Retirement Review Questions

Question 1

Sam and Sally (both age 35) plan to retire at age 65. They estimate their annual income need in retirement will be $50,000 in today's dollars.They expect to receive $30,000 (in today's dollars) annually from Social Security. They expect to earn 7% after-taxes both before and after retirement. They also expect inflation to be constant at 4%. Table V (Ordinary Life Annuities One Life-Expected Return Multiples) indicates a multiple of 20 years at age 66. Table VI (Two Lives) indicates 25 years at age 65. They expect to live 30 years after retiring.  What amount of money will Sam and Sally need at the beginning of the retirement period to fund an annual income need that increases with inflation?
A. $1,003,587
B. $1,117,225
C. $1,327,848
D. $2,943, 062
E. $3,319,620

Answer 1

C - 1st Retirement deficit is $20,000 ($50,000 - 30,000).
2nd The net figure is inflated (PV of $20,000, inflation is 4%, 30 years to retirement); therefore, the income deficit in the first year of retirement (FV) is $64,868.
3rd To determine the lump sum needed:
Payment (PMT)
$64,868
Inflation-adjusted yield
2.8846%
Period
30
Sum needed at beginning of retirement
$1,327,848
age 35 30 years age 65 30 years
$20,000 PV 4 i FV=$64,868 PMT (1.07/1.04) -1x 100i
Solve for PV = $1,327,848
(Must use Begin mode)

Question 2

After much soul searching, Sam and Sally (from question #1) now estimate they will need $2,000,000 to retire. They project that their assets will grow to $1,500,000 at the first year of retirement. How much must they set aside by the end of each year to fulfill their retirement goal?
A. $4,946.92
B. $5,293.20
C. $15,879.60
D. $21,172.80

Answer 2

B - End mode $500,000, FV, 7i, 30n = $5,293.20 PMT
There is no inflation factor to solve this question. Inflation was built into the solution to question 1 step
#2 and #3.

Question 3

During what period should the client be willing to bear the most investment risk?
A. During a long-term accumulation period
B. During a short-term accumulation period
C. During a short-term retirement period
D. During a long-term retirement period

Answer 3

A - Investing is long-term, not short-term. Answer A is the best answer.

Question 4

Which of the following are true about health issues and retirement?
I. Planning for health care issues should not be restricted to the client alone but should also encompass all family members.
II. Good health may allow continued employment even after normal retirement age.
III. If a person is in poor health, he or she may want to retire early to enjoy as many years as possible.
IV. Future caregiving may be required for the retiree or family members even if they are currently in good health.
A. All of the above
B. I, II, III
C. III, IV
D. II, IV

Answer 4

A - All of the answers are true.

Question 5

Bob and Mary expect to have $300,000 in retirement funds when they retire in 15 years (assuming a 7% investment return rate on current assets). When they retire, they expect to need $22,000 annually which will increase with inflation (3%). They can make an 8.5% after-tax return on their money. They expect their joint life expectancy to be 21 years after retirement. What would you tell them?
NOTE: Slightly different calculation. Compare what they expect to have ($300,000) against what they expect to need.
A. They are okay. The $300,000 will exceed their needs by more than $10,000.
B. They are deficient. The $300,000 will be underfunded by almost $27,000.
C. They need to increase their preretirement investment return rate from 7% to 7.12% to meet their goal.

Answer 5

A - They expect to have when they retire in 15 years $300,000 They need - Begin $22.00 PMT, 5.3398i, 21n = -288,438 PV
Excess $11,562
Why begin? Can they wait until the end of the year to get retirement funds? No, always use begin mode for retirement needs unless the question indicates end mode.

Question 6

Mr. and Mrs. Nan now have $130,000 in their retirement savings account. They hope to retire in 20 years and want to accumulate sufficient assets to support a 25-year post-retirement period. Assume they make no more additions to the retirement account. They expect to earn on average 10% on tl1e account until they retire and then 7% on the account during retirement. What amount of income should they expect to receive each month during retirement?
A. $6,145
B. $6,254
C. $9,897
D. $9,955

Answer 6

A Begin Mode
HP 10BII/17BII+
1 P/YR, $130,000 ± PV, 10 I/YR, 20 N, FV = $874,575
12 P/YR, $874,575 ± PV, 7 I/YR, 25 gold xP/YR, PMT = $6,145
HP 12C
$130,000 CHS PV, 10 I, 20 n, FV = $874,575$874,575 CHS PV, 7 enter 12 Ö i, 25 enter 12 x n, PMT =
$6,145

Question 7

Sally, age 62, dies. She is a fully-insured worker. Who will receive Social Security benefits when she dies?
I. Daughter, age 19, in college
II. Ex -husband, age 62, married to her from 1974-1995, never remarried
III. Son, age 15, in high school, lived with Sally
IV. Current husband, age 60 (Sally married him 12 years ago)
A. All of the above
B. II, III, IV
C. II, III
D. III, IV
E. I, IV

Answer 7

B - Both the ex-husband and current husband are eligible. The current husband also has a child in care under age 16. Whose? Doesn’t say.

Question 8

Hal, age 63, decides to take Social Security retirement benefits 30 months early.  How much will his PIA be reduced?
A. 10%
B. 12%
C. 13.333%
D. 16.667%
E. 20%

Answer 8

D - His benefits will be reduced by 30/180 or 16.667%.

Question 9

Tina, a widow age 70, decides to go back to work. She has been collecting Social Security payments of
$1,000/month. She expects to make $30,000 in salary. She receives $1,000 in dividends, $3,000 in CD interest, and $5,000 in municipal bond interest. Will her Social Security payments become taxable if she goes back to work?
A. No, she is over 70 years old.
B. Her benefits will no longer be reduced by $1 for every $2 earned over a threshold.
C. 6,000 of Social Security income will be taxable income.
D. $10,200 of Social Security income will be taxable income.

Answer 9

D - Do not get caught up with Answer A. You do not lose any benefits after NRA. If her modified AGI (including municipal bond interest) exceeds $25,000, 50% of the Social Security benefits will be included in income (Answer C). If her modified AGI exceeds $34,000, 85% of the Social Security benefits are included ($12,000 x .85 = $10,200). Answer B is true, but her MAGI is $45,000. (Don’t forget to add in 1/2 of her Social Security benefits when calculating MAGI.) Answer D is the best answer.

Question 10

A man, age 66, receives $1,000 in monthly Social Security payments and continues to be actively employed. What is the maximum that his Social Security could be taxed?
A. $0
B. The benefit is reduced $1 for every $3 earned
C. 50% of the Social Security payment will be subject to income tax
D. 85% of the Social Security payment will be subject to income tax

Answer 10

D - Remember, over $34,000 of MAGI (single) means that 85% of the benefits could be taxed. The $1 for every $3 rule only affects people under NRA (normal retirement age) 66. The key phrase is could be.

Question 11

Mrs. Kittel was a fully-insured worker.  She is survived by the following persons. Who will receive Social Security benefits?
I. 19 year old son in college
II. 15 year old daughter in high school
III. Mr. Kittel, age 55
IV. Ex-husband, age 62, married to her from 1982-1993. He never remarried
A. All of the above
B. II, III, IV
C. II, IV
D. II

Answer 11

B - The daughter is Mr. Kittel’s. She divorced her first husband in 1993. The 15-year-old daughter has to be Mr. Kittel’s daughter. Mr. Kittel is caring for his child under age 16. The 19 year old is too old.

Question 12

What is the maximum contribution amount to a defined benefit plan?
A. $52,000
B. $210,000
C. $260,000
D. $400,000
E. None of the above

Answer 12

E - It is the amount necessary to fund the benefit. However, the benefit can only be based on compensation up to $260,000 (2014). The maximum benefit is $210,000, but the contribution could be
$300,000 to $400,000 per year.

Question 13

If Bob's company's pension plan provides a life annuity equal to 1.5% of earnings up to 30 years of service, how much could Bob ($150,000 average annual compensation) receive as annual pension after 20 years of service?
A. $35,000
B. $45,000
C. $46,000
D. $67,500
E. $150,000

Answer 13

B - 1?% x 20 years x $150,000 = $45,000. The question says after20 years of service.

Question 14

ABC, Inc. has a defined benefit plan. Due to a reversal of fortune, the company cannot afford any type of pension plan. What should ABC, Inc. do?
A. Adopt a cash balance plan
B. Adopt a money purchase plan
C. Adopt a target benefit plan
D. Freeze the defined benefit plan

Answer 14

D - The company can no longer afford any type of pension plan.

Question 15

What impact would the event below have on a money purchase plan? A key employee retires and is replaced by a clerical employee.
A. Increases company contributions
B. Decreases company contributions
C. No effect

Answer 15

B - The key employee had a higher salary level than the clerical employee. The employer is contributing only.

Question 16

What impact would the event below have on a money purchase plan? Plan investment returns increase.
A. Increases company contributions
B. Decreases company contributions
C. No effect

Answer 16

C - Investment returns affect account balances, not contributions. This is a money purchase pension plan not a defined benefit plan.

Question 17

What impact would the event below have on a money purchase plan? Forfeitures are not reallocated to remaining participants.
A. Increases company contributions
B. Decreases company contributions
C. No effect

Answer 17

B - If the forfeiture is not reallocated to the participants, then they must be used to reduce company contributions.

Question 18

What impact would the event below have on a money purchase plan? Salary levels for all employees increase.
A. Increases company contributions
B. Decreases company contributions
C. No effect

Answer 18

A - Money purchase plan require a percentage of salary to be contributed to the plan.

Question 19

What is the maximum retirement benefit for a participant in a target benefit plan?
A. $52,000 per year
B. 100% of the participant’s salary ($260,000 cap)
C. The actuarial value
D. The value of the participant’s account at retirement

Answer 19

D - The question asked for the retirement benefit not the contribution. The retirement value is the account value.

Question 20

On what is the maximum deductible contribution in a target benefit plan based?
A. An actuarial determination
B. The minimum-participation rule
C. A maximum of 25% of the aggregate eligible compensation of all covered participants
D. A maximum of 25% of the firm’s total payroll

Answer 20

C - A target benefit plan is a defined contribution plan. Although an actuarial calculation is made when a target benefit plan is first installed, the maximum deductible contribution is always limited by Answer C. This is true even if the actuarial calculation calls for a larger contribution (likely if there are many older highly compensated employees and relatively few lower-paid rank-and-file employees). Answer D is wrong. It is not total payroll but eligible compensation or payroll.

