Deck 19: Deferred Compensation

Question 1

A 20% excise tax is imposed on nondeductible contributions by an employer to a qualified plan.

Answer 1

False

Question 2

A taxpayer who receives a distribution can avoid current taxation by rolling the distribution into another qualified employer retirement plan or into an IRA.

Answer 2

True

Question 3

A defined contribution plan is exempt from funding requirements.

Answer 3

True

Question 4

The payout to an employee in a cash balance plan is based upon a formula based on years of service.

Question 5

Qualified plans have higher startup and administrative costs than nonqualified plans.

Question 6

The minimum annual distributions must be made over the life of the participant or the life of the participant and a designated individual beneficiary.

Question 7

Any pre-tax amount elected by an employee as a plan contribution to a § 401(k)plan that does not exceed the statutory limit is not includible in gross income in the year of deferral and is 100% vested.

Question 8

If an employer's contribution to a SEP IRA is less than $53,000 in 2016 (or 25% of the employee's earned income,if less),the employee can contribute the difference.

Question 9

In a stock bonus plan,contributions are dependent on the employer's profits.

Question 10

Forfeitures may be allocated to the accounts of the remaining participants in defined contribution plans.

Question 11

A defined benefit plan must reduce the $210,000 (in 2016)maximum benefits payable by one-tenth for each year of participation under 10 years that an employee has performed.

Question 12

A restricted property plan is considered a deferred compensation plan.

Question 13

Group life insurance is considered a deferred compensation plan.

Question 14

Dana contributes $2,000 too much to a § 401(k)plan which is not returned within 2 1/2 months after the close of the tax year.The employer will have to pay a tax of $200.

Question 15

Under a defined benefit plan,the annual benefit payable to an employee is limited to the smaller of $210,000 (in 2016)or 100% of the employee's average compensation for the highest 3 years of employment.

Question 16

In a profit sharing plan,a separate account is not maintained for each participant.

Question 17

A failure to make a minimum required distribution to a participant in any taxable year results in a 50% nondeductible excise tax on any excess of the amount that should have been distributed over the amount that actually was distributed.

Question 18

After 2011,income averaging is allowed for Federal income tax purposes.

Question 19

If a taxpayer receives an early distribution from a qualified retirement plan,a 10% additional tax is levied on the full amount of any distribution includible in gross income.

Question 20

A cash balance plan is a hybrid form of pension plan that is similar in many aspects to a defined contribution plan.

Question 21

A participant has an adjusted basis of $0 in any nondeductible contributions to a traditional IRA.

Question 22

In a direct transfer from one qualified retirement plan to another qualified retirement plan,the employer does not have to withhold 20% of the amount of the direct transfer.

Question 23

On February 1,2016,Tuan withdrew $15,000 from his IRA #1.He deposited the funds back into IRA #1 within 60 days (a"rollover").Tuan may do one more nontaxable rollover distribution from either IRA #1 or IRA #2 starting in April 2016.

Question 24

A company is denied a deduction for a golden parachute payment to an employee,but not for a golden parachute payment to an independent contractor.

Question 25

A NQDC plan cannot discriminate in favor of officers or other highly compensated employees.

Question 26

Distributions from a Roth IRA that are subject to taxation are treated first as from earnings and last as from contributions.

Question 27

A direct transfer of funds from a qualified retirement plan to an IRA is subject to the withholding rules.

Question 28

An individual,age 40,who is not subject to the phase-out provision may contribute a nondeductible amount to a Roth IRA up to $5,500 per year in 2016.

Question 29

If a married taxpayer is an active participant in another qualified retirement plan,the traditional IRA deduction phaseout begins at $98,000 of AGI for a joint return in 2016.

Question 30

The $1 million deduction limitation on executive compensation is decreased by any nondeductible golden parachute payments made to an employee.

Question 31

The maximum annual contribution to a Roth IRA for an unmarried taxpayer who is age 35 is the smaller of $5,500 or the individual's compensation for the year.

Question 32

An employer obtains a tax deduction at the same time and to the extent that ordinary income is recognized by the employee who receives nonqualified stock options.

Question 33

For the spousal IRA provision to apply,a joint return must be filed.

Question 34

A participant who is at least age 59 1/2 can make a tax-free qualified withdrawal from a Roth IRA after a five-year holding period.

Question 35

If an individual is ineligible to make a deductible contribution to a traditional IRA,nondeductible contributions of any amount can be made to a traditional IRA.

Question 36

Traditional IRA contributions made after an individual reaches the age of 65 are treated as excess contributions and are subject to a nondeductible 6% excise penalty tax.

Question 37

The "spread" on an incentive stock option is subject to the alternative minimum tax.

