Question 1

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 determined by calculating 25% of the total compensation paid to plan participants. In this case, 25% of $42,300 is $10,575. This is the deductible amount.

The contribution carryover is calculated by subtracting the actual contribution made in the current year ($12,800) from the maximum contribution allowed ($53,000 for 2012). This gives us a carryover amount of $40,200.

Therefore, the answer is C) $10,575 deductible; $2,225 carryover.

Question 2

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 Green Corporation is calculated as follows:

Total contributions = $10,000
Maximum deductible amount = 25% of participant compensation

Participant compensation = $38,300
Maximum deductible amount = 25% x $38,300 = $9,575

Since the total contributions made by Green Corporation are less than the maximum deductible amount, the deductible amount for the corporation is $10,000. Therefore, the answer is option (C).

Question 3

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 4

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 5

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 Debby can deduct as a contribution to her Keogh plan for 2012 is the lesser of 25% of her self-employment income or $50,000. Calculating 25% of her self-employment income ($120,000), we get $30,000. Since $30,000 is greater than $50,000, the maximum amount Debby can deduct is $50,000. Therefore, choice C is the correct answer.

Question 6

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

The answer of Scott,age 68,has accumulated $850,000 in a defined...

Question 7

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 contributes 5% of her salary, which is $5,550 (5% × $111,000). This amount is deducted from her taxable income, so she would pay income taxes on $105,450 ($111,000 − $5,550).

Question 8

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 a two- to six-year graded vesting approach, an employee's nonforfeitable percentage increases by 20% for each year of service completed. So, after three years of service, Sloane would have a nonforfeitable percentage of 40%.

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

At age 70 1/2, Danielle must begin taking required minimum distributions (RMDs) from her traditional IRA. The first distribution can be delayed until April 1 of the year following the year in which she turns 70 1/2, but she will also have to take another distribution for that year by December 31. Since Danielle turns 71 in 2011, she reached age 70 1/2 in 2011, which means she must take her first RMD by April 1, 2012. The RMD is calculated by dividing the balance in the IRA at the end of the previous year (in this case, 2011) by her life expectancy factor (15.3). So, her RMD for 2011 is $150,000 / 15.3 = approximately $9,804. Since she turned 71 in 2011, she also needs to take a distribution for 2011 by December 31, 2011. However, since she can delay her first distribution until April 1, 2012, she can count that distribution toward her 2011 RMD. Therefore, she only needs to take a distribution of $9,804 by April 1, 2012, and no further distribution for 2011. Option B is the closest answer to this amount.

Question 10

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 11

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 12

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, at least 70% of all non-highly compensated employees must be covered by the retirement plan. The plan covers 72% of the non-highly compensated individuals, so it meets the 70% coverage requirement.

To meet the minimum participation test, at least 70% of the employees who are eligible to participate in the retirement plan must actually participate. There's not enough information to determine whether or not the plan meets this requirement.

Therefore, the correct answer is C.

Question 13

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

According to the three-to-seven year graded vesting approach, Pete's nonforfeitable percentage would increase by 20% for each year of service completed. Since Pete has five years of service completed, his nonforfeitable percentage would be 60% (20% for each of the first three years plus 10% for each of the next two years). Therefore, the correct answer is B) 60%.

Question 14

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 true. When an employee exercises a non-qualified stock option (NQSO), they must recognize ordinary income equal to the difference between the option's exercise price and the stock's fair market value at the time of exercise. This income is subject to income tax withholding, but the employee may not receive enough cash from the exercise to cover the tax liability, creating a potential cash flow problem.

Question 15

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 16

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

Accepted Answer

The answer of If a NQSO does not have a...

Question 17

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

The answer of Which of the following characteristics describes a...

Question 18

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

The other options are all disadvantages of qualified pension or profit sharing plans, whereas contributions being immediately deductible by the employer is an advantage.

Question 19

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 20

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...

Quiz 19: Deferred Compensation

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:

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?

Which is not considered to be a fringe benefit?

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

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%?

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:

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?

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?

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?

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

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 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.

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:

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

Which of the following characteristics describes a defined benefit plan?

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

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

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