Question 21

Which of the following plans would be least appealing to an employer looking to:
1) maximize benefits for older employees,
2) give long-term employees a secure and specified retirement income, and
3) tie employees to the company through the benefit program?
A. Defined Benefit pension plan
B. Cash-balance pension plan
C. Target-benefit pension plan
D. Profit sharing

Answer 21

D - For meeting the three listed objectives, A is the best answer, followed by B (also a DB plan), and finally by C (a DC plan that shares some of the characteristics of a DB).

Question 22

In which of the following retirement plans may forfeitures increase account balances of plan participants?
I. Defined benefit 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 22

C - Forfeitures in defined benefit plans and cash balance plans must reduce plan costs or contributions. Money purchase plan forfeitures may (not must) be allocated to employee account balances.
Forfeitures in a profit-sharing plan normally are allocated to the plan participants.

Question 23

If you had to suggest a plan to an employer, which plan would provide employer the maximum contribution and the maximum deductible contribution flexibility?
A. Defined benefit plan
B. Profit-sharing 401(k) plan
C. Money purchase plan
D. Cash balance

Answer 23

B - All the other plans require a contribution to be made each year. With a profit-sharing 401(k), the employer could contribute nothing at all or the maximum 415 limit. This would allow maximum flexibility and maximum contributions be made.

Question 24

Which statement is true regarding profit-sharing plans?
A. A company must show a profit in order to make a contribution for a given year.
B. Profit-sharing plans should make contributions that are substantial and recurringaccording to the IRS.
C. Forfeitures in profit-sharing plans must be credited against future years’ contributions.
D. Employer deductions for plan contributions are limited to 15% of the participant’s total compensation.

Answer 24

B - The company doesn’t have to show a profit to make a contribution. Forfeitures are normally reallocated to the plan participants. Employers can contribute for each participant up to the lesser of 100% of compensation or $52,000 (compensation maximum $260,000). However, the employer is still bound by the overall deduction limit of 25% of total plan compensation.

Question 25

``` The employee's final-average monthly salary is $4,800. To arrive at the employee's benefit, multiply 1.25% by the $4,800 final-average monthly salary by 25 (the number of years of service). The employee's monthly retirement benefit will be equal to $1,500 paid in the form of a life annuity. This is an example of what type of benefit formula? A. Flat-percentage-of-earnings B. Flat-amount-per-year of service C. Unit-benefit D. Flat-benefit-percentage ```

Answer 25

C - Answer C is also known as percentage-of-earnings-per-year of service. Answer D is nonsense.

Question 26

``` Quick Manufacturing, Inc. always has a top-heavy profit-sharing plan because of employee turnover due to layoffs. Which vesting schedule should they adopt if the company feels this will be an ongoing situation? A. 3-year cliff B. 5-year cliff C. 2- to 6-year graded D. 100% - 2 years eligibility ```

Answer 26

A - The employees will be eligible after one year, but unless they stay three years, the employees will forfeit all contributions made to the plan. The forfeitures will be allocated to the long-term employees (probably the HCEs) allowing them to potentially get up to 100% of compensation or $52,000 annual additions. There is no indication the company wanted to retain employees (2-6 year graded). The 100% vested plan (2-year eligibility) is not an advantage over the 3-year cliff in the situation.

Question 27

If the plan was adopted on 12/31/2014 for the plan year 2014, which employee would be eligible under 21 and one? A. Ned, date of birth 1/1/1994 B. Seth, date of employment 1/10/2014 C. Martha, date of birth 10/21/1984, date of employment 7/1/2011, works 1,500 hours per year part time D. Beth, date of birth 6/28/1992, date of employment 2/1/2010, works 750 hours per year part time

Answer 27

C - Ned is age 20 (plan year 2014). Seth's age isn't known. He may or may not qualify under the one-half year rule. Beth works part-time (less than 1,000 hours each year).

Question 28

``` Assume that an 8% money purchase plan is to be integrated. What is the plan's maximum permitted disparity? A. 4.3% B. 7.65% C. 5.7% D. 13.7% ```

Answer 28

C - The question asked for permitted disparity (5.7%) not base contribution or excess contribution percentage (13.7%). It does not specify that the integration level is below the taxable wage base, so 5.7% must be used.

Question 29

``` Dale works for a company with an integrated profit-sharing plan. She makes $150,000. The integration level is $113,700 with a base contribution of 10% and an excess contribution of 15.7%. What amount will be contributed to her account this year? A. $15,000 B. $16,881 C. $23,550 D. $25,000 E. $52,000 ```

Answer 29

``` B - $117,000 @ 10% = $11,700.00 ($150,000 - $117,000) @ 15.7% = - 5,181.00 $16,881.00 ```

Question 30

``` Which of the following retirement plans can be integrated with Social Security? I. Stock bonus II. ESOP III. SEP IV. Defined benefit V. Target benefit A. I, II, IV, V B. I, III, IV, V C. I, IV, V D. I, IV E. II, III ```

Answer 30

B - A SEP and a stock-bonus plan can be integrated with Social Security. An ESOP cannot be integrated.

Question 31

``` Assume that a 25% defined benefit plan is to be integrated. What is the plan's permitted disparity using the excess method? A. 25% B. 26.25% C. 50% D. 51.25% ```

Answer 31

A - The lesser of the base benefit (25%) or 26.25%

Question 32

Four doctors own 100% of Labs, Inc., a support organization. The ownership percentages are 80%, 10%, 5%, and 5%. The doctors have their own practice, a personal service corporation with no employees, and each have their own defined benefit plan. Which type of controlled group would Labs, Inc. fall under? A. Parent-subsidiary controlled group (80% combined) B. Brother-sister controlled group (80% combined) C. Affiliated service group D. Leased employees

Answer 32

C - The IRS defines this as an affiliate service group. I realize the 80% factor may lead you to answer this as brother -sister.

Question 33

``` Which of the following is not an example of a controlled group? A. Parent-child control group B. Brother-sister control group C. Combined group under common control D. Parent-subsidiary control group Retirement Planning Quiz Lesson 4 ```

Answer 33

A - Answer A is no such control group. | Retirement Planning Quiz - Lesson 5

Question 34

Tim works two jobs, and both provide SIMPLE plans. He wants to maximize his deferrals and matches. At Company A he defers $6,000. How much can be deferred at Company B? A. None as an employee can only have one SIMPLE plan B. $12,000 at Company B C. $6,000 at Company B D. $12,000 at Company B ($17,500 total)

Answer 34

C - Multiple plan deferrals are generally aggregated. In case of SIMPLE/SIMPLE, the limit is $12,000 total. A worker having two employers, both of which offer a SIMPLE plan, may participate in both plans but may only defer $12,000 (total) in the aggregate.

Question 35

Which of the following is true about plan loans from a 401(k)? A. They are prohibited because the plan accepts employee elective deferrals. B. Interest is never deductible. C. If married, the spouse never needs to consent. D. They do not have to be secured. E. If a plan allows loans, they must be made available to all participants without discrimination.

Answer 35

E - Interest paid on a plan loan for a principal residence may be deductible. If the plan is subject to QPSA/QJSA and if the loan is secured with plan assets, both spouses must sign off on the loan. In all cases, the loans must be adequately secured (with plan assets or other collateral acceptable to the plan administrator).

Question 36

``` Tom, age 55, has an annual salary of $120,000 (HCE). His company offers a 401(k) plan in which Tom does not participate at this time. His company also has a money purchase pension plan (12%). Tom is considering contributing to the 401(k) plan. Under the best circumstances, what is the maximum Tom is allowed to defer in 2014 including catch-up using ADP/ACP testing if the NHCEs are contributing 4%? A. $7,200 B. $12,700 C. $17,500 D. $23,000 E. A maximum total of $52,000 ```

Answer 36

B - The deferral is limited to 6% under ADP/ACP testing (4% + 2%) of his salary ($7,200) plus $5,500 catch- up. NOTE: The catch up is not an employer contribution; it is an employee deferral. The 6% is a plan limitation. The total of employer contributions, employee contributions, and forfeitures to the two plans cannot exceed $52,000 (415 limits). The question asked the amount of the deferral, not how much the employer is matching.

Question 37

Bill works for two related employers. Each employer has a 401(k) plan. With one employer he makes $50,000, and with the second employer he makes $60,000. If both plans allow for a 6% deferral and a 3% match, how much can he defer in 2014? A. $3,000 B. $3,600 C. $6,600 D. $9,900 E. $17,500

Answer 37

C - 6% of a total of $110,000 = $6,600. The plan only allows for a 6% deferral. He cannot defer $17,500.

Question 38

A plan participant takes a 401(k) loan to purchase a house. When is the interest deductible? A. The participant, a key employee, secures the loan with the primary residence purchased with the loan. B. Home mortgage interest is always deductible. C. The participant, a rank-and-file employee, secures the loan with both the primary residence purchased with the loan and elective deferrals. D. The participant, a rank-and-file employee, secures the loan only with the primary residence purchased with the loan.

Answer 38

D - 401(k)s [and 403(b)s] do allow principal residence loans to key employees and non-key employees. However, interest paid on a plan loan for a principal residence is only deductible under two conditions. 1) The loan is secured by the residence for which the loan is made, and 2) the participant is not a key employee. Interest on plan loans (even if for a primary residence) will be considered consumer interest if secured by elective deferrals. Home mortgage interest isn't always deductible. Consumer interest is not deductible.

Question 39

``` Nate, a sole proprietor, is going to contribute to a SEP. His net income is $50,000. What is the maximum he can contribute? A. $6,059 B. $9,295 C. $10,000 D. $11,000 E. $12,500 ```

Answer 39

B - 25% short-cut method $50,000 x 18.59% = $9,295 He is self-employed.

