deferrals are never subject to vesting ($50,000 deferral total). Second the company contribution ($70,000) are 80% vested: Year 1 20%; Year 2 40%; Year 3 60%; Year 4 80% $70,000 x 80% = $56,000 $50,000 + $56,000 = $106,000

Answer 52

A Catch-up contributions do not affect deferrals, company contributions or the $52,000 maximum contribution.

Answer 53

A - Plan assets must be used for the exclusive benefit of the participants and their beneficiaries.

Answer 54

B - He can receive up to the 415 annual addition limit ($52,000). However, the excess forfeiture ($1,000) cannot be applied to his account this year (see question on page 5-1). Furthermore, any of the other types of contributions are also limited for those participants whose annual additions would exceed the 415 limit. MP ' $12,000 PS ' $12,000 Deferral ' $17,500 120,000 x 5% x ? ' $ 3,000 Forfeitures ' $ 7,500 $52,000

Answer 55

B The Section 415 limit is $52,000. If the company contributes can defer a 15% of $210,000 ($31,500), the owner maximum of $17,500. The answer cannot defer $20,500.

Answer 56

C - 10% of $150,000 (Contribution is based on pre- deferral salary.) His salary is not reduced by the deferrals ($9,000 and $6,000). Contributions are by the employer. Deferrals are made by the employee.

Answer 57

C Compensation that exceeds $260,000 (2014) cannot be included. It must be excluded. The rest may be included or excluded providing the definition of compensation is not discriminatory.

Answer 58

B An outside director (an individual that is not an employee of the corporation for which he or she is a director) may establish a qualified retirement plan on the basis of director fees. Board of Director fees qualify as compensation.

Answer 59

C The phaseout for single is $60,000 - $70,000 and $96,000 - $116,000 for married (2014). With only the director's fees shown she could contribute 25% ($18,750). $75,000 ' 18,750 is less than $60,000 (phaseout).

Answer 60

B $50,000 minus $3,532 ($50,000 x 92.35% x .0765) times 20% (owner-employee contribution) equals $9,294 or use shortcut $50,000 x .1859 = $9,295

Answer 61

C Both statements are true.

Answer 62

A - Pension plans (DB, CB, MP, and TB) are subject to a stringent minimum funding standard whereas profit- sharing plans are subject to a more flexible standard. Contributions only need to be substantial and recurring.

Answer 63

C SEPs, SIMPLEs, and IRAs are prohibited from having loan provisions. All qualified plans may have loan provisions although defined benefit, ESOP, and stock bonus plans seldom do.

Answer 64

B - Loans must be available to all participants on a reasonably equivalent basis and must not be available to HIGHLY compensated employees (HCEs) in an amount greater than the amount made available to other employees. Discrimination against HCEs is always safe, but discrimination against the NHCEs is not.

Answer 65

C They are allowed; they have to be adequately secured, and limits apply ($50,000, etc.). Secured by what? The loan can be secured by the plan assets or if the loan was used to purchase a home, then it could be secured by the home.

Answer 66

C - The attribution rules only affect whether a plan is top heavy or not. There are no limitations when both spouses work for the same company.

Answer 67

A The 415 limit. He is not self-employed, he owns a corporation. In 2014, the amount would be $52,000 under 415. But you say where would the money come from? He would reduce his salary or use retained earnings.

Answer 68

A The definition of compensation is salary. The K- 1 income is unearned income. She is limited to compensation. Under 415, she can get up to 100% of compensation. However, under 404 she can only get 25% or $6,000. There are no other employees that would allow her to get Answer B. Remember in the overall, the plan cannot exceed 25%. There is no mention of employees; therefore, there are no employees.

Answer 69

A - Deferrals are in the aggregate. There is nothing to indicate his age. When no age is given you cannot use catch-up.

Answer 70

A - You must first calculate his net income.

Answer 71

C - S corporation distributions are unearned income (K-1 distributions). Informal funded deferred compensation is not constructively received. It is not income until it is constructively received.

Answer 72

D If ABC, Inc. does not make a contribution to a profit- sharing plan in a given year, John is not considered an active plan participant although he is covered under the plan. This is true as long as there were no annual additions" made to the employee's account under the plan. Answer V says contributions not annual additions that makes Answer V incorrect. Money purchase and defined benefit plans are subject to minimum funding rules but profit-sharing plans are not subject to minimum funding rules(Answer I).