Question 38

An individual is considered an active participant in an employer-sponsored retirement plan merely because an individual's spouse is an active participant for any part of a plan year in applying the IRA phase-out provision.

Question 39

Contributions to a Roth IRA can be made up to the due date (excluding extensions)of the taxpayer's income tax return.

Question 40

Income is taxed if a taxpayer's control over the amount earned is subject to substantial restrictions.

Question 41

Which of the following characteristics is not a characteristic of a stock bonus plan?

A)Can be in the form of a defined benefit plan.
B)Contributions need not be dependent on employer's profits.
C)Exempt from funding requirements.
D)Not subject to plan termination insurance.
E)None of the above.

Question 42

If a NQSO has a readily ascertainable value,an employee recognizes income on the grant date.

Question 43

Zackie has five years of service completed as of February 5,2016,which is his employment anniversary date.If his defined benefit plan [not a § 401(m)arrangement] uses the graded vesting rule,determine Zackie's nonforfeitable percentage.

A)40%
B)60%
C)80%
D)100%
E)None of the above

Question 44

Which of the following characteristics is not a characteristic of a cash balance plan?

A)Similar in many aspects to a defined benefit plan.
B)Employee bears the investment risk and rewards.
C)Establishes allocations to individual employee accounts.
D)Payout depends on how much builds up over time in the employee's individual account.
E)None of the above.

Question 45

The compensation paid by Purple Corporation to the plan participants of a profit sharing plan in 2016 was $38,300.During 2016,Purple Corporation contributed $10,000 to the plan.Purple's deductible amount for 2016 is what amount,if any?

A)$0
B)$7,660
C)$9,575
D)$10,000
E)None of the above

Question 46

Brown,Inc. ,uses the three-to-seven year graded vesting approach for its defined benefit retirement plan.Peter has five years of service completed as of February 5,2016,his employment anniversary date.Determine Peter's nonforfeitable percentage.

A)40%
B)60%
C)80%
D)100%
E)None of the above

Question 47

Fred is a self-employed accountant with gross earned income of $140,000 per year (after the deduction for one-half of any self-employment tax).He has a profit sharing plan (i.e. ,defined contribution plan).What is the maximum amount Fred can contribute to his retirement plan?

A)$28,000
B)$35,000
C)$40,000
D)$140,000
E)None of the above

Question 48

Dianna participates in a defined benefit plan that uses a fixed formula providing an employee with a benefit of 2% for each year of service,up to a maximum of 30 years.The total percentage accumulated before retirement is applied to the average of her three highest years of salary.Dianna works for 21 years,and the average of her three highest years of salary is $290,000.Calculate the amount of retirement benefits she will receive each year.

A)$0
B)$102,800
C)$109,200
D)$110,000
E)None of the above

Question 49

Joyce,age 40,and Sam,age 42,who have been married for seven years,are both active participants in qualified retirement plans.Their total AGI for 2016 is $120,000.Each is employed and earns a salary of $65,000.What are their combined deductible contributions to traditional IRAs?

A)$0
B)$3,000
C)$4,000
D)$8,000
E)None of the above

Question 50

Danielle,who is retired,reaches age 70 1/2 in 2015,and she will also be age 71 in 2015.She has a $150,000 balance in her traditional IRA.If her life expectancy is 15.3 years,what distribution,if any,must be made by April 1,2016?

A)$0
B)$9,804
C)$19,608
D)$150,000
E)None of the above

Question 51

In 2016,Jindal Corporation paid compensation of $42,300 to the participants in a profit sharing plan and then contributed $12,800 to the plan.Jindal's deductible amount and any contribution carryover are as follows:

A)$0 deductible;$12,800 carryover.
B)$8,460 deductible;$4,340 carryover.
C)$10,575 deductible;$2,225 carryover.
D)$12,690 deductible;$110 carryover.
E)None of the above.

Question 52

A defined benefit retirement plan covers 72% of the non-highly compensated individuals.The plan benefits 48 of the 131 employees.Which is true?

A)The 70% coverage requirement is not met.
B)The plan meets the minimum participation test.
C)The plan meets the 70% coverage requirement,but fails the minimum participation test.
D)The plan does not meet the 70% coverage requirement,but does meet the minimum participation test.
E)None of the above is true.

Question 53

Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan).She has the following income items for the year:
Earned income from self-employment
$50,000
Dividend income
8,000
Interest income
2,000
Net short-term capital gain
12,000
Adjusted gross income
$72,000
​
What is the maximum amount Susan can deduct as a contribution to her retirement plan in 2016,assuming the self-employment tax rate is 15.3%?

A)$9,235.
B)$12,000.
C)$46,000.
D)$46,468.
E)None of the above.

Question 54

A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2016?