Question 40

``` How are qualified plans and traditional IRAs most similar? A. Funding limits B. Required minimum distributions C. Participation qualifications D. Vesting requirements ```

Answer 40

B - Both have required minimum distribution requirements.

Question 41

Which of the following is (are) an exception(s) to the 10% early withdrawal penalty for IRAs? I. Medical expense in excess of 7.5% of AGI II. Substantially equal payments III. Early termination from employment IV. Distributions used to pay medical insurance premiums after separation from employment (Unemployment compensation has been received for at least 12 weeks and the withdrawal was made in year of unemployment or year immediately following unemployment). A. I, II, IV B. I, III C. II, III, IV D. I, IV E. I

Answer 41

A - Substantially equal payments can start at any age, but they must be over the owner's life expectancy. The 7?% floor for medical care does not apply to health insurance premiums if unemployment compensation has been received for at least 12 weeks and the distribution occurs in the year unemployment payments are received or the year after. Test taking tip. If II is true and III is false, the answer has to be A. Even if you did not know whether IV is true or not, it did not matter.

Question 42

``` Which investment is the least suitable for an IRA account for a young single client with a moderate risk tolerance? A. High-yield municipal bonds B. Individual stocks C. Variable annuity (growth) D. Growth mutual fund ```

Answer 42

A - The least suitable is the municipal bonds.

Question 43

Can a retired 71-year-old man make a contribution to a Roth IRA? A. No, he can't B. Yes, he can C. No, he is too old D. Yes, but it isn't deductible E. Yes, but he can only if he is divorced and paying alimony

Answer 43

A - You MUST have earned income to be able to contribute to a Roth IRA. If no earned income is shown, you cannot assume he has earned income. The question says he is retired. The alimony was paid, not received. Alimony received would have been compensation.

Question 44

Bob and Sally, married filing jointly, have an AGI of $200,000. Neither Bob nor Sally has a retirement plan at work. What IRA options are available to them? A. They can both start deductible IRAs. B. They can both start Roth IRAs. C. They can either start deductible IRAs or Roth IRAs. D. They can't start deductible IRAs or Roth IRAs.

Answer 44

A - Their AGI is too high to do Roth IRAs, but since neither has a pension plan, they can both do deductible IRAs.

Question 45

When can a Roth account be closed with no adverse tax consequences? A. Immediately B. When it's a special purpose distribution C. After the individual has had the Roth IRA for five years D. After age 59? E. C and D combined

Answer 45

E - Earnings must meet the five-year rule, and the person must be 59? to be tax-free.

Question 46

``` Seth is age 42 and married. He is an active participant in his employer's governmental 457 plan. Seth and his spouse's joint AGI is $106,000 (before making the maximum allowable 457 deferral). How much can he contribute to his IRA (and deduct) this year (2014)? A. $2,750 B. $4,000 C. $5,000 D. $5,500 E. $11,000 ```

Answer 46

D - The phaseout for married plan participants is $96,000 to $116,000. If someone is an active participant, IRA deductibility depends on whether the MAGI is within the phase-out range. HOWEVER, a 457 plan (any type) does not count as active participation, so he can make a deductible contribution. It only asked about his contribution, not hers.

Question 47

In 2011, James converted his $25,000 IRA to a conversion Roth IRA. By 2014, his conversion Roth IRA has grown to $31,000, and he takes a full withdrawal. None of the special purposes have been met. Which of the following are true? I. The $25,000 conversion is not subject to income tax or early withdrawal penalty. II. The $25,000 conversion is subject to a 10% early withdrawal penalty. III. The $25,000 conversion is subject to a 10% early withdrawal penalty and a 10% conversion penalty tax. IV. The $6,000 of earnings is subject to income tax and a 10% early withdrawal penalty. V. The $6,000 of earnings is subject to a 10% early withdrawal penalty. A. I, IV B. II, V C. III, IV D. II, IV E. III, V

Answer 47

D - Five years have not passed and none of the special purposes have been met.

Question 48

Which of the following statements regarding Roth salary deferral accounts is false? A. A TSA [(403b)] may be offered as a Roth account. B. Current 401(k) sponsors may offer Roth 401(k) accounts. C. Governmental 457 accounts may be offered as Roth accounts. D. There are income restrictions associated with a Roth 401(k).

Answer 48

D - Only current 401(k), 403(b) and 457(b) sponsors may offer a qualified Roth contribution program.There are no income restrictions like with Roth 401(k) phaseouts ($181,000 - $191,000).

Question 49

Bill, age 72, and Jane, age 69, married and filing jointly, want to contribute to a Roth IRA. He earns $18,000 per month. They normally have limited itemized deductions. How much can they contribute? A. $0 B. $5,000 C. $5,500 D. $10,000 E. $11,000

Answer 49

A - Their AGI is too high. The phaseout is $181,000 to $191,000. The only number you have been given is monthly income. Their AGI is around $200,000 ($18,000 x 12 = $216,000).

Question 50

Jack, age 40, is employed by Bet-On-Us. The company recently established a SIMPLE. Jack has been a participant fewer than two years. He contributed $3,000, and his employer matched $600. He has decided to leave the company and take all the money as a distribution. Whicl1 of the following is true? A. The $3,000 will be taxable as ordinary income plus a 10% early withdrawal penalty. B. The $600 will be forfeited and allocated to the remaining employees; the remaining $3 1000 will be taxed at ordinary income tax rates plus a 10% penalty. C. The $3,600 will be taxable as ordinary income plus a 10% early withdrawal penalty. D. The $3,600 will be taxable as ordinary income plus a 25% early withdrawal penalty. E. Jack cannot take any distributions for two years.

Answer 50

D - Employer contributions are non-forfeitable. The 10% penalty is increased to 25% for distributions taken within two years of the employee's first participation.

Question 51

``` Tony's, a specialty deli, has a SIMPLE plan. They would like to provide more retirement benefits to their employees. Which plan can they adopt in addition to the SIMPLE plan? A. Money purchase plan B. SEP C. 403(b) D. None of the above ```

Answer 51

D - Having a SIMPLE precludes Tony from having another plan.

Question 52

``` Tom Sellers is self-employed. He has no other employees. His income after expenses is $80,000. Which of the following plans provides the maximum allowable contribution? A. SEP B. SIMPLE 401(k) C. SIMPLE IRA D. Keogh ```

Answer 52

A - A SEP is easy to install. The SEP contribution would be $80,000 x 18.59% = $14,872. The SEP is subject to the Social Security calculation like a Keogh for self-employed. SIMPLE IRA and SIMPLE 401(k) contributions are $12,000 + $2,400 (3%) = $14,400. Keogh isn't enough of an answer. It should say Keogh defined benefit or money purchase plan.

Question 53

``` Which of the following plans has the maximum allowable contribution and a mandatory contribution? A. Money purchase B. SEP C. Profit-sharing D. SIMPLE 401(k) E. TSA ```

Answer 53

A - A money purchase plan can allow for a $52,000 contribution and is subject to the minimum funding standard (mandatory contribution). A SEP or a profit-sharing plan can allow for a $52,000 contribution, but the contribution isn't mandatory.

Question 54

``` Joseph Mills, owner of Mills Manufacturing, has seen excessive employee turnover. He would like some kind of retirement plan. The number of employees on the payroll averages 50-60 yearly. He wants a simple plan. He will match to a limited extent. Which plan would you suggest? A. SIMPLE IRA B. Profit-sharing 401(k) C. SIMPLE 401(k) D. SEP ```

Answer 54

A - The SIMPLE IRA has a special election under the 100% match on the first 3%. Under a SIMPLE IRA, the employer may elect a 1% match in no more than 2 years of any 5-year period. The SIMPLE 401(k) may not have a special match election. It has an extremely rigid plan design. The SIMPLE 401(k) and the PS 401(k) are ERISA plans. They are subject to all the normal ERISA requirements (not simple plans). SEPs do not allow for matching.

Question 55

``` Which retirement plan is best for a woman who is a consultant (self-employed) and makes $150,000? She wants to put away 10%. A. Keogh B. SEP C. IRA D. Roth IRA ```

Answer 55

B - The SEP allows for up to 18.59% (self-employed). It is simple. A Keogh answer by itself isn't enough of an answer. It should say Keogh DB, MP or PS.

Question 56

Sam's corporation established a SARSEP prior to 1997. Which of the following are correct? I. The 415 limits apply (total additions equal to the lesser of $52,000 or 25% of compensation) II. New employees, as they join the firm, can be added to the plan up to 25 total employees. III. The maximum deferral is $17,500 (not including catch-up) IV. All contributions are 100% vested A. I, II B. I, III C. I, III, IV D. II, III, IV E. All of the above

Answer 56

E - Answers I through IV are true. SARSEPS are subject to the contribution limit (the lesser of 25% of compensation or $51,000). New employees can be enrolled in the plan. A new plan cannot be started, but existing plans may continue.

Question 57

``` Which plan contributions are not subject to FICA and FUTA? A. SEP B. SARSEP C. 403(b) D. SIMPLE IRA E. SIMPLE 401(k) ```

Answer 57

A - In the deferral-type plans, the employee contribution is subject to FICA and FUTA.

Question 58

``` When may a SEP or SARSEP account balance be withdrawn by a participant? A. Upon separation of service B. At normal retirement age C. At age 59? D. All of the above ```

Answer 58

D - Participants must be given the opportunity to withdraw the account balance at any time (for any reason). Of course, there may be a 10% penalty in some situations.

Question 59

Which of the following investment vehicles may not be used to fund a TSA? A. Open-end investment management companies B. Mutual funds C. Annuities with incidental life insurance D. U.S. operating company stock (cannot be passive)

Answer 59

D - Answer A is a different name for Answer B. Any type of annuity is an acceptable investment. Incidental life insurance within the annuity is also acceptable. A TSA cannot be funded with common stock.

Question 60

Mrs. Ball has accumulated $500,000 in her Section 457 non-governmental plan. She is approaching retirement. Which one of the following is not a correct statement? A. She can defer taxation by rolling the 457 into an IRA. B. She cannot defer taxation by rolling the 457 into a Roth IRA. C. She can defer taxation by leaving the $500,000 in the Section 457 plan. D. She can take a full distribution and have her employer withhold regular income and FICA taxes.

Answer 60

A - A nongovernmental 457 cannot be rolled either an IRA (Answer A) or into a Roth IRA. A governmental can be rolled directly into a Roth IRA. Answer B is incorrect, because it says cannot. NOTE: Cannotmakes Answer B true.

Question 61

Brad, a school teacher, takes a summer job with a local government agency each summer. Brad is contributing $17,500 into his 403(b)/TSA. Can he defer a portion of his salary into the local government agency's Section 457 plan? A. Yes, up to $17,500 B. Yes, up to one-third of his compensation C. No, he has already exceeded $17,500 of aggregate deferrals D. No, he has to be a full-time employee

Answer 61

A - Under the new rules, he can defer the lesser of $17,500 or 100% of compensation.

