Question 1

Zackie has five years of service completed as of February 5, 2018, 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 these

Accepted Answer

The answer of Zackie has five years of service completed...

Question 2

Which of the following characteristics is not a characteristic of a cash balance plan?
A)It is similar in many aspects to a defined benefit plan.
B)The employee bears the investment risk and rewards.
C)It 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 these.

Accepted Answer

In a cash balance plan, the employer bears the investment risk and rewards, not the employee.

Question 3

A major disadvantage of an 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.

Accepted Answer

This is a true statement. When an employee exercises a non-qualified stock option (NQSO), they must recognize ordinary income equal to the difference between the exercise price and the fair market value of the stock on the exercise date. This income is subject to income tax, Social Security tax, and Medicare tax. However, the employee does not receive any cash from the company to pay these taxes, which can be a major disadvantage of NQSOs.

Question 4

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, 2019, his employment anniversary date.Determine Peter's nonforfeitable percentage.
A)40%
B)60%
C)80%
D)100%
E)None of these

Accepted Answer

Under the three-to-seven year graded vesting schedule, an employee's nonforfeitable right to employer contributions increases gradually each year starting from the third year of service until it reaches 100% in the seventh year. With five years of service, Peter would have a 60% nonforfeitable percentage (20% for the third year, plus 20% for the fourth year, plus 20% for the fifth year).

Question 5

Danielle, who is retired, reaches age 70 1/2 in 2018, and she will also be age 71 in 2018.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, 2019?
A)$0
B)$9,804
C)$19,608
D)$150,000
E)None of these

Accepted Answer

The required minimum distribution (RMD) for someone who is 70 1/2 years old with a traditional IRA account balance of $150,000 and a life expectancy of 15.3 years is calculated by dividing the account balance by the life expectancy. Therefore, $150,000 / 15.3 = $9,803.92, which rounds to $9,804. This distribution must be made by April 1 of the year following the year she reaches age 70 1/2.

Question 6

Merrill is a participant in a SIMPLE § 401(k) plan, and he elects to contribute 4% of his $40,000 compensation to the account, and his employer contributes 3%.What amount, if any, will vest immediately?
A)$0
B)$1,200
C)$1,600
D)$2,800
E)None of these

Accepted Answer

In a SIMPLE § 401(k) plan, both the employee's contributions and the employer's contributions are immediately 100% vested. Merrill contributes 4% of his $40,000 salary, which is $1,600, and his employer contributes 3%, which is $1,200. Therefore, the total amount that vests immediately is $1,600 + $1,200 = $2,800.

Question 7

In 2019, 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 these.

Accepted Answer

The deductible amount for a profit sharing plan is limited to 25% of the compensation paid to plan participants. In this case, 25% of $42,300 is $10,575, which is the maximum deductible amount. 
The contribution carryover is the excess contribution made in a year over the deductible amount, which can be carried forward to be deducted in future years. In this case, the contribution made by Jindal Corporation ($12,800) exceeds the maximum deductible amount ($10,575) by $2,225. Therefore, the contribution carryover is $2,225. 
So, the best choice is C: $10,575 deductible; $2,225 carryover.

Question 8

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 2019 is:
A)$0.
B)$12,000.
C)$24,000.
D)$30,000.
E)None of these.

Accepted Answer

The answer of Heather, age 48, is the sole remaining...

Question 9

Dana, age 31 and unmarried, is an active participant in a qualified retirement plan.Her AGI is $124,000.What amount, if any, may she contribute to a Roth IRA in 2019?
A)$0.
B)$3,225.
C)$4,400.
D)$6,000.
E)None of the above

Accepted Answer

The answer of Dana, age 31 and unmarried, is an...

Question 10

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 2019, his early distribution penalty is:
A)$0.
B)$75,000.
C)$85,000.
D)$127,500.
E)None of these.

Accepted Answer

The penalty for early withdrawal from a defined contribution plan is 10%. However, Scott is over the age of 59.5, so he is exempt from the penalty. He will still owe income tax on the distribution, but there is no penalty for early withdrawal in this case.

Question 11

Which of the following characteristics is not a characteristic of a stock bonus plan?
A)It can be in the form of a defined benefit plan.
B)Contributions need not be dependent on employer's profits.
C)It is exempt from funding requirements.
D)It is not subject to plan termination insurance.
E)None of these.

Accepted Answer

A stock bonus plan is a type of defined contribution plan, not a defined benefit plan. The other characteristics listed are commonly associated with stock bonus plans.

Question 12

Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan).She has the following income items for the year: $$\begin{array} { l r } 
\text { Earned income from self-employment } & \$ 50,000 \
\text { Dividend income } & 8,000 \
\text { Interest income } & 2,000 \
\text { Net short-term capital gain } & \underline { 12,000 } \
\text { Adjusted gross income } &\underline { \underline { \$ 72,000 }} \

\end{array}$$ What is the maximum amount that Susan can deduct as a contribution to her retirement plan in 2019, assuming that the self-employment tax rate is 15.3%?
A)$9,235.
B)$12,000.
C)$46,000.
D)$46,468.
E)None of these.

Accepted Answer

To calculate the maximum amount that Susan can deduct as a contribution to her retirement plan, we need to use the following formula:

Maximum contribution = (Net self-employment income - 1/2 self-employment tax) x 20%

Net self-employment income = total income - deductible expenses - one-half of self-employment tax

From the information given, we know that Susan has a net income of $80,000, and the self-employment tax rate is 15.3%.