A)$12,000
B)$17,000
C)$17,500
D)$18,000
E)None of the above

Question 55

Heather,age 48,is the sole remaining participant of a money purchase pension plan.The plan is terminated and a $240,000 taxable distribution is made to Heather.The early distribution penalty tax,if any,for 2016 is:

A)$0.
B)$12,000.
C)$24,000.
D)$30,000.
E)None of the above.

Question 56

A major disadvantage of a NQSO is that an employee must recognize ordinary income on the exercise of the option or at the date of the grant without receiving cash to pay the tax.

Question 57

Which of the following characteristics does not describe a defined benefit pension plan?

A)Actuarial calculations are required to determine the employer's annual contribution.
B)Upon retirement,the employee's pension amount depends on the value of the employee's account.
C)Forfeitures must reduce subsequent funding costs and cannot increase the benefits any participant can receive under the plan.
D)A separate account is not required to be maintained for each participant.
E)None of the above.

Question 58

Deidre has five years of service completed as of February 5,2016,her employment anniversary date.If the defined benefit plan [not a § 401(m)arrangement] uses the cliff vesting schedule,determine Deidre's nonforfeitable percentage.

A)0%
B)60%
C)80%
D)100%
E)None of the above

Question 59

Scott,age 68,has accumulated $850,000 in a defined contribution plan,$100,000 of which represents his own after-tax contributions.If the full amount is distributed in 2016,his early distribution penalty is:

A)$0.
B)$75,000.
C)$85,000.
D)$127,500.
E)None of the above.

Question 60

Merrill is a participant in a SIMPLE § 401(k)plan,and he elects to contribute 4% of his $40,000 compensation to the account,while his employer contributes 3%.What amount will vest immediately,if any?

A)$0
B)$1,200
C)$1,600
D)$2,800
E)None of above

Question 61

What statement is false with respect to an incentive stock option (ISO)?

A)To qualify as an ISO,the option price must equal or exceed the fair market value of the stock at the time the option is granted.
B)The spread is not subject to the alternative minimum tax.
C)If the employee meets the holding period requirement,the employer does not obtain a business deduction.
D)The spread is the excess of the FMV of the share at the date of exercise over the option price.
E)None of the above are false.

Question 62

Which statement is true with respect to golden parachute payments?

A)Refers to excess severance pay.
B)Does not include payments from a qualified profit sharing plan.
C)A deduction is denied to the employer.
D)A 20% excise tax is imposed on the recipient.
E)All of the above are true.

Question 63

Pony,Inc. ,issues restricted stock to employees in July 2016,with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.The stock is trading at $10 per share when Sam is issued 1,000 shares,and he proceeds to make a § 83(b)election.At the end of 2016,the stock is selling for $13 per share.Sam remains a full-time employee of Pony for the required two-year vesting period at which time the stock is worth $30 per share.Sam sells his 1,000 shares in 2020 at $36 per share.What amount and type of income will Sam recognize in 2020?

A)$26,000 capital gain.
B)$26,000 ordinary income.
C)$23,000 capital gain.
D)$23,000 ordinary income.
E)$36,000 capital gain.

Question 64

Yvonne exercises incentive stock options (ISOs)for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21,2016,when the fair market value is $120 per share.She sells the 100 shares of stock 3 1/2 years later for $140.Determine the recognized gain on the sale and classify it as capital or ordinary.

A)$2,000 LTCG.
B)$2,000 ordinary income.
C)$4,000 LTCG.
D)$4,000 ordinary income.
E)None of the above.

Question 65

Jana has $225,000 of earned income in 2016.Calculate the amount she can contribute to a SEP.

A)$22,500
B)$24,500
C)$53,000
D)$55,000
E)None of the above

Question 66

Which of the followings is not a characteristic of a Keogh plan?

A)A trust is established.
B)Considered to be a qualified plan.
C)Contribution to plan by extension due date.
D)Favorable 10-year forward averaging is not available.
E)All of the above are characteristics.

Question 67

Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach.What amount is deductible by the program in 2016 his first full year of employment.

A)None
B)$1,000,000
C)$3,000,000
D)$4,500,000
E)None of the above

Question 68

Pony,Inc. ,issues restricted stock to employees in July 2016,with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.The stock is trading at $10 per share when Sam is issued 1,000 shares,and he does not make a § 83(b)election.At the end of 2016,the stock is selling for $13 per share.Sam remains a full-time employee of Pony for the required two-year vesting period,at which time the stock is worth $30 per share (in 2018).Sam sells his 1,000 shares in 2020 at $36 per share.What amount and type of income will Sam recognize in 2020?

A)$6,000 ordinary income.
B)$6,000 capital gain.
C)$26,000 capital gain.
D)$6,000 capital gain;$20,000 ordinary income.
E)$20,000 capital gain;$6,000 ordinary income.

