Deck 19: Deferred Compensation

Question 1

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.

Answer 1

True

Question 2

A defined benefit plan must reduce the $200,000 (in 2012)maximum benefits payable by one-tenth for each year of participation under 10 years that an employee has performed.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

Under a defined benefit plan,the annual benefit payable to an employee is limited to the smaller of $200,000 (in 2012)or 100% of the employee's average compensation for the highest 3 years of employment.

Question 6

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 7

Contributions to a qualified pension plan are immediately deductible by the employer.

Question 8

In a profit sharing plan,a separate account is maintained for each participant.

Question 9

Higher compensation does not necessarily guarantee commensurate performance.

Question 10

A qualified plan must provide,at a minimum,that all employees in the covered group who are 21 years of age are eligible to participate after completing one year of service.

Question 11

Group term life insurance is considered to be a type of deferred compensation.

Question 12

Income earned by a qualified pension plan trust grows at a tax-free rate.

Question 13

Defined contribution plans are generally more favorable to older employees.

Question 14

An incentive stock option (ISO)plan is considered to be a deferred compensation arrangement.

Question 15

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 16

The five-year cliff vesting alternative minimizes administrative expenses for a company and provides more vesting for long-term employees.

Question 17

If an employer's contribution to a SEP IRA is less than $50,000 in 2012 (or 25% of the employee's earned income,if less),the employee can contribute the difference.

Question 18

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 19

Forfeitures may be allocated to the accounts of the remaining participants in a defined benefit plan.

Question 20

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 21

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

Question 22

The $1 million limitation for deductible executive compensation does not apply to the alternative minimum tax.

Question 23

An individual,age 40,who is not subject to the phase-out provision may contribute a deductible amount to a Roth IRA up to $5,000 per year in 2012.

Question 24

Restricted stock cannot be sold or treated as owned by an employee until it vests.

Question 25

In a direct transfer from one qualified retirement plan to another qualified retirement plan,the employer must withhold 20% of the amount of the direct transfer.

Question 26

A direct transfer of funds from a qualified retirement plan to an IRA is not subject to the withholding rules.

Question 27

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

Question 28

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 29

The maximum annual contribution to a Roth IRA for an unmarried taxpayer who is age 35 is the smaller of $5,000 or the individual's compensation for the year.

Question 30

Low- and middle-income taxpayers may make nondeductible contributions up to $4,000 per child per year to a Coverdell Education Savings Account (CESA).

Question 31

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 32

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

Question 33

If a married taxpayer is an active participant in another qualified retirement plan,the traditional IRA deduction phaseout begins at $92,000 of AGI for a joint return in 2012.

Question 34

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 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

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

Question 37

A substantial risk of forfeiture exists if an employee's rights to full enjoyment of property are conditioned upon the future performance,or refraining from the performance,of substantial services of that individual.

Question 38

Traditional IRA contributions made after an individual reaches the age of 59 1/2 are treated as excess contributions and are subject to a nondeductible 6% excise penalty tax.

Question 39

A NQDC plan may discriminate in favor of officers or other highly compensated employees.

Question 40

Income is not taxed if a taxpayer's control over the amount earned is subject to substantial restrictions.

Question 41

Paul is a participant in a qualified retirement plan in 2012.In which situation would he be considered highly compensated?

A) He owns 4% of the company.
B) He receives a total salary of $110,000 from the company.
C) He is a member of the top-paid group and receives a salary of $75,000.
D) He is vice-president and receives a salary of $55,000.
E) None of the above.

Question 42

Which of the following characteristics describes a defined benefit plan?

A) Subject to PBGC plan termination insurance rules.
B) An account for each participant is not established.
C) Defines the amount the employer is required to contribute.
D) Only a. and b.
E) a., b., and c.

Question 43

Stream,Inc.,uses a two- to six-year graded vesting approach in its defined contribution plan.If Sloane has 3 years of service,what is her nonforfeitable percentage?

A) 0%.
B) 20%.
C) 40%.
D) 60%.
E) 80%.

Question 44

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 45

Which is not a disadvantage of a qualified pension or profit sharing plan?

A) The employer must make contributions for most employees on a nondiscriminatory basis.
B) There are a number of limits on contributions to defined contribution plans and on benefits that may be paid under defined benefit plans.
C) Qualified plans have higher startup and administrative costs than nonqualified plans.
D) Contributions are immediately deductible by the employer.
E) All of the above are advantages.

Question 46

Which is not considered to be a fringe benefit?

A) Tax deferred annuities.
B) Group legal service
C) Group term life insurance.
D) Qualified transportation benefit.
E) All of the above are fringe benefits.

Question 47

Ebony,Inc.,uses the three-to-seven year graded vesting approach for its retirement plan.Pete has five years of service completed as of February 5,2012,his employment anniversary date.Determine Pete's nonforfeitable percentage.

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

Question 48

Debby is a self-employed accountant with a qualified defined benefit plan (a Keogh plan).She has the following income items for the year:
What is the maximum amount Debby can deduct as a contribution to her retirement plan in 2012,assuming the self-employment tax rate is 15.3%?

A) $9,235.
B) $12,000.
C) $50,000.
D) $55,761.
E) None of the above.

Question 49

Danielle,who is retired,reaches age 70 1/2 in 2011,and she will also be age 71 in 2011.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 1,2012?

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

Question 50

In 2012,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 51

Which is not considered to be a type of deferred compensation?

