Question 1

An employer with a qualified defined contribution (profit sharing) plan is required to make an annual contribution to the plan.

Accepted Answer

Employers with a qualified defined contribution (profit sharing) plan are not required to make annual contributions. They have the flexibility to decide each year whether to make contributions on behalf of participants.

Question 2

A taxpayer who is 60 years old on retirement in the current year may use the special forward averaging method of computing his or her income tax on a lump sum distribution from a qualified plan only once.

Accepted Answer

This is true according to IRS rules. A taxpayer who is 59 1/2 or older can use special averaging only once in their lifetime.

Question 3

A self-employed taxpayer is limited only by the amount of his or her earned income in determining the maximum annual contribution to a defined contribution Keogh plan.

Accepted Answer

False

Question 4

Only corporate employers may have qualified retirement plans for their employees.

Accepted Answer

Both corporate and non-corporate employers are allowed to have qualified retirement plans for their employees.

Question 5

The value of an annual employer-sponsored Christmas party may be excluded from an employee's gross income because it is a de minimis fringe benefit.

Accepted Answer

The value of an annual employer-sponsored Christmas party is considered a de minimis fringe benefit and may be excluded from an employee's gross income.

Question 6

In 2010, M corporation transferred 1000 shares of its common stock worth $90,000 to Y, an employee, in connection with her performance of services for the corporation.The shares, however, are subject to substantial restriction: Y will have to forfeit the shares if she leaves M corporation before 2013.Y makes a § 83(b) election to include the $90,000 value of the shares in her 2010 income.In 2013 Y is still working for M corporation and her 1,000 shares are worth $230,000.Y realizes $140,000 of taxable income on her 2013 return.

Accepted Answer

Y's taxable income in 2013 is not $140,000. Y has already recognized the $90,000 value of the shares as income in 2010 due to her § 83(b) election, so she should only recognize an additional $140,000 - $90,000 = $50,000 of taxable income in 2013 when she realizes the gain on the shares.

Question 7

In order for a retirement plan to be "qualified," retirement benefits must vest immediately in participating employees.

Accepted Answer

Immediate vesting is not required for a retirement plan to be qualified, but the plan must meet certain requirements set by the IRS to receive favorable tax treatment. Vesting schedules may vary depending on the type of retirement plan.

Question 8

Stock options are always taxed as income to the recipient on the day they are granted.

Accepted Answer

Stock options are not taxed as income at the time of grant. The tax treatment of stock options will depend on the type of option and the rules of the particular country or state. In many cases, stock options are taxed when they are exercised or sold.

Question 9

If the value of a noncash fringe benefit is not specifically excluded from gross income by statutory law, it must be included in the recipient's gross income.

Accepted Answer

This is known as the general rule of taxation of fringe benefits, which states that unless a noncash fringe benefit is specifically excluded from gross income by statutory law, it must be included in the recipient's gross income.

Question 10

The employee who exercises an ISO creates a deduction for his employer at that time equal to the difference between the option price and the market price.

Accepted Answer

The employee does not create a deduction for the employer when exercising an ISO. The employer only incurs a tax liability if the employee sells the stock obtained through the exercise of the ISO within a specific timeframe.

Question 11

Taxpayer A, a dentist, fills a cavity for Taxpayer B, an attorney, in exchange for legal services.If the value of the dental services equals the value of the legal services, neither A nor B has earned taxable income.

Accepted Answer

Both Taxpayer A (the dentist) and Taxpayer B (the attorney) have earned taxable income equal to the fair market value of the services exchanged, regardless of whether the values are equal. The fact that the services are exchanged instead of paid for in cash does not exempt them from taxation.

Question 12

The employee retirement plan adopted by BT Corporation provides that the total amount of retirement benefits provided to a particular employee under the plan can be reduced by the amount of any social security benefits to which that employee is entitled.Because this provision of the plan discriminates in favor of the highly compensated employees of BT, the retirement plan cannot be "qualified" for Federal tax purposes.

