Wrong Questions Flashcards
Dr. Woods, age 29, is a new professor at Public University where has has a salary of $111,000. PU sponsors a 403b and a 457 plan. Dr. Woods also has a consulting practice called DEC. He generates $200,000 of revenue and has $50,000 of expenses for DEC. Assume his SE tax is $20,000. What is the most that he could contribute to all of the retirement plans this year assuming he establishes a Keogh Plan for DEC?
A. 38,000
B. 58,000
C. 67,000
D. 73,000
C.
Dr. Woods can contribute 19,500 to each of the 403b and 457 Plans. In addition he can establish a Keogh plan and contribute 20% of his net self-employment income after deducting 1/2 of SE Taxes.
$200,000 -$50,000 \_\_\_\_\_\_\_\_\_\_ $150,000 -$10,000 (1/2 SE) \_\_\_\_\_\_\_\_\_ $140,000 * .20 \_\_\_\_\_\_\_\_\_\_ $28,000
In total:
19,500 + 19,500 + 28,000 = 67,000
Sherman, age 52, works as an employee at Cupcakes etc. They sponsor a 401k plan and he earns $50,000 while making a 10% deferral into his 401k. His employer matches the first 3% deferral at 100% and made a 5% profit sharing contribution to his plan. Sherman also owns hiw own landscaping business and has adopted a solo 401k plan. His landscaping business earned $40,000 for the current year. What is the total contribution that can be made to the solo plan, assuming his SE taxes are $6,000?
A. 19,500
B 21,000
C. 26,000
D. $28,400
D
An individual can defer up to $19,500 plus an additional 6500 catch up for all of their 401k and 403b’s combined. Since he already contributed $5k into his employer plan, he can still defer $21,000 into the solo plan. The employer contributions in this question are in addition to the employee deferral limit.
Then you have to add in the employer contribution for the solo 401k plan by doing the keogh, add that to the 21,000 and get 28,400
James is covered under his employers top heavy Defined Benefit Pension Plan. He currently earns $120,000 per year. The defined benefit plan uses a funding formula of years of service * average of three highest years of comp * 1.5%. He has been with the employer for 5 years. What is the maximum defined benefit that can be used for him for funding purposes?
A. 9,000
B. 12,000
C. 58,000
D. 120,000
B
This is a TOP HEAVY plan, which means that the maximum benefit looks like this:
120,000 * 5 * 2% (NOT 1.5%)
In 2021, the Section 415 limit for defined contribution plans is:
A. 19,500
B. 58,000
C. 230,000
D. 290,000
B
Answer A is the employee contribution. Section 415 is the Annual Additions Limit
A supplemental deferred compensation plan that pays retirement benefits on salary, above the Section 415 limits, at the same level as the underlying retirement plan is known as:
A. SERP
B. A funded deferred compensation plan
C. An excess benefit plan
D. A rabbi trust
C
An excess benefit plan extends the same benefits to employees whose contributions to the plan are limited by section 415. An excess benefit plan would put additional 12k into non-qualified retirement plans. Do not confuse with a sERP which provides benefits in excess of the section 415 limits AND ignores the covered compensation limits.
Donald and Daisy are married and file jointly. They are both age 42, both work, and their combined AGI is 116k. This year Donald’s profit sharing account earned over $5k. Neither he nore the company made any contributions and there were not forfeitures. Daisy declined to participate in her company’s defined benefit plan because she wants to contribute to and manage her own retirement money. (Her benefit at age 65 under the plan is $240 a month). How much of their 12,000 IRA contribution can they deduct? Assume that $6000 is contributed into each account.
A. 6,000
B. 8700
C. 9600
D. 12000
B. Daisy is an active participant. You cannot opt out of a defined benefit plan.
$6000 * (116000-105000 / 20000) = Reduction of 3300
Stewart is single, age 32, and contributed 1500 into a payroll deduction IRA sponsored by his employer. His annual earned income is 40,000. What is the maximum that he can contribute to a Roth IRA for the current year?
A. 0
B. 3000
C. 45000
D. 6000
C
The Payroll Deduction IRA is probably the simplest retirement arrangement that a business can have. No plan documents need to be adopted under this arrangement. The employer has no filing requirements BUT this counts towards the contributions for regular IRA’s for the year.
