Eastern Illinois University
FIN 4300
Final Exam Topics
Calculations will be required for items in bold.
Introduction to Retirement Funding
Chapter 2
1)
2)
3)
4)
5)
6)
1)
Factors Affecting Retirement Planning
a) Remaining Work Life Expectancy (RWLE)
b) Retirement Life Expectancy (RLE)
c) Savings
d) Annual Income Needs
e) Wage Replacement Ratio (WRR)
f)
Inflation
g) Retirement Income Sources
h) Investment Returns
Retirement Needs Analysis
a) Methods of Calculating
i) Top-Down Approach
Sources of Retirement Income
Capital Needs Analysis
a) Calculation methods
i) Annuity Method
Sensitivity Analysis
a) Monte Carlo Analysis
Sustainable withdrawal rate
Qualified Plan Overview
Chapter 3
Qualified Plans
a) Advantages of Qualified Plans
b) Qualification Requirements
i)
Coverage
ii) Vesting
iii) Covered Compensation
iv) Plan Limitations on Benefits and Contributions
(1) Defined Benefit Plan Annual Benefits
(2) Defined Contribution Plans Contributions
Qualified Pension Plans
Chapter 4
1)
2)
3)
4)
5)
6)
Pension Plan Requirements
a) Mandatory Funding
b) Disallowance of Most In-Service Withdrawals
c) Limited Investment in Employer Securities
d) Limited Investment in Life Insurance
Defined Benefit vs. Defined Contribution Pension Plans
a) Primary differences
i)
Investment risk
ii) Forfeitures
iii) PBGC
iv) Accrued Benefit vs. Account Balance
Actuary
a) Assumptions in determining plan contributions
Target Benefit Pension Plan
Social Security Integration
a) Excess Method
Defined Benefit Plans
a)
b)
c)
d)
Defined Benefit Pension Plans
i) Pension formula
Cash Balance Pension Plans
Malburg Purchase Pension Plans
Target Benefit Pension Plans
Profit Sharing Plans
Chapter 5
1)
2)
3)
4)
5)
Profit Sharing Plans
a) Stock Bonus Plans
b) Employee Stock Ownership Plans
c) 401(k) Plans
d) Thrift Plans
e) Age Based Profit Sharing Plans
f)
New Comparability Plans
Characteristics
Contributions and Deductions
a) Allocation of Contributions
i) Standard Allocation
ii) Age-Based Profit Sharing Plans
Cash or Deferred Arrangements (CODA) – 401(k)
a) Establishing a 401(k)
b) Eligibility
c) Vesting
d) Contributions
i) ADP/ACP
e) Nondiscrimination Testing
f)
Investment
Distributions
a) Hardship Distributions
Stock Bonus Plans and ESOPs
Chapter 6
1)
2)
Stock Bonus Plans
a) Special Requirements
b) Advantages and Disadvantages of Stock Bonus Plans
c) Contributions:
d) Eligibility:
e) Allocation:
f)
Vesting:
g) Investment:
h) Distributions:
i)
Net Unrealized Appreciation Then taxed as long-term capital gain (lower tax rates)
Employee Stock Ownership Plans (ESOPs)
a) Advantages of ESOPs
b) Disadvantages of ESOPs
c) Distributions from ESOPs (1 of 2)
Distributions from Qualified Plans
Chapter 7
1)
2)
Distributions:
a) Pension Plan
i)
Normal Retirement Age
ii) Termination of Service Before Normal Retirement Age
iii) At participant’s death before retirement:
iv) At participant’s disability before retirement:
b) Profit Sharing Plan
i)
Qualified Domestic Relations Orders (QDRO).
ii) Rollovers to IRAs
iii) Adjusted Basis in Plan
Plan Loans
a) Amount
3)
4)
b) Repayment
Distributions Prior to 59½
a) Early withdrawal penalty
i)
Exceptions
RMD
a) Amount
b) When distributions begin
i)
Roth
ii) Beneficiary
(1) Spouse
(2) Trophy spouse
(3) Non spouse
iii) Before death
iv) After death
Installation, Administration and Termination of Qualified Plans
Chapter8
1)
Establishment
a) Requirements
i)
Master/prototype
ii) Custom
(1) Determination letter
b) Filings
i)
Initial Notification of Eligible Employees
ii) Summary Plan Description
iii) Summary of Material Modifications
2) Qualified Trust
3) Fiduciary
4) Installments
5) Keogh Plans: self-employed individuals
6) Prohibited Transactions
7) Employee Retirement Income Security Act (ERISA)
a) Anti-alienation:
8) Department of Labor
9) Pension Benefit Guaranty Corporation (PBGC)
a) Premiums
10) Amending or Terminating a Qualified Plan
a) Amending
b) Terminating
11) Qualified Plan Selection
12) Administration Costs
IRAs and SEPs
Chapter 9
1)
2)
3)
4)
5)
6)
7)
8)
9)
Traditional IRAs
a) Amount deductible
b) Nondeductible contributions
Roth IRAs
a) Qualified distributions
b) Nonqualified distributions: penalties
c) Conversions
Contribution Limits
a) Deductible: Traditional
Required Minimum Distributions
Exceptions to 10% Early Withdrawal Penalty
IRA Investment Options
Rollovers from Qualified Plans to IRAs
Simplified Employee Pensions (SEPs)
Small Business Retirement Plan
a) Coverage Requirements
b) Establishment of a SEP
c) Contributions to SEPs
1)
2)
3)
SIMPLES, 403(b) Plans, and 457 Plans
Chapter 10
Savings Incentive Match Plans for Employees (SIMPLEs).
