CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

Final Review Questions

©2013, College for Financial Planning, all rights reserved.

Question 1

A fully insured worker is a worker who has accumulated a minimum number of quarters of coverage (credits). A quarter of coverage (credit) is earned for each $1,160 (in 2013) that a worker earns (up to four) per year. How many quarters of coverage must a worker have accumulated in order to be fully insured?

a.

b.

c.

d.

13 25 36 40

Key Terms in OASDI Programs

• • • • • • • • • • Quarter of coverage ($1,160 in 2013) Currently insured/Fully insured Average Indexed Monthly Earnings (AIME) Full retirement age (FRA) Primary Insurance Amount (PIA) Spousal benefit Benefit reductions due to age Benefit reductions due to earnings Events that trigger the end of benefits Divorced spouse coverage (married 10 years)

Question 2

Which of the following workers are covered by Social Security?

I.

II.

railroad employees with more than 10 years of service III.

self-employed individuals IV.

persons who are in the military domestic employees a. I and II only b. II and III only c. I, II, and III only d. II, III, and IV only

Groups Excluded from Social Security

• • • • • • Federal employees hired prior to 1984 Railroad employees covered under Railroad Retirement System Business owners receiving only distributive income (dividends) for services performed Children under age 18 employed by a parent in an unincorporated business State and local government groups covered by a retirement system where employer has elected to exclude Social Security coverage Employees of religious organizations opting out for religious reasons

Question 3

After meeting with your clients, the Smiths, you have determined that their annual retirement income need, net of expected Social Security benefits, will be $22,000 in today’s dollars. They anticipate an annual after-tax return of 6% on their investments, and they expect inflation to average 4% over the long term. They also plan to retire in 25 years, and they want their projected retirement income to last for 30 years.

Based upon this information, determine the lump-sum amount (plus or minus $25) that the Smiths will need at the beginning of retirement to fund their retirement. a.

b.

c.

d.

$1,313,507 $1,327,503 $1,339,777 $1,353,036

Question 4

Judy and Charles Oakland want to retire in 12 years, at which time they would like to have accumulated $350,000 in today’s dollars. To achieve this goal, they plan to invest a sum at the end of each year that will remain constant in purchasing power.

If they anticipate average inflation of 6% and after-tax investment earnings of 9%, what payment is required at the end of the first year?

a.

b.

c.

d.

$24,901 $26,395 $28,332 $32,508

Question 5

Which one of the following is not a characteristic of a defined benefit plan?

a.

b.

c.

d.

The retirement benefit is not certain; investment risk is borne by the participant.

Benefits are limited to the lesser of 100% of compensation or $205,000 in 2013.

Forfeitures may only be applied to reduce the employer’s contribution.

The plan requires annual actuarial determinations of contributions.

Defined Benefit Plan Benefit Formulas

• •

Flat benefit: Service is not considered

Benefit is flat amount or percent of earnings Service reduction may be used: reduced benefit for

Unit benefit: Service is considered

Benefit is a dollar amount per year of service or a percentage of earnings per year of service Participant accrues additional benefit each year Service limitation may be used; considers years of service up to specified maximum

Benefit Formula Examples

Funding Formula

Flat Amount Formula Flat Percentage Formula Unit Credit Formula

Benefit Calculation

Flat amount per month Flat percentage based on compensation Benefit determined on a combination of service and compensation

Example

$250 per month 10% of comp. Per year 2% x years of service x average 3 highest years pay

Comments

No incentive for participants to continue employment after attaining maximum flat amount Incentive to increase compensation through raises but not to continue employment after attaining a desired benefit Incentive to attain additional years of service and additional compensation to increase ultimate benefit

Survivor Annuities

• • • • Required of all pension plans QJSA 50% then a 75% QOSA (qualified optional survivor annuity) must be offered or QJSA 75% then a 50% QOSA must be offered QPSA must also be offered

Question 6

Which one of the following characteristics is not shared by defined benefit plans and target benefit plans?

a.

b.

c.

d.