Jacinth is an executive at PU. As part of her compensation she has a restricted stock plan that allows her to received 2,000 shares of stock after she completes 5 years of service. She has met the vesting requirements 8 months ago when the stock was trading at 28 per share. She has decided to sell her stock. All of the following are true, except:
A. If she sells the stock today for $3 per share she would have an ordinary loss of $50k
B. If she sells the stock today for $15 per share she will recognize a capital loss of $26,000
C. If she sells the stock today for $28 per share then she will not recognize any gain or loss.
D. If she sells the stock today for $38 per share then she will recognize $20k in STCG
A. is the false statement. When she became vested in the shares, since she didn’t take the 83b election, she would recognize the W-2 gain then of $56,000. If she sold it for $3 per share she would recognize a capital loss, not an ordinary loss of $50k
Which of the following statements are true regarding Section 457 Plans?
I. Eligible Plan Sponsors include non-profit organizations, churches, and governmental entities.
II. In-service distributions after age 59.5 are allowed in a 457 plan
III. Salary deferrals are subject to SS, Medicare, and Federal unemployement tax in the year of the deferral.
IV. Assets of the plans for non-governmental entities are subject to the claims of the sponsor’s general creditors
I, II, IV
Churches are not qualifying sponsors of Section 457 plans
Safe Harbor requirements to exclude leased employees from an employers retirement plan include all but the following:
A. The leasing company must maintain a money-purchase plan with a contribution rate of 10%
B. The retirement plan of the leasing company may be integrated
C. The leasing company’s plan must provide immediate vesting
D. Safe Harbor can be used until leased employees constitute 20% of the NHC work force
B.
Under safe harbor leasing rules the plan must provide 10% non-integrated money purchase plan with immediate vesting. No more than 20% of the employers nonHCE may be leased to qualify for safe harbor rules.
Randal was just hired by Chastain, Inc., which sponsors a defined benefit plan. After speaking with the benefits coordinator, Randal is still confused regarding eligibility and coverage for the plan. Which of the following is correct?
A. The plan could provide that employees be age 26 and have 1 year of service before becoming eligible if upon entering the plan, the employee is 100% vested.
B. The plan may not cover Randal due to his position in the company, even if Randal meets the eligibility requirements.
C. Part-Time employees, that work less than 1,000 hours within a 12 month period, are always excluded from DB plans.
D. Generally, employees begin accruing benefits as soon as they meet the eligibility requirements
B.
Choice A is not correct because its 21+1. Choice C is not correct because a plan could cover part time employees.
Choice D is not correct because employees become part of a plan only as early as at the next available entrance date after meeting the eligibility requirements.
To retain its qualified status, a retirement plan must:
I. Have pre and post death distributions
II. Stipulate rules under what circumstances employee contributions are forfeited
III. Be intended to be permanent
IV. Be established by the employer
I,III,IV only
Employee contributions must be vested and cannot required to be forfeited.
Which statements accurately reflect the provisions for a self-employed owner (partnerships and sole props) in a small business pension plan?
I. Loans are available to owners and employees alike, if each has equal right and terms of the loans.
II. Contributions from owners are based on net earnings rather than wages
III. Contributions for employees (as a percentage of salary) is the same as for the self-employed owner (as a percentage of profit)
IV. Lump-Sum distribution tax treatment allowed for employees
I, II, IV
III cannot be right because they have to use the SE keogh contribution calculation
Which of the following is not a requirement for the owner of a corporate stock who sells to an ESOP to qualify for the nonrecognition of gain treatment?
A. The ESOP must own at least 55% of the corporations stock immediately after the sale.
B. The owner must reinvest the proceeds from the sale into a qualified replacement securities within 12 months after the sale.
C. The ESOP may not sell the stock within three years of the transaction unless the corporation is sold
D. The owner must not receive any allocation of the stock through the ESOP
A.
The ESOP must own at least 30% of the corporations stock immediately after the sale. All of the other statements are true.
Fred’s Po-boy shop sponsors an age-based profit sharing plan and contributes 20% of total covered comp to the plan. What is the most that could be contributed by the employer to Will’s account if his annual compensation is $230,000 for 2021? Assume Will is 58 years old.