a) Establishing a SIMPLE
b) Eligibility
c) Vesting
d) Employee Elective Deferrals
e) Employer Contributions
f)
Withdrawals and Distributions
403(b) Plans – Tax Sheltered Annuities
a) Eligible institutions
b) Distribution options
c) Eligibility
457 Plans
a) Eligible Entities
b) Eligibility
c) Employee elective deferrals
d) Distributions from 457 Plans
Social Security
Chapter 11
1)
2)
3)
4)
5)
6)
a)
b)
c)
7)
8)
9)
10)
11)
12)
a)
b)
c)
13)
Benefits Available
Inadequate funding of Social Security, Medicare
Social Security Taxes and Contributions
Qualifying for Social Security Benefits
Social Security Beneficiaries
Retirement benefits payable at retirement
Calculating the Retirement Benefit (AIME percentages provided)
Early Retirement
Delayed Retirement
Early-retirees who have earnings from continued employment
Taxation of Social Security Benefits
Disability Benefits
Benefits payable to family members of deceased individuals
Maximum Family Benefit
Medicare Benefits
Hospital Insurance - Medicare Part A
Medical Insurance - Medicare Part B
Prescription Drug – Medicare Part D
Effect of Marriage or Divorce on Benefits
Phaseouts (provided on exam):
Phaseout for Traditional IRA
Single: active participant $58,000 - $68,000
MFJ: active participant $92,000 - $112,000
MFJ: spouse active participant $173,000 - $183,000
Phaseout for Roth IRA
Single: $110,000 - $125,000
MFJ: $173,000 - $183,000
Enter your answers for the following questions on a separate sheet of paper with your name on it and
bring this paper to class. These answers will be collected at the start of class prior to the review.
Questions: 7,37,47,68,78,85,91,101
1)
Cloppy Centeno, age 52, currently earns $60,000. He would like to retire in 10 years and receive his retirement
income at the end of each year . He expects to earn 7% on his investments and anticipates inflation will
average 3%. He anticipates $10,000 of annual Social Security benefits in today’s dollars. Assuming he is expected
to live until age 95 and he has a wage replacement ratio of 80% and he wants his retirement income to stay
the same each year, how much will Centeno need to have accumulated as of the day he retires if he plans to
leave his children $500,000?
a) 523,563
b) 704,938
c) 1,063,216
d) 1,307,716
e) none of the above
2)
Mildred and Milford Malburg would like to have accumulated $2,242,179 when they retire in 28 years. They
currently have no retirement funds. If they can average a nine percent return on investment and inflation averages
three percent, what is the amount they need to save each year to achieve their objective?
a) -19,848
b) 19,848
c) -32,719
d) 32,719
e) none of the above
3)
The
a)
b)
c)
d)
e)
4)
Corky Centeno, age 50, currently earns $100,000. He would like to retire in 15 years and receive his retirement
income at the beginning of each year. He expects to earn 6% on his investments and anticipates inflation will
average 4%. He anticipates $20,000 of annual Social Security benefits in today’s dollars. Assuming he is expected
to live until age 95 and he has a wage replacement ratio of 75% and he wants his retirement income to
increase with inflation, how much will Centeno need to have accumulated as of the day he retires if he plans to
leave no inheritance for his children?
a) 1,231,805
b) 1,256,441
c) 2,218,411
d) 2,262,780
e) none of the above
5)
How much does Centeno need to save each year until retirement to achieve his goal assuming he currently has
$400,000 in retirement savings?
a) 56,030
b) 99,716
c) 138,400
d) 161,976
e) none of the above
6)
Which of the following would not impact the amount of Social Security benefits an individual would receive?
a) age that individual began to receive benefits
b) lifetime earnings of the worker
c) whether the individual is married
d) the amount of assets the individual has accumulated in retirement accounts at his date of retirement
7)
Which of the following will be added to AGI and increase the amount of taxable Social Security benefits?
a) municipal bond interest
b) self-employed health insurance
c) Federal income tax refund received in the current year
d) group-term life insurance of $40,000
earliest age an individual can begin to receive Social Security benefits is age __?
59 ½
62
65
67
70
8)
Centeno Cogs sponsors a 401(k) profit sharing plan. In the current year, the company contributed 25% of each
employees’ compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC was 3.5%. If Hobo
Hinds, age 57, earns $100,000 and is a 7% owner, what is the maximum amount that he may defer into the 401(k)
plan for this year?
a) $3,500.
b) $5,500.
c) $17,000
d) $22,500.
e) $50,000.
9)
Which of the following will impact a participant’s monthly retirement benefit in a defined benefit plan?
a) the amount of forfeitures allocated to an employee’s account
b) the rate of return earned on investments in the retirement account
c) the employee’s length of service
d) the amount of employer contributions
10) Which of the following is not a qualified retirement plan?
a) ESOP.
b) 401(k) plan.
c) Roth IRA
d) Cash balance pension plan.
11) Each of the following is a characteristic of a defined benefit retirement plan EXCEPT:
a) The plan specifies the benefit an employee receives at retirement.
b) The law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of salary
or $200,000 per year currently.
c) The plan has less predictable costs as compared to defined contribution plans.
d) The plan assigns the risk of pre-retirement inflation, investment performance, and adequacy of retirement
income to the employee.
12) Which of the following factors may affect a person’s individual retirement planning?
a) Work life expectancy.
b) Retirement life expectancy.
c) Inflation.
d) Savings rate.
i)
1 and 2.
ii) 2 and 3.
iii) 1, 3, and 4.
iv) All of the above.