Qualified joint and survivor annuity requirements apply.

Minimum funding requirements apply.

The contribution must be made each year.

Excess investment earnings result in greater retirement benefits for participants.

Qualified Plan Characteristics (1)

Basic Statutory Characteristic

Cont. Type

Defined Contribution Plans Profit Sharing/ Stock Bonus

Flexible contribution

Money Purchase Pension

Fixed annual requirement

Target Benefit

contribution to meet minimum funding Maximum Employer Deduction 25% of covered payroll

Defined Benefit Plans Cash Balance

Fixed % of comp.; annual actuarial adjustment

Defined Benefit

Annual actuarial determination Amount necessary to fund benefit up to IRS limits

Qualified Plan Characteristics (2)

Basic Statutory Characteristic

Minimum funding standard Employee contribution Forfeitures

Defined Contribution Plans Profit Sharing/ Stock Bonus

Generally No

Money Purchase Pension

Yes

Target Benefit

Yes 401(k) provisions allowed Generally reallocated May permit voluntary after-tax N/A Reallocated or applied to reduce employer contribution

Defined Benefit Plans Cash Balance

Yes N/A

Defined Benefit

Yes May permit voluntary after-tax Must be applied to reduce employer contribution

Qualified Plan Characteristics (3)

Basic Statutory Characteristic

Annual additions limit (415 limit) Annual benefit limit (415 limit)

Defined Contribution Plans Profit Sharing/ Stock Bonus Money Purchase Pension Target Benefit

Annual additions to a participant’s account may not exceed the lesser of 100% of compensation or $51,000 in 2013 N/A N/A N/A

Defined Benefit Plans Cash Balance

N/A

Defined Benefit

N/A Participant’s annual benefit may not exceed lesser of $205,000 or 100% of compensation in 2013

Other Qualified Plan Characteristics

Basic Statutory Characteristic

Most favored age group Investment risk Maintenance of plan funds Certainty of retirement benefits 1 PBGC insured

Defined Contribution Plans Profit Sharing/ Stock Bonus

Younger

Money Purchase Pension

Younger

Target Benefit

Older Employee Individual Accounts Uncertain

Defined Benefit Plans Cash Balance

Younger Employer Pooled Funds Guaranteed minimum return on fund 1

Defined Benefit

Older Specific annual benefit 1

Question 7

All of the following may be included under the IRS’s definition of compensation as it applies to qualified plans except a.

b.

c.

d.

employer contributions.

bonuses.

employer paid premiums for life insurance in excess of $50,000.

salary reduction contributions.

Question 8

All of the following affect retirement benefits in a defined benefit plan except a.

b.

c.

d.

investment earnings on the plan’s assets.

the participant’s compensation.

the participant’s years of service.

the plan’s formula.

Question 9

Which of the following statements is true about the 50/40 test?

a.

b.

c.

d.

If at least 40 employees are covered, then the plan passes.

If less than 50 employees are covered, then the plan fails.

If there are only three employees, then at least two must be covered.

If there are union employees, then they must also be considered when doing the 50/40 test calculation.

Defined Benefit Plan Minimum Participation Test

Defined benefit plans also must satisfy the minimum participation (50/40) test. The plan must benefit at least the lesser of • • 50 employees, or The greater of: o 40% of all the company’s ERISA eligible employees, or o Two employees (one employee if there is only one employee)

Question 10

Which one of the following types of qualified plans does not allow Social Security integration?

a.

b.

c.

d.

profit sharing plan target benefit plan employee stock ownership plan (ESOP) stock bonus plan

Question 11

Jim Hanson, age 35, is the 100% shareholder and president of an incorporated business that has no retirement plan for its 20 full-time and 28 part-time employees. Jim’s goal is to maximize his retirement contributions; however, Jim wants to avoid fixed employer contributions. Which one of the following retirement arrangements should the corporation adopt?

a.

b.

c.

d.

tandem plan target benefit plan money purchase plan profit sharing plan

Question 12

Which one of the following is not correct about qualified plan limits for profit sharing 401(k) plans?

a.

b.

c.

d.