Question 62

``` Mr. Pope, age 55, is a sole proprietor. He wants to establish an uncomplicated retirement plan to put away the maximum allowable per year. He has no employees, and his net profit is always in excess of $250,000. Which type of plan should he adopt? A. SIMPLE 401(k) B. Profit-sharing C. SIMPLE D. SEP E. uni-401(k) Retirement Planning Quiz - Lesson 7 ```

Answer 62

E - With the uni-401(k) he can defer $17,500 plus add employer contributions to a cap of $52,000 plus catch-up of $5,500 (page 3-7). The SIMPLE and SIMPLE 401(k) would only allow for $12,000 plus 3% of compensation. The profit-sharing and SEP would allow him to do $52,000 but no catch-up. Retirement Planning Quiz - Lesson 8

Question 63

``` A defined benefit plan has incidental life insurance using the 100 to 1 test. Tom died prior to retiring. His wife received two checks during the year: $200,000 pure death benefit and $20,000 cash value. How much will not be taxable this year? A. 0 B. $20,000 C. $200,000 D. $220,000 ```

Answer 63

C - The pure life insurance death benefit will be tax-free. The employee is charged with the cost of the pure death benefit of the life insurance. The cash value will be taxable. Reference Lesson 8 materials for more explanation.

Question 64

``` Which of the following type of plan is subject to PBGC? A. Target benefit pension plan B. Cash balance pension plan C. Money purchase pension plan D. ESOP ```

Answer 64

B - Defined benefit plans are generally subject to PBGC insurance program. Answers A, C and D are defined contribution plans.

Question 65

``` XYZ's pension plan has the following investments. Which investment(s) may produce UBTI income? I. Real property rents II. Gain from sale of capital assets III. Equipment leasing program (containers) IV. Annuities V. Whole life insurance A. I, II, IV B. I,II C. III D. III, IV E. III, IV, V ```

Answer 65

C - Equipment leasing programs are normally limited partnerships.

Question 66

``` What entity or regulation imposes extensive reporting and disclosure requirements on a defined benefit plan? A. PBGC B. ERISA C. Department of Labor D. IRS ```

Answer 66

B - A defined benefit plan is subject to mandatory insurance by the PBGC. Benefit levels are guaranteed by the PBGC. However, the plan is subject to all the ERISA requirements for qualified plans (participation, funding, vesting, etc.) and the ERISA reporting and disclosure requirements. This information is disclosed to the plan participants and/or filed with the IRS or the Department of Labor.

Question 67

Apex, Inc. wants to reward its employees but does not have cash to contribute for year-end 2014. The company feels it will be in a very profitable position during the year 2015. What would you suggest Apex do? A. Adopt a profit-sharing plan and, in lieu of a cash contribution, give the plan a promissory note. B. Adopt a profit-sharing plan and borrow the necessary contribution from a bank. C. Adopt an ESOP and fund the contribution with company stock. D. Do not start the plan until 2015 Retirement Planning Quiz - Lesson 8

Answer 67

B - This option allows Apex to put money in the plan now and get a tax deduction now. Answer C is a good answer, but there is no indication in the question that Apex is interested in using company stock. This is the best answer (subjective). Retirement Planning Quiz - Lesson 9

Question 68

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 legal separation C. Distribution for purchase of principal residence D. Distribution due to separation from service at age 55

Answer 68

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

Question 69

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. Qualified plan loan D. Higher education cost for a participant's child

Answer 69

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 59? rule with plan loans.

Question 70

``` Sally, a widow, continues to work past age 70?. She continues to add to her 401(k). She has $100,000 in her IRA and $150,000 in her 401(k). Does she have to take minimum distributions? A. Yes, from both plans B. Yes, from her IRA C. Yes, from her 401(k) D. No ```

Answer 70

B - She must take RMDs from her IRA. Distributions from the 401(k) can wait until she retires. Safe harbor on page 9-1 does not mean a person is exempt from the 10% penalty. Please reread 9-1 if you thought it was.

Question 71

``` Esther is eligible for her company's money purchase plan. She is married to Jim. She has two children: Danny and Suzi. Whom can she name as a beneficiary? A. Anyone she wishes B. Her estate C. Jim D. Danny E. Suzi ```

Answer 71

C - The participant, Esther, can only name another beneficiary if Jim consents. The question must say he waived his rightto choose for the other answers to be correct. Applies to pension plans only (DB, CB, MP and TB) not profit-sharing.

Question 72

Arthur and Beth are getting a divorce. Arthur has an IRA with an account value of $500,000. Under QDRO, Beth has which of the following rights? A. None B. 50% of the value of the account C. 50% of the value of the account when Arthur turns 59? D. A QJSA equal to 50% of the value of the account

Answer 72

A - QDROs only apply to qualified plans, 403(b)s, and governmental 457s Ñ not IRAs.

Question 73

Jane divorces Bill. She is age 42. Per the divorce agreement (QDRO), she decides to take a direct distribution of Bill's qualified plan money ($1,000,000) now. If she gets half, what will be the amount of her check from the plan administrator? A. $500,000 B. $500,000 (less 10%) C. $500,000 (less 20%) D. $500,000 (less 30%) E. $250,000

Answer 73

C - There is no 10% early penalty (QDRO), but the plan will deduct 20% (withholding) when a direct distribution is paid.

Question 74

``` Mrs. Fitch recently retired. She took a 100% distribution from her retirement plan. Her employer did not take a 20% mandatory withholding. What kind of plan did she have? I. Defined benefit II. 403(b) III. Defined contribution IV. Profit-sharing 401(k) V. SIMPLE IRA A. I, III, IV B. II C. V ```

Answer 74

C - A direct distribution from a qualified plan requires the plan administrator to withhold 20%. A SIMPLE is not a qualified plan; a SIMPLE 401(k) is a qualified plan. 403(b) distributions that are not directly rolled over are subject to mandatory withholding. Answer C is the best choice.

Question 75

Todd wants to defer his pension distributions as long as possible. He works for RJ, Inc. RJ wants him to stay beyond the normal retirement age of 70. If he works beyond the normal retirement age, what is the latest he can take a distribution and not be penalized? A. 70? B. By April 1st of the year after he turns 70? C. When he retires D. By April 1st of the year after he retires

Answer 75

D - There is no indication that he owns stock in RJ, Inc. Therefore, the best answer is by April 1st of the year after he retires.

Question 76

``` Tom is age 70? at the end of the first distribution year. His IRA account balance was $250,000 at the beginning of the first year. He takes his first distribution by April of the next year. What is the required distribution he must take by 12/31 of the second year if the account balance is $265,000 at the beginning of the second year? Uniform Lifetime Table Age Distribution Period 70 27.4 71 26.5 72 25.6 A. $7,023 B. $9,772 C. $10,000 D. $10,352 ```

Answer 76

C - $265,000 Ö 26.5 = $10,000 (2nd year), $250,000 Ö 27.4 (1st year)

Question 77

Barney is a participant in his employer's ESOP. The company makes a contribution of stock worth $40,000 ($4/share) to Barney's account. Twenty years later, Barney retires and takes a lump-sum distribution of the company stock and rolls the balance of the account (the cash portion) into an IRA. The market value of the stock is $100,000 ($10/share). After two years of retirement, he sells the stock for $150,000. What are the tax implications? A. $150,000 taxed as ordinary income at retirement B. $40,000 as ordinary income at retirement, $110,000 as long-term capital gain at the sale C. $110,000 as ordinary income at retirement, $40,000 as long-term capital gain at the sale D. $100,000 as ordinary income at retirement, $50,000 as long-term capital gain at the sale

Answer 77

B - Basis of employer stock is treated as ordinary income at time of distribution regardless of whether the stock is sold or not. NUA is always treated as long-term capital gain regardless of holding period. There are two assets in the plan, the company stock and cash. He takes a lump sum of the company stock, then that qualifies for NUA treatment. The non-company stock portion which in this case was cash can be rolled over into the IRA. If he rolls the company stock into the IRA, then it loses its NUA.

Question 78

Mr. Pierce died at age 69. Match up his IRAs to the correct distributions. His wife, Mrs. Pierce, is the beneficiary of one IRA. I. Take distributions at the owner's RBD based on the spouse's single life expectancy recalculated each year II. Roll into beneficiary's IRA; take distributions based on beneficiary's RBD (new uniform lifetime table) III. Take distributions over the beneficiary's life expectancy by December 31st of the year after the owner's death IV. Take distributions at least as rapidly as under the schedule in effect A. I B. I, II C. III D. II, IV

Answer 78

B - NOTE: Answer IV is just a distractor answer.

Question 79

Mr. Pierce died at age 69. Match up his IRAs to the correct distribution. His son, Tim, is the beneficiary of one IRA. I. Take distributions at the owner's RBD based on the spouse's single life expectancy recalculated each year II. Roll into beneficiary's IRA; take distributions based on beneficiary's RBD (new uniform lifetime table) III. Take distributions over the beneficiary's life expectancy by December 31st of the year after the owner's death IV. Take distributions at least as rapidly as under the schedule in effect A. I B. I, II C. III D. II, IV

Answer 79

C

Question 80

Husband (Phil) and wife (Tamara) (second marriage for both) want to make sure the surviving spouse is taken care of, but both want their assets to go to their own children from prior marriages. Tamara's (age 60) IRA still has her first husband listed as her beneficiary. He died 5 years ago. Can Tamara name her QTIP trust as the primary beneficiary? A. No, only her revocable trust can be a named beneficiary. B. Yes, but it only can be a contingent beneficiary not a primary beneficiary. C. Yes, if the requirements for a trust to be a beneficiary are met, she can name her QTIP trust as the beneficiary. D. No, only a natural person can be a beneficiary.

Answer 80

C - This is an IRA account, not a qualified plan.

Question 81

If an IRA participant dies at age 55 and has named a 30-year-old child as the beneficiary, what must happen in order to ensure that distributions can be made over the child's life expectancy? A. Because a distribution for a child does not need to start before age 40, nothing must happen. B. Distributions must begin by the end of the year following the year of death. C. Distributions must begin by April of the year following the year of death. D. Because distributions can begin at the child's RBD, nothing must happen.

Answer 81

B - Answer B is true. Otherwise, distributions are over a 5-year period.

Question 82

May an individual with two IRA accounts satisfy the minimum distribution rules by taking a distribution from only one plan? A. No, proportional amounts must be taken out of each account. B. Yes, the first step is to calculate the required minimum distribution from the aggregate IRA values and then take the total required distribution from one plan. C. Yes, the first step is to calculate the required minimum distribution from each plan separately and then take one of the distributions. D. No, the IRS has specifically ruled against taking distributions from only one plan.

Answer 82

B - If answer B is accomplished, then the distributions can be made from either or both plans.

Question 83