Answer 73

Question 1 - F (not participating) Question 2 - P (in phaseout $60,000 - $670,000) Question 3 - F (neither participating) Question 4 - P (both spouses in phaseout) Question 5 - S (spouse B" only spouse "A" phased out $96000 - $116000) NOTE: Spouse A could do a nondeductible IRA.

Answer 74

E First home purchase and qualified educational cost are exempt. Hardship withdrawals are in 401(k)s; loans and separation from service apply to qualified plans. IRA loans are not allowed.

Answer 75

D Answer B would be correct if the question indicated that he only pledged $15,000 of the account balance.

Answer 76

C Their AGI limit is below $181,000. Paul can fund a deductible IRA; Mary can't above $117,000, and both Paul and Mary can fund Roth IRAs.

Answer 77

B The rollover (conversion) can be directly from the 401(k) to the Roth (Answer E). If she retires soon, she will have 3-4 years (depending on 70?) to do careful tax planning. Answer B is a better answer.

Answer 78

C Only a Roth and a Roth inherited by a spouse are not subject to RMD rules.

Answer 79

D In January 2004 Beth was age 52. She has attained age 61 in 2014 and meets the five-year holding period. The contribution ($4,000), the conversion funds($20,000), and the earnings ($16,000) are tax-free.

Answer 80

C There are no income restrictions. Patrick can roll his traditional IRA into a Roth. If he does roll (Answer B), he will have to pay regular income tax (federal tax) but no penalty. Patrick does not have to take distributions from the Roth at any age (Answer D). He may have to pay income tax on the earning he withdraws for educational needs, but the conversion distributions will be tax-free (already paid tax). See page 6-7 (remaining special provisions) Answer C is the best answer.

Answer 81

C Answer A might be the best answer if the small cap did not pay any yearly gain. It did not say that. Then fund distributions at retirement would be subject to LTCG in excess of basis. Answer B is wrong because he is contributing the maximum allowed. Answer D is wrong because they are already contributing $5,500 each to traditional IRAs. Answer C would give them tax- deferred growth until retirement. Then the distributions would be based on the annuity income distribution rules.

Answer 82

B A participant cannot roll over his/her Roth 401(k) account to a traditional IRA, a governmental 457, or any type of qualified plan without a Roth 401(k) type option. Answers II, III, and IV have Roth 401(k) type options. A participant can roll over his/her Roth 401(k), Roth 403(b) or Roth 457(b) account to Roth IRA, but that option is not given in this question.

Answer 83

B She is 52 in 2014. She can fund a $5,500 catch-up in her 401(k) ' Roth or regular ' in 2014. Her Roth IRA contribution will begin to be phased out at $114,000. In 2014, the Roth contribution limit is $5,500, but the catch-up amount is $1,000. Employers may match on Roth 401(k) deferrals, but the match must be in pre-tax dollars. Her active participation will prevent her from doing a deductible IRA only. She can do a Roth IRA that makes Answer IV incorrect.

Answer 84

E - He does not state he has compensation. AGI is not compensation. To do an IRA, he must have compensation.

Answer 85

C There is nothing to indicate T2 has a retirement plan. No retirement plan, no AGI phaseout. He is over 50, so he gets $1,000 catch-up plus $5,500.

Answer 86

E Age rules out Answer A and B. AGI rules out Answer C (AGI = $150,000). No, he cannot do Answer D; his wife died.

Answer 87

C She is a participant in a retirement plan and is subject to IRA phaseout (Answer A and B). Her AGI even after subtracting $23,000 from her salary is above phaseout for a Roth. NOTE: These are the only two numbers given. That is all you can use.

Answer 88

C - Answer C refers to a SARSEP not a SEP. A SARSEP is only available to a company with up to 25 eligible employees if established prior to 1997. A corporation can contribute up to 25% of $260,000 of compensation for each employee ($52,000). Sole proprietors and partners can contribute up to 20% of net earned income less self-employment tax like a Keogh. (see Lesson 5)

Answer 89

B Answers A and C are wrong. SARSEP distributions are pretax money. Answer D is wrong because she'd also have to pay a 10% early distribution penalty. (She is still subject to the age 59 1/2 rules.)

Answer 90

C Answer A is wrong because the employee must have attained age 21 to be a participant. Answer B is wrong because the employee must have worked there for at least 3 of the immediately preceding 5 years.