The retirement benefit is not certain; investment risk is borne by the participant.

Includible compensation is limited to the lesser of 100% of compensation or $205,000 in 2013.

The employer contribution limit is 25% of compensation.

The maximum allowable employee deferral amount is $17,500, not counting any catch-ups, in 2013.

Question 13

Which one of the following statements correctly describes the term “elective deferral”?

a.

b.

c.

d.

the ratio of nonhighly compensated employees’ benefits to highly compensated employees’ average compensation the dollar amount of forfeitures being allocated to a 401(k) plan participant the dollar amount contributed by the employer into a 401(k) plan the dollar amount contributed by an employee into a 401(k) plan

Question 14

Which one of the following would classify an employee as being highly compensated? a.

b.

c.

d.

5% or less owner greater than 5% owner 10% or less owner greater than 10% owner

Highly Compensated Employee

• • Was a “5% owner” (ownership of >5%) in the determination year or in the preceding plan year or In 2013, a person whose compensation was in excess of $115,000 in the previous year (2012) is a highly compensated person. o Employer has the option to limit highly compensated to the top-paid 20% employees based upon preceding year’s compensation.

Question 15

Harry, a frantic 34-year-old, contributed $2,000 to a Roth IRA in January 2010. By January 2013, the investments in his account had grown to $3,785. Finding himself in a financial bind, Harry is now compelled to withdraw $2,000 from this Roth IRA. What is the tax and penalty status of this withdrawal?

a.

b.

c.

Harry must pay tax on the $2,000, but there is no penalty.

Harry must pay tax and a $200 penalty.

Harry does not have to pay any tax or penalty on the $2,000 distribution, even though he is only 34.

Question 16

James and Doris Stewart will contribute a total of $11,000 to their IRAs for this tax year. They both work outside the home, and they file a joint tax return. James Stewart is a teacher at the local high school and contributes to a TSA. Doris’s employer has no retirement plan. Their adjusted gross earnings for this year will be $105,000.

What amount, if any, can they deduct for their IRA contributions?

a.

b.

c.

d.

$0 $5,500 $8,250 $11,000

IRA Deductibility Active Participant Status

An employee is an active participant in a defined contribution plan if, during the taxable year, the employee received any annual additions to his/her account.

Employer Contribution or Employee Contribution (either voluntary or mandatory) or Forfeiture To one of the following plans: • All qualified plans • Tax-sheltered annuity (TSA) under §403(b) • Simplified employee pension (SEP) & SIMPLE plans • Government pension plan An employee is an active participant in a defined benefit plan if the employee is eligible to participate in the plan, whether or not participation is waived. (Note that investment earnings do not affect active participant status.)

Traditional IRA Deduction Phaseout Amounts (2013)

Single Taxpayer

Not an Active Participant

No Phaseout

Active Participant

$59,000-$69,000 Married Taxpayers Filing Jointly

Neither is an Active Participant

No Phaseout

One Active Participant

Active participant: $95,000-$115,000 Other Spouse: $178,000-$188,000

Both Active Participants

$95,000-$115,000

Question 17

Allen Baker, a single taxpayer with AGI of $76,000, is covered by his employer’s profit sharing/401(k) plan. During the current plan year, no employer contribution was made, and Allen did not make any salary reduction contributions to the 401(k) portion of the plan. Allen’s account balance increased by $120 this year, which was attributable to investment earnings of $80 and forfeitures of $40. If he contributes $5,500 to his IRA for this year, what is the amount of his allowable IRA deduction?

a.

b.

c.

d.

$0 $600 $1,200 $5,500

Question 18

Which one of the following is not exempt from the 10% penalty tax on premature distributions from an IRA? a.

b.

c.

d.

e.

a series of substantially equal periodic payments a distribution following the owner’s death a distribution to a 55-year-old employee following separation from service a distribution following disability a distribution for medical expenses in excess of deductible medical expenses

Question 19

Which of the following categories of employers are able to offer Section 403(b) plans?