13) Which of the following is not a defined benefit plan formula(s)?
a) Unit benefit (a.k.a. percentage-of-earnings-per-year-of-service) formula.
b) Percentage of age formula
c) Flat-percentage formula.
d) Flat-amount formula.
14) What is the minimum number of years an individual must work to be eligible for Social Security benefits?
a) 4
b) 10
c) 29 ½
d) 30
e) 40
15) Which of the following individuals would be eligible to receive Social Security benefits?
a) B. Late Skender, age 69, who worked for two years as a pizza chef and is single. She was married to Porkchop
Park for eight years.
b) Jammer Janes, age 67, who worked one year as a dog washer. He is currently unemployed and married to
Shifty Skender, age 68, who worked as a cow tipper for seven years. They have a three-year old son.
c) both a) and b)
d) neither a) or b)
16) All of the following statements concerning cash balance pension plans are correct EXCEPT:
a) The cash balance plan is generally established as a cost saving measure.
b) The cash balance plan is a defined benefit plan.
c) The cash balance plan has no guaranteed annual investment return to participants.
d) The cash balance plan is subject to minimum funding requirements.
17) In 2012, Mabel Malburg, age 49, is a participant in the 401(k) plan at her employer. Her husband Marvin, age 51, is
a stay at home soccer dad. Mabel’s salary is $96,000 and the couple’s AGI is $99,000. What is the maximum
deduction the Malburgs can take for contributions to Traditional IRAs?
a) 0
b) 6,000
c) 7,750
d) 8,750
e) 9,250
18) What is the maximum percentage of Social Security benefits subject to Federal income tax?
a) 15%
b) 25%
c) 75%
d) 85%
e) 100%
19) Bruno Brownfield sponsors a 401(k) profit sharing plan. In the current year, the company contributed 25% of each
employees’ compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC (peons) was 3.5%. If
Labby Brownfield, age 57, earns $180,000 and is a 2% owner, what is the maximum amount that he may defer into
the 401(k) plan for this year?
a) $3,500.
b) $5,000.
c) $5,500
d) $17,000.
e) $22,000.
20) Which of the following is one of the tests a plan can meet to satisfy qualified plan discrimination testing?
a) The plan must benefit at least 70% of non-highly compensated employees
b) If 80% of the highly compensated employees are covered by the plan, only 56% of the non-highly
compensated employees must be covered by the plan
c) both a) and b)
d) neither a) or b)
21) If an employer elects to use cliff vesting, when are employee and employer contributions fully vested in a qualified
plan?
a) immediately, 3 years
b) 3 years, 6 years
c) immediately, 6 years
d) both vest in 3 years
22) Which of the following are subject to FICA (payroll) taxes?
a) employer contributions to a qualified plan
b) employee contributions to a qualified plan
c) both a) and b)
d) neither a) or b)
23) If the base contribution to a defined contribution plan is six percent, the maximum percentage contribution for wage
earnings above the Social Security base is:
a) 5.7%
b) 6%
c) 11.7%
d) 15.2%
24) Bola
is:
a)
b)
c)
d)
Brownfield has a $9,000 balance in her 401(k) account. The maximum she can borrow from the plan in 2012
600
4,500
5,000
9,000
25) Which of the following is a defined benefit plan?
a) Profit sharing plan
b) Cash balance pension plan
c) 401(k) plan
d) ESOP
26) Brownfield Brownies has a defined benefit plan with 100 nonexcludable employees (20 HC and 80 NHC). They are
unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that
must be covered on a daily basis to conform with the requirements set forth in the IRC?
a) 40.
b) 50.
c) 56
d) 80.
e) 100.
27) Which of the following is not a characteristic of a defined contribution plan?
a) Employer contributions are limited to 25% of payroll
b) The maximum contribution per participant is $50,000
c) Each participant has their own individual account
d) The plan can not permit loans prior to age 59 1/2
e) The maximum compensation which can be used in calculating employer contributions is $250,000
28) Which of the following qualified plans would allocate a higher percentage of the plan’s current contributions to a
certain class or group of eligible employees?
(1) An ESOP.
(2) An age-based profit sharing plan.
(3) A defined benefit pension plan.
(4) A target benefit pension plan.
(a) 1 only.
(b) 1 and 3.
(c) 2 and 4.
(d) 1, 2, 3, and 4.
29) Sadys Skender, age 58, has earned $49,000 per year for the last six years and is a participant in her employer’s
defined benefit plan. What is the maximum amount of annual benefits Skender can receive from her employer’s
defined benefit plan if she retires at age 64?
a) $22,500
b) $49,000.
c) $200,000.
d) $250,000.
30) Pern Park, age 20, has worked at Park Ports for the last three years. She has worked 1,000 hours per year and has
received wages of $7,000. She would be eligible to participate in which of the following employer retirement plans?
a) SEP
b) 401(k)
c) Defined benefit
d) SIMPLE IRA
e) Cash balance
31) Which of the following distributions from a Traditional IRA will be subject to a 10% early withdrawal penalty?
a) BoLo Brownfield, age 43, withdrew $5,400 from his Traditional IRA in 2009 to pay his daughter’s tuition at a
private university
b) Mabel Malburg, age 63, withdrew $8,400 from her Traditional IRA in 2009 to pay buy a bass boat
c) Boretta Brownfield, age 33, withdrew $9,400 from her Traditional IRA in 2009 to repay a loan from her
employer’s 401(k) plan
d) $753,900 of Kleon Keller’s Traditional IRA was distributed to his charming ex-wife Very Smiley pursuant to a
QDRO
32) Mally Malburg turned 70½ on March 2, 2012. He works as a grocery sacker at County Market and is an active
participant in the company’s profit sharing plan. When is Malburg required to begin taking minimum distributions
from the profit sharing plan?
a) March 2, 2012
b) April 1, 2012
c) April 1, 2013
d) No distributions are required
33) Razor Rakers, 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 Rakers
foresees shaky cash flows in the future as new computer prices decline. Rakers would like to allocate as much of the
plan contributions to himself as possible. He is the only employee whose compensation is in excess of $100,000.