Answer 91

C A SEP uses individual IRA accounts. Individual IRAs do not have hardship or loan provisions. SEPs cannot be age-weighted. SEPs can be integrated with Social Security. A one-person sole proprietorship can install a SEP. It does not have to be a stand-alone plan like a SIMPLE.

Answer 92

B $10,000 as indexed ($12,000in 2014)

Answer 93

C - Annuities may be used as a funding vehicle, but life insurance is not allowed. Collectibles cannot be used as a funding vehicle, but U.S. government gold coins are acceptable. Participant loans are never allowed. Vesting is immediate.

Answer 94

C D is wrong because the employer has the option of making a (non-matching) 2% nonelective contribution to all eligible employees. The 2% contribution is not dependent on deferrals. In other words, anyone who is eligible to participate in the plan would receive the 2% contribution even if he/she were not deferring.

Answer 95

C - A participant can be 49 and still make a catch-up deferral providing the participant will attain age 50 by December 31st of the current plan year.

Answer 96

C Under a SIMPLE using the maximum match formula, someone under age 50 making $400,000 is capable of receiving a match of $12,000 (3% x $400,000 plus another $12,000 from deferral. Regarding SIMPLE 401(k)s, the $260,000 compensation cap applies regardless of which method of employer contribution is used ' match or nonelective deferral. Under a SIMPLE 401(k), the answer is $12,000 plus 3% of $260,000 ($7,800) or $19,800.

Answer 97

D He can defer the lesser of $17,500 or 100% of compensation. Answer B was an old rule which as you can see was very limiting and confusing.

Answer 98

D - Cash value life insurance must be an incidental benefit. Only open-end mutual funds are allowed, not UITs, closed-end funds, or individual securities.

Answer 99

A A state or local government can be a qualified employer but only with regard to employees who perform service, directly or indirectly, for an educational organization (Answer C).

Answer 100

C - The deferral limit for Answers A, B, and D is $17,500 (2014) plus applicable catch-up ($5,500 for age 50). A SIMPLE 401(k) has a deferral limit of $12,000 (2014) plus applicable catch-up ($2,500 for age 50).

Answer 101

C SIMPLE, SIMPLE 401(k), SEP, and SARSEP employer contributions are always 100% vested. Employee deferrals in any type of plan also are always 100% vested.

Answer 102

B - The State of Florida employees would be eligible for a 457 plan.

Answer 103

B A state, city, and any agency of a state or political subdivision of a state( for example, a school system or the water authority) are eligible. Any organization that is exempt from federal income tax, except a church or a synagogue, is eligible.

Answer 104

C The Keogh profit sharing plan is subject to all The ERISA filings and requirements. The Keogh DB does not fit for his income or age. The SEP has the same contribution limits (18.59%) (see page 5-8), but is simple to install. He could contribute $37,180. The SIMPLE is a combination of deferral $12,000 plus 3% of salary $6,000 for a total of $18,000. For simplicity and contribution limits, Answer C is the best answer.

Answer 105

D - The SEP is like a Keogh for self-employed (18.59%). He cannot do 100% of compensation for a SEP. He will be 70? this year. No IRA contributions. He can do IV (18.59%) and V (the SIMPLE) based on $84,000.

Answer 106

A You should be able to eliminate two answers right away. A defined benefit plan is not simple and can require large mandatory contributions. An ESOP means Bill has to share stock with his employees. There is no indication he is will do so. With a SEP there is no mandatory contributions and it is simple to install. There is no indication that the employees would want to contribute to a SIMPLE and employer contributions are very limited (3%). The SEP will allow for higher employer contribution. Debatable question/answer.

Answer 107

A - Profit sharing and SIMPLE 401(k) are ERISA plans (1,000 hours per year requirement). Group health normally requires 30 hours per week. The SEP only requires the 3 year rule which many of the part-time employees may already qualify for.

Answer 108

C With a SEP, it is doubtful an employee would meet the 3-year requirement. In addition, the company could contribute the maximum of 25% or $51,000.

Answer 109

D - In my opinion, because this is a profit-sharing plan, not a 401(k), they can do nothing. The plan calls for prudent investments, and a fiduciary is not required to be successful in managing the plan's assets. NOTE: This plan is funded solely with employer funds, not employee deferrals.