I.

II.

public education systems state and local government entities III.

certain tax-exempt organizations IV.

sole proprietors a. I and II b. I and III c. II and III d. III and IV

Qualified Employer & General Plan Features

• • • •

Qualified employers

Public educational systems 501(c)(3) organizations Ministers performing religious services for for profit companies 403(b) plans are not considered to be qualified, were around before ERISA • •

Two basic types of 403(b) arrangements

Employee-deferral only Employer contribution and employee deferral

Question 20

Which of the following describes the nondiscrimination test that a deferral-only 403(b) plan must satisfy?

a.

b.

c.

d.

If the plan benefits at least 70% of the non-key employees, the ratio test is satisfied.

The ratio test can be satisfied only if the percentage of nonhighly compensated employees equals at least 75% of the percentage of highly compensated employees.

If the plan allows any employee who will defer a minimum of $200 per year to participate, it satisfies the non-discrimination requirements.

The plan is not considered discriminatory if at least 70% of the HCEs benefit.

401(k) & 403(b) Plan Comparison

Characteristic

Sponsor?

Private employer?

Qualified plan?

Eligibility?

Salary deferral?

Matching allowed?

Nonelective contributions?

Nondiscrimination tests?

401(k)

Nongovernmental employers Yes Yes ERISA requirements Yes Yes Yes Yes

403(b)

Public schools and 501(c)(3) No No Any employee (typically) Yes Yes, but seldom done Yes, but seldom done No, if only salary deferral Yes, if employer contributions

401(k) & 403(b) Plan Comparison (2)

Characteristic

Maximum deferral?

Overall limits?

Catch-up election?

Loans?

Hardship withdrawal?

Investment limitations?

ADP and ACP testing?

401(k)

$17,500 in 2013 (indexed) The lesser of the 415(a) limit or annual deferral limit Yes, for those age 50 and older Yes Yes

403(b)

$17,500 in 2013 (indexed) The lesser of the 415(a) limit or annual deferral limit Yes, two, age 50 and 15 years of service Yes Yes No (all ERISA investments) Yes, only mutual funds and annuities Yes, unless safe harbor plan Only ACP testing, safe harbors available

Question 21

Based upon George’s salary and years of service, he could contribute $17,500 to the Section 403(b) plan in which he participates. However, during the summer he paints homes and contributes $4,500 into a SIMPLE IRA through that employer. How much can George contribute to the Section 403(b) plan?

a.

b.

c.

d.

$7,500 $12,000 $13,000 $17,500

Question 22

The vested accrued benefit in George’s TSA is $87,500. He has never taken a loan from the plan, but is now interested in building an addition to his home. Which of the following statements correctly describes George’s option?

a.

b.

c.

d.

The amount of the loan would be limited to $43,750 and the term would be limited to five years.

George could borrow up to $43,750; and since the loan is for his primary residence, it could be longer than five years.

George can borrow up to $50,000, but the term of the loan would be limited to five years.

The amount of the loan would be limited to $50,000; and since the loan is for his primary residence, it could be for longer than five years.

Question 23

Which of the following statements correctly identifies the tax consequences of a hardship withdrawal from a profit sharing plan?

a.

b.

c.

d.

Since profit sharing plans are qualified, a hardship distribution is subject only to income taxation without any penalty.

All hardship withdrawals would be subject to both taxation and a 10% penalty.

Hardship withdrawals that are used to pay certain medical expenses would be subject to income tax, but not to the tax penalty.

Hardship withdrawals used to pay for post secondary education would be subject to income tax, but not to the penalty tax.

Question 24

Which of the following statements correctly describes a Section 457 catch-up provision?

a.

b.

c.

The final three-year catch-up provision allows all participants of a Section 457 plan to contribute an additional $17,500 during the three years preceding retirement. The other catch-up is for those who have attained age 50. They can increase their deferrals by $5,500 (in 2013) in all but the last three years before retirement.