Which of the following qualified plans would you advise Rakers to establish?
a) Profit sharing plan (Integrated).
b) Defined benefit pension plan.
c) Cash balance pension plan.
d) Money purchase pension plan.
34) Which of the following statements regarding determination letters for qualified plans is true?
a) When a qualified plan is created, the plan sponsor must request a determination letter from the IRS.
b) An employer who adopts a prototype plan must request a determination letter from the IRS.
c) If a qualified plan is amended, the plan sponsor must request a determination letter from the Department of
Labor.
d)
A qualified plan which receives a favorable determination letter from the IRS may still be disqualified at a later
date.
35) All of the following are acceptable reasons for an employer to terminate a qualified retirement plan except:
a) The employer is no longer in a financial position to make further plan contributions.
b) The employer no longer wants to maintain the plan because it must cover other employees other than just
himself.
c) The plan benefits are not meaningful amounts, and participants are limited in their ability to make deductible
IRA contributions.
d) To lower plan costs and ease administrative complexity, the employer wants to switch plan designs.
36) Mildred Malburg, age 67, has just retired. She has a balance of $1,000,000 in her 401(k) account and is in good
health. What is the maximum amount she should withdraw each year if she doesn’t want to risk liquidating her
account before she dies?
a) 10,000
b) 20,000
c) 40,000
d) 45,000
e) 80,000
37) What is the maximum percentage of pension plan assets that can be invested in securities of the employer?
a) 0%
b) 10%
c) 50%
d) 90%
e) 100%
38) Sam Skender passed away April 24, 2012, leaving a $380,000 balance in his Traditional IRA. His charming spouse,
Sally, age 24, is the beneficiary of his IRA. When must Sally withdraw the funds from Sam’s IRA?
a) Over her life expectancy
b) Over the next five years
c) Immediately
d) Over the next 10 years
39) Beroy Brownfield, age 63, is the defending age group champion at Ironman New Zealand. His wife, Boretta, age 77,
smokes 14 packs of cigarettes a day, eats 16 Big Macs for breakfast and sky dives every weekend using parachutes
from the clearance rack at Rural King. What form of retirement benefits should Mr. Brownfield elect from his defined
benefit plan?
a) lump sum
b) he should have Mrs. Brownfield waive her right to a survivor annuity and take a single life annuity
c) he should elect a joint and survivor annuity
d) he should elect the required minimum distribution
40) A cash balance plan is:
a) a defined benefit plan
b) a pension plan
c) both a) and b)
d) neither a) or b
41) Belbert Brownfield, single and age 53, had the following items of income:
Dividend Income: $1,200
Farming Income: $600
Alimony: $900
Wages: $1,400
Interest Income: :$700
Capital Loss: $-2,100
What is the maximum contribution Lelbert can make to a Roth IRA for this year?
a) 0
b) $800
c) $2,000
d) $2,900
e) $6,000
42) Bic Brownfield, a single 29 year old, deferred 10% of his salary, or $7,000, into a 401(k) plan sponsored by his
employer during 2011. What is the maximum deductible IRA contribution Brownfield can make during 2012 to a
traditional IRA?
a) $0.
b) $2,500.
c) $3,500.
d) $4,000
e) $5,000
43) At the age of 57, Blabby Brownfield converted his traditional IRA, valued at $45,000, to a Roth IRA. At age 60,
Brownfield took a distribution from this Roth IRA of $100,000 to buy a new car for his daughter. Which of the
following statements is true with regards to the distribution from the Roth IRA?
a) $100,000 will be subjected to ordinary income tax and penalty.
b) $55,000 will be subjected to ordinary income tax and penalty.
c) $55,000 will be subjected to ordinary income tax but no penalty.
d) $55,000 will not be subjected to ordinary income tax but will be subjected to penalty.
44) Sudolph Skender, age 54 and single, has compensation this year of $85,000. His employer does not sponsor a
qualified plan, so Skender would like to contribute to a Roth IRA. What is Skender’s maximum contribution for this
year to the Roth IRA?
a) $0.
b) $5,000.
c) $6,000.
d) $17,000.
45) What is the automatic form of benefits for a married participant in a defined benefit plan?
a) lump sum distribution
b) joint and survivor annuity
c) single life annuity
d) required minimum distribution
46) RuRu Rakers, age 54, earns $100,000 annually from Brownfield Incorporated. Brownfield sponsors a SIMPLE 401(k),
and matches all employee deferrals 100% up to a 3% contribution. Assuming Rakers defers the maximum to her
SIMPLE 401(k), what is the total contribution to the account in 2012 including both employee and employer
contributions?
a) $11,500.
b) $13,000.
c) $14,500.
d) $16,500.
e) $17,000
47) Bedu Brownfield, age 42, had the following items of income:
Gambling Income: $1,200
Child Support: $2,300
Rent Income: $900
Wages: $2,200
Municipal Bond Interest:$700
Capital Gain: $1,400
Brownfield also contributed $1,000 to his Roth IRA during the year. What is the maximum deduction Brownfield can
take for a Traditional IRA contribution for this year?
a) $1,200.
b) $2,400.
c) $3,000.
d) $4,000.
e) $5,000
48) Borbert Brownfield, a married 29 year old, deferred 10% of his salary, or $10,000, into a 401(k) plan sponsored by
his employer this year. His wife, Bellie, age 76, is a volunteer mountain rescue climber. Assuming the Brownfields
have no other income, what is the maximum contribution Bellie can make to her Roth IRA for this year?
a) $0.
b) $1,000.
c) $5,000
d) $6,000.
