FP 515 Module 3 Profit-Sharing and Other Defined Contribution
Plans || All Answers are Flawless.
Basic provisions of an IRC Section 401(k) plan correct answers Employee elective deferrals are
subject to FICA and FUTA taxes. Employer's deduction for a vested contribution to a Section
401(k) plan cannot exceed 25% of covered payroll, which is not reduced by employees' elective
deferrals.
Basic provisions of a 401k plan continued correct answers There can be a two-year period of
service requirement if the participants are 100% immediately vested. Employee elective deferrals
may be made from salary or bonuses. Qualified profit-sharing or stock bonus plan.
32, needs $10,000 for a primary residence. No other source of funds. 401(k) plan allows
participant loans. Current value of deferral account $14,000, of which $9,500 is her aggregate
vested balance. What is the maximum loan she can take? correct answers $9,500, which is her
aggregate vested balance. When the vested account balance is less than $20,000, loans up to
$10,000 are available without regard to the half the vested balance rule.
Safe harbor rules for 401(k) plans: Employer can avoid ACP and ADP testing if it matches:
correct answers 100% up to 4% of compensation for non-highly compensated employees or if it
makes contributions of 3% or more of compensation for all eligible to participate, whether or not
the employee chooses to participate.
Safe Harbor Rules Continued correct answers Matching and non-elective contributions must be
immediately 100% vested. Employer must provide notice to each eligible employee about rights
and obligations under the plan.
Under a SIMPLE 401(k), an employer does not have the option to change the percentage used
for the matching contribution. Employers who begin using the 3% matching contribution do not
have any option available to modify the company's contribution. correct answers However, the
employer can use the 2% non-elective contribution instead of the 3% matching contribution.
51, made an initial contribution of $10,000 to a Roth 401(k) in 2013. He made subsequent
contributions of $6,000 annually for next four years. In 2020, took a $50,000 distribution from
,his Roth 401(k) to purchase a boat. Distro taxation? correct answers Although took distro after
five taxable years from date of initial contribution, did not meet one of the other requirements for
a qualified distribution: made after 59½, or disabled, or for beneficiary or estate after death, or
first-time home purchase.
In this case, the first $34,000 is counted against correct answers His contributions so no tax or
penalty on $34,000. There are no conversions, so the rest of the distribution is earnings and thus
subject to income tax and the 10% early distribution rules.
SIMPLE 401k's vesting schedules are correct answers not permitted. Employees are always
100% vested in employer contributions.
401k Rules: Hardship withdrawals must come only from correct answers Employee deferrals and
cannot include matching contributions or earnings. Salary reduction elections must be made
before compensation earned. Special safe harbor provisions can be used to comply with actual
deferral percentage (ADP) tests.
Has Simplified employee pension (SEP). Makes $50,000 of self-employment income, what is
maximum amount could contribute to a SEP this year? Self-employment tax $7,065 each year.
correct answers Deduct half of self-employment income $50,000 - ($7,065 ÷ 2) = $46,467.50.
Second, adjusted contribution rate 20% (.25 ÷ 1.25) times adjusted self-employment income: .20
x $46,467.50 = $9,293.50.
Qualified stock bonus plans, some provisions: correct answers Taxation of the capital gain on
employer stock held in the plan may be deferred beyond the distribution date.
Like profit-sharing plans, stock bonus plans allow for flexible employer contributions. Social
Security integration not allowed in ESOPs.
Qualified Stock Bonus Plans Distributions: correct answers Must be allowed to receive
distributions in shares of employer stock that is publicly traded. If employer's securities not
readily tradable on an established market, must be provided a put (sell) option available for at
least 60 days after distribution.
, If a tax-sheltered annuity (TSA) plan provides for employer-matching contributions, which of the
following tests apply? correct answers ACP only. ACP and ADP both apply to 401ks.
Profit-sharing plans permitted to invest plan assets in correct answers Qualifying employer
securities. They are not subject to Employee Retirement Security Act of 1974 (ERISA)
diversification requirements for investments made in qualifying employer securities.
52, sole proprietor, Schedule C net income $80,000 this year. Only plan participant. What is the
maximum that can be contributed to the plan on owner-employee's behalf? correct answers Self
employment tax deduction two ways: Schedule C net income $ 80,000 times .0765 = 6,120.