The final three-year catch-up provision allows participants to make contributions up to twice the maximum deferral allowed for a 457 plan. The additional deferral amount is available only from prior unused deferrals and is to make up for those years when deferrals were less than the maximum allowed. The other catch-up is for those who have attained age 50. They can increase their deferrals by $5,500 (in 2013) in all but the last three years before retirement if they use the final three-year catch-up.

During the final three years before retirement, a participant in a Section 457 plan could contribute up to the lesser of 100% of compensation, or $51,000. The other catch-up is for those who have attained age 50. They can increase their deferrals by $5,500 (in 2013) in all but the last three years before retirement.

Catch-up Provisions of 457(b) Plans

•

Age 50 catch-up

Additional $5,500 for those age 50 and older not in the final three years prior to retirement • • • •

Final three years catch-up

Available for each year of the three years preceding normal retirement age Catch-up contribution up to the allowable deferral for the current year, resulting in total deferrals up to two times the allowable deferral for the current year From unused deferrals only Cannot use with age 50 catch-up

Question 25

In the first two years, a SIMPLE IRA may be rolled over into which one of the following?

a.

b.

c.

d.

another SIMPLE IRA a qualified plan an IRA a SEP

SIMPLE IRA

• • • • • 100 or fewer employees paid at least $5,000 in any two preceding years and current year—must be only plan Permits employee elective deferrals ($12,000 with $2,500 age 50 catch-up) 100% immediate vesting Nondiscrimination tests met if: o 100% match on first 3% (1% match in 2 of 5 years), or 2% non-elective contribution to account of each employee earning more than $5,000 IRA distribution rules apply, except o o 25% penalty on withdrawals in initial two years Rollovers limited during initial two years

Permissible Rollovers

IRA SEP-IRA IRA

YES YES

SEP-IRA

YES YES

SIMPLE IRA

YES, after two years YES, after two years.

Roth IRA

NO NO

SIMPLE IRA

NO NO YES NO

Roth IRA

YES, but taxable YES, but taxable YES, after two years, is taxable YES

Roll to Government 457(b)

YES, must have separate accounts.

YES, must have separate accounts.

YES, must have separate accounts.

NO

403(b)

YES YES

Qualified Plan

YES YES YES, after two years YES, after two years.

NO NO

Designated Roth Account

NO NO NO NO

457(b)

YES YES NO YES, but taxable YES YES YES NO

403(b) Qualified Plan Designated Roth Account

YES YES NO YES YES NO NO NO NO YES, but taxable YES, but taxable YES YES, must have separate accounts.

YES, must have separate accounts.

NO YES YES NO YES YES NO NO NO YES, if a direct trustee to trustee transfer.

Question 26

Which one of the following is a correct statement about the constructive receipt doctrine?

a.

b.

c.

It may tax income that is made available but is not yet received by a taxpayer.

It taxes payments made in the future that are based on a company’s earnings.

It prevents a deferred compensation agreement from being informally funded.

Constructive Receipt

• • The constructive receipt issue isn’t whether the taxpayer has actually received the income, but whether he/she has access to it.

To avoid constructive receipt, agreements usually contain specific provisions establishing substantial risk of forfeiture (funded plans), or availability of funds to company’s general creditors (unfunded plans).

Question 27

Which one of the following is a requirement for incentive stock options (ISOs)?

a.

b.

c.

d.

ISOs, with limited exceptions, must be made available to all employees.

ISOs, when granted, can be issued at a discount of up to 15% from the current fair market value of the company stock.

ISOs must be exercised within three months of retirement in order to preserve favorable tax treatment.

ISOs require approval only from senior management.

Tax Treatment of Incentive Stock Options

• • • • • No income tax is owed when the ISOs are granted.

No income tax is owed when the ISOs are exercised.

The difference between grant and exercise price is AMT income in year of exercise (if stock is disposed of in same year as exercise, no AMT income).

Income tax is owed when the stock purchased with the ISOs is sold.

How the gain will be taxed depends on whether the disposition is a “qualifying disposition” or a “disqualifying disposition.”