A. 36,000
B. 42000
C. 58000
D. 63500
C
The mos that could be contributed is the annual 415 limit and there’s no indication that the 20% applies to everyone equally (it’s an age-based profit sharing plan)
All of the following accurately reflect the characteristics of a stock bonus plan, except:
A. Useful in cash flow planning for plan sponsor due to cashless contributions
B. Provides motivation to employees because they become “owners”
C. 20% withholding does not apply to distributions of employer securities and up to $200 in cash
D. May not allow “permissible disparity” or integration formulas
D
Integration formulas are not allowed under an ESOP plan but they are allowed under a stock bonus plan. All other statements are accurate in their description.
Which of the following correctly describes characteristics of group universal life insurance?
I. The contract has a master group policy
II. The employer usually pays all of the policy premiums
III. Expenses are often lower than for individual universal life policies
IV. These policies offer the potential for higher returns than whole life policies
V. The coverage is based on a combination of decreasing units of group term and accumulating units of single premium whole life
III and IV only
I - applies to group term life
II - usually the employee is required to pay part or all of the premium cost of group universal life insurance
V - applies to a group whole life program
Based upon the IRC, which of the following statement(s) is/are correct?
I Medical expenses paid as a benefit to the surviving spouse are excludable from gross income only to the extent they would have been excluded if they had been paid to the employee
II. Highly-compensated employees may lose their tax-free status of medical benefits under a self-insured plan which is disciminatory
III. A highly-compensated employee may be taxed on part of his or her medical expenses for which he or she is reimbursed under a discriminatory self-insured plan, even if the same benefits are available to all workers
I, II, III
Need to spend more time looking into all of this
Eldrick, age 40, established a Roth IRA 3 years ago and was tragically struck and killed by an errant golf ball hit by a drunk spectator at a golf tournament. Eldrick had contributed a total of 10k to the account and had converted 20k from his traditional IRA. His 20 year old son, Charlie, inherited the Roth IRA, which now has a balance of 60k. Which of the following statements is correct?
A. Charlie can distribute the entire balance from the Roth IRA without it being subject to any income tax or penalty the month after eldrick dies
B. Charlie must take minimum distirbutions from the Roth in the year that Eldrick dies
C. If charlie begins taking RMD’s, then the first distribution will be partially taxable
D. Charlie could delay taking a distribution from the Roth IRA for several years, avoid all penalties and income tax on the distribution
D.
Jacque’s wife just lost her job and they had a death in the family. Jacque is planning on taking a hardship withdrawal from his 401k plan to pay for living expenses and funeral costs. Which of the following is correct regarding hardship withdrawals?
A. Hardship withdrawals can be taken even if there is another source of funds that the taxpayer could use to pay for the hardship
B. Hardship withdrawals are beneficial because although they are taxable, they are not subject to the early withdrawal penalty
C. Hardship withdrawals can only be taken from elective deferral amounts
D. Unless the employer has actual knowledge to the contrary, the employer may rely on a written representation of the employee to satisfy the need of heavy financial need
D.
Answer C is not correct because a hardship distribution an be take from employee deferrals and employer contributions
According to ERISA, which of the following is/are required to be distributed automatically to defined benefit plan participants or beneficiaries?
I Annual Accrued benefit as of the end of the previous year
II. The plan’s summary annual report
III. A detailed descriptive list of investments in the plan’s fund
IV. Terminating employee’s benefit statement
II and IV
SEP IRA plans are unique from defined contribution plans in which of the following areas:
I Length of permissible exclusion from coverage based upon service
II. Establishment date of the plan
III. Income requirement for participation
IV. Car be paired with another plan
I+III
Employees can be excluded up to 3 years or age 21, whichever is longer. Employee needs to earn only $650 to be included in the plan.
If an employee receiving incentive stock options does not meet the employment time requirement, but receives options as a nonqualifying and exercises them, what will the consequences be?
A. The employee will be required to recognize income immediately upon receipt of the options
B. The employee will be required to recognize compensation income in the year the option is exercised
C. If an employee meets the holding period requirement, it does not matter whether he or she meets the employment requirement and the option is qualified
D. There is no consequences to this circumstance
C.
