Question 1

Zackie has five years of service completed as of February 5,2014,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

Under the graded vesting schedule for defined benefit plans, after five years of service, an employee is typically 60% vested.

Question 2

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 2014,his early distribution penalty is:
A)$0.
B)$75,000.
C)$85,000.
D)$127,500.
E)None of these.

Accepted Answer

There is no penalty on the distribution since it is not an early distribution .

Question 3

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 these.

Accepted Answer

A stock bonus plan typically involves allocation of shares of company stock to employees as a form of incentive or retirement benefit, but it is not typically structured as a defined benefit plan. The other characteristics listed are common features of stock bonus plans.

Question 4

The compensation paid by Purple Corporation to the plan participants of a profit sharing plan in 2014 was $38,300.During 2014,Purple Corporation contributed $10,000 to the plan.Purple's deductible amount for 2014 is what amount,if any?
A)$0
B)$7,660
C)$9,575
D)$10,000
E)None of these

Accepted Answer

The limitation for Purple Corporation for 2014 is $9,575 ($38,300 × .25).

Question 5

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 2014 is:
A)$0.
B)$12,000.
C)$24,000.
D)$30,000.
E)None of these.

Accepted Answer

$240,000 × 10% = $24,000.

Question 6

Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan).She has the following income items for the year: $\begin{array}{lr}
\text { Earned income from self-employment } & \$ 50,000 \
\text { Dividend income } & 8,000 \
\text { Interest income } & 2,000 \
\text { Net short-term capital gain } & 12,000 \
\text { Adjusted gross income } & \$ 72,000
\end{array}$ What is the maximum amount Susan can deduct as a contribution to her retirement plan in 2014,assuming 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

The answer of Susan is a self-employed accountant with a...

Question 7

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

Accepted Answer

If a non-qualified stock option (NQSO) has a readily ascertainable value, the employee must recognize income on the grant date. This means that the employee must include the value of the option as ordinary income in the year that it is granted, even if they have not exercised the option or sold any shares.

Question 8

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.

Accepted Answer

This is correct. 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, which can be a major disadvantage of a non-qualified stock option (NQSO).

Question 9

Danielle,who is retired,reaches age 70 1/2 in 2013,and she will also be age 71 in 2013.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 1,2014?
A)$0
B)$9,804
C)$19,608
D)$150,000
E)None of these

Accepted Answer

Danielle must withdraw $9,804 ($150,000/15.3 years)by April 1,2014,to avoid a penalty.She also must receive another distribution of $9,804 by December 31,2014.

Question 10

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 2014 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 these

Accepted Answer

Joyce and Sam may contribute a total of $11,000 ($5,500 each)to a traditional IRA,but because their AGI exceeds the phaseout ceiling of $116,000 in 2014,$0 is deductible.

Question 11

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 these.

Accepted Answer

The employer bears the investment risks and rewards.

Question 12

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 these is true.

Accepted Answer

This plan meets the 70% coverage requirement,but does not meet the minimum participation test: the smaller of 50 employees or 40% of all the employees (40% × 131 = 53).

Question 13

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 these

Accepted Answer

Merrill has elected to contribute $1,600 ($40,000 × 4%)to his SIMPLE § 401(k)plan.His employer will contribute $1,200 ($40,000 × 3%).Both amounts will vest immediately.

Question 14

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 these.

Accepted Answer

This characteristic describes a defined contribution plan.

Question 15

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 these

Accepted Answer

However,this amount is subject to an annual average maximum compensation limit (for 2012 is $250,000,for 2013 is $255,000,and for 2014 is $260,000).So the maximum amount is $255,000 [($250,000 + $255,000 + $260,000)/3].Thus,the amount Dianna receives is $107,100 ($255,000 × 42%).

Question 16

Deidre has five years of service completed as of February 5,2014,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

Upon completion of not more than five years of service,the employee must have a nonforfeitable right to 100% of his or her accrued benefits if the cliff vesting schedule is used.

Question 17

In 2014,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 limitation for Jindal Corporation is $10,575 (25% × $42,300),and the contribution carryover to 2015 and subsequent years is $2,225 ($12,800 - $10,575).

Question 18

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 5,2014,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 with five years of service is vested at 60%.

Question 19

A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2014?
A)$12,000
B)$16,500
C)$17,000
D)$17,500
E)None of these

Accepted Answer

The indexed amount for 2014 is $17,500,for 2013 is $17,500,and for 2012 is $17,000.A taxpayer who is age 38 is not eligible for the $5,000 catch-up amount in 2014.

Question 20

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

Fred can contribute $28,000,which is 20% of $140,000,or 25% ($140,000 - $28,000).

Quiz 19: Deferred Compensation

Zackie has five years of service completed as of February 5,2014,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.

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 2014,his early distribution penalty is:

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

The compensation paid by Purple Corporation to the plan participants of a profit sharing plan in 2014 was $38,300.During 2014,Purple Corporation contributed $10,000 to the plan.Purple's deductible amount for 2014 is what amount,if any?

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 2014 is:

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

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.

Danielle,who is retired,reaches age 70 1/2 in 2013,and she will also be age 71 in 2013.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 1,2014?

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 2014 is $120,000.Each is employed and earns a salary of $65,000.What are their combined deductible contributions to traditional IRAs?

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

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

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?

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

Deidre has five years of service completed as of February 5,2014,her employment anniversary date.If the defined benefit plan [not a § 401(m) arrangement] uses the cliff vesting schedule,determine Deidre's nonforfeitable percentage.

In 2014,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:

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 5,2014,his employment anniversary date.Determine Peter's nonforfeitable percentage.

A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k) ] may contribute up to what amount in 2014?

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?