Question 28

Joseph Scarpelli is an employee of Cabinet Masters, Inc., a publicly held corporation. Joseph’s salary is $35,000 per year. Cabinet Masters is considering the adoption of a group term life insurance plan on its 5,000 employees, whereby each will be offered life insurance in an amount equal to twice his or her current salary. The premiums will be paid by Cabinet Masters. Joseph, a single individual, wants to name the American Cancer Society, a charitable organization, as beneficiary of his group life proceeds. Which of the following identifies the income tax implications of the cost of this group term life insurance coverage for Joseph?

a.

b.

c.

Since Joseph can change the beneficiary at any time, the cost of $20,000 of the coverage will be taxable income.

With this beneficiary arrangement, Joseph will not have any tax consequences.

Cabinet Masters, and not Joseph, will have to pay taxes on any premiums that are paid.

Question 29

Which of the following statements describes the tax implications of disability insurance?

a.

b.

c.

If premiums are paid 100% by the employer, benefits are not considered taxable income to the employee as long as the employee qualifies under the Social Security definition of disability.

If the employee pays 100% of the premiums, benefits paid to the employee are not considered taxable income.

If the employer purchases disability coverage on a key employee and benefits are payable to the employer, the employer can deduct the expense of premium payments, but benefits are taxable income.

Question 30

Which of the following events are considered a qualifying even under COBRA?

I.

II.

involuntary termination of an employee due to gross misconduct any voluntary termination or a change from full-time to part-time status III.

dependent’s loss of dependent status IV.

employee’s death or divorce a. I and II only b. II and III only c. II, III, and IV only d. I, II, III, and IV

COBRA Qualifying Events

Qualified beneficiaries Covered employee Spouses and other dependents Children of employees Qualifying events

Voluntary or involuntary termination Change from full-time to part time status Disability (S.S. definition) Plan termination • • • • Employee’s Death Divorce Legal separation Eligibility for Medicare Loss of dependent status

Length of coverage

18 months 18 months 29 months 36 months 36 months 36 months

Question 31

Which of the following benefits would not create taxable income for employees, assuming that the plans are nondiscriminatory?

I.

II.

country club dues paid by the employer de minimis fringe benefits III.

qualified employee discounts IV.

business use of an employer-owned automobile a. I and II only b. II and III only c. II, III, and IV only d. I, II, III, and IV

Taxable Non-Cash Fringe Benefits

• • • • Personal use of company automobile or lodging No-additional-cost services and qualified employee discounts to highly paid employees if not available to rank-and-file employees Country club dues paid for employees Season tickets

Non-Taxable Non-Cash Fringe Benefits

• • • • • • Working condition fringe benefits (must be business related and substantiated) o o business use of company car, professional dues and subscriptions No-additional-cost services Qualified employee discounts Use of on-premises athletic facilities De minimis fringe benefits o o o o limited use of copy machine occasional tickets for business purposes public transportation allowances up to $245 per month qualified parking also $245 per month Meals and lodging furnished for employer’s convenience

Question 32

Select the basic provisions of an IRC Section 401(k) plan from the following statements.

I.

II.

III.

IV.

Employee elective deferrals are exempt from income tax withholding and FICA and FUTA taxes.

An employer’s deduction for a contribution to a Section 401(k) plan cannot exceed 25% of covered payroll, and the deduction is not reduced by the employees’ elective deferrals.

A Section 401(k) plan cannot require as a condition of participation that an employee complete a period of service longer than one year.

Employee elective deferrals may be made from salary or bonuses.

a. I and III only b. I and IV only c. II and IV only d. I, III, and IV only e. II, III, and IV only

Question 33

Which of the following are correct statements about Keogh plans?

I.

II.

III.

IV.

Benefits provided by a defined benefit Keogh plan cannot exceed the lesser of $205,000 in 2013 or 100% of salary.

Keogh plans are qualified plans established by any unincorporated business entity.

Keogh contributions for owner-employees are based on their gross salary.

