Deck 19: Deferred Compensation

Question 1

A restricted property plan is considered a deferred compensation plan.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

A defined benefit plan must reduce the $225,000 (in 2019) maximum benefits payable by one-tenth for each year of participation under 10 years that an employee has performed.

Question 7

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 8

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 9

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

Question 10

Group life insurance is considered a deferred compensation plan.

Question 11

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 12

Under a defined benefit plan, the annual benefit payable to an employee is limited to the lesser of $225,000 (in 2019)
or 100% of the employee's average compensation for the highest three years of employment.

Question 13

Any pretax 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 14

A defined contribution plan is exempt from funding requirements.

Question 15

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

Question 16

If an employer's contribution to a SEP IRA is less than $56,000 in 2019 (or 25% of the employee's earned income, if less), the employee can contribute the difference.

Question 17

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

Question 18

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

Question 19

Dana contributes $2,000 too much to a § 401(k) plan but it 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 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

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 22

On February 1, 2019, 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 in April
2019.

Question 23

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

Question 24

If a married taxpayer is an active participant in another qualified retirement plan, the traditional IRA deduction phaseout begins at $103,000 of AGI for a joint return in 2019.

Question 25

The maximum annual contribution to a Roth IRA for an unmarried taxpayer who is age 35 is the lesser of $6,000 or the individual's compensation for the year in 2019.

Question 26

An individual, age 40, who is not subject to the phase-out provision may contribute a nondeductible amount to a Roth
IRA up to $6,000 per year in 2019.

Question 27

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 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

In applying the IRA phase-out provision, 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.

Question 34

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 35

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 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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 41

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

Question 42

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.

Question 43

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.

Question 44

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

Question 45

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

Question 46

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

Question 47

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.

Question 48

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.

Question 49

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

Question 50

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.

Question 51

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.

Question 52

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.

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

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.

Question 59

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.

Question 60

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

Question 61

Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach. Calculate any tax payable by the university, if any, in the first year of his contract.

A)None
B)$210,000
C)$735,000
D)$945,000
E)Some other amount

Question 62

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 63

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 these is false.

Question 64

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 these

Question 65

Yvonne exercises incentive stock options (ISOs) for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21, 2019, when the fair market value is $120 per share.She holds the stock for only two years and sells the shares for $115 per share.Determine the recognized gain on the sale and classify it as capital or ordinary.

A)$2,000 ordinary income and $2,000 STCG.
B)$2,000 ordinary income and $2,000 LTCG.
C)$4,000 ordinary income.
D)$1,500 LTCG.
E)None of these.

Question 66

Yvonne exercises incentive stock options (ISOs) for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21, 2019, 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 these.

Question 67

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?

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 these.

Question 68

Yvonne exercises incentive stock options (ISOs) for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21, 2019, when the fair market value is $120 per share.She holds the stock for only seven months and sells the shares for $140 per share.Determine the recognized gain on the sale and classify it as capital or ordinary.

A)$2,000 ordinary income and $2,000 STCG.
B)$2,000 ordinary income and $2,000 LTCG.
C)$4,000 ordinary income.
D)$4,000 LTCG.
E)None of these.

Question 69

Which is not an advantage of a § 401(k) plan over a traditional IRA?

A)Deduction limitation.
B)Early withdrawal option without penalty.
C)Loans from the plan.
D)Record keeping.
E)All of these are advantages of § 401(k) plan.

Question 70

Under a nonqualified stock option (NQSO) plan that is granted to Damon on March 15, 2017, 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, 2019, 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 these.

Question 71

Jana has $225,000 of earned income in 2019.Calculate the amount she can contribute to a SEP.

A)$22,500
B)$24,500
C)$56,000
D)$56,250
E)None of these

Question 72

Which statement is true with respect to golden parachute payments?

A)It refers to excess severance pay.
B)It 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 these are true.

Question 73

James, an executive at Silver, Inc., 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 37% individual tax rate?

A)$0
B)$92,000
C)$222,000
D)$314,000
E)None of these

Question 74

Emmanuel, an executive at Blue Corporation, receives a $600,000 payment under a golden parachute agreement. Emmanuel's base amount from Blue 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 these

Question 75

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 these are false.

Question 76

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

A)It establishes a trust.
B)It is 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 these are characteristics.

Question 77

Pony, Inc., issues restricted stock to employees in July 2019, 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.It 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 2019, 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 2023 at $36 per share.What amount and type of income will Sam recognize in 2023?

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 78

Pony, Inc., issues restricted stock to employees in July 2019, 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 it is issued.An employee, Sam, decides to make the § 83(b) election with his 1,000 shares.At the end of 2019, 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 2019.
C)$13,000 in 2019.
D)$10,000 when stock is sold.
E)$13,000 when stock is sold.

Question 79

Pony, Inc., issues restricted stock to employees in July 2019, 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.It 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 2019, 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 2021).Sam sells his 1,000 shares in 2023 at $36 per share.What amount and type of income will Sam recognize in 2023?

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 80

Pony, Inc., issues restricted stock to employees in July 2019, 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 it is issued.An employee, Sam, decides to make the § 83(b) election with his 1,000 shares.At the end of 2019, the stock is trading at $13 per share.How much income, if any, must Sam recognize in 2019?

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