Answer 110

E - As long as the company (the fiduciary) contracts for the investment services, it may be liable. Investments tend toward bonds, money market, and liquid cash-type media. Small plans use a family of funds.

Answer 111

B - PBGC insures against loss of benefits and also oversees plan terminations. The Department of Labor (DOL), through the Pension and Welfare Benefits Administration (PWBA), is charged with the enforcement of reporting, disclosure, and fiduciary provisions of ERISA.

Answer 112

B - Defined benefit plans (which include cash balance plans) are generally eligible for coverage under PBGC. A target benefit plan is not covered by PBGC because it is a defined contribution plan.

Answer 113

D - Only the first three reasons may justify a PBGC involuntary terminations.

Answer 114

A Assets already paid into either plan are beyond the reach of the employer's creditors, but if the company fails, the plan defined contribution may not have sufficient assets to meet the plan's obligations (an event that would not be covered by the PBGC). The cash balance plan has coverage under the PBGC. Answer C may be true for the year of 2008 but will not necessarily be true every year. Cash balance plans can allow past service credits, but they are not required to do so. This is not a significant advantage.

Answer 115

C They only have to come up with 61% because taxes will fund 39%. Answer C makes more sense than Answer B. It gives the corporation more time. The funding has to be in place before the tax filing, but not by year end. The 39% is correct. Corporations have a special make-up rule. The 39% is shown on Income Tax page 4-2.

Answer 116

B - The company cannot change into a cash type accounting system. They can do answer C, but why not save on 39% taxes? Answer D is not allowed, the cash must be contributed to the plan.

Answer 117

D - Income from a limited/general partnership interest (except real estate) is considered UBTI income.

Answer 118

D - The only plans that are allowed to purchase life insurance are the qualified plans (answers A and C) and the 403(b). A SIMPLE is an IRA.

Answer 119

B - With a fully funded whole life DB plan, you can use the actuarial assumptions of the whole life contract. The actuarial assumptions of the cash value insurance policy are normally lower than the plan assumptions, allowing for additional contributions.

Answer 120

A - Universal life and term must follow the 25% rule. | The 50% rule only applies to Whole life, not Universal or Term.

Answer 121

C PS 58 is no longer used.

Answer 122

A - The incidental rules for death benefits do not apply to SEPs (and SIMPLEs). However, the reason they do not apply is that SEPs (and SIMPLEs) cannot have life insurance. They are IRAs.

Answer 123

B Only profit-sharing plans can hold second-to-die insurance. Pension plans cannot. Cash balance plans and money purchase plans are pension plans.

Answer 124

D - Qualified plans are eligible to hold disability insurance.

Answer 125

B - The 412(i) is a fully funded insurance plan. This would allow for large contributions. The life insurance, even if he was rated, would be charged to him at standard rate (based on Table 2001). This charge is taxable. It would build a tax-free basis at retirement. In addition should he die before retirement the beneficiary would receive the pure death benefit income tax-free (see 412(i) ' Lesson 3). At retirement, he could buy this policy from the plan to keep it into his retirement years. This is the best solution; although the others are not bad answers. However, if he dies within one or two years, there is not much in the plan.

Answer 126

B Various surveys concluded that couples are not discussing their retirement goals. 62% do not even agree on what the expected retirement age should be. The husbands seemed to be more involved with money. This is a very subjective behavioral finance type question. All of the above is not an impossible answer. Writer- opinion answer

Answer 127

C - His Social Security benefits may not be enough to support her lifestyle. While living, Mr. Adams never saved any money. By taking the guaranteed lifetime income, she will not be forced to make a decision. Answer A and B do not address her needs for money now. Answer D would be subject to income tax. Writer-opinion answer

Answer 128

C - Well, he can do the SEP until his business files its tax return or extensions. However, he will have to make contributions for those part-time employees who qualify. Nothing may be the best answer.

Answer 129

A - In-service withdrawals can only be made by those who have reached age 59 1/2 or have a financial hardship regardless of age.

Answer 130

C - Answers A and D are wrong because they do not specify principal" residence. Second homes, vacation homes, or rental property owned by the participant do not qualify under the hardship rules. Answer B is wrong because it included K-8 and secondary tuition. Only payment of "postsecondary" tuition is included under the hardship rules.

Answer 131

B A plan subject to ERISA may not acquire or hold qualifying securities if the total fair market value of such assets exceeds 10% of the plan's portfolio at the time of acquisition. The plan can invest up to 100% of the plan's assets in the sponsoring company's stock if, and only if, the plan document allows it.