Accepted Answer

The provision described does not inherently discriminate in favor of highly compensated employees. A retirement plan's qualification for federal tax purposes is primarily determined by its adherence to the Internal Revenue Code requirements, which include numerous non-discrimination rules. However, integrating retirement benefits with social security benefits, by itself, does not automatically disqualify a plan. The key is whether the plan benefits disproportionately favor highly compensated employees in ways not allowed by tax laws, which is not clearly indicated by the integration with social security benefits alone.

Question 13

Qualified retirement plans may be funded or non-funded by the employer.

Accepted Answer

The answer of Qualified retirement plans may be funded or...

Question 14

Employee Q has been a participant in his employer's non-qualified retirement plan for 25 years, during which period Q's employer has made regular annual contributions to the plan on Q's behalf.Q's right to his retirement fund is fully vested.Upon retirement, any amounts withdrawn from this plan will be fully taxable to Q.

Accepted Answer

The answer of Employee Q has been a participant in...

Question 15

If a taxpayer makes a § 83(b) election to recognize current income on the receipt of restricted property, the subsequent forfeiture of the property will give rise to a tax deduction.

Accepted Answer

The answer of If a taxpayer makes a § 83(b)...

Question 16

B Inc.has an unfunded deferred compensation program for its employees.In the current year, B employees earned $120,000 in deferred compensation, none of which is taxable to any employee.If B Inc.is an accrual basis taxpayer, the corporation may claim a $120,000 tax deduction in the current year because of its deferred compensation liability.

Accepted Answer

B Inc. cannot claim a tax deduction for the deferred compensation in the current year because, under the tax rules for accrual basis taxpayers, a deduction for deferred compensation is not allowed until the year in which it is includible in the employee's gross income.

Question 17

As a general rule, any economic benefit granted an employee by his or her employer and intended to compensate the employee for services rendered represents gross income to the employee.

Accepted Answer

This is known as the general taxability rule for compensation and benefits. Any form of payment, whether in cash or non-cash, is considered as compensation for services rendered and is therefore considered as gross income to the employee for tax purposes.

Question 18

Individuals who are not disabled and who make lump-sum withdrawals from an Individual Retirement Account (IRA) prior to age 5972 years must pay a 10 percent penalty tax.

Accepted Answer

This statement is true. Individuals who withdraw money from an IRA before the age of 59 ½ and are not disabled must pay a 10 percent penalty tax in addition to normal income taxes. There are some exceptions to this penalty, such as for certain medical expenses or first-time home purchases, but in general, the penalty applies.

Question 19

During the current year, AC Corporation required a key employee, Taxpayer X, to transfer from AC's San Diego, California office to AC's Phoenix, Arizona office.AC agreed to pay the commission charged by the real estate agent on the sale of X's home in San Diego.Because the payment represents a "working condition fringe benefit," the amount of the real estate commission paid is not included in X's gross income for the current year.

Accepted Answer

The payment of the real estate commission by AC Corporation on behalf of Taxpayer X for the sale of X's home due to a job relocation does not qualify as a "working condition fringe benefit" under the IRS code. Instead, it is considered as income to the employee and should be included in X's gross income for the year. Working condition fringe benefits typically cover expenses that would be deductible by the employee as business expenses if they had paid them directly. However, costs associated with the sale of an employee's residence do not fall under this category.

Question 20

An accrual basis employer may take a deduction for deferred compensation when the employer promises to pay the deferred compensation, but does not set aside funds for that purpose.

Accepted Answer

Under the accrual basis of accounting, an employer can only take a deduction for deferred compensation when the services are performed and the employee's right to the compensation vests, not merely when the employer promises to pay. Setting aside funds is not a requirement for the deduction, but the obligation must be fixed and determinable.

Quiz 18: Employee Compensation and Retirement Plans