Thomas, age 55 and the owner of a computer repair shop, has come to you to establish a qualified plan. The repair shop, which employs mostly young employees, has had steady cash flows over the past few years, but Thomas foresees shaky cash flows in the fu
Profit sharing plan.
A profit sharing plan would be the best choice for Thomas' company. All of the other options describe pension plans that require mandatory funding. A pension plan would not be an appropriate choice due to the company's unstable cash f
Mary, age 46, is a self-employed financial planner and has Schedule C net income from self-employment of $22,000. Her self-employment tax for the year is $6,000. She has failed to save for retirement until now. Therefore, she would like to make the maximu
$3,800.
$22,000 Schedule C net income - 3,000 (less � self-employment taxes of $6,000) $19,000 Net self-employment income x 0.20 (0.25/1.25) $3,800 Keogh profit sharing contribution amount
A plan sponsor has the right to terminate a qualified retirement plan when the plan sponsor no longer has the funds available to continue funding the plan at a reasonable level.
True or False
True
A plan sponsor can terminate a plan when the plan sponsor can no longer make contributions to the plan. In this case, all participants will become 100% vested in their accrued benefit.
An individual has a vested account balance in his employer-sponsored profit sharing plan of $120,000. He would like to take a loan for the maximum amount permitted. The individual has not taken any other plan loans before. The maximum loan the individual
True
The maximum loan an individual can take from a qualified plan is the lesser of $50,000 or 50% of the vested account balance, less the maximum outstanding loan balance within twelve months prior to taking the loan. If the individual's vested account b
Robbie is the owner of SS Automotive and he would like to establish a qualified pension plan. Robbie would like most of the plan's current contributions to be allocated to his account. He does not want to permit loans and he does not want SS Automotive to
Money purchase pension plan.
Because Robbie does not want SS Automotive to bear the investment risk of the plan assets, the money purchase pension plan or the target benefit plan would be the available options to fulfill his requirements. The target benef
An individually-designed qualified plan will generally cost more for a company to establish than a prototype plan.
True or False
True
An individually-designed qualified plan will be drafted by attorneys to meet the specific needs and desires of the plan sponsor. A prototype plan is a standard or form plan which has already received a determination letter from the IRS. The plan spon
Which of the following qualified plan distributions will be subjected to a 10% early withdrawal penalty?
A. Lonnie, age 35, takes a $100,000 distribution from his profit sharing plan to pay for his son's college tuition.
B. Carolyn, age 56, was terminated
A. Lonnie, age 35, takes a $100,000 distribution from his profit sharing plan to pay for his son's college tuition.
The distribution described in answer a will be subjected to the 10% penalty. Education expenses are only an exception to the 10% penalty fo
Which of the following is/are elements of an effective waiver for a preretirement survivor annuity?
(I) The waiver must be signed within six months of death.
(II) The waiver must be signed by a plan participant.
(III) The waiver must be notarized or signe
III only. The waiver must be notarized or signed by a plan official.
Only the nonparticipant spouse must sign the waiver. Statement 3 is correct. Statement 1 is unfounded.
Paper Chasers, a shop that specializes in confetti has a 401(k) plan that allows plan loans up to the legal limit allowed by law. Participants must repay the loans under the most generous repayment schedule available by law. Paper Chasers plan has the fol
The maximum Judy can borrow from her account is $8,000.
Judy can borrow up to $10,000 from her 401(k) plan. Since her loan balance is $2,000, she can borrow an additional $8,000. The maximum loan is the lesser of 50% of a participant's vested account bala
A profit sharing plan is required to offer its participants, or the participant's beneficiaries, a qualified preretirement survivor annuity (QPSA).
True or False
False
A profit sharing plan is not required to provide its participants, or participant's heirs, with a QPSA if the plan provides the participant's vested account balance to the surviving spouse at the participant's date of death.