Answer 132

D - The first two answers are for IRA distributions, not qualified plan distributions. Substantially equal periodic payments from qualified plans must be due to separation from service. With IRA distributions, A, B, C, and D would be true. In general, a premature distribution is a distribution prior to age 59-1/2. Section 72(t) provides for a number of exceptions to the 10% additional tax. Among these exceptions is that the 10% additional tax will not apply to a distribution which is part of a series of substantially equal periodic payments." "

Answer 133

D - Profit-sharing type plans do not have to offer the QPSA or QJSA although they can. Profit-sharing plans are not pension plans. Money purchase plans that have been merged into a profit-sharing plan must retain the QPSA and QJSA provisions (on the merged monies only). Pension plans (there are 4) are subject to QPSA and QJSA. A distribution from a 457 governmental plan can be rolled over to a qualified plan or to an IRA. Transfers to another 457 plan remain the only option for nongovernmental tax-exempt organizations.

Answer 134

A - The first distribution is a 401(k) distribution (a qualified 60 day"). It doesn't count as a 60-day IRA distribution. Therefore he can also do a 60-day IRA distribution within the next year.

Answer 135

D After Tax Act 2001, rollovers are generally permitted between one traditional IRA and another or in some cases, between a traditional IRA and a qualified plan. However, in order to preserve capital gains and special averaging treatment, a distribution from a qualified plan may still need to be made to a conduit IRA." Answer D is the safest answer to cover all bases for the exam. "

Answer 136

E The problem does not indicate separation from service. He's still employed. Therefore, he cannot take an in- service withdrawal until he reaches age 70-1/2. Since he is still employed, he cannot take a distribution now. Once he separates from service, he can take a distribution. Governmental 457 can be rolled into an IRA but not until age 70-1/2 or separation from service. 457s do not qualify for 10-year averaging. 10-year averaging is a special tax treatment. It is still in effect. Doubtful, it will be tested. In addition, he was not 60 by 1/1/1996. 457s are not qualified plans subject to mandatory withholding.

Answer 137

A An IRA owner who was born before July 1st will attain age 70-1/2 in the same year that he or she attained age 70. The required beginning date is April 1st of next year using age 70.

Answer 138

B $1,000,000 = $36,496.35 27.4 Although he has until next year (age 71) to take the distribution, it is made for this year when he is age 70. The table or the distribution period will be given on the exam. Same as question #1.

Answer 139

B He or she will attain age 70-1/2 in the same year in which he or she attained age 71 (next year). This July 30th, he turns age 70; RMD is not required until next year when the owner turns 70-1/2. 7/1 - 12/31 age 70 / next year 1/1 - 6/30 age 70-1/2 use age 71

Answer 140

D He or she will attain age 70-1/2 in the same year in which he or she attained age 71 (2014). You use age 71 for RMD. Same as question #3.

Answer 141

C $1,050,000 = $39,622.64 See Question 3 - by 26.5 4/1/15, but for 2015 (use age 71) He can delay taking his 2015 RMD until April 2016, but it is for 2015. In this case, he is both 70 ? and 71 in the same year, then use age 71 (26.5). But, the distribution is for the year of 2015. He can delay taking the distribution until 2016. Practice question Mr. Thomas is age 70 in June. He has a $1,000,000 IRA. If Mrs. Thomas is 50 years old, what is the minimum distribution he must take by April of next year based on the spousal table below? $1,000,000 : 34 = $29,411.76 This would allow for even more stretch out" of payments versus $39622.64 in question #5.

Answer 142

D - The exception to the new uniform lifetime table only applies if the sole primary beneficiary is the spouse and he or she is more than 10 years younger.

Answer 143

B - The exception to the new uniform lifetime table only applies if the sole beneficiary is the spouse. From the table on page 9-8

Answer 144

C - He is more than a 5% owner. He just turned 70. He must take a distribution (per Answer C). If he doesn't take the required minimum distribution, the penalty will be $36,496.35* times 50% or $18,248.17. *(1,000,000��27.4)

Answer 145

B - See required beginning date for SIMPLEs.

Answer 146

C - $500,000 : 27.4 (age 70) = $18,248 $18,248 ' 9,000 = $9,248 $9,248 x 50% = $4,624

Answer 147

A - Kate is younger than Dave. She can delay his distributions until her RBD.