Keogh plans are permitted to make loans to common-law employee participants and owner-employees.

a. I and II only b. I and III only c. II and IV only d. I, II, and IV only e. II, III, and IV only

Keogh Plans—Basic Provisions

• • • Available only to unincorporated businesses — proprietor or partnership sole Takes the form of a qualified plan (defined contribution or defined benefit) Certain provisions for owner/employee are unique to Keoghs: o o Owner/employee’s contribution is calculated on net earnings Lump-sum distribution treatment is not available to owner/employee for separation from service before age 59½—available only for death, disability, or attainment of age 59½

Question 34

Which of the following would not be considered unrelated business taxable income (UBTI)?

a.

b.

c.

d.

limited partnership income royalty income income from a directly held business dividend income from leveraged stock

UBTI

UBTI (unrelated business taxable income) is derived when a qualified plan participates in running a business.

• • •

Income not considered to be UBTI

Passive income (interest, dividends, royalties, rent) Capital gains Leveraged real estate that is held directly • • •

Income considered to be UBTI

Income from a directly held business Dividend income, if stock is margined Partnership income (general and limited)

Question 35

Which of the following qualified plans are required to provide a qualified joint and survivor annuity (QJSA)?

I.

II.

cash balance plan certain ESOPs III.

target benefit plan IV.

thrift plan a. I and II only b. I and III only c. III and IV only d. I, II, and IV only e. II, III, and IV only

Question 36

Which one of the following statements is correct?

a.

b.

c.

d.

ADP testing measures employee and employer deferrals.

ACP testing measures employee after-tax deferrals.

The ratio percentage test uses key employees.

The average benefits test uses highly compensated employees.

Question 37

John, age 52, has worked for a local hospital for 17 years, and earns $75,000 a year. The hospital offers a 403(b) plan, and John has asked you what would be the maximum amount he could defer this year. You would advise him that he could potentially defer a.

b.

c.

d.

$12,000.

$17,500.

$23,000.

$26,000.

Question 38

Which one of the following is applicable to both governmental and non-governmental Section 457 plans?

a.

b.

c.

d.

Both have the final three-year catch-up available allowing twice the deferral amount.

Upon separation from service, both can be transferred to a qualified plan.

Both are considered to be unfunded, and potentially subject to the claim of creditors.

If the employer elects as such, both can allow loans.

Funded & Unfunded 457(b) Plans

• • • •

Nongovernmental 457(b) plans:

Unfunded (money may be set aside, but is available to creditors) Participant does not have constructive receipt Since unfunded no loans allowed No rollovers allowed (such as to an IRA) • • •

Governmental 457(b) plans:

Funded (funds are not at risk) Loans are allowed Can be rolled over to an IRA, Roth IRA, SEP, 403(b), or qualified plan

Question 39

Which of the following legal requirements apply to employee stock ownership plans (ESOPs)?

I.

II.

III.

IV.

ESOPs must permit participants who have reached age 55 and have at least 10 years of service the opportunity to diversify their accounts.

ESOPs cannot be integrated with Social Security.

A C corporation’s deduction for ESOP contributions and amounts made to repay interest on an ESOP debt cannot exceed 25% of the participants’ payroll.

The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP.

a. I and II only b. II and III only c. I, II, and III only d. I, II, and IV only e. II, III, and IV only

Question 40

Which of the following is (are) true about both incentive stock options (ISOs) and nonqualified stock options (NSOs)?

I.

II.

III.

IV.

V.

Upon exercise, both are taxable as compensation, subject to payroll taxes (Social Security).

If held for at least two years from the grant date and one year from the date of exercise, both are eligible for capital gains treatment on any gain above the grant price.

Only employees are eligible to receive either ISOs or NSOs.

Both ISO and NSO grant prices must be at fair market value at the time of issue.

Generally, neither is taxed upon being granted since there is no ascertainable value when granted.

a. III only b. V only c. II and III only d. IV and V only e. I, III, and V only

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

Final Review Questions End of Slides

©2013, College for Financial Planning, all rights reserved.