CFP 514, Module 3 || Answers 100% Rated Correct.
Traditional Profit-Sharing Plan correct answers -a qualified defined contribution plan featuring a
flexible, discretionary employer contribution provision
-the employer's contribution to the plan each year may be purely discretionary, or based on some
kind of formula related to the employer's profits
-employer can still make contributions in a down year, in which case, the contributions would
come from *retained earnings or current cash flow*
-vice versa, employeer does *not* have to make profit-sharing contributions for an individual in
a profitable year
-*however*, in order to remain a qualified plan, Treasury Regulations require than contributions
be made on a *substantial and recurring basis* (3-5 contributions per year)
-since they are not a defined benefit plan, they *are not subject to the PBGC*
Contribution Limits: *lesser of*
-100% of employee compensation, or
-$58,000
*with only the first $290,000 of employee compensation taken into account*
*Employer Deductions*
-limited to 25% of aggregate covered compensation
In-service Distribution correct answers -the ability of the participant to access the individual
account balance prior to retirement
,-this option *is not a federal mandate*
-the employer makes the decision whether or not to include this option when the plan document
is accepted
-most profit sharing plans only allow this option for hardship withdrawals or after age 59 1/2
Hardship Withdrawal Tests correct answers Must meet the following tests to qualify:
-*Financial Needs Test*: the hardship must be due to an immediate and heavy financial need of
the participant-employee
-*Resources Test*: the participant must not have other financial sources sufficient to satisfy the
need
-if a hardship withdrawal is approved and made, the *distribution is taxable and a 10% early
withdrawal penalty will apply for all distributions except for deductible unreimbursed medical
expenses*
*NOTE*: these withdrawals are taxed and penalized (only deductible unreimbursed medical
expenses will not receive the 10% early withdrawal penalty, *IF* expenses are over 10% of AGI)
Hardship Withdrawals: Unreimbursed Medical Expenses correct answers -not exactly the same
as deductible medical expenses
-hardship withdrawals are *available for unreimbursed medical expenses whether or not they rise
to the amount relative to AGI* that allows some of the expenses to be deducted
-however, the requirement that a financial need be "immediate and heavy" means low-level,
routine unreimbursed medical expenses do not qualify
, Hardship Withdrawal: Allowable Reasons correct answers In addition to meeting the tests,
money may only be withdrawn for the following reasons:
-payment of unreimbursed medical expenses or funeral costs (not just those above the annual
AGI limit that are deductible)
-disasters that have been declared by the federal government
-purchase of a primary residence
-payment of higher education expenses for the participant, the participant's spouse, or dependent
children
-payment necessary to prevent foreclosure on the participant's primary residence
"*M*y *D*isastrously *F*aulty *E*mergency *F*und"
My = Medicical and funeral expenses (unreimbursed)
Disastrously = federally declared Disaster
Faulty = First home purchase
Emergency = Education
Fund = Foreclosure of home
When to Use a Profit-Sharing Plan: Appropriate Use correct answers Traditional xxxxx xxxxxxx
plans may be appropriate when:
-an employer's *profits, or cash flow, fluctuate from year to year*
Traditional Profit-Sharing Plan correct answers -a qualified defined contribution plan featuring a
flexible, discretionary employer contribution provision
-the employer's contribution to the plan each year may be purely discretionary, or based on some
kind of formula related to the employer's profits
-employer can still make contributions in a down year, in which case, the contributions would
come from *retained earnings or current cash flow*
-vice versa, employeer does *not* have to make profit-sharing contributions for an individual in
a profitable year
-*however*, in order to remain a qualified plan, Treasury Regulations require than contributions
be made on a *substantial and recurring basis* (3-5 contributions per year)
-since they are not a defined benefit plan, they *are not subject to the PBGC*
Contribution Limits: *lesser of*
-100% of employee compensation, or
-$58,000
*with only the first $290,000 of employee compensation taken into account*
*Employer Deductions*
-limited to 25% of aggregate covered compensation
In-service Distribution correct answers -the ability of the participant to access the individual
account balance prior to retirement
,-this option *is not a federal mandate*
-the employer makes the decision whether or not to include this option when the plan document
is accepted
-most profit sharing plans only allow this option for hardship withdrawals or after age 59 1/2
Hardship Withdrawal Tests correct answers Must meet the following tests to qualify:
-*Financial Needs Test*: the hardship must be due to an immediate and heavy financial need of
the participant-employee
-*Resources Test*: the participant must not have other financial sources sufficient to satisfy the
need
-if a hardship withdrawal is approved and made, the *distribution is taxable and a 10% early
withdrawal penalty will apply for all distributions except for deductible unreimbursed medical
expenses*
*NOTE*: these withdrawals are taxed and penalized (only deductible unreimbursed medical
expenses will not receive the 10% early withdrawal penalty, *IF* expenses are over 10% of AGI)
Hardship Withdrawals: Unreimbursed Medical Expenses correct answers -not exactly the same
as deductible medical expenses
-hardship withdrawals are *available for unreimbursed medical expenses whether or not they rise
to the amount relative to AGI* that allows some of the expenses to be deducted
-however, the requirement that a financial need be "immediate and heavy" means low-level,
routine unreimbursed medical expenses do not qualify
, Hardship Withdrawal: Allowable Reasons correct answers In addition to meeting the tests,
money may only be withdrawn for the following reasons:
-payment of unreimbursed medical expenses or funeral costs (not just those above the annual
AGI limit that are deductible)
-disasters that have been declared by the federal government
-purchase of a primary residence
-payment of higher education expenses for the participant, the participant's spouse, or dependent
children
-payment necessary to prevent foreclosure on the participant's primary residence
"*M*y *D*isastrously *F*aulty *E*mergency *F*und"
My = Medicical and funeral expenses (unreimbursed)
Disastrously = federally declared Disaster
Faulty = First home purchase
Emergency = Education
Fund = Foreclosure of home
When to Use a Profit-Sharing Plan: Appropriate Use correct answers Traditional xxxxx xxxxxxx
plans may be appropriate when:
-an employer's *profits, or cash flow, fluctuate from year to year*