Answer 148

B - Kate is younger than Dave. He can delay his distributions until she would have reached her RBD. The disclaimed IRA must be paid to another party.

Answer 149

D - No distributions were required in the year of death. (Neither sister was 70-1/2.) Allan was a named beneficiary (Answer II), but Timothy was not named. The assumption here is that Timothy inherited the IRA. (No other answer was given.)

Answer 150

B - Trust documentation must be delivered to the IRA plan administrator by October 31st of the year following the year of death. The charity's interest should be cashed out before September 30th of the year following the year of the owner's death. If the deadline is met, the charity is disregarded in determining the payout term. A designated beneficiary must be an individual (that is not a charity) if minimum distributions are to be based on the beneficiary's life expectancy. NOTE: Probably not tested.

Answer 151

B - NUA is a tremendous advantage over a normal distribution from a money purchase or profit- sharing plan.

Answer 152

A - The extra $30,000 is either short-term or long- term depending on the holding period after distribution. A In regards to Answer II, there is an income tax deduction for estate taxes paid on the NUA (if any). Since she is a spouse, there will be none. The NUA is considered IRD even when it involves a beneficiary receiving a distribution from an ESOP (covered in the estate planning).

Answer 153

A Only pension plans require the husband to be the beneficiary. There may be reason to name any one of them, but there is no indication of that reason.

Answer 154

C - He is more than a 5% owner. He can wait until April 1st to take the distribution, but it is for this year. He is both 70 and 70 ? this year. He can be a participant in the plan next year

Answer 155

A Answer I is only true if he has other employees because he is still limited by the 25% rule. Remember 415 says 100% of compensation or $52,000. The company can contribute $52,000. See page 5-3. He will be 70? this year. Answer II is false. He is an S Corporation. The corporation can contribute 25%. Picky. Answer III is false. The contribution will not go into the plan until next year for this year. But the distribution (70?) is based on the account balance as of the end of the prior year which was zero. The account balance is the contribution for this year even though the corporation contributed it next year. Answer IV is true. Answer V is false. IRA contributions are not allowed after 70? but SEP's and qualified contribution are allowed.

Answer 156

C - Recapture will apply because he ceased receiving payments before the end of the five year period. The recapture will be as shown but for only those payments before he turned 59?. He turned 62 after four payments.

Answer 157

B He will be both 70 and 70? this year. The distribution period is 27.4 of the value of the account at the end of the prior year. There is nothing to indicate he is still a participant but it does not matter the money is in the IRA account. Distribution is required. $2,100,000 / 27.4 = $76,642.34

Answer 158

A Unfortunately he is a greater than 5% owner. He will be both 70 and 70? this year. Although C is a correct answer, he will be both 70 and 70? next year. Answer A is the more complete answer. Answer D is false. The funds could have been moved.

Answer 159

B I is correct. It describes a salary continuation plan. II is correct. It refers to a pure deferred compensation plan. III is correct because that is the purpose of nonqualified deferred compensation.

Answer 160

C An unfunded plan can be a naked promise" to pay but a funded plan cannot be. Certain unfunded plans (also known as informally funded) are within the reach of the employer's insolvency or bankruptcy creditors. Answer IV is the only correct answer.

Answer 161

D You have constructive receipt. This is a Section 162 insurance plan. Section 162 insurance is a direct cash bonus made to an insurance company to pay the premium on a policy owned by the employee. A 162 double bonus is an additional cash bonus to the employee to pay the tax on the bonus. This is not a funded nonqualified deferred compensation plan.

Answer 162

B, C and E would have been correct.

Answer 163

B - The rabbi trust provides no benefit security for an executive should the employer file bankruptcy. The executive must stand in line with the other creditors.

Answer 164

E Because the assets in a secular trust are beyond the reach of the employer's bankruptcy or insolvency creditors, taxation will occur at the later of the following two dates: 1) when the funds are deposited into the plan or 2) when there is no longer a substantial risk of forfeiture. (Normally there is no substantial risk of forfeiture with a secular trust.) Since answer IV states, there is no substantial risk of forfeiture taxation will occur at the time the funds are deposited into the plan.

Answer 165

E There is no substantial risk of forfeiture. When your grandfather and father run the firm, there is no substantial risk of forfeiture. Informally funded plans mainly use life insurance, not stock grants or options. Stock grant plans (Restricted stock grants) normally have provisions for substantial risk of forfeiture and are not taxable under normal circumstances.

