L7. Qualified Plans

  1. A 54-year-old client surrenders their 403B TSA for cash. Their tax implication will be:

    • B) The full amount is taxed as ordinary income plus a 10% penalty on the full amount distributed
    • Explanation: (Qualified Plans) Since the individual is under age 59 1/2 they will have a 10% IRS early withdrawal penalty on the full amount that is distributed. Knowing this alone would be enough to select the correct answer to this question. Since tax sheltered annuities (TSAs) are funded with pre-tax money, the individual has NO cost basis. When a distribution is taken the full amount will be taxable as ordinary income. The individual can avoid current taxation by rolling over the distribution, if done within 60 days.
  2. A corporation may set up a qualified plan to contribute a percentage of their net earned income. This is known as a:

    • D) Profit sharing plan
    • Explanation: (Qualified Plans) A profit sharing plan is an arrangement by an employer in which employees share in profits of the business. To be a qualified plan, a predetermined formula must be used to determine contributions to the plan and benefits to be distributed once a participant attains a specified age, becomes ill or disabled, severs employment, retires, or dies. An advantage to an employer is that in low or no profit years, the business does not have to contribute to the plan, since contributions are voluntary.SEP IRAs are employer sponsored IRAs, Keogh plans are for self-employed individuals or partners, and 403B tax sheltered annuities (TSAs) are for public-school teachers, school superintendents, college professors, and employees of religious-affiliated hospitals and charities.
  3. All of the following are eligible for Keogh plans, EXCEPT:

    • A) Corporate officers
    • Explanation: (Qualified Plans) Corporate officers are not eligible for Keogh plans unless they have separate self-employment income.
  4. The maximum contribution limits for qualified plans are governed by:

    • D) IRS rules
    • Explanation: (Qualified Plans) It is the Internal Revenue Service (IRS) that establishes the maximum contribution limits on qualified plans.
  5. An employee's contributions to a SIMPLE IRA vest:

    • D) Immediately
    • Explanation: (Qualified Plans) All contributions to a SIMPLE IRA account must be fully vested immediately. However, the premature distribution penalty for withdrawals is increased to 25% during the first two years of participation.
  6. A 403(b) Tax Sheltered Annuity (TSA) is purchased with:

    • B) Voluntary before-tax contributions
    • Explanation: (Qualified Plans) TSAs are generally sold only to employees of public educational institutions, non-profits and charitable organizations. Eligible employees make voluntary, before-tax contributions on a payroll deduction basis, up to specified limits. 403(b) plans are very similar to 401(k) plans.
  7. All of the following are true regarding SEP IRAs, EXCEPT:

    • B) Employer contributions may be discriminatory
    • Explanation: (Qualified Plans) SEP IRAs are employer sponsored IRAs that are owned by the employees. Although contributions may not be made on a discriminatory basis, contribution limits are much higher than permitted on Traditional IRAs.
  8. If the trustee of a qualified plan splits a participant's funds with their separated spouse against their wishes, the trustee has committed a violation of ERISA known as:

    • A) Alienation
    • Explanation: (Qualified Plans) Under a Federal law known as ERISA, trustees of qualified plans may not allocate funds to anyone other than the participant without their consent. To do so is a violation of ERISA known as "alienation."
  9. A client contributed $20,000 to a tax-qualified IRC 403 (b) Tax Sheltered Annuity over a period of time, which has now grown to $30,000 due to interest earnings that were credited to the account. If the client, who is now age 45, wants to take cash surrender, what will be their tax implication:

    • D) $30,000 ordinary income, plus a 10% penalty
    • Explanation: (Qualified Plans) A TSA is a tax-qualified annuity, meaning that they are purchased with before-tax dollars. Since none of the money in the account has ever been taxed, the client would have to pay ordinary income taxes on the entire balance of the account, plus a 10% penalty due to their age.
  10. Which of the following organizations is responsible for enforcing the Employees Retirement Income Security Act of 1974 (ERISA) pension plan requirements:

    • A) Department of Labor
    • Explanation: (Qualified Plans) The Employee Retirement Income Security Act of 1974 (ERISA) is a Federal law that sets minimum standards for pension plans in private industry. ERISA does not require any employer to establish a pension plan. It only requires that those who establish plans must meet certain minimum standards. The law generally does not specify how much money a participant must be paid as a benefit. ERISA requires plans to regularly provide participants with information about the plan including information about plan features and funding; sets minimum standards for participation, vesting, benefit accrual and funding; requires accountability of plan fiduciaries; and gives participants the right to sue for benefits and breaches of fiduciary duty. ERISA also guarantees payment of certain benefits through the Pension Benefit Guaranty Corporation, a Federally chartered corporation, if a defined benefit plan is terminated. The Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) enforces ERISA.
  11. A client who has contributed $20,000 to their Traditional IRA over a period of time now has an account balance of $30,000. How much of their account balance may they elect to roll over to another IRA:

    • B) The entire amount in the account
    • Explanation: (Qualified Plans) There are no limits governing the amount that may be rolled over. In other words, a participant may roll over all or part of their IRA to another IRA. If the roll-over is done trustee-to-trustee direct, then no taxes will be withheld.
  12. In order to be considered "qualified" a retirement plan must include all of the following, EXCEPT:

    • D) Discrimination
    • Explanation: (Qualified Plans) Qualified plans cannot be discriminatory.
  13. If four business partners start a new business and establish a Keogh plan, which of the following would not be eligible to participate:

    • A) A limited partner who is not active in the business
    • Explanation: (Qualified Plans) Limited partners in a partnership would not be eligible to participate in a Keogh plan, since they are not actively involved in the partnership.
  14. In order to avoid withholding tax applied to a qualified plan rollover an individual should do which of the following:

    • A) Make a trustee to trustee roll over
    • Explanation: (Qualified Plans) Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump sum from employer retirement plans regardless of whether you plan to roll over the taxable amount within 60 days. The only way this 20% withholding can be avoided is by executing a trustee-to-trustee direct rollover.
  15. Which of the following could occur if the owner of a corporation takes out a series of interest free loans from their company's qualified retirement plan:

    • A) The IRS could disqualify the plan under the Exclusive Benefit rules
    • Explanation: (Qualified Plans) Qualified corporate pension plans are regulated by the Employee Retirement Income Security Act of 1974 (ERISA) which states that such plans must be set up for the "exclusive benefit" of the employees. Violation of ERISA rules may result in plan disqualification and reclassification as a non-qualified plan.
Card Set
L7. Qualified Plans
Qualified Plans