In August of this year, Paul turned 71. He was a participant in his former employer's profit sharing plan. His profit sharing plan had an account balance of $600,000 on December 31 of this year, and $450,000 on December 31 of last year. According to the U
$16,981.
$450,000/26.5 = $16,981 Note: For 2009, required minimum distributions were not necessary but returned in 2010.
Retirement plan participants who wish to take advantage of a qualified plan's loan provision must agree to the following restrictions on the amount of the loan and how it is repaid:
A. Generally, a participant may borrow no more than $50,000 or one-half o
Both a and b.
Option c is incorrect. It describes "sham" repayments. Sham repayments are the reason that the rules were designed so that the $50,000 loan limit is reduced by the highest outstanding loan balance during the one-year period ending the day be
Lee, a single individual, turned 70 on November 13, 2012. The fair market value of his 401(k) plan was $400,000, $425,000 and $385,000 on January 1, 2012, January 1, 2013, and January 1, 2014, respectively. The factors, according to the Uniform Life Table
$16,038
Lee will not be required to begin taking minimum distributions until April 1, 20X4 - April 1 of the year after he attains the age of 70�. This would be for the year 2013. The calculated required minimum distribution using the plan balance as of th
Which of the following statements concerning stock bonus plans and ESOPs is(are) true?
(I) They both give employees a stake in the company through stock ownership and allow taxes to be delayed on stock appreciation gains.
(II) They both limit availability
Both I and II.
Statement 1 lists advantages of choosing stock ownership plans and ESOPs. Statement 2 lists the disadvantages.
Randy, age 63, is a participant in a stock bonus plan sponsored by XYZ, Inc., a closely held corporation. Randy's account was credited with contributions in shares of XYZ stock to the stock bonus plan and XYZ Inc. had the following income tax deductions:
(IV) Randy has a short term capital gain of $16,000 in year 7.
Randy's ordinary income is exactly equal to XYZ, Inc.'s deduction at the time of contribution, $15,875 (see chart below) and this will be taxable as ordinary income in the year of the distribu
One disadvantage of an ESOP is that it may place an unnecessary cash flow burden on the plan sponsor.
True/False
True
An ESOP can create an unnecessary cash flow burden for the plan sponsor in any of the following cases: (1) a participant terminates employment and requests a distribution of cash from the plan, (2) a participant attains the age of 55 and requests div
Several years ago, Rustin retired from Fox, Inc., a national plastics supplier. When Rustin retired, he had 1,000 shares of Fox, Inc. stock in his stock bonus plan. Fox, Inc. took deductions equal to $20 per share for the contributions made on Rustin's be
$0 of ordinary income, $0 of short-term capital gain, $20,000 of long-term capital gain.
Rustin will not be subject to ordinary income at the date the stock is sold. $20,000 ($20 x 1,000) would have been subject to ordinary income tax at the date the stoc
Participants of a stock bonus plan sponsored by a C corporation must be given pass-through voting rights for the employer stock held by the plan.
True/False
True.
Participants of a stock bonus plan sponsored by a C corporation must be given pass-through voting rights for the employer stock held by the plan.
Melissa is the sole shareholder of Cupcake Surprises, Inc. (CSI) and sells 25% of the company stock to an ESOP for $550,000. Melissa had an adjusted basis in the CSI stock of $100,000. Provided Melissa reinvests the $550,000 in qualified replacement secur
False.
Melissa would be required to recognize capital gain of $450,000 on the transaction because in order to benefit from the nonrecognition of gain treatment, the ESOP must own at least 30% of the corporation's stock immediately after the sale. In this
Bobby owns Advertising Solutions, Inc. (ASI) and sells 100% of the company stock on July 1 of the current year to an ESOP for $3,000,000. Bobby had an adjusted basis in the ASI stock of $450,000. If Bobby reinvests in qualified replacement securities befo
Bobby will not recognize long term capital gain or ordinary income in the current year.
A major advantage for an ESOP is the ability of the owner to diversify his interest in a closely held corporation. In this case, if Bobby reinvests in qualified replac