So, self-employment tax = $80,000 x 0.153 = $12,240

One-half of self-employment tax = $6,120

Deductible expenses are not provided, so we will assume they are zero.

Net self-employment income = $80,000 - 0 - $6,120 = $73,880

Therefore, the maximum contribution that Susan can deduct is:

Maximum contribution = ($73,880 - $6,120) x 20%
= $67,760 x 0.20
= $13,552

However, the maximum contribution that Susan can actually make is subject to certain limits. For 2019, the maximum contribution limit is:

Maximum contribution limit = lesser of $56,000 or 25% of compensation

Since Susan's net self-employment income is $73,880, her maximum contribution limit is:

Maximum contribution limit = $73,880 x 0.25
= $18,470

Therefore, the maximum amount that Susan can deduct as a contribution to her retirement plan in 2019 is the lesser of the two limits, which is $13,552.

However, this amount may be further limited by other factors, such as the contribution limits for the specific type of retirement plan she has (in this case, a Keogh plan).

Looking at the answer choices, the closest amount to $13,552 is D) $46,468, which is incorrect. The correct answer is D) $13,552 as explained above.

Question 13

A 38-year-old participant in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2019?
A)$12,000
B)$17,000
C)$17,500
D)$19,000
E)None of these

Accepted Answer

The maximum contribution limit for a 38-year-old participant in a § 401(k) plan in 2019 is $19,000.

Question 14

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 these

Accepted Answer

Roth IRA contributions and earnings can be withdrawn tax-free if the account has been open for at least five years and the owner is at least 59 1/2 years old. Frank meets these conditions, so the entire $376,000 can be withdrawn tax-free.

Question 15

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 these

Accepted Answer

The maximum amount Fred can contribute to his retirement plan is $28,000. This is because the maximum contribution limit for a profit sharing plan is 25% of the participant's compensation, and Fred's compensation is $140,000.

Question 16

The compensation paid by Purple Corporation to the participants of a profit sharing plan in 2019 was $38,300.During 2019, Purple contributed $10,000 to the plan.Purple's deductible amount for 2019 is what amount, if any?
A)$0
B)$7,660
C)$9,575
D)$10,000
E)None of these

Accepted Answer

The deductible amount for a profit sharing plan is the lesser of 25% of compensation or $56,000. In this case, 25% of $38,300 is $9,575, which is less than $10,000, so Purple's deductible amount for 2019 is $9,575.

Question 17

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 2019 is $130,000.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)$12,000
E)None of the above

Accepted Answer

Since both Joyce and Sam are active participants in qualified retirement plans and their combined AGI exceeds the phase-out range for married couples filing jointly for the year 2019, they cannot deduct their contributions to traditional IRAs.

Question 18

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 her or his 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 these.

Accepted Answer

A defined benefit pension plan guarantees a specific retirement benefit amount based on a predetermined formula, such as years of service and average salary. Actuarial calculations are required to determine the employer's annual contribution, and forfeitures must reduce subsequent funding costs and cannot increase the benefits any participant can receive under the plan. A separate account is not required to be maintained for each participant. The pension amount upon retirement is not dependent on the value of the employee's account, as in a defined contribution plan.

Question 19

Sammy, age 31, is unmarried and is not an active participant in a qualified retirement plan.His modified AGI is $55,000 in 2019.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)$6,000.
E)None of these.

Accepted Answer

For tax year 2019, if Sammy is unmarried and not an active participant in a qualified retirement plan, the maximum amount he can deduct for a contribution to a traditional IRA is $6,000.

Question 20

Deidre has five years of service completed as of February 5, 2019, 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 these

Accepted Answer

Under a cliff vesting schedule in a defined benefit plan, an employee becomes 100% vested in their employer-provided benefits after a certain period of service, typically 3 to 5 years. Since Deidre has completed five years of service as of February 5, 2019, she would be 100% vested according to common cliff vesting schedules.

Quiz 19: Deferred Compensation

Zackie has five years of service completed as of February 5, 2018, 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.

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

A major disadvantage of an 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.

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, 2019, his employment anniversary date.Determine Peter's nonforfeitable percentage.

Danielle, who is retired, reaches age 70 1/2 in 2018, and she will also be age 71 in 2018.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, 2019?

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

In 2019, 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:

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 2019 is:

Dana, age 31 and unmarried, is an active participant in a qualified retirement plan.Her AGI is $124,000.What amount, if any, may she contribute to a Roth IRA in 2019?

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 2019, his early distribution penalty is:

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

A 38-year-old participant in a cash or deferred arrangement plan [§ 401(k) ] may contribute up to what amount in 2019?

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?

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?

The compensation paid by Purple Corporation to the participants of a profit sharing plan in 2019 was $38,300.During 2019, Purple contributed $10,000 to the plan.Purple's deductible amount for 2019 is what amount, if any?

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 2019 is $130,000.Each is employed and earns a salary of $65,000.What are their combined deductible contributions to traditional IRAs?

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

Sammy, age 31, is unmarried and is not an active participant in a qualified retirement plan.His modified AGI is $55,000 in 2019.The maximum amount that Sammy can deduct for a contribution to a traditional IRA is:

Deidre has five years of service completed as of February 5, 2019, her employment anniversary date.If the defined benefit plan [not a § 401(m) arrangement] uses the cliff vesting schedule, determine Deidre's nonforfeitable percentage.