``` Mr. Hale turns 70 on April 1 of this year. His IRA account has a value of $96,000. He is married, and his wife's combined life expectancy IRS factor is 24. If Mr. Hale only takes a $2,000 distribution by next April 1st, what will be his tax penalty? A. $0 B. $500 C. $1,000 D. $1,500 ```

Answer 83

``` C - He was 70? on October 1st. He should have taken the distribution by April 1st of the next year. If the factor is given (24), then use it. His wife could be 20 years younger. $96.000 = $4,000 24 He took -2,000 Penalty 2,000 x 50% = $1,000 ```

Question 84

Your client has $500,000 in her IRA at Mutual Fund A, and she withdraws $100,000 of that IRA. Before 60 days pass, she deposits $100,000 in an IRA at Bank B. When can she take another 60-day withdrawal? A. From Mutual Fund A or Bank B after 12 months B. From Bank B anytime (no penalty) Retirement Planning Quiz - Lesson 9

Answer 84

A - The withdrawal affected both accounts. You only get one 60-day rollover per one-year interval per IRA account. Think of this in terms of a mutual fund. You are with Mutual Fund A, you take a 60-day withdrawal, you then put the money in Bank B. This is the same money. Now, if prior to the A money being put into the B account, the client could do a withdrawal from B Ñ if it was separate money, not the same money. Retirement Planning Quiz - Lesson 10

Question 85

Which of the following statements describe(s) the provisions of constructive receipt as it is applied to nonqualified deferred compensation plans? I. Constructive receipt occurs when the funds are available to the employee. II. Constructive receipt by employee results in taxation to the employee of the applicable benefits. III. If a company goes through a merger or acquisition, the rabbi trust provisions will automatically trigger constructive receipt to the employee. IV. If a company owns the assets, its employee will not have constructive receipt. A. I, II, III, IV B. I, II, IV C. I, II D. III E. IV

Answer 85

B - A rabbi trust might trigger constructive receipt due to a merger or acquisition.

Question 86

Which of the following statements are true concerning a rabbi trust? I. The rabbi trust provides complete protection. II. The rabbi trust is informally funded. III. The employer may fund the rabbi trust from the general assets of the company. IV. Employer contributions to the rabbi trust are not subject to payroll taxes. V. The rabbi trust assets may be used for purposes other than discharging the obligations of the employee. A. I, II, III B. II, III, IV, V C. III, IV, V D. II, IV

Answer 86

B - The assets are always subject to the company's creditors. The employer may fund the trust from general assets. Contributions are not subject to payroll taxes, but distributions are subject to withholding and FICA. The rabbi trust offers no protection in case of bankruptcy or financial obligations of the company.

Question 87

John, a high-performing sales manager for ABC Auto Parts, is unhappy with the company's 401(k) program. The $250,000 compensation cap and the ADP test are limiting contributions. ABC, in an effort to keep John, should offer him which of the following? A. A salary continuation plan using a variable annuity policy B. An increase in company contributions to the 401(k) C. A secular trust D. A split-dollar policy E. A pure deferred compensation arrangement using a VUL policy

Answer 87

A - A salary continuation plan uses only employer contributions. Pure deferred compensation uses a portion of the employee's current compensation. The question did not indicate a need for life insurance (Answers D and E). A secular trust contribution is taxable to John and limits his ability to use the funds until some period of time goes by.

Question 88

Harry is granted $250,000 of ISO options that vest in one year. Next 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 88

A - A company cannot grant more than $100,000 of ISOs (based on exercise price) that are vested in the same year to any one employee if favorable ISO treatment is desired. If more than $100,000 of such ISOs that vest in the same year are granted, the excess options, once exercised, are treated as NSOs (for tax purposes).

Question 89

A large financial organization wants to hire Tom. Tom is a successful financial planner with a large practice. To entice Tom, the company is proposing a large nonqualified stock grant. The grant will be based on Tom's ability to build the financial planning division over the next five years. When will the grant be taxable to Tom? I. The grant will be taxable in five years when the substantial risk of forfeiture expires. II. The grant will be taxable now. III. The grant will be taxable when Tom can freely transfer the stock. IV. The grant of restrictive stock will not be taxable until Tom sells the stock. A. I, III B. I, IV C. II, III D. II E. III

Answer 89

A - The two major determinants of taxation are the following: - the free transferability of the employee's interest and - the presence of a substantial risk of forfeiture

Question 90

Gail, an employee of Quick, Inc., is given an ISO of 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 is true? A. Gail's taxable gain will be $5,000 of capital gain. B. Quick, Inc. will get a deduction of $10,000 when Gail exercises her option. C. Gail's taxable gain will be $15,000 of capital gain. D. Gail's taxable gain will be $10,000 when she exercises her option and a $5,000 capital gain when she sells the shares.

Answer 90

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

Question 91

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, and $100,000 is capital gains. II. Under the ISO, $50,000 is an add-back item, 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 Retirement Planning Quiz - Lesson 10

Answer 91

``` 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. 10,000 shares ISO exercise $10 $100,000 ISO option price -5 -50,000 (paid) ISO add back $5 $50,000 ISO sold $15 $150,000 ISO option price -5 -50,000 ISO capital gain $10 $100,000 With the NSO, at exercise the basis is $10/share, the option price ($5) plus the ordinary income ($5). Retirement Planning - Final ```

Question 92

``` Dr. Teal, age 35, has recently opened up a new successful practice. He wants to keep his young key employees from leaving him after they are fully trained. Based on these facts, which plan should he adopt? A. Defined benefit plan B. Cash balance plan C. Money purchase plan D. Target benefit plan ```

Answer 92

C - The key words are young, successfuland retain key employees.Money purchase plans guarantee that a contribution will be made each year. Dr. Teal is young. Cash balance doesn't have the flexibility to do age weighting or integration that a money purchase plan does. Answer C is the best choice.

Question 93

``` Lana has a money purchase plan. Her employer contributes 25% to the plan for all employees. If Lana makes $170,000 annually, what is the maximum her employer could contribute on her behalf this year? A. $25,500 B. $40,000 C. $52,000 D. $57,500 ```

Answer 93

C - The maximum annual contribution that an employee could receive is the lesser of 100% of salary or $51,000. If you used 25%, you got $42,500. Either $42,500 or $52,000 will be on the exam, not both. In this case only $40,000 was on the exam along with $52,000. Answer C is the only possible choice (maximum).

Question 94

Which of the following factors affect a target benefit plan participant's retirement benefits? I. The age of the plan participant II. The participant's compensation for the plan year III. The investment performance of the plan assets IV. The actuarial assumptions used to determine the contribution to the plan A. All of the above B. I, II, IV C. II, III, IV D. I, II

Answer 94

A All are correct

Question 95

In a profit-sharing plan, can the employer contribute more than 25% to an employee's account? A. No, the limit is 25% B. Yes, the limit is the lesser of 100% or $52,000 C. Yes, as long as the total company contributions do not exceed 25% of total plan compensation, the employer can contribute more than 25%. D. B and C

Answer 95

D - Individual employees can receive contributions in excess of 25% providing the contributions conform to the 415 limit (as long as company contributions do not exceed 25% of total plan compensation).

Question 96

``` ABC has a 401(k) plan where the average NHCE deferral is 4%. Bill (age 39) earns $90,000, and Todd (age 49/HCE) earns $180,000. How much can they respectively defer using ADP/ACP concepts? A. $3,600/$10,800 B. $3,600/$7,200 C. $17,500/$7,200 D. $17,500/$17,500 ```

Answer 96

A - The average NHCE deferral is 4%. Todd's (HCE) deferral is limited to 6% (4% + 2%). Although the deferral limit is actually the lesser of 100% of compensation or $17,500, Todd (HCE) must still comply with the Actual Deferral Percentage (ADP) limit which, in this scenario, limits his deferral to 6%, 2% more than the average NHCE deferral percentage of 4%. NOTE: You only have four answers to work with. $17,500/$10,800 is not an answer. It would have possibly been a better answer but it wasn't there. Both answers will NOT be on the exam.

Question 97

Which of the following features applies to employee stock ownership plans (ESOPs)? A. ESOPs can be integrated with Social Security B. ESOPs invest plan assets primarily in employer stock C. Benefits are normally distributed in cash D. NUA is the difference between stock sale price and the employer's cost basis

Answer 97

B - ESOPs cannot be integrated with Social Security. Benefits are generally distributed in the form of stock. By definition, NUA is the difference between the employer's cost basis and the market value at lump sum distribution to the employee.

Question 98

Stu is a sole proprietor. He has established a 15% profit-sharing plan. In the current year, his business will produce $75,000 of business profit. How much can he contribute to his Keogh plan? A. $9,032 ± 1 B. $9,090 ± 1 C. $9,781 ± 1 D. $10,390 ± 1 E. $11,251 ± 1

Answer 98

B - Shortcut: $75,000 x .1212 = $9,090

Question 99

``` Small Moves, Inc. has 12 employees. Three employees work part-time. Two full-time employees are under the age of 21. The part-timers all earned $1,000 or less last year and this year. The company wants a plan with minimal expenses to set up and maintain. The four owners (all related) are all full- time employees. Which plan would you suggest? A. SEP B. SIMPLE 401(k) C. SIMPLE IRA D. IRA ```

Answer 99

A - The SEP will have to cover the part-timers. At worst, the contribution would only be $3,000 @ 25% or $750. The part-timers still have to meet the 3-out-of-5 rule. The employees under age 21 would not be eligible until they were at least 21. A SEP is the simplest, most flexible plan. No mention of employee deferrals is made, eliminating the SIMPLE plans. The deciding factor is that all the four owner employees are related, but all of them would benefit. The company can make the contribution.

