Retirement Q's

Question 1

For tax year 2023, what is the maximum permissible contribution amount to a defined benefit plan?

A. $66,000
B. $265,000
C. $330,000
D. $516,667
E. None of the above

Answer 1

E.

Amount is actuarily determined. The benefit can only be based on compensation up to $330,000. The maximum annual BENEFIT is $265,000. The contribution could exceed $300,000 / year.

Question 2

Which of the following qualified plans may forfeitures be allocated to increase account balances of the remaining plan participants?

I. DB plan
II. Profit sharing plan
III. Money purchase plan
IV. Cash balance plan

A. I, II
B. I, IV
C. II, III
D. II, IV

Answer 2

C

Forfeitures in DB plans and cash balance plans MUST reduce costs / contributions.

Money purchase plans / Profit sharing plans MAY be allocated to employees.

Question 3

On what is the max deductible contribution in a target benefit plan based?

A. An actuarial determination
B. The minimum participation rule
C. A max 25% of the aggregate eligible compensation of all covered participants.
D. A maximum of 25% of the firms total payroll

Answer 3

C.

ELIGIBLE compensation.

Question 4

While complying with ERISA pension plan participation rules, the employer also wants to adopt a plan using the most stringent service requirement. Which schedule should the client adopt?

A. 2-year/100 percent schedule
B. 3-year cliff
C. 5-year cliff.
D. 2-through-6-year graded
E. 3-through-7-year graded

Answer 4

A.

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

Question 5

Presume that the XYZ company plan is not considered top-heavy. Which kind of vesting schedule can the company provide through its defined benefit plan to retain employees, if we know the following:

• Three eligible officers (more than 5% owners) make a total of $250,000 (not $250,000 each, $250,000 in total).
• Six eligible employees make a total of $180,000.

I. The plan is top-heavy, it can use 3-year cliff.
Il. The plan is not top-heavy; it can use 5-year cliff.
III. The plan is top-heavy; it can use 2- to 6-year graded.
IV. The plan is not top-heavy; it can use 3- to 7-year graded.

A. I, III
B. I
C. II, IV
D. II

Answer 5

C

Since this is a DB plan that is not top-heavy, it can use the slower vesting schedule.
Answers I and III do not apply.
$250.000* = 58.14%
$430,000

Question 6

Mark wants to establish a pension plan for himself. He is age 55. He’s considering a defined benefit plan. He knows the plan will be considered top-heavy. He wants a vesting schedule that will help his company retain employees. What is the most restrictive schedule the plan would be permitted to implement?
A 3-year cliff
B 5-year cliff
C 2- to 6-year graded
D 3- to 7-year graded

Answer 6

C

Key word “Retain”
Top Heavy = FAST = 2-6 yr vesting

Question 7

Which of the following are true about net earnings?

I. Net earnings are determined after claiming all allowable business deductions, including the deduction for the employee only retirement contribution

II. The self employed person’s contribution or benefit is based on net earnings

A. I only
B. II only
C. Both I and II
D. Neither I and II

Answer 7

C.

Question 8

Jerry owns Jerry’s jerseys an S corp. He take a salary of $24,000 per year. Typically the corporation has additional earnings of $200,000. His basis in the corporation is zero, so Jerry’s K-1 usually reflects an additional $200,000 of unearned income. He wants to establish a money purchase plan with maximum contributions. What is the maximum amount that Jerry’s Jerseys may contribute on his behalf?

A. $6,000
B. $30,000
C. $66,000
D. We don’t know his age

Answer 8

A.

Compensation means Salary (not profits) Under section 415 limits, the plan can contribute up to 100% of compensation.

However, under 404 limits he can only receive a contributions of 25% of compensation or $6,000. Jerry’s jerseys has no other employees. Overall, the deductible plan contributions cannot exceed 25%.

Question 9

Lucas works for two unrelated companies. Both need his specialized services. He works for one or the other 30+ hrs per week. He enrolled in both of their SIMPLE plans and defers the maximum. What amount can he defer to the SIMPLE plans?

A. $15,500 total
B. $15,500 plus catch up of $3,500 in total.
C. $15,500 plus 3% of salary in total.
D. $22,500
E. $66,000

Answer 9

A. Deferrals are aggregated. Nothing indicates his age.

Question 10

Which of the following income sources can be used to determine the amount of deductible IRA contribution that is allowed?

I. S Corp distributions
II. Deferred comp
III. Professional fees
IV. Board of director fees
V. Alimony received from pre-2019 divorce

A. All the above
B. II, III, IV
C. III, IV, V
D. III, IV

Answer 10

C.

S corp distributions are unearned income (K-1 distributions)

Question 11

Mr. Green is retired. He has an AGI of $100,000. Can he contribute to a deductible or nondeductible IRA?

Answer 11

No, he can do neither. He has no earned income. He is retired.

