Question 1

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.

Accepted Answer

The answer of Paul is a participant in a qualified...

Question 2

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.

Accepted Answer

A defined benefit plan is subject to PBGC plan termination insurance rules and does not establish an individual account for each participant. It defines the benefit to be received, not the contribution amount.

Question 3

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%.

Accepted Answer

With the two to six-year graded vesting approach, the nonforfeitable percentage increases by 20% for each year of service. Sloane has 3 years of service, so her nonforfeitable percentage would be 40%.

Question 4

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 a true statement. When an employee exercises a non-qualified stock option (NQSO), they are required to recognize ordinary income equal to the difference between the fair market value of the stock and the exercise price of the option. This income must be recognized even if the employee does not receive any cash from the exercise. This can create a cash flow problem for the employee if they do not have the funds available to pay the resulting tax liability.

Question 5

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.

Accepted Answer

All of the other options listed are disadvantages of qualified pension or profit sharing plans. Option D, on the other hand, is an advantage as it allows for immediate tax deductions for employer contributions.

Question 6

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.

Accepted Answer

The answer of Which is not considered to be a...

Question 7

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.

Accepted Answer

Under the three-to-seven year graded vesting schedule, an employee with five years of service is 60% vested.

Question 8

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.

Accepted Answer

The maximum amount that Debby can deduct as a contribution to her retirement plan in 2012 is the lesser of 100% of her earned income or $50,000. 
Her earned income is $50,000 (net earnings from self-employment) - $5,650 (half of self-employment tax) = $44,350. 
Therefore, the maximum amount she can deduct is $44,350 since it is less than $50,000. 
Thus, the correct answer is (C) $50,000.

Question 9

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.

Accepted Answer

Danielle is subject to Required Minimum Distributions (RMDs) because she has reached age 70 1/2. The first RMD must be taken by April 1 of the year after the year in which she reaches age 70 1/2. Since she reaches age 70 1/2 in 2011, her first RMD must be taken by April 1, 2012. The amount of the RMD is calculated by dividing the account balance by the life expectancy factor provided by the IRS. In this case, the RMD would be $9,804 ($150,000 divided by 15.3). Option A is incorrect because Danielle is required to take a distribution. Option C is incorrect because the RMD would be less than $19,608. Option D is incorrect because the entire account balance cannot be distributed as the RMD.

Question 10

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.

Accepted Answer

The deductible amount for a profit-sharing plan is 25% of the compensation paid to the plan participants. Therefore, the deductible amount for Jindal Corporation is $10,575 (25% of $42,300). The contribution carryover is calculated by subtracting the deductible amount from the contribution made to the plan, which is $12,800 - $10,575 = $2,225. Hence, the best choice is C.

Question 11

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.

Accepted Answer

The answer of Which is not considered to be a...

Question 12

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

Accepted Answer

An employee recognizes income on the exercise date, not the grant date, for a non-qualified stock option (NQSO) without a readily ascertainable value.

Question 13

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.

Accepted Answer

The answer of Fred is a self-employed accountant with gross...

Question 14

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.

Accepted Answer

Kay's contribution to the SIMPLE § 401(k) plan is tax-deferred, which means it is not counted as taxable income for the year. Therefore, Kay will pay income taxes on her salary minus her contribution to the plan. 
Her contribution is 5% of $111,000 which equals $5,550. 
Her taxable income will be $111,000 - $5,550 = $105,450. 
Therefore, the amount of her salary on which she pays income taxes in 2012 is $105,450.

Question 15

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.

Accepted Answer

Scott is 68 years old, which is above the age of 59½, so he is not subject to the early distribution penalty.

Question 16

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.

Accepted Answer

To meet the minimum coverage requirement under the nondiscrimination rules of the Internal Revenue Code, a retirement plan must cover at least 70% of all non-highly compensated employees, or satisfy the minimum participation test. The plan in this scenario covers 72% of non-highly compensated employees, thus meeting the 70% coverage requirement. However, the plan only benefits 48 out of the 131 non-highly compensated employees, which may signify a failure to meet the minimum participation test. Therefore, option C is correct.

Question 17

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.

Accepted Answer

The answer of A participant,who is age 38,in a cash...

Question 18

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.

Accepted Answer

The answer of Dana,age 48,is the sole remaining participant of...

Question 19

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.

Accepted Answer

The answer of Dianna participates in a defined benefit plan...

Question 20

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.

Accepted Answer

The deductible amount for a profit sharing plan includes both the contributions made by the employer and the compensation paid to plan participants. Therefore, Green Corporation's deductible amount for 2012 would be:

$10,000 (employer contribution) + $38,300 (compensation paid to plan participants) = $48,300

However, there is a limit on the amount of compensation that can be taken into account for plan contributions and deductions. For 2012, the limit is $250,000. Therefore, the deductible amount for Green Corporation would be:

$10,000 + $9,575 (which is the amount of compensation that can be taken into account) = $19,575

This is less than the total amount contributed by Green Corporation, so the answer is not A or D. Option B is incorrect because it only includes the compensation paid to plan participants and not the employer contribution. Therefore, the correct answer is C.

Quiz 19: Deferred Compensation

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

Which of the following characteristics describes a defined benefit plan?

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 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.

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

Which is not considered to be a fringe benefit?

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.

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%?

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?

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:

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

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

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?

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?

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

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

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:

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?