Question 100

The following statements are about various retirement plans. Which one is false, based on 2014 information? A. The $17,500 contribution limit to a 401(k) profit-sharing plan cannot be exceeded (age 50 and over). B. The annual additions limit (under Section 415) to both profit and pension plans cannot be exceeded. C. The maximum deductible employer contribution to a profit sharing plan is 25% of the total eligible payroll of covered employees. D. The maximum contribution match under a SIMPLE by the employer is $12,000 E. The maximum employer contribution to a single employee under a money purchase plan is limited by the annual additions limits (under Section 415).

Answer 100

A - The maximum annual employee salary reduction is limited to $17,500. This can be supplemented by employer contributions and forfeitures up to 415 limits for the 401(k). The maximum employer match for a SIMPLE is 3% of $400,000 (no salary compensation limit) or $12,000. The other answers are true.

Question 101

``` Xcel, Inc. would like to adopt a retirement plan with the following characteristics: - Flexible employer contributions - No employee contributions - Loan provisions Which of the following plans would you suggest? A. Profit-sharing B. SEP C. ESOP D. Profit-sharing 401(k) ```

Answer 101

A - Both a profit-sharing plan and an ESOP meet the plan characteristics. Unless there is some indication that Xcel wanted to contribute company stock, I wouldn't use an ESOP. SEPs do not have loan provisions. The 401(k) is wrong because it says no employee contributions.Do not be confused here. Profit sharing can have loan provisions, but it cannot have hardship provisions.

Question 102

Which of the following statements correctly describes a SIMPLE? A. Employee deferrals are limited to $12,000, and employer contributions are limited to 25% of compensation. B. An employer can offer a SIMPLE and a money purchase plan. C. Salary deferrals are subject to FICA and FUTA. D. Participant accounts are subject to vesting.

Answer 102

C - Employer contributions are subject to a match (3% or other options). A sponsoring employer cannot maintain another plan. Participants are always fully vested at all times.

Question 103

Twins, Inc. wants a retirement plan or plans that allow flexible yearly contributions and that can be integrated with Social Security. Which of the following is true? A. The company could do an ESOP. B. The company could do a SIMPLE. C. The company could do a tandem plan. D. The company could do a SIMPLE 401(k) plan. E. The company could do a profit-sharing plan.

Answer 103

E - Flexible yearly contributions eliminate the SIMPLE plan, the tandem plan, and the SIMPLE 401{k). A tandem plan was a combination of a money purchase plan and a profit-sharing plan with 401(k) provisions. Tandem plans were applicable before 2001. Integration eliminates the ESOP. SEPs can be integrated with Social Security.

Question 104

Debra Snow, age 50, works for Tilden, Inc. Tilden has a defined benefit pension plan. Debra is the VP of creative marketing. She earns $200,000 per year from Tilden. Debra is also a talented artist. She sold paintings netting $100,000 after expenses this year. If Tilden adds $100,000 to her defined benefit plan this year, can Debra do a SEP? A. No, the $100,000 exceeds the 415 limit of 25% or $52,000. B. Yes, but it is limited to 25% of $100,000 less Social Security offset or $18,590 (18.59%) C. Yes, but it is limited to $17,500. D. No, she is already a participant in a DB plan, and the 1.0 rule applies.

Answer 104

B - The SEP works somewhat like a Keogh PS Plan. For self-employed, the maximum contribution percentage is 18.59% (NOTE: $18,590/$100,000 is 18.59%) of earned income (like Keogh) using a 25% plan, and for corporate employees (including owners) it is 25%. The 1.0 rule no longer applies to any plan. NOTE: She works for two unrelated employers, so both contributions are allowed.

Question 105

Mary Jane's husband died this year. He had a qualified plan at work. Mary Jane, age 53, also has a qualified plan at work. She doesn't need his qualified plan money now or in the immediate future. Since her husband's death, she is uncertain whether she will retire early or not. She would like to roll the qualified plan over into her name. Which is a workable alternative for her? A. Do a direct rollover into an IRA account in her name. B. Do a direct rollover into her qualified plan at work. C. Take a direct distribution and open an IRA account in her name. D. Leave the funds in her deceased husband's qualified plan and change the name on the account to her name.

Answer 105

B - If she does a direct rollover into her IRA, she will be subject to the IRA rules. If she does a direct rollover into her qualified plan, she can use separation from service at age 55 (no 10% penalty) or wait until after retirement to take RMDs. This gives her greater flexibility considering her uncertainty as to when she will retire, plus she gets creditor protection under ERISA with a qualified plan. See Lesson 9 for rationale.

Question 106

A 72-year-old client tells you that, through personal oversight, required minimum distributions were not taken from his/her IRA beginning at age 70?. You are aware of the penalty. What should you tell the client to do? A. Do nothing. B. File an amended return and ask for the excise tax to be waived. C. File an amended return and ask for the excise tax to be waived and pay any tax due. D. Take missed distributions but don't file an amended return.

Answer 106

C - The IRS can waive the excise tax if the taxpayer demonstrates the following. 1) The missed distribution was due to reasonable error. 2) Appropriate steps are being taken to remedy the situation. The obvious advantage to Answer B is that the taxpayer would wait to pay the tax. The IRS wants you to pay the tax first and then request a waiver. It's questionable whether voluntarily making up missed distributions (Answer D) gives the taxpayer much leverage in asking for a waiver of excise tax if the IRS later discovers the under- distribution. You must tell the client to do something (ethics).

Question 107

``` Mrs. Todd dies at age 69 with $1,000,000 in her IRA. Her son's age in the year after her death is 48 (distribution period 34.9). What is the required distribution in the two years after her death if the account balance is $1,100,000 at the end of next year? A. $28,499 B. $28,653 C. $31,519 D. $32,448 ```

Answer 107

D - $1,100,000 Ö 33.9* = $32,448 (*34.9 - 1 next year)

Question 108

Mr. Thomas is age 70?. He is married. His second wife is age 54. He has two sons (ages 40 and 36) from his prior marriage. He wants to take his RMD as slowly as possible. Which of the following is his best option? A. Take distributions, using the new uniform life expectancy table. B. Take distributions with his son (age 36), using the joint and last survivor table. C. Take distributions with his son (age 40), using the joint and last survivor table. D. Take distributions with his wife using the joint and last survivor table.

Answer 108

D - His wife is more than 10 years younger. The joint and last survivor table would be more favorable than the new uniform life expectancy table. The new uniform life expectancy table is based on a 10-year spread.

Question 109

Janice and Bill Carpenter file a joint tax return. Both earn $60,000 per year in wages (for a total of $120,000 per year), and neither is covered by any retirement plans. Janice and Bill each contributed $5,500 to their IRAs for the current tax year. What is their total IRA deduction for the current tax year? A. $0 Their wages phase out all deductions. B. $5,500 C. $11,000 D. They could contribute $11,000 to a nondeductible IRA. E. $13,000

Answer 109

C - Since neither is covered by a pension plan, they both can deduct their IRA contributions. There is no information to indicate they are over age 5O.

Question 110

``` Mr. Hale wants to borrow money to purchase more investments. He would like to deduct the loan interest. Which of the following assets makes the most sense to pledge? A. $100,000 of municipal bonds B. $100,000 IRA account C. $100,000 of common stock D. $100,000 in a money market account ```

Answer 110

C - The loan interest deduction may be disallowed when municipal bonds are pledged for a loan. Municipal income is not investment income. If an IRA is pledged for a loan, the IRA will be disqualified. Pledging the stock is like buying stock on the margin. It makes the most sense.

Question 111

``` Bert, age 71, is retired. Can he make a contribution to a Roth IRA? A. No, he cannot. B. Yes, he can. C. No, he is too old. D. Yes, but it is not deductible. ```

Answer 111

A - Bert has to have earned income to be able to contribute to a Roth IRA. It never said he has any earned income.

Question 112

Mr. and Mrs. Able (AGI $190,000) would like to contribute to either a Roth IRA or a Coverdell Education Savings Plan for their 9-year-old son. Which of the following is true? A. The Coverdell contribution is tax-deductible. B. Distributions for education purposes from a Roth IRA are always tax-free. C. They can only contribute to a Coverdell, not a Roth IRA, due to AGI limitations. D. The can only contribute $1,000 to a Coverdell due to phaseout on AGI.

Answer 112

C - The Coverdell contribution is not tax deductible. Roth IRA distributions for education purposes are not always tax free. In addition, whose Roth? The Roth phaseout is $181,000 - 191,000. Their AGI is above phaseout. But, is the AGI compensation? No compensation, then you cannot contribute to a Roth (same as 27). The AGI phaseout for Coverdells is $190,000 to $220,000. The current law allows contributions of $2,000 to a Coverdell.

Question 113

The board of directors of the publicly held company Frames & Frames, Inc. wants to offer to its chief executive officer, Harold Hayden, an employee benefit that will act as a performance incentive while postponing vesting into the future. Under consideration is an arrangement giving Harold a current right to purchase newly issued shares of the company's stock at a specified price, with later conversion in the company's common stock. Because Harold is in the maximum marginal income tax bracket, his primary objective is to avoid incurring additional income tax as a result of the arrangement. Which of the following is the most appropriate form of compensation plan for both Frames & Frames and Harold to accomplish their objectives? A. A funded plan established solely in Harold's name B. An informally funded nonqualified deferred compensation plan C. A nonqualified stock option plan D. Stock appreciation rights E. A junior stock plan

Answer 113

E - This is a junior stock plan (JCS). He has the right to purchase newly issued shares with later conversion into the company's common stock.

Question 114

Mr. Henry is the sales manager for LK Industries. He would like a nonqualified deferred compensation plan that is not subject to the creditors of the company. He is concerned the company may have future financial problems. The company has agreed but wants an immediate deduction for any money contributed to the plan. Which one of the following plans should they install? A. Rabbi trust using life insurance B. Section 457 plan C. Secular trust using a variable annuity D. Pure deferred compensation plan E. Nonqualified stock option plan

Answer 114

C - Contributions to a secular trust are deductible by LK Industries. The secular trust is irrevocable (funded) and not subject to the company's bankruptcy or insolvency creditors. A secular trust can be funded with various investments including (but not limited to) variable annuities.