49) Margaret Malburg earned $4,000 during January of this year. She was unemployed for February and March, and
during April she earned an additional $3,000. She did not work again until December, at which time she earned
$1,200. How many quarters of coverage has Malburg earned for Social Security during this year?
a) 1.
b) 3.
c) 4.
d) 7.
50) Which of the following statements is true?
a) Social Security payments are not adjusted for inflation.
b) A worker’s average indexed monthly earnings (AIME) will be their Social Security benefit at retirement.
c) An individual born after 1960 will reach full retirement age for Social Security purposes at the age of 67.
d) A 70 year old worker will have their Social Security benefits reduced based on earnings from their current
employment
51) Manda Malburg, age 74, works as a cocktail waitress at the trendy Club Intestacy. Her wages were $3,800 during
2012. Which of the following statements are true?
i)
Malburg could contribute $3,800 to a Roth IRA in 2012
ii) Malburg must take a distribution from her Traditional IRA in 2012
iii) Malburg’ wages will reduce her Social Security benefits
(a) i) only
(b) i) and iii)
(c) i) and ii)
(d) ii) and iii)
52) Which of the following investments would you not recommend for a Roth IRA?
a) a REIT
b) Zero coupon corporate bond
c) United States gold coins
d) Zero coupon municipal bond
e) A double short Russell 5000 ETF
53) The following statements concerning retirement plan service requirements for qualified plans are correct EXCEPT:
a) A 22 year-old employee who has worked at least 1,000 hours during the initial 12-month period after being
employed is credited with one year of service.
b) A 19 year-old employee who has worked at least 2,000 hours during the initial 12-month period after being
employed is credited with no years of service.
c) An employer has the option of increasing the one-year of service requirement to 2 years of service.
d) Once an employee attains the service requirement of the plan, the employer cannot make the employee wait
more than an additional month to be considered eligible to participate in the plan.
54) Park Pork has a noncontributory qualified profit sharing plan with 210 employees in total, 140 who are
nonexcludable (40 top dogs and 100 peons). The plan covers 20 top dogs and 40 peons. The peons receive an
average of 4.5% benefit and the top dogs receive 6.5%. Which of the following statements is (are) correct?
(1) The plan meets the ratio percentage test.
(2) The plan fails the average benefits test.
(a) 1 only.
(b) 2 only.
(c) Both 1 and 2.
(d) Neither 1 or 2
55) Ponda Park, age 63, is a participant in the stock bonus plan of Skender Smocks, Inc., a closely held corporation. Park
received contributions in shares of Skender Smocks stock to the stock bonus plan and Skender Smocks, Inc. had
income tax deductions for 1,000 shares at an average price of $16.00 per share. Park terminates employment in
2012 and takes a distribution from the plan of 1,000 shares of Skender Smocks, Inc., having a fair value of $24,000.
Which of the following correctly describes Park’s tax consequences for 2011 from this distribution if Park does not
sell the Skender Smocks stock until 2014?
a) Park has ordinary income of $16,000 and long term capital gain of $8,000 in 2012.
b) Park has long term capital gain of $24,000 in 2012.
c) Park has ordinary income of $16,000 in 2012.
d) Park has a long term capital gain of $8,000 in 2012.
56) Assuming Park sells the shares for $28,000 in 2014, which of the following correctly describe Park’s tax
consequences for 2013?
a) Park has long term capital gain of $4,000
b) Park has long term capital gain of $8,000
c) Park has long term capital gain of $12,000
d) Park has ordinary income of $4,000
57) Rabbi Rakers owns Skender Solutions, Inc. (SSI) and sells 100% of the company stock on July 1 of the current year
to an ESOP for $3,000,000. Rakers had an adjusted basis in the SSI stock of $450,000. If Rakers reinvests in
qualified replacement securities before the end of the current year, which of the following statements is true?
a) Rakers will not recognize long term capital gain or ordinary income in the current year.
b) Rakers must recognize $2,550,000 of long term capital gain in the current year.
c) Rakers must recognize $450,000 of ordinary income in the current year.
d) If Rakers dies before selling the qualified replacement securities, his heirs will have an adjusted taxable basis in
the qualified replacement securities of $450,000, Rakers’s carryover adjusted basis.
58)
Which of the
(1)
(2)
(3)
(4)
following statements concerning stock bonus plans and ESOPs is (are) true?
They give employees a stake in the company through stock ownership.
They give employees a diversified portfolio for the first five years of employment.
They allow taxes to be delayed on stock appreciation gains.
They create a cash-flow problem for employers by requiring them to offer a repurchase option (a.k.a.
put option) if their stock is not readily tradable on an established market.
(a) 1 only.
(b) 1,2,and 3.
(c) 1,3, and 4.
(d) 1,2,3 and 4.
59) Mally Malburg turned 70½ in November of 2012. He was a participant in his employer’s profit sharing plan. His profit
sharing plan had an account balance of $220,000 on December 31, 2011 and $250,000 on December 31, 2012.
According to the Uniform Lifetime Table the factors for ages 70, 71, and 72 are 27.4, 26.5, and 25.6 respectively.