Answer 166

C - A, B, and D are wrong because this is an unfunded plan, not a funded plan. The investment remains an asset of the employer at all times.

Answer 167

B All of these entities could use a deferred compensation plan. However, with pass-through entities (A, C, D, and E) contributions to nonqualified plans are nondeductible at the time of contribution. The owners will have to report the amount contributed to the deferred compensation plan on their personal returns. Regular corporations do not have this problem because they are separate tax entities.

Answer 168

B - A gift before exercise to Susan is a disqualifying disposition. (The ISO becomes an NSO.) Mr. Phillips is charged with the income. The only exception to the transfer before exercise is if Mr. Phillips dies before he can exercise the options. If that occurs, it maintains its ISO status when his daughter exercises.

Answer 169

C - Before selling the exercised ISO shares, he held them at least one year from the date of exercise and two years from the grant date. This is a qualified" disposition. The bargain element (an AMT add-back item) is $15 per share. The gain (long-term) at the time of the sale is $90 per share. "

Answer 170

C There is no ordinary income tax at exercise. The basis is $50,000, and the difference is a capital gain. The grant was some years ago (more than 2). Answer C is correct, see the next question.

Answer 171

B - The bargain element is the excess of the fair market value of the stock at the exercise date over the option price. The stock's market value at the time of exercise is $100,000, and the exercise price is $50,000. This is an add-back item.

Answer 172

B The bargain element is the difference between the market price at exercise ($25) and the option price ($10). The $100,000 ISO limit does not apply to the amount of gain. It applies only to the amount of options that become exercisable in any given year.

Answer 173

B - Exercise to sale less than 1 year is a disqualifying event. The ISOs became NSOs. Answers A and D are false. He will have no gain or loss on the date of sale since his basis ($35) is the same as the sale price ($35). If he had sold them for a gain, the gain would have been short-term. If he sold them for a loss, the loss would have been short-term.

Answer 174

D - This is a disqualifying disposition (but only for the shares that were sold). The ordinary income is $40 less $20 times 500 or $10,000. Her basis in the shares sold is $40 per share. However, she only sold 500 shares at $50. ($50 less $40 times 500 equals $5,000.) The gain is long term. As long as the other 500 shares are not sold before January 1, 2014, they retain ISO tax treatment.

Answer 175

B For ISOs, if the shares are sold at least two years after the grant date and at least one year after the exercise date, ISO status is maintained, and the difference between the option (grant) price and the sale price is a long-term capital gain. If both holding-period requirements are met for ISOs, the resulting gain will always be a long-term capital gain. A short-term capital gain associated with an ISO indicates that a disqualifying disposition has taken place. (That is, the shares were sold within 12 months of the exercise date). For nonqualified stock options, the difference between the exercise price and the sale price is either a long- or short-term capital gain depending on the length of the holding period after exercise. NOTE: This does not violate the $100,000 rule because the vesting is 50%/50%. 2,500 x $40 per share is $100,000 ISO (granted 1/1/2010) (2012) Sell @ $57 strike price $40 = $17 x 2,500 = $ 42,500 (2015) Sell @ $77 strike price $40 = $37 x 2,500 = $ 92,500 Long-term capital gain = $135,000 NSO (granted 1/1/2010) (2012) Exercise @ $47 strike price $40 = $7 ordinary income; Basis increases to $47; Sell @ $57 basis $47 = $10 x 5,000 = $ 50,000 (2015) Exercise @ $67 strike price $40 = $27 ordinary income; Basis increases to $67; Sell @ $77 basis $67 = $10 x 5,000 = $ 50,000 Long-term capital gain = $100,000

Answer 176

C - Answer D is wrong because when more than $100,000 worth of ISOs are vested in the same calendar year, only the first $100,000 will be treated as ISOs, and the balance of options that are vested in the same year will be treated as NSOs (regardless of when they are exercised). The value of ISOs granted in a given calendar year does not cause any of the ISOs to be treated as NSOs so long as the value of ISOs vested in a given calendar year does not exceed $100,000. In other words, $200,000 of ISOs could be granted today, but as long as no more than $100,000 vests in any given year, no income tax liability will be generated upon exercise. For this type of problem just look for an answer that includes both an income tax liability and an AMT bargain element.