Question 115

When may an employee avoid receipt of taxable income in a funded nonqualified deferred compensation plan? A. When the plan is unfunded B. When there is no constructive receipt C. When there is a substantial risk of forfeiture D. When there is no economic benefit

Answer 115

C - The best answer is substantial risk of forfeiture.

Question 116

``` Which of the following retirement plans cannot have plan loans? A. 401(k) plan B. 403(b) plan C. Defined benefit plan D. Stock bonus plan E. SIMPLE plan ```

Answer 116

E - Any type of qualified plan [or Section 403(b)] may permit loans (including DBs). Loans from IRA type plans are not permitted.

Question 117

Which of the following are not taxable fringe benefits? I. Season tickets for the Tampa Bay Bucs (pro football) games II. Use of a company apartment or lodge for weekend getaways III. Occasional money for meals IV. Occasional typing of personal letters by the company secretary V. Gifts for illness A. All of the above B. II, III, IV, V C. III, IV, V D. II, III E. I, II, V

Answer 117

C - Use of a company apartment or lodge for weekends is taxable. Occasional usage would not be taxable. The question is asking which benefits are not taxable.

Question 118

Your wife is accompanying you on a business trip. She is employed by your closely held company. Are her expenses tax deductible? A. Yes, if her reason for making the trip is for a valid business purpose B. No, cannot be deductible C. Deductible up to 50% of expenses D. Must get a private letter ruling before making the trip

Answer 118

A - Expenses are deductible if the individual is an employee of the taxpayer, the travel of the individual is for a bona fide business purpose, and the expense would otherwise be deductible by the individual. The wife is an employee.

Question 119

``` What kind of yield do Bill and Martha need to achieve to have $3,000,000 in 10 years? To calculate, use their combined 401(k), IRA, listed stock, and mutual fund net of margin loan. Then assume the 401(k) with match and profit sharing contribution will total $50,000 on an annual basis. Bill does not do catch- up of $5,500. A. 4.36 B. 6.37 C. 6.43 D. 6.60 ```

Answer 119

D - 1,225,000* CHS PV, 50,000 CHS PMT, 10n, 3,000,000 FV yield (i) = 6.60% (end) Both PV and PMT must be inputted as negatives. The PMT is negative because money is going into the account. *1,550,000 - ($125,000 margin and $200,000 PA value) Contributions are always at the end of the period (monthly/annual). Benefits are in Begin mode. If you used begin mode you calculated 6.43 (answer C).

Question 120

Should Bill change the type of profit-sharing plan he has? If so, why? A. No, he should leave the plan alone. B. Yes, he should change to a tandem plan to be guaranteed at least a 25% contribution each year. C. Yes, he should change to a defined benefit plan to get the maximum benefits to retire in 10 years. D. Yes, he should discontinue any kind of pension or profit-sharing plan and adopt a SEP.

Answer 120

A - No, Bill barely can pay himself enough to survive. Additional contributions (such as to a money purchase, defined benefit plan, or SEP) would have to come from his personal income.

Question 121

``` What is Bill's AGI for the current year? Very difficult Ñ Make sure you read the footnotes along with case data carefully, and remember he has an S corporation. He is married filing separately (affects other questions). NOTE: The CFP Board exam will not give you these type of hints. A. $202,500 B. $202,800 C. $214,000 D. $225,300 E. $229,500 ```

Answer 121

``` A - Bill's income $250,000 *** less capital losses - 1,500 * less alimony - 36,000 less alimony - 4,000 ** less 100% health premium - 6,000 ** ($500 x 12) AGI $202,500 * Married filing separately allows only ? ($1,500) on capital losses. See page 9 of mock exam. ** The life policy is paid separately from the monthly alimony ($4,000). The P.A. cannot deduct Bill and Martha's health premium (It becomes part of his income - S corporation rules). He can personally deduct 100%. See page 13 and 14 of this exam. The $3,000 of dividends and the $7,500 of capital gains come from her mutual fund (see question 46). *** This includes disability and medical insurance payments - see footnote 1 of the financial statement. ```

Question 122

If Bill becomes disabled, what will he receive after 90 days in after-tax benefits if he is in a 35% marginal tax bracket? A. $6,550/mo. B. $7,150/mo. C. $7,350/mo. D. $11,000/mo.

Answer 122

D - He would get $11,000 per month ($10,000 plus $1,000 of SIS) before Social Security pays. The Social Security rider is in Insurance Lesson 5. The S corporation will pass the premium to Bill. The premium paid becomes part of his taxable income. It is important to remember that S corporation owners are always charged with the premium (nondeductible expense). SIS starts at the same time as the base policy benefit. Payments from Social Security are never mentioned and have a 5 month waiting period.

Question 123

``` Susan has a medical claim. How much of the claim will be paid by P.A.'s medical insurance? Claim Surgical $1,000 One-day inpatient $3,000 Prescription drugs $300 NOTE: Please read the client information to see if Susan is a covered person. A. -0- B. $825 C. $3,475 D. $4,000 ```

Answer 123

``` C - $3,375 See page 10 of mock exam Ñ Bill's children. She is covered under his group health plan. Surgical $1,000 Susan pays $25 One-day inpatient 3,000 Susan pays 500 (ded.) Prescription drugs 300 Susan pays 300 $4,300 $825 ```

Question 124

Should Bill put Martha on his payroll? If so, why? A. No, he has a poor relationship with her which might result in divorce. B. Yes, it might help their cash flow and their relationship. C. No, she doesn't work full-time. D. Yes, she would be eligible for the 401(k) and health benefits.

Answer 124

``` B - Yes, it might improve their cash flow because she is in the 15% tax bracket (capital gains are 0%), and he is in the 33% tax bracket. Alimony $24,000 Interest 5,000 Dividends 3,000 Capital gains 6,000 (7,500 - 1,500*) $38,000 Property taxes - 6,000 Exemption - 3,400 $28,600 If she worked more than 1,000 hours, she might be eligible for the 401(k) plan. In addition, if she qualifies as an employee for health insurance (30 hours per week), her premium would be fully deductible. It is not deductible under the S corporation rules/2% owner. The medical insurance is currently deductible on the front of the 1040 (see #43). I feel answer B is a better answer choice. *The $1,500 is half of his $3,000 capital loss. ```

Question 125

``` How much investment interest expense can Bill deduct if he itemizes? A. -0- B. $10,500 C. $15,500 D. All the margin interest ```

Answer 125

A - Zero. He has no investment income. Bill and Martha file separately. The investment income (CD and mutual funds) is hers, not his.

Question 126

``` What can Martha do? HINT: Remember they are filing separately. What do you need to receive to do a Roth IRA or an IRA? I. Contribute to a Roth IRA II. Contribute to a deductible IRA III. Contribute to a non-deductible IRA A. I, II B. I, III C. III D. Nothing ```

Answer 126

D - Since they are filing separately, she has no compensation. No compensation, she can't do anything. Please read footnote #3. It says he has to split the loss.

Question 127

Bill is concerned about his low level of malpractice coverage. What suggestions would you give him considering the facts of the case? I. Put future earnings into a variable annuity II. Each year take all profits out of the business as salary III. Raise the deductible and increase the coverage as much as possible IV. Purchase cash value life insurance with future earnings A. All of the above B. I, II C. I, III, IV D. II, III, IV E. I

Answer 127

A - The variable annuity is creditor proof. Removing assets from the P.A. makes the business less valuable. He could take more salary now and invest in annuities or life insurance. He can improve his malpractice per Answer III. This is a very practical question. When working with clients who can be sued, like financial planners, how do you protect their assets? Answers II and V strip all the value out of his P.A. (PSC Corporation). He can then put the cash into an annuity or cash value life insurance policy. Go back to General Principles 10-6 for additional information.

Question 128

``` When Bill retires at age 63 (36 months early) and takes his Social Security early, what can he expect to receive if his normal age 66 NRA benefit is $2,200 per month? A. $1,100 B. $1,760 C. $1,870 D. $1,980 ```

Answer 128

B - The factor 1/180 is in Retirement Lesson 2. He will lose 20% or $440.00 $2,200 x 36 = $440 $2,200 - $440 = $1,760 180 Question 38: She can have an additional $500,000 in a jointly-held account with her son at another bank. It will be fully insured ($250,000 for her and $250,000 for him).

Question 129

``` Martha wants to set up another CD at a different bank with her son (joint tenancy). How much can she deposit in a joint account and have it fully insured if the name on the account was JT (her and her son)? A. $150,000 B. $250,000 C. $300,000 D. $400,000 E. $500,000 ```

Answer 129

E - Eligible earnings $100,000 x 15% = $15,000 Vested 60% $9,000 She is eligible after one year, but vesting starts in the second year. After four years she will be 60% vested. Years 2 to 6 is 60% vested (years 2, 3 and 4).

Question 130

``` Helen, an employee, has been a participant in Bill's profit-sharing 401(k) plan (15% company contribution). The plan uses a 2- to 6-year graded vesting schedule with a 1-year eligibility requirement. How much of her profit sharing account is vested (ignore earnings)? NOTE: Her 401(k) deferrals are vested. Helen's earnings history Year Salary 1 $28,000 2 $30,000 3 $34,000 4 $36,000 A. $1,500 B. $3,840 C. $6,000 D. $7,680 E. $9,000 ```

Answer 130

E - Changing the eligibility and vesting requirements for the 401(k) might not impress his young son. There is no indication that his son has student loans to pay off. I think his son will be most interested in a salary plus bonus. You may disagree with my answer. The doctor can barely pay himself. However, he is in poor health working alone. He needs his son to help him before he kills himself.

Question 131

What could Bill do to entice his son to join him in his medical practice? A. Provide him with occasional sport event tickets B. Shorten the eligibility and vesting requirements for the profit-sharing 401(k) C. Pay off all the college loans D. Provide him with a company car E. Pay him a guaranteed salary plus bonus

Answer 131

B - Selling puts after a long downturn seems logical. Short puts are a bullish position that provides income. He is optimistic (positive) about the stocks. In addition, the possibility of an up market seems greater than a downturn. If the market goes up and he sells calls, his stocks will be called away. The other answers are wrong because he wants to write options (sell) not buy options.