Question 69

If the special election under § 83(b)is made as a result of a restricted property transaction,which statement is false?

A)A factor supporting making the § 83(b)election is the expectation the property will appreciate substantially.
B)Ordinary income is recognized on the excess of the FMV over the amount paid for the property on the date received.
C)Any appreciation on the property after receipt is treated as capital gain.
D)A deduction is allowed to the employee for any taxes paid on the original amount included in gross income if the property is subsequently forfeited.
E)None of the above is false.

Question 70

Under a nonqualified stock option (NQSO)plan which is granted to Damon on March 15,2014,he may purchase 200 shares of stock from his employer at $15 per share.At that date,the option does not have a readily ascertainable fair market value.Eight months later on the date of exercise the fair market value of the stock is $20.On December 1,2016,Damon sells 100 shares for $24 each.Which of the following would be the result of these transactions on the date of exercise and the date of sale?

A)Ordinary income of $1,000 and a long-term capital gain of $400.
B)Ordinary income of $1,200 and a long-term capital gain of $300.
C)Ordinary income of $2,400 and a long-term capital gain of $0.
D)Ordinary income of $1,000 and a short-term capital gain of $400.
E)None of the above.

Question 71

Emmanuel,an executive,receives a $600,000 payment under a golden parachute agreement.Emmanuel's base amount from Blue Corporation is $140,000.What amount,if any,is deductible by the corporation?

A)$0
B)$140,000
C)$460,000
D)$600,000
E)None of the above

Question 72

Sammy,age 31,is unmarried and is not an active participant in a qualified retirement plan.His modified AGI is $55,000 in 2016.The maximum amount that Sammy can deduct for a contribution to a traditional IRA is:

A)$2,800.
B)$3,500.
C)$5,000.
D)$5,500.
E)None of the above.

Question 73

Saysha is an officer of a local bank that merges with a national bank,resulting in a change of ownership.She loses her job as a result of the merger,but she receives a cash settlement of $390,000 from her employer under her golden parachute.Her average annual compensation for the past five tax years is $110,000.Calculate any nondeductible excise tax Saysha must pay,if any.

A)$0.
B)$56,000.
C)$110,000.
D)$280,000.
E)Some other amount.

Question 74

Frank established a Roth IRA at age 25 and contributed a total of $131,244 to it over 38 years.The account is now worth $376,000.How much of these funds can Frank withdraw tax-free?

A)$0
B)$131,244
C)$244,756
D)$376,000
E)None of the above

Question 75

Pony,Inc. ,issues restricted stock to employees in July 2016,with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.The stock is trading at $10 per share when the stock is issued.An employee,Sam,decides to make the § 83(b)election with his 1,000 shares.At the end of 2016,the stock is selling for $13 per share.What amount,if any,can Pony take as a compensation deduction?

A)$0.
B)$10,000 in 2016.
C)$13,000 in 2016.
D)$10,000 when stock is sold.
E)$13,000 when stock is sold.

Question 76

The special § 83(b)election (i.e. ,where income is taxed in the year of the grant)with respect to a restricted stock plan may be advantageous in which of the following situations in 2016?

A)The employer is an unstable company.
B)The bargain element is relatively small.
C)A minimum amount of appreciation is expected in the future.
D)The restriction probably will not be satisfied.
E)None of the above.

Question 77

Dana,age 31 and unmarried,is an active participant in a qualified retirement plan.Her AGI is $120,000.What amount,if any,may Dana contribute to a Roth IRA in 2016?

A)$0
B)$3,225
C)$4,400
D)$5,500
E)None of the above

Question 78

James,an executive,receives a $600,000 payment under a golden parachute agreement.James's base amount from Silver,Inc. ,is $140,000.What is the total tax James must pay,assuming a 39.6% individual tax rate?

A)$0
B)$92,000
C)$210,000
D)$329,600
E)None of the above

Question 79

Mary establishes a Roth IRA at age 50 and contributes the maximum amount per year to the Roth IRA for 15 years.The account is now worth $199,000,consisting of $75,000 in contributions plus $124,000 in accumulated earnings.How much can Mary withdraw tax-free?

A)$0
B)$75,000
C)$124,000
D)$199,000
E)None of the above

Question 80

Pony,Inc. ,issues restricted stock to employees in July 2016,with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.The stock is trading at $10 per share when the stock is issued.An employee,Sam,decides to make the § 83(b)election with his 1,000 shares.At the end of 2016,the stock is trading at $13 per share.How much income,if any,must Sam recognize in 2016?

A)$0.
B)$10,000 capital gain.
C)$10,000 ordinary income.
D)$13,000 capital gain.
E)$13,000 ordinary income.