What is Malburg’ approximate required minimum distribution in 2012 for 2012?
a) $0.
b) $8,029
c) $8,301
d) $9,124.
60) Mally Malburg turned 70½ in November of 2012. He was a participant in his employer’s profit sharing plan. His profit
sharing plan had an account balance of $250,000 on December 31, 2011 and $200,000 on December 31, 2012.
According to the Uniform Lifetime Table the factors for ages 70, 71, and 72 are 27.4, 26.5, and 25.6 respectively.
What is Malburg’ approximate required minimum distribution in 2013 for 2012?
a) $0.
b) $7,300.
c) $7,547.
d) $9,124
61) Meta Malburg operates Malburg Moose, a sole proprietorship. The company sponsors a profit sharing plan. The
business had net income of $200,000 and paid self employment taxes of $20,000 during the year. If Malburg makes
a 25% of salary contribution on behalf of all of his employees to the profit sharing plan, how much is the
contribution to the profit sharing plan on behalf of Malburg?
a) 35,000
b) 38,000
c) 45,000
d) 50,000
e) 51,250
62) If an employee contributes to a 401(k) plan because of a negative election, what percent of his salary will be
contributed to the plan after ten years if the employee does nothing to change the amount of the negative election?
a) 1%
b) 3%
c) 6%
d) 20%
e) 25%
63) Mally Malburg saves $2,000 per year for 10 years at the end of each year starting at age 26 and ending at age 35.
He invests the funds in an account earning 12% annually. Malburg stops investing at age 35 but continues to earn
12% annually until she reaches the age of 65. What is the value of Malburg’s account at age 65?
a) $35,097
b) $482,665
c) $1,051,517
d) $1,534,183
64) Melbert Malburg’s employer uses a unit credit formula to determine employees’ annual retirement benefits of two
percent per years of service times the average of the three highest years consecutive salary. Mr. Malburg currently
earns $80,000, has 20 years of service and anticipates a five percent raise for the next two years. Mr. Malburg plans
to retire three years from now. What will be his annual retirement benefit?
a) 33,627
b) 36,800
c) 38,671
d) 40,000
e) 46,000
65) Beach Brownfield is currently 60 years old. If she retires today she will receive an annual benefit from her
employer’s defined benefit plan of $45,000. Ms. Brownfield expects to live to age 95. What will be the increase in
the current value of her defined benefit plan benefits assuming she works one more year before she retires and
increases her annual benefits to $46,000 if the risk-free rate of return is 6%?
a) -28,898
b) -8,513
c) 8,513
d) 16,374
e) 222,112
66) Relma Rakers has compensation of $300,000 in 2012. Her employer, Park Pops, has a profit sharing plan integrated
for Social Security. The plan contributes 8% of base compensation and 13.7% of excess compensation over
$110,100. What is the total contribution to Ms. Rakers’s account in 2012?
a) $8,544
b) $19,166
c) $27,974
d) $34,824
e) $41,100
67) The non-highly compensated employees (peons) of Skender Saws contributed 1% of their salary to the company’s
401(k) plan in 2012. What percent of salary are the company’s highly compensated employees (top dogs) allowed
to contribute to company’s 401(k) plan in 2012?
a) 1%
b) 2%
c) 3%
d) 5%
e) 6%
68) Bedith Brownfield, age 53, contributes 8% of her $50,000 salary to Rakers Rags’ 401(k) plan. Her employer
matches 100% of the first 3% of employee contributions and 50% of employee contributions from 3% to 7%. What
is the amount of Brownfield’s income that will be subject to income taxes?
a) $46,000
b) $50,000
c) $51,500
d) $52,500
e) $56,500
69) The non-highly compensated (peons) employees of Malburg Mops contributed 3.0% of their compensation to the
company’s 401(k) plan. The highly compensated (top dog) employees of Malburg Mops contributed 6.5% of their
compensation to the company’s 401(k) plan. Which of the following corrective actions will allow the company to
pass the ADP test?
i)
a contribution to all non-highly compensated employees’ accounts to increase the non-highly
compensated’s ADP to 4.5%
ii) a matching contribution to all non-highly compensated employees’ accounts to increase the non-highly
compensated’s ADP to 6.0%
iii) a corrective distribution from all highly compensated employees’ accounts to decrease the highly
compensated’s ADP to 6.0%
a) i) only
b) i) and ii)
c) i) and iii)
d) ii) and iii)
e) iii) only
70) Which of the following is true regarding automatic enrollment in a safe harbor 401(k) plan?
i)
a participant’s contribution will increase in the second year unless the participant elects out of automatic
enrollment
ii) employer’s who auto-enroll new employees are not required to match employee contributions
iii) a participant has the right to have his contributions refunded to him
a) i) only
b) i) and ii)
c) i) and iii)
d) ii) and iii)
e) iii) only
71) Brownfield Bites has an age weighted profit sharing plan. Musty Malburg, age 60, has a salary of $80,000 during the
year. The company’s other employee, Ravendar Rakers, age 25, has a salary of $20,000. If Brownfield Kites
contributes $30,000 to the profit sharing plan during the year and the plan’s normal retirement age is 65 and uses a
discount rate of 8%, what is the amount of the contribution that will be allocated to the account of Musty Malburg?
a) $ 6,000
b) $20,000
c) $20,417
d) $29,501
e) $30,000
72) What is the amount of the contribution that will be allocated to the account of Ravendar Rakers?
a) $ 499
b) $ 981
c) $9,583
d) $10,000
e) $24,000
73) Rapalm Rakers purchased a single premium annuity for $100,000. She will receive $30,000 per year for the
remainder of her life. Her life expectancy is 20 years. What portion of the annual annuity payments will be subject
to Federal income tax?
a) 0
b) 10,000
c) 15,000
d) 20,000
e) 25,000
74) Which of the following individuals must take a required minimum distribution from qualified plans during 2012?
