Unit 18: Retirement Plans for Businesses

Question 1

Retirement plans generally must adhere to certain nondiscrimination requirements intended to ensure they do not favor owners or executives of the sponsoring employer over the employees. Depending upon the type of plan, the requirements may include:

Answer 1

• Minimum coverage tests that limit elective deferral and employer contributions to highly compensated employees (HCEs) as percentages compared to the corresponding percentages for non-highly compensated employees
• Prohibition of terms that favor HCEs dollar amounts of contributions or benefits, or other rights

Question 2

An employer may establish a SEP as late as:

Answer 2

The due date (including extensions) of its income tax return and have it be effective for that year. The employer must also make its contribution to the plan by the due date (including extensions)

Question 3

Do SEPs have to have an official “plan document”?

Answer 3

No, but the employer must execute a written agreement to provide benefits to all eligible employees under the SEP-IRA

Question 4

5305-SEP

Answer 4

Using this form will typically eliminate the need to file annual information returns with the IRS and the Department of Labor

Question 5

If an employer sets up a SEP, what employees are allowed to use it?

Answer 5

Everyone! All employees, including part-time, seasonal, and employees who die/terminate employment must participate in the plan

Question 6

Vesting for SEP IRA

Answer 6

All contributions are 100% vested

Question 7

An eligible employee for SEP-IRA purposes meets all the following requirements:

Answer 7

• Is at least 21 years old
• Has worked for the employer in at least three of the last five years
• Have received at least $650 of compensation in 2022

Question 8

The following employees can be excluded from coverage under a SEP-IRA:

Answer 8

• Employees already covered by a union agreement
• Nonresident alien employees who have recieved no U.S. source income from the employer

Question 9

Contributions to a SEP must be made in:

Answer 9

Cash, participants cannot contribute property

Question 10

SEP-IRA contributions are not reported on an employee’s Form W-2. SEP-IRA contributions cannot exceed the lesser of:

Answer 10

• 25% of the employee’s compensation
• $61,000 for 2022

Question 11

Once a company decides to contribute to a SEP-IRA all contributions to employees:

Answer 11

Must be identical (they cannot discriminate by each person)

Question 12

Can participants take loans from a SEP-IRA?

Answer 12

No, however, they can make withdrawals at anytime

Question 13

If an employee withdrawals money from a SEP-IRA before 59 1/2, a:

Answer 13

A 10% additional tax may apply unless the taxpayer qualifies for an exemption

Question 14

A SIMPLE plan can be structured in one of two ways:

Answer 14

• As a SIMPLE IRA
• As a SIMPLE 401(k)

Question 15

To establish a SIMPLE plan an employer must have less than

Answer 15

100 employees

Question 16

SIMPLE plans must be offered to:

Answer 16

All employees who have compensation of at least $5,000 in any prior 2 years, (and are reasonably expected to earn at least $5,000 in 2022)

Question 17

If a business maintains a SIMPLE plan and subsequently fails to meet the 100-employee limit, the business is:

Answer 17

Allowed a two-year grace period to establish another retirement plan, with the business able to continue to maintain the SIMPLE plan during the grace period

Question 18

Who can contribute to a SIMPLE plan?

Answer 18

Both employees and employers

Question 19

What employees does a SIMPLE IRA not have to be offered to?

Answer 19

• Employees covered by a union agreement
• Nonresident alien employees who have recieved no U.S. source income

Question 20

Employee contribution limit for a simple IRA

Answer 20

100% of compensation, up to $14,000
- 50+ can add $3,000

Question 21

SIMPLE IRA: Each year, the employer must choose to make either matching contributions or nonelective contributions to the employee’s retirement plan. In general, the employer must provide either:

Answer 21

Matching Contributions: A dollar-for-dollar match on payroll contributions up to 3% of compensation. This percentage can be reduced to as low as 1% in any 2 out of 5 years

Nonelective Contributions: The business may also choose to contribute a flat 2% of each eligible employee’s compensation.

Question 22

SIMPLE IRA: Max employee compensation taken into account?

Answer 22

$305,000

Question 23

SIMPLE IRA plans that have already been established must have an annual election period that extends from:

Answer 23

NOV 2nd to DEC 31st

Question 24

SIMPLE IRA vesting:

Answer 24

Employer and employee contributions are 100% vested

Question 25

SIMPLE IRA: Salary reduction contributions must be deposited with the applicable financial institution within:

Answer 25

30 days after the end of the month in which they would otherwise have been paid to the employee.

Question 26

SIMPLE IRA: Matching or nonelective contributions must be by:

Answer 26

The due date (including extensions) for filing the company’s income tax return for the year

Question 27

An employer can set up a SIMPLE IRA plan effective on any date form:

Answer 27

Janaury 1st throuhg October 1st

• New businesses that come into existence after October 1st can set a plan as soon as possible

Question 28

SIMPLE IRA: If a participant terminates employment during the year after making a salary reduction contribution are they still entitled to the employer match?

Answer 28

Yes

Question 29

SIMPLE IRA penalty for 2 year withdrawal

Answer 29

25%

Question 30

Do SIMPLE 401ks require annual nondiscrimination testing?

Answer 30

No

Question 31

Under a SIMPLE 401(k) plan, an employee can elect to defer some of their compensation into their retirement account. The employer is required to make either:

Answer 31

• A matching contribution, of up to 3% of each employee’s pay, or
• A nonelective contribution of 2% of each eligible employee’s pay

Question 32

Can a simple 401k reduce matching contributions down to 1%?

Answer 32

No

Question 33

In order to establish a SIMPLE 401(k), the business:

Answer 33

• Must have 100 or fewer employees
• Cannot have any other retirement plans
• Needs to file a Form 5500 annually

Question 34

SIMPLE 401k contiribution limites

Answer 34

$14,000

50+ $17,000

Question 35

Can a SIMPLE plan be terminated mid-year

Answer 35

No, the plan must be maintained for a full calendar year

Question 36

SIMPLE PLans: notification to terminate plan

Answer 36

November 2nd

Question 37

When must a 5500 be filed:

Answer 37

By the last day of the seventh month after the plan year ends

Question 38

Generally, distributions cannot be made from a qualified plan until one of the following occurs:

Answer 38

• The employee retires, dies, becomes disabled, or otherwise terminates employment
• The plan terminates
• The employee reaches age 59 1/2 or suffers financial hardship

Question 39

Qualified plan: The additional 10% penalty may not apply in the following situations:

Answer 39

• Distributions are for the taxpayer’s medical care, up to the amount allowed as a medical deduction
• Disability or death
• Distributions in the form of an annuity
• Distributions are made because of an IRS levy on the plan
• Distributions are made to a qualified reservist
• Qualified birth and adoption distributions
• Qualified disaster recovery distribution

Question 40

Qualified plan: penalty on excess contributions

Answer 40

6% on employee
10% on employer

Question 41

Defined contribution plan: Employer contributions are limited to:

Answer 41

25% of the employees total compensation

Question 42

The limitation on the annual benefit under a defined benefit plan in 2022

Answer 42

Lesser of:

1. $245,000
2. The average compensation of the employee in the three highest years