Question 12

Lucas, an employee of Smart, Inc., is concerned because he has not received an annual addition to the Smart profit-sharing plan for the last 2 years. He earns $100,000 per year, is age 40 and married. Which of the following are true?

I. All DC plans are subject to minimum annual funding.
II. He cannot contribute to an IRA because he is an “active participant” in an employer plan.
III. He can make a deductible contribution to his IRA
IV. He can make a deductible contribution to a spousal IRA
V. He can make a deductible IRA contribution because Smart Inc. hasn’t made contributions to the profit sharing plan.

A. I, II
B. I, III
C. III, IV, V
D. III, IV
E. II, III

Answer 12

D.

If Smart Inc. does not make a contribution to a profit sharing plan in a given year, Lucas is not considered to be an active plan participant. (Although he is covered under the plan.) This is TRUE as long as there are no “Annual additions” made to the employees account.

Answer V says contributions not annual additions. Money purchase and DB plans are subject to minimum funding requirements.

Question 13

Which of the following IRA distributions is exempt from the 10% early withdrawal penalty?

I. Hardship withdrawal
II. First home acquisition cost of up to $10,000
III. Qualified loan of $10,000 for first home purchase.
IV. Qualified education cost for participants child.
V. Separation from service at age 55

A. All the above
B. II, III, IV
C. II, III
D. III, IV
E. II, IV

Answer 13

E.

First time home purchase and qualified educational costs (college tuition and fees) are exempt.

Hardship withdrawals are available with 401ks. Loans from IRAs are not allowed.

Question 14

Who among the following taxpayers may recharacterize a Roth contribution that was made (attributable) to the 2023 tax year?

A. Lou, who recharacterized because the value of the converted investments declined aftter the conversion was completed.
B. Rue, a single taxpayer who received a substantial bonus that raised her AGI to $200,000.
C. Sue, who realized she would benefit more from a a deductible contribution to a traditional IRA instead.
D. Stu, who realized that he didn’t have enough available cash to pay the federal income tax generated by the conversion of his traditional IRA to a Roth.

Answer 14

B.

Under the TJCA and beginning in 2018, the only circumstance under which Roth recharacterization is permitted is when the taxpayers AGI exceeds the contribution threshold for that year.

Question 15

A DC or DB plan is prohibited from defining compensation to include or exclude which of the following?

A. overtime
B. bonuses
C. compensation that exceeds $330,000 (2023)
D. nonrecurring compensation (e.g. one time bonus, etc)

Answer 15

C.

In 2023, compensation that exceeds $330,000 cannot be considered. It must be excluded.

Question 16

Do board and director fees qualify as compensation?

Answer 16

Yes, earned income

Question 17

What entity or regulation imposes extensive reporting or disclosure requirements on a DB plan?

A. PBGC
B. ERISA
C. DOL
D. IRS

Answer 17

B.

DB plans are subject to all the ERISA requirements for qualified plans. And the ERISA disclosure / reporting requirements.

Question 18

Which of the following qualified plan distributions is exempt from the 10% early withdrawal penalty?

A. First home acquisition cost
B. Qualified education cost for participants child.
C. Substantially equal periodic payments.
D. Death

Answer 18

D.

The first 2 answers are for IRA distributions not qualified plan distributions. Substantially equal periodic payments must be due to separation from service. ABCD would be true with IRA distributions

Question 19

Phil and his four brothers are equal owners of Brothers Inc. Although he just turned 73, Phil does not want to retire. His account balance in Brothers Inc Money Purchase plan is $1m. Uniform lifetime table factor is 26.5) Is he exposed to an underpayment penalty this year?

A. No because he hasn’t retired yet.
B. Yes, he iwll have to pay an excise tax of $37,735.
C. No because he must take a distribution by April 1st of the year following the year in which he attained 73.

Answer 19

C.

Phil is a more than 5% owner. If he fails to take a distribution, his penalty would be $37,735 * 25% = $9,436.

Question 20

Which of the following qualified plan distributions is exempt from the 10% early withdrawal penalty?

A. Hardship withdrawal
B. Distribution due to a husband and wife in conjunction with a legal separation.
C. Distribution for the purchase of the participant’s principal residence.
D. Distribution due to separation of service at age 55.

Answer 20

D.

Legal separation, divorce does not prevent the penalty. A QDRO is necessary to avoid the 10% early penalty. Principal residence distributions are not exempt from the penalty. For IRAs, it is first home not primary home.

Question 21

Which of the following qualified plan distributions would be exempt from the 10% early withdrawal penalty?

A. Distributions following a separation from service
B. Distributions for a temporary, partial disability
C. A qualified plan loan
D. A distribution for higher education cost for a participant’s child

Answer 21

C

Distributions following separation from service must give a year (e.g., age 55).