(1) Mildred Malburg, age 72, has a Roth IRA
(2) Sally Skender, age 73, is a participant in the 401(k) of Google, Inc., where she is a full-time
dishwasher
(a) (1) only
(b) (2) only
(c) Both (1) and (2)
(d) Neither (1) or (2)
75) On Valentine’s Day Big Boss Brownfield, age 73, asked Edith Edgar, age 23, to marry her. If Walcott accepts:
(1) Brownfield’s required minimum distributions from his Traditional IRA will be decreased
(2) Brownfield’s payments from County Market’s defined benefit plan will be increased if he receives a
joint and survivor annuity
(a) (1) only
(b) (2) only
(c) Both (1) and (2)
(d) Neither (1) or (2)
76) Bola Brownfield, age 28, died last week. Her husband, Larry Brownfield, age 83, was the primary beneficiary of
Lola’s Traditional IRA. Larry should:
(1) Roll Lola’s IRA into his Traditional IRA
(2) Continue taking distributions based on the required minimum distributions for Lola
(a) (1) only
(b) (2) only
(c) Both (1) and (2)
(d) Neither (1) or (2)
77) Sally Skender, age 81, died last week. Her son, Sam Skender, age 43, was the primary beneficiary of Sally’s
Traditional IRA. Sam can:
(1) withdraw the entire balance from the IRA any time in the next 10 years
(2) take distributions based on his life expectancy
(a) (1) only
(b) (2) only
(c) Both (1) and (2)
(d) Neither (1) or (2)
78) Bi Li Brownfield, age 54, has worked for Rakers Rats for 15 years. He earns $450,000 per year and is covered by a
qualified defined benefit pension plan with a funding formula of (1.5% x Years of Service x Last Years Salary). What
is Brownfield’s accrued annual benefit under this defined benefit plan given the funding formula, his earnings and his
years of service?
a) $20,500.
b) $50,000.
c) $56,250
d) $101,250.
79) The owners of Skender Snow want to establish a qualified plan. Their primary goal is to retain employees as they
are currently experiencing a high rate of employee turnover among their young, low paid employees. Which of the
following would assist the company in accomplishing this goal?
a) Integrating a profit sharing plan with Social Security
b) Selecting an age weighted profit sharing plan
c) Establishing a target benefit plan
d) Establishing a 401(k) plan with three year vesting
80) Which of the following plans would have the lowest administration costs?
a) safe harbor 401(k) plan
b) defined benefit plan
c) target benefit plan
d) an ESOP
e) a stock bonus plan
81) Anti-allienation:
(1) prevents employees from pledging their retirement benefits as collateral for a loan
(2) requires employers to diversifying employees investments in a retirement plan
(3) prohibits a fiduciary from charging fees for managing qualified plan assets
(a) (1) only
(b) (2) only
(c) (1) and (2)
(d) (1) and (3)
(e) (2) and (3)
82) Benefits from the following qualified plans are guaranteed by the PBGC:
a) 401(k) plan
b) ESOP
c) safe harbor 401(k) plan
d) defined benefit plan
e) target benefit plan
83) Radish Rakers, age 44, is single. During 2009 she earned $12,000 as an alligator psychiatrist. What is the latest
date she can make a contribution to her Traditional IRA for 2012?
a) January 1, 2012
b) April 15, 2012
c) December 31, 2012
d) April 15, 2013
e) October 15, 2013
84) Bernie Brownfield, age 28, is single. He has made contributions totaling $8,000 in 2005 and 2006 to his Roth IRA
which now has a value of $20,000. If Bernie withdraws $10,000 from his Roth IRA in 2011 to buy a dairy cow, what
amount of tax, including penalties, will he pay on the distribution assuming his marginal tax rate is 25%?
a) 0
b) 500
c) 550
d) 700
e) 2,500
85) Which of
i)
ii)
iii)
iv)
the following can not be held in an IRA account as an investment?
American Eagle gold coins
Variable life insurance
An apartment building
A painting of Brittany Tears
(a) (i) and (ii)
(b) (i), (ii) and (iii)
(c) (ii) and (iii)
(d) (ii) and (iv)
(e) (i), (ii) (iii) and (iv)
86) B. R. Brownfield, age 65, is single. He has made contributions of $4,000 in both 2001 and 2002 to his Roth IRA
which now has a value of $30,000. What is the maximum amount L.R. can withdraw from this Roth IRA in 2011 to
purchase a home and pay no income tax or penalties?
a) 0
b) 8,000
c) 10,000
d) 18,000
e) 30,000
87) B.Z. Brownfield, age 24, is single. During 2011 she earned $11,000 as an elephant orthodontist. What is the latest
date she can make a contribution to her SEP for 2012?
a) December 31, 2012
b) April 15, 2013
c) August 15, 2013
d) October 15, 2013
e) December 31, 2013
88) Sumpy Skender, a single 69 year old, earned $427,500 as a cocktail waitress during 2012. Her employer does not
sponsor a qualified plan. What is the maximum deductible IRA contribution Skender can make during 2012 to a
Traditional IRA assuming her only income was her salary?
a) $0.
b) $3,500.
c) $4,000
d) $5,000.
e) $6,000
89) Briz Brownfield, a single 78 year old, earned $564,900 as a cocktail waitress during 2012. Her employer does not
sponsor a qualified plan. What is the maximum contribution Brownfield can make during 2012 to a Roth IRA
assuming her only income was her salary?
