Question 1

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

Accepted Answer

A stock bonus plan is a type of defined contribution plan, not a defined benefit plan. Therefore, the characteristic of "can be in the form of a defined benefit plan" is not applicable to stock bonus plans. The other characteristics listed are applicable to stock bonus plans.

Question 2

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 recognizes income on the grant date. This means that the value of the option is already known and can be easily determined, therefore the employee must report the amount as ordinary income on their tax return for the year in which the option is granted.

Question 3

Zackie has five years of service completed as of February 5,2016,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.

Accepted Answer

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

Question 4

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

Accepted Answer

The answer of Which of the following characteristics is not...

Question 5

The compensation paid by Purple Corporation to the plan participants of a profit sharing plan in 2016 was $38,300.During 2016,Purple Corporation contributed $10,000 to the plan.Purple's deductible amount for 2016 is what amount,if any?

Accepted Answer

The answer of The compensation paid by Purple Corporation to...

Question 6

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 5,2016,his employment anniversary date.Determine Peter's nonforfeitable percentage.

Accepted Answer

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

Question 7

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?

Accepted Answer

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

Question 8

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.

Accepted Answer

Dianna's retirement benefit is calculated by multiplying her percentage accumulated from her years of service by the average of her three highest years of salary.
Her accumulated percentage is 2% per year × 21 years = 42%.

Therefore, her retirement benefit = 42% × $290,000 = $121,800.

However, the maximum benefit she can receive is limited to 2% × 30 years = 60%. Thus, her final retirement benefit is reduced to 60% of her average salary, which is $174,000.

Therefore, Dianna will receive $174,000 ÷ 12 = $14,500 per month or $109,200 per year.

The correct answer is (C).

Question 9

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 2016 is $120,000.Each is employed and earns a salary of $65,000.What are their combined deductible contributions to traditional IRAs?

Accepted Answer

Since both Joyce and Sam are active participants in qualified retirement plans and their AGI exceeds the phase-out limit for deductible IRA contributions for married couples filing jointly in 2016, they are not eligible to make deductible contributions to traditional IRAs.

Question 10

Danielle,who is retired,reaches age 70 1/2 in 2015,and she will also be age 71 in 2015.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 1,2016?

Accepted Answer

Danielle is required to take a distribution by April 1, 2016, based on the Required Minimum Distribution (RMD) rules of the IRS. Her RMD for 2015 is calculated as the account balance on December 31, 2014, divided by her life expectancy factor of 15.3. This equals $150,000/15.3 = $9,804. Therefore, she must take a distribution of at least $9,804 by April 1, 2016, to avoid a penalty of 50% of the shortfall between the required amount and the actual distribution made. Option A is incorrect because she is required to take a distribution. Option C is incorrect because the RMD amount is less than her full account balance. Option D is incorrect because she cannot withdraw the entire account balance without penalty. Option E is incorrect because a distribution is required.

Question 11

In 2016,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:

Accepted Answer

To calculate the deductible amount, we need to add the current year contribution ($12,800) to the prior year carryover (which is $0 for the first year), and then subtract the total plan compensation from this amount.

Deductible amount = ($12,800 + $0) - $42,300 = -$29,500

Since a negative deductible amount is not allowed, we need to limit it to $0. Therefore, the deductible amount for 2016 is $0. The remaining amount of $12,800 will be carried over to the following year.

Therefore, choice C is correct, with a deductible amount of $10,575 and a carryover of $2,225.

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?

Accepted Answer

To meet the requirements of the minimum coverage test, a plan must benefit the lesser of 70% of non-highly compensated employees or 100 employees. In this case, 72% of non-highly compensated individuals are covered, which means the 70% coverage requirement is met.

However, the plan must also meet the minimum participation test, which requires that at least 50 employees (or 40% of the total non-highly compensated employees covered by the plan, whichever is lesser) must participate in the plan. In this case, 48 out of 131 employees participate, which is only 36.6% of the total non-highly compensated employees covered by the plan. Therefore, the plan meets the 70% coverage requirement but fails the minimum participation test.

Question 13

Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan).She has the following income items for the year:
Earned income from self-employment
$50,000
Dividend income
8,000
Interest income
2,000
Net short-term capital gain
12,000
Adjusted gross income
$72,000
​
What is the maximum amount Susan can deduct as a contribution to her retirement plan in 2016,assuming the self-employment tax rate is 15.3%?

Accepted Answer

The maximum amount Susan can deduct as a contribution to her retirement plan in 2016 is $46,468. This is because the maximum contribution limit for a Keogh plan is 100% of earned income, up to a maximum of $54,000. Susan's earned income is $50,000, so she can contribute up to $50,000 to her Keogh plan. However, she must also take into account the self-employment tax rate of 15.3%. This means that she must reduce her contribution by 15.3%, or $7,632. This leaves her with a maximum contribution of $46,468.

Question 14

A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2016?

Accepted Answer

The maximum contribution limit for an individual aged 38 in a 401(k) plan for the year 2016 is $18,000. Therefore, option D is the correct answer.

Question 15

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 2016 is:

Accepted Answer

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

Question 16

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 because the employee is receiving the benefit of the option (i.e. the ability to purchase company stock at a discounted price) without actually receiving cash. This creates a tax liability for the employee, as they must pay taxes on the value of the option even though they have not yet realized any actual financial gain.

Question 17

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

Accepted Answer

A defined benefit pension plan provides a specific, predetermined benefit amount to the employee at retirement. The amount does not depend on the value of the employee's account. Actuarial calculations are required to determine the employer's annual contribution, and forfeitures must reduce subsequent funding costs and cannot increase the benefits any participant can receive under the plan. However, a separate account is not required to be maintained for each participant.

Question 18

Deidre has five years of service completed as of February 5,2016,her employment anniversary date.If the defined benefit plan [not a § 401(m)arrangement] uses the cliff vesting schedule,determine Deidre's nonforfeitable percentage.

Accepted Answer

Under the cliff vesting schedule, an employee becomes 100% vested after completing a specified number of years of service, typically five years. Since Deidre has completed five years of service, her nonforfeitable percentage is 100%.

Question 19

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 2016,his early distribution penalty is:

Accepted Answer

As Scott is over age 59.5, he will not incur any early distribution penalty. Therefore, the answer is option A, which is $0.

Question 20

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?

Accepted Answer

The answer of Merrill is a participant in a SIMPLE...

Quiz 19: Deferred Compensation