A) SIMPLE IRA.
B) Tax-deferred annuities.
C) Restricted property plan.
D) Cafeteria benefit plan.
E) All of the above are considered types of deferred compensation.

Question 52

If a NQSO does not have a readily ascertainable value,an employee recognizes income on the grant date.

Question 53

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 54

Kay,a single individual,participates in her employer's SIMPLE § 401(k)plan.The plan permits participants to contribute a percentage of their salary.Kay elects to contribute 5% of her annual salary of $111,000 to the plan.On what amount of her salary does Kay pay income taxes in 2012?

A) $5,550.
B) $11,500.
C) $105,450.
D) $111,000.
E) None of above.

Question 55

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 2012,his early distribution penalty is:

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

Question 56

A 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 57

A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2012?

A) $12,000.
B) $16,500.
C) $17,000.
D) $17,500.
E) None of the above.

Question 58

Dana,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 Dana.The early distribution penalty tax,if any,for 2012 is:

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

Question 59

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) $110,000.
D) $250,000.
E) None of the above.

Question 60

The compensation paid by Green Corporation to the plan participants of a profit sharing plan in 2012 was $38,300.During 2012,Green Corporation contributed $10,000 to the plan.Green's deductible amount for 2012 is what amount,if any?

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

Question 61

Donna,age 27 and unmarried,is an active participant in a qualified retirement plan.Her AGI is $116,000.What amount,if any,may Donna contribute to a Roth IRA in 2012?

A) $0.
B) $3,000.
C) $4,000.
D) $5,000.
E) None of the above.

Question 62

Which statement is not true with respect to golden parachute payments?

A) Refers to excess severance pay.
B) Does 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

Joyce,age 39,and Sam,age 40,who have been married for seven years,are both active participants in qualified retirement plans.Their total AGI for 2012 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 64

Larry negotiates a $2.5 million contract with Red,Inc.,a publicly-held corporation that receives TARP funds,to become their CEO for 2012.What amount is deductible by Red,Inc.in 2012?

A) $0.
B) $1,000,000.
C) $2,064,000.
D) $2,500,000.
E) None of the above.

Question 65

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 66

Susan,an executive,receives a golden parachute payment of $500,000 from her employer.Her average annual compensation for the most recent five years is $100,000.Which of the following statements is correct?

A) The disallowed deduction to the employer is $500,000, and the excise tax to Susan is $100,000.
B) The disallowed deduction to the employer is $400,000, and the excise tax to Susan is $80,000.
C) The disallowed deduction to the employer is $100,000, and the excise tax to Susan is $20,000.
D) The disallowed deduction to the employer is $100,000, and the excise tax to Susan is zero.
E) None of the above.

Question 67

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.What amount,if any,is deductible by the bank?

A) $0.
B) $50,000.
C) $110,000.
D) $390,000.
E) Some other amount.

Question 68

Jeff,age 43,establishes a traditional IRA in 2012 and contributes $5,400 in cash to the plan.He has earned income of $30,600.What is the amount of the penalty tax that Jeff will incur,if any,assuming he keeps the $5,400 in the account?

A) $0.
B) $24.
C) $40.
D) $400.
E) None of the above.

Question 69

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 2012 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 70

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 71

What is the maximum amount Velvia can contribute to a Coverdell Education Savings Account (CESA)on behalf of a grandson in 2012? She is single with an AGI of $99,000.

A) $0.
B) $500.
C) $1,467.
D) $2,000.
E) None of the above.

Question 72

Pony,Inc.,issues restricted stock to employees in July 2012,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 2012,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 2016 at $36 per share.What amount and type of income will Sam recognize in 2016?

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 73

Pony,Inc.,issues restricted stock to employees in July 2012,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 2012,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 2014).Sam sells his 1,000 shares in 2016 at $36 per share.What amount and type of income will Sam recognize in 2016?

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 74

Pony,Inc.,issues restricted stock to employees in July 2012,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 2012,the stock is trading at $13 per share.How much income,if any,must Sam recognize in 2012?

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

Question 75

Sammy,age 31,is unmarried and is not an active participant in a qualified retirement plan.His modified AGI is $55,000 in 2012.The maximum amount that Sammy can deduct for a contribution to a traditional IRA is:

A) $2,800.
B) $3,500.
C) $4,000.
D) $5,000.
E) None of the above.

Question 76

Elvis receives a $2,000 distribution from a CESA.On this date,the total balance is $30,000,with $12,000 representing earnings.If his qualified higher education expenses are $2,195,what amount can he exclude from gross income?

A) $0.
B) $800.
C) $1,200.
D) $2,000.
E) Some other amount.

Question 77

Pony,Inc.,issues restricted stock to employees in July 2012,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 2012,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 2012.
C) $13,000 in 2012.
D) $10,000 when stock is sold.
E) $13,000 when stock is sold.

Question 78

Beth,age 51,has a traditional deductible IRA with an account balance of $221,419 of which $160,400 represents contributions and $61,019 represents earnings.In 2012,she converts her traditional IRA into a Roth IRA.What amount,if any,must Beth include in her gross income in 2012?

A) $0.
B) $61,019.
C) $160,400.
D) $221,419.
E) None of the above.

Question 79

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 2012?

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 80

Harry receives a $10,000 distribution from a CESA.On this date,his total account balance is $16,000,with $4,000 representing earnings.If his qualified higher education expenses are $8,000,the amount included in gross income is:

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