a) $0.
b) $4,000
c) $5,000.
d) $6,000
e) $13,500
90) Not So Krusty Brownfield, a single 28 year old, earned $564,900 as a cocktail waitress during 2012. Her employer
does not sponsor a qualified plan. She has a $2,984,300 balance in her Traditional IRA. When is the earliest she
can take distributions from her Traditional IRA and not pay a 10% penalty?
a) Now, if she continues to take equal distributions every year
b) Age 59 ½
c) Age 62
d) Age 65 years, 10 months
e) Age 70 ½
91) Which of the following statements is true?
a) Traditional IRAs can be used as collateral for auto loans
b) 401(k) plans typically offer more investment options than a Traditional IRA
c) There are no required minimum distributions for a Roth IRA during the original owner’s lifetime
d) Individuals are allowed to borrow from their Traditional IRA if they repay the loan balance prior to age 59 ½
e) Distributions of company stock from a Traditional IRA are taxed at capital gains rates on the Net Unrealized
Appreciation
92) Which of the following statements is true?
a) Social Security payments are not adjusted for inflation if you begin receiving payments prior to age 65.
b) An individual who has elected to begin receiving Social Security benefits at age 62 will have their Social Security
benefits reduced if they continue to work and earn $12,000
c) Your highest 20 years of earnings are used in calculating your Social Security benefits.
d) An individual over 66 may collect Social Security benefits based on their earnings record or their spouse’s
earnings record
e) Social Security benefits are equal to 32% of a worker’s PIA.
93) Kelilah Keller, age 89, died in his sleep last week. Which of the following individuals will be eligible for Social
Security benefits after his death?
i)
Her husband of three years, Kelbert, age 27
ii) Her child, Killy, age 19
iii) Her charming ex-husband of twelve years, Knoorknob, age 61
(a) i) and ii)
(b) ii) and iii)
(c) i) and iii)
(d) ii) only
(e) iii) only
94) Relma Rakers will turn 62 in 2012. She can begin receiving monthly Social Security benefits of $758 in 2012, or
$1,000 in 2016 or $1,300 in 2020. She anticipates she will live to be 90 years old and inflation will average three
percent during her lifetime. What is the current present value of her benefits if she begins to collect them at age
66?
a) $172,168
b) $181,956
c) $184,444
d) $205,124
e) $234,404
95) If a worker elects to begin collecting Social Security benefits at age 62, what percent of their normal Social Security
benefits will they currently receive?
a) 32%
b) 50%
c) 60%
d) 75%
e) 85%
96) If a worker elects to delay collecting Social Security benefits until age 70, what is the percent increase in their Social
Security benefits?
a) 32%
b) 50%
c) 60%
d) 75%
e) 85%
97) Which of the following covers doctors’ services for individuals age 65 and older?
a) Medicare Part A
b) Medicare Part B
c) Medicare Part C
d) Medicare Part D
e) None of the above
98) Which of the following covers prescription drugs for individuals age 65 and older?
a) Medicare Part A
b) Medicare Part B
c) Medicare Part C
d) Medicare Part D
e) None of the above
99) Sogbed Scott, age 87, receives $1,800 per month in Social Security benefits. Her ex-husband, Deadbeat, age 66,
has never worked. How much will Deadbeat receive each month in Social Security benefits?
a) 0
b) $450
c) $900
d) $1,800
100) Sogbed Scott, age 87, receives $1,800 per month in Social Security benefits. Her husband, Doorknob, age 67, has
never worked. Assuming Doorknob accidentally runs over Sogbed with a forklift and causes fatal injuries to Sogbed,
How much will Doorknob receive each month in Social Security benefits?
a) 0
b) $450
c) $900
d) $1,800
101) Which of
i)
ii)
iii)
the following statements are true?
The federal government can only invest Social Security funds in Treasury bonds.
Social Security is currently expected to exhaust its funds before Medicare will.
Funds invested in longevity insurance annuities are not subject to required minimum distribution rules.
(a) i) and iii).
(b) ii) and iii).
(c) i) only
(d) ii) only
(e) iii) only
102) Buford Bonic, age 26, has come to you for assistance in selecting an appropriate asset allocation for his 401(k).
Bonic, likes to eat bon bons, bowl and has extremely high risk tolerance. He left school after eighth grade when his
best friend, Crusty Cameron, won $220 million in the lottery. Bonic now earns $580,000 per year as Cameron’s body
guard and butler. Which of the following would you recommend for Bonic?
a) An emerging markets small cap equity fund
b) A high yield global bond fund
c) A target date fund
d) A money market fund
e) A Canadian currency ETF
103) George Gallaher, age 69, has come to you for assistance in selecting an appropriate qualified plan. Gallaher owns
Gallaher Glamour Garbage which provides discreet garbage collection service for movie stars. Gallaher is distressed
that his elderly peons never quit work despite lifting garbage bags full of empty botox bottles all day. Gallaher likes
his peons but does not want them to own part of his company and he would like to eventually hire new peons.
Gallaher earns $943,000 per year, his peons earn $59.24 per hour. Which of the following plans would you
recommend?
a) an ESOP
b) defined benefit plan
c) a 401(k) plan with automatic enrollment
d) a 401(k) plan with graduated vesting
e) an integrated profit sharing plan
104) The summary
(1)
(2)
(3)
plan description for a plan must:
be approved by the Internal Revenue Service
be provided to employees
be approved by the PBGC
(a) (2) only
(b) (1) and (2)
(c) (1) and (3)
(d) (2) and (3)