80,000 - 6,120 = Self-employment income subject to self-employment taxes $73,880 times
15.3% Self-employment tax $11,304 divided by 2 = 5,652.
Second way to figure out self employment tax deduction: correct answers 80,000 x .0765 =
6,120. 1 - .0765 = .9235. 6,120 x .9235 = 5,652.
Second Step in Determining Max Owner-Employee Contribution: Owner-Employee can only
contribute .2 not .25: correct answers Schedule C net profit, business profit, $80,000 minus
income tax deduction allowed of 1/2 self-employment tax of $5,652 = Net earnings from self
employment $74,348 times .20 = Owner's contribution $14,870
Although Roth IRAs have an additional reason for qualified distributions, up to $10,000 of first-
time homebuyer expenses, a distribution from either type of Roth account after five years and
over age 59½: correct answers Qualified distribution. No type of Roth contribution is deductible.
Roth IRAs are not subject to RMDs while original owner alive, but employer Roth accounts have
normal RMD rules. Roth IRAs phased out, but not employer Roth accounts.
A defined benefit plan that is not top-heavy could go up to 5-year cliff and 3-to 7-year graded
vesting. But a defined contribution plan correct answers And top-heavy defined benefit plans
vesting is either 2- to 6- year graded or 3-year cliff.
Owner wants to retire and get his money out of his company. Should amend the profit-sharing
plan, making it a LESOP. Then, as the LESOP trustee, can borrow $3 million in LESOP's name
Plans || All Answers are Flawless.
Basic provisions of an IRC Section 401(k) plan correct answers Employee elective deferrals are
subject to FICA and FUTA taxes. Employer's deduction for a vested contribution to a Section
401(k) plan cannot exceed 25% of covered payroll, which is not reduced by employees' elective
deferrals.
Basic provisions of a 401k plan continued correct answers There can be a two-year period of
service requirement if the participants are 100% immediately vested. Employee elective deferrals
may be made from salary or bonuses. Qualified profit-sharing or stock bonus plan.
32, needs $10,000 for a primary residence. No other source of funds. 401(k) plan allows
participant loans. Current value of deferral account $14,000, of which $9,500 is her aggregate
vested balance. What is the maximum loan she can take? correct answers $9,500, which is her
aggregate vested balance. When the vested account balance is less than $20,000, loans up to
$10,000 are available without regard to the half the vested balance rule.
Safe harbor rules for 401(k) plans: Employer can avoid ACP and ADP testing if it matches:
correct answers 100% up to 4% of compensation for non-highly compensated employees or if it
makes contributions of 3% or more of compensation for all eligible to participate, whether or not
the employee chooses to participate.
Safe Harbor Rules Continued correct answers Matching and non-elective contributions must be
immediately 100% vested. Employer must provide notice to each eligible employee about rights
and obligations under the plan.
Under a SIMPLE 401(k), an employer does not have the option to change the percentage used
for the matching contribution. Employers who begin using the 3% matching contribution do not
have any option available to modify the company's contribution. correct answers However, the
employer can use the 2% non-elective contribution instead of the 3% matching contribution.
51, made an initial contribution of $10,000 to a Roth 401(k) in 2013. He made subsequent
contributions of $6,000 annually for next four years. In 2020, took a $50,000 distribution from
,his Roth 401(k) to purchase a boat. Distro taxation? correct answers Although took distro after
five taxable years from date of initial contribution, did not meet one of the other requirements for
a qualified distribution: made after 59½, or disabled, or for beneficiary or estate after death, or
first-time home purchase.
In this case, the first $34,000 is counted against correct answers His contributions so no tax or
penalty on $34,000. There are no conversions, so the rest of the distribution is earnings and thus
subject to income tax and the 10% early distribution rules.
SIMPLE 401k's vesting schedules are correct answers not permitted. Employees are always
100% vested in employer contributions.
401k Rules: Hardship withdrawals must come only from correct answers Employee deferrals and
cannot include matching contributions or earnings. Salary reduction elections must be made
before compensation earned. Special safe harbor provisions can be used to comply with actual
deferral percentage (ADP) tests.
Has Simplified employee pension (SEP). Makes $