Higher education costs are exempt under IRA rules only. Total, long-term disability is exempt; partial and/or temporary disability does not qualify for the exemption.

Plan loans are available at any age tax-free. There is no 59½ rule with plan loans.

Question 22

Sally is a widow and loves her job. She continues to work past 73 and makes elective deferrals into her employers 401k. She has $100,000 in an IRA and $150,000 in her 401k. Does Sally have to take RMDs?

A. Yes from both plans.
B. Yes, from her IRA
C. Yes from her 401k
D. No

Answer 22

B.

Distributions from the 401k can wait until she retires. Safe harbor

Question 23

On January 1, 2019, Harry (an employee of Zebra) was granted 1000 ISOs to purchase Zebra stock at fair market value on the date of grant ($20). On June 30, 2023, he exercised all of the ISOs when the market price of Zebra was $35, and he sold the stock for $35 the next day. Which of the following is true?

A. There is no taxable event on the exercise of the options

B. Harry will have to recognize $15 per share as compensation (ordinary income) on the date of exercise. There will be no gain or loss at the time of sale.

C. Harry will have to recognize $15 per share as short-term capital gain on the date of the sale

D. Harry will have an AMT adjustment of $15 on the exercise date

Answer 23

B

When the time between the exercise to sale is less than 1 year a disqualifying event
occurs. The ISOs became NSOs. Answers A and D are false. He will realize 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.

Question 24

On January 1, 2019, Sally (a managerial employee of Classy Corp.) is granted 1,000 ISOs to purchase shares of Classy at the fair market value of the stock on the date of grant ($20). On June 30, 2019, Sally exercises all the ISOs when the stock’s fair market value is $40. On December 30, 2020, she sells 500 shares for $50 per share. Which of the following are true?

I. This is a disqualifying disposition

II. Sally will recognize ordinary income of $20,000

III. Sally will recognize ordinary income of $10,000

IV. Sally will also recognize short-term capital gains of $5,000 when she sells the shares

V. Sally will also recognize long-term capital gains of $5,000 when she sells the shares

A. I, II
B. I, III
C. I, II, IV
D. I, III, V
E. II, V

Answer 24

D

The ISOs are disqualified. They become NSOs. Sally is required to recognize the bargain element or $10,000. That added to the exercise price creates an adjusted basis of $40 per share. She held the exercised shares for over one year

Question 25

What are the 2 major determinants of the taxation of non-qualified employer stock granted to an employee?

Answer 25

1. Free transferability
2. Presence of “substantial risk of forfeiture”

Question 26

John has a choice between nonqualified stock options or incentive stock options.

The option price is $5/share, and he will exercise when the share price is $10/share, (The options vest a year and a day after the grant date). The option is for 10,000 shares.

What is the tax ramification with each option if he sells the shares for $15/share and more than one year after he exercises them?

I. Under the ISO, $50,000 is an add-back item for the AMT, and $100,000 is capital gains.

II. Under the ISO, $50,000 is an add-back item for the AMT, and $50,000 is ordinary income.

III. Under the NSO, $50,000 is ordinary income, and $50,000 is capital gains.

IV. Under the NSO, $100,000 is ordinary income.

A. I, III
B. I, IV
C. II, III
D. II, IV

Answer 26

A

If John is subject to the alternative minimum tax (on the ISO), his basis in the stock for AMT purposes will be increased by the amount included in income (unknown). If the stock is sold before the one-year holding period, John will lose preferential long-term capital gains treatment.

With the NSO, at exercise the basis is $10/share, representing the option price ($5) plus the ordinary income

Question 27

Gail, a division manager for Quick, Inc., is granted an ISO for 1,000 shares of stock at $20 per share. Three years later, she exercises them when the stock is $30 per share. Then, two years later, she sells the stock at $35 per share. Which of the following statements is true?

A. Gail’s will realize $5,000 of capital gain.
B. Quick, Inc. will get a deduction of $10,000 when Gail exercises her option.
C. Gail’s will realize $15,000 of capital gain.
D. Gail’s will realize $10,000 when she exercises her option and a $5,000 capital gain when she sells the shares.

Answer 27

C

With an ISO, the corporation will not receive a tax deduction when the shares are exercised.

Question 28

Harry is granted $250,000 of ISO options that vest in one year. The following year he exercises $150,000 of the options. What will be the result of this exercise?

A. $100,000 will be treated as
ISOs; $50,000 will be treated
as NSOS.
B. $50,000 will be treated as
ISOs; $100,000 will be
treated as NSOs.
C. $75,000 will be treated as
ISOs; $75,000 will be
treated as NSOs.
D. $150,000 will be treated as
NSOs.

Answer 28

A

If more than $100,000 of ISOs that vest in the same year are granted, only the first $100,000 (worth) are treated as ISOs with the excess treated as NSOs