Question 132

``` Bill feels the stock market after a long downturn is stable. He would like to write options for income on stocks he owns. He still wants to keep the stocks long-term. What would you suggest if he is optimistic? A. Sell calls B. Sell puts C. Buy calls D. Buy puts ```

Answer 132

C - A defined contribution plan only will allow a contribution of $52,000 for 2014 (the lesser of 100% of compensation or $52,000). A 401(k) with catch-up would exceed $52,000 for 2014 ($51,000 + $5,500). This seems affordable to him and allows him to defer some income. A tandem plan was used before 2001 to create 25% contribution. 15% was the maximum for profit sharing prior to 2014, so a money purchase plan had to be added (10%). But, this is expensive because you have to maintain two plans. When PS went to 25%, the tandem type of planning ceased. NOTE: He may want to take more salary to make answers A, B, or C work (Rule 404 - 25%).

Question 133

Dan and Jane have reviewed your preliminary figures (answer #55) and have informed you that they need $3,200,000 (to be safe) and that their current assets will grow to a value of $1,900,000 at the first year of retirement. They will need to save $50,000+ per year to meet their goal. Identify the qualified retirement plan that would be most appropriate to install in Dan's company if he needs to save $50,000+ per year. A. Money purchase plan B. Target benefit plan C. Profit-sharing 401(k) D. LESOP E. Tandem plan (money purchase and profit-sharing combined)

Answer 133

C - While answer B is true, answer C is a better answer (addition of 1 year of eligibility). Answer D is wrong because of a graded vesting schedule eliminates 2 year eligibility. (Based on year 2013.)

Question 134

Assume that a money purchase plan with a graded vesting schedule is adopted by Sounds Terrific, Inc. What maximum eligibility requirements are permitted by law for this plan? A. Under money purchase, there is no maximum age requirement. B. 21 years C. 21-and-one D. 21-and-two E. 70?

Answer 134

C - These employees fail under the 21-and-one rule. One employee is age 20, and the other is employed less than one- half year (based on year 2014).

Question 135

Which of the company's employees, if any, may be excluded because of failure to satisfy the most restrictive statutory participation requirements for the above plan? (Base your answer on the plan being installed December 31, 2014, for the year January 1 to December 31, 2014, and a graded vesting schedule.) A. None of the employees - All will be eligible because of statutory requirements. B. If all employees are not enrolled, the plan will be ruled top-heavy. C. H. Plant and C. Caruso D. Only B. West will be vested

Answer 135

C - He cannot qualify for a hardship withdrawal. He is 58. He hasn't met the 10 year of reserves for in- service withdrawals.

Question 136

For questions 45 and 46 only, assume that Dan establishes a qualified profit-sharing plan for Sounds Terrific, Inc. in 2014, allowing for employer and employee contributions, plan loans, and in-service withdrawals (The plan requires 10 years of service for in-service withdrawals). Further assume that Dan will be a participant from 2014 until his distributions from the plan begin. Dan has certain concerns regarding the future distributions he will receive from the plan. Assume that when Dan is age 58, his retirement plan account is valued at $200,000 and then answer 45 and 46. To fund the purchase of a new home, he withdraws 20% of his account balance in the plan. What penalty tax and income tax, if any, are imposed in this situation? A. None, as this is less than $50,000 and would be considered a hardship withdrawal B. Ordinary income tax only C. 10% early withdrawal penalty and ordinary income tax D. No penalty or income tax if he followed plan guidelines E. If repaid in 60 days, there would be no penalty or income tax

Answer 136

D - Loans are not subject to ordinary income tax or the 10% early withdrawal penalty. It doesn't matter if the home is a principal residence or not. He has $200,000 in his account. This is not a distribution.

Question 137

For questions 45 and 46 only, assume that Dan establishes a qualified profit-sharing plan for Sounds Terrific, Inc. in 2013, allowing for employer and employee contributions, plan loans, and in-service withdrawals (The plan requires 10 years of service for in-service withdrawals). Further assume that Dan will be a participant from 2014 until his distributions from the plan begin. Dan has certain concerns regarding the future distributions he will receive from the plan. Assume that Dan, instead of withdrawing the funds, borrows the $40,000 amount needed from the plan for the home purchase. What penalty tax and income tax, if any, are imposed in this situation? A. None. This is less than $50,000 and would be considered a hardship withdrawal. B. Ordinary income tax only C. 10% early withdrawal penalty and ordinary income tax D. No penalty or income tax if he followed plan guidelines E. If he repaid in 60 days, there would be no penalty or income tax

Answer 137

D - Dan will receive the equivalent of 50% ($100,000 Ö $201,000)* of the contribution. This is less than the threshold of 60% as defined by the top heavyrules. *The $201,000 is $236,000 less employees. Plant ($20,000) and Caruso ($15,000)

Question 138

``` Dan Nelson decided to use a unit credit formula (DB plan) based on the employee's service with the employer. The formula is 1.5% of earnings for each of the employee's years of service, with the total percentage applied to the employee's average earnings. At Dan's retirement he should have 30 years of service and $75,000 of average earnings. What amount of annual pension should he receive? A. $11,250 B. $22,500 C. $33,750 D. $45,000 E. $75,000 ```

Answer 138

C - 1.5 x 30 = 45% 45% x 75,000 = $33,750

Question 139

``` For questions 49 and 50 Assume that Sounds Terrific installed a profit-sharing plan and that the plan is considered to be top heavy. Which of the following vesting schedules would be most appropriate for this plan? A. 2-year cliff vesting B. 3-year cliff vesting C. 5-year cliff vesting D. 2- to 6-year graded vesting E. 3- to 7-year graded vesting ```

Answer 139

D - Answer B is also correct, but Answer D is the best answer for the facts in the case (retain employees). Answers C and E are no longer available after PPA (top-heavy or not).

Question 140

For questions 49 and 50 Assume that Sounds Terrific installed a profit-sharing plan and that the plan is considered to be top heavy. What effect, if any, will this have on contributions for non-key employees? I. The employer must contribute a minimum of 3% for all non-key employees or the percent paid to the key employee receiving the highest percentage if less. II. The plan must comply with vesting requirements for top-heavy plans. III. The top-heavy condition must be corrected by the end of the plan year to prevent disqualification of the plan. IV. An additional 5.7% of compensation must be contributed to the accounts of non-key employees who are plan participants. A. I, II, III B. I, II C. II D. III, IV E. III

Answer 140

C - Profit-sharing plans are not subject to minimum funding standards (Answer I). If the plan is top-heavy,it must comply with top-heavy vesting requirements. The 5-year cliff and the 3-7 year graded vesting schedules no longer exist for top-heavy plans (or for matching contributions).

Question 141

Assume that Dan is age 70 and has decided to begin distributions from his retirement plan early next year. His life expectancy at age 70 is 27.4 years. The total amount of Dan's account balance for distribution purposes is $504,000. His cost basis in the account is $105,000. He wants his annual distributions to comply with the required distribution rules (Assume plan makes 6% net income). What is the amount of the minimum distribution requirement for the first year? A. $18,394.16 B. $15,229.01 C. $37,004.36 at the beginning of the first year D. $29,295.33 if taken at the end of the first year E. $39,224.91 based on joint life expectancy

Answer 141

A - $504,000 divided by 27.4 years Per the Census, he was born in June, so he would turn 70? in the second half of the year prior to the year of his first distribution (He'll still be 70 as of 12/31 the year before the distribution year). Remember 70 and 70? in the same year, use age 70.

Question 142

Assume that Dan is retired. He has sufficient retirement funds from other sources to delay distributions from the qualified plan. As a result, he does not begin to take distributions until he reaches age 75. Assume that his age 75 annual distribution would be $31,000 to comply with the required distribution. Identify the penalty tax, if any, which applies to these distributions from the plan. A. 50% of $31,000 B. $31,000 C. 50% of $31,000 plus interest D. The 50% penalty is suspended for retirement plan benefits. The penalty only applies to IRA plans. E. 50% penalty on distributions he should have taken since age 70?

Answer 142

E - The RMD is $31,000 for age 75. So the penalty isn't 50% of $31,000 because five years have passed. You must be an active participant (and not a 5% owner) of a retirement plan not to be subject to the late penalty. In this case, since he retired, he must take RMD distributions or be subject to the penalty.

Question 143

As an employee of Worldwide Banknotes, Inc., Jane is covered by a group term life insurance policy. Are there any income tax consequences for Jane due to the amount of her life insurance coverage? A. Her employer is permitted to deduct premiums paid only for the amount of coverage up to $50,000, and Jane will be responsible for excess premiums. B. Her employer is permitted to deduct premiums paid only for the amount of coverage in excess of $50,000. C. Jane is subject to ta x on the first $50,000 of coverage. D. Jane isn't subject to tax due to the amount of coverage (nondiscriminatory plan rules). E. Jane is subject to income tax on the cost of insurance over $50,000.

Answer 143

E - Since the plan is nondiscriminatory, the income tax applies only on the cost of insurance over $50,000. She makes $40,000, so she has coverage of $80,000.

Question 144

Jane was disabled for seven months due to an automobile accident. Jane received six months of benefits from the disability plan in the current year. Are there any income tax consequences to Jane as a result of the benefits she received? A. Benefits received will be taxable income. B. Benefits received will be tax-free income limited to $2,000 per year. C. Employer-provided disability income is considered wage continuation and is thus fully taxable to the employee when benefits are paid. D. Benefits received will be tax-free without any IRS limitations. E. None of the answers are correct.

Answer 144

D - Jane contributes wages equal to the premium due for the disability plan. She is paying the premium with after-tax dollars (contributory); therefore, the benefits are tax-free. Answer B is wrong because the benefit is $2,000 per month (60% of 40,000).

Question 145

If Jane terminates her employment with Worldwide, are there any penalties or responsibilities to extend coverage to Jane by Worldwide? A. Worldwide must purchase conversion coverage for Jane. B. By not providing continuation coverage for the employees, Worldwide must pay a penalty of $100 for each day that continuation coverage is not offered. C. Worldwide loses its deduction for premiums paid on the policy. D. Worldwide would have to offer COBRA to Jane for 18 months. Termination is a qualifying event. E. Even if Worldwide had 4 additional nonparticipating employees, there is no health continuation requirement.

Answer 145

E - COBRA (health continuation coverage) only affects employers with 20 or more employees. COBRA is based on the number of employees, not how many are participating in the plan. HIPPA would cover her, but to date there has not been a HIPPA question or answer on the exam.