This illustrates the difference between the treatment of ‘qualified’ versus ‘nonqualified’ stock options. The tax implications are immediate and the income is recognized as soon as the option is exercised rather than when the stock is subsequently sold.
Bob Thornton received his NQSO from his company (traded on the NYSE), one year ago last week, with an option exercise price and stock price of $30. He told you recently, as his trusted financial adviser, that he desperately needed cash, and so he exercised the options last week on the one year anniversary with the stock price at $40 per share, and he sold the stock as it climbed to $45 peer share. What will the tax ramifications of these transactions be?
A. Bob will be taxed at cap gains rates only when the option is exercised and again for the difference when the stock is sold.
B. Bob will be taxed as W-2 income for the FMV of the stock less the exercised price when it is exercised, and then he will be taxed at capital gains rates for the balance when the stock then subsequently sold (LT or ST)
C. Bob will be taxed at ordinary income rates on the difference between the exercise price and the FMV of the stock when the option is granted and then on capital gain rates when the stock is sold for the FMV
D. There are no consequences to this circumstance until Bob sells the stock with all proceeds being taxed at capital gains rates
B
He will be required to report the gain as W-2 income of $10 when the option is exercised and then another $5 cap gain when it’s sold.
Match the following statement with the type of retirement plan which is most completely describes: “A plan which requires annual employer contributions equal to a formula determined by each participant’s salary” is a….
A. Profit sharing plan
B. Money Purchase plan
C. SIMPLE IRA
D. Defined Benefit Plan
B
Defined benefit and cash balance plans have their contributions determined by age, as well as salary.
An actuary establishes the required funding for a defined benefit pension plan by determining:
A. The lump sum equivalent of the normal retirement life annuity benefit of each participant
B. The amount of annual contributions needed to fund single life annuities for the participants at retirement
C. The future value of annual employer contributions until the participant’s normal retirement date, taking an assumed interest rate, the number of compounding periods, and the employee attrition into account.
D. The amount needed for the investment pool to fund period certain annuities for each participant upon retirement
B is correct
A - it deals with a lump sum, NOT annual contributions
C - DB plans deal with present value, not future value calculations
D - DB plans deal with life annuities, not period certain annuities
Prince, age 60, is the sole member of Symbols, LLC. Symbols sponsors a 401(k)/profit sharing plan. Prince’s SE income after expenses was 123,000 and his SE taxes were 17,400 for the year. What is the maximum that could be contributed by the employer and Prince for the benefit of Prince for 2021 ?
A. 42360
B. 48860
C. 49600
D. 55850
B
26000 for Prince employee deferral
123000 - (.5*17,400) * .2 = 22860 for contribution from the company
Factors which would affect a participant’s retirement benefits in a target benefit plan include:
I. The actuarial assumptions used to determine plan contribution
II. The total return on plan assets
III. The age of the participant
IV. The includible compensation for the plan year for the participant
All of these are correct
Abe’s Apples has an integrated stock bonus plan. If the plan makes a 10% contribution for the current ear what is the maximum excess rate?
A. 5.7%
B. 10%
C. 15.7%
D. 20%
C
The maximum excess rate is 2x the contribution rate limited to a disparity of 5.7%.
Calculate the maximum contribution that could be contributed for an employee, age 41, earning 140,000 annually, working in a company with the following retirement plans: 401k with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary.
A. 19500
B. 16800
C. 36,300
D. 58,000
C
Maximum 401k contribution (no match) - 19500
12% money purchase plan: 12% * 140000 = 16,800
16800+19500=36300
Carol, age 55, earns 200k per year. Her employer, Reviews are use, sponsors a qualified profit sharing 401k plan, which is not a safe harbor plan, and allocates all plan forfeitures to remining participants. In the current year, Reviews Are Us makes an 18% contribution to all employees and allocates 7000 of forfeitures to Carol’s profit sharing plan account, what is the maximum Carol can defer to the 401k plan in 2021 if the ADP of the NHC is 1%.
A. 4000
B. 19500
C. 10500
D. 26000
C
Even though it’s not a safe harbor plan, they still have to deal with ADP testing.
1% ADP = 2% ADP for HCE, which is 4000. BUT since she’s 55 years old she gets the 6500 annual catch up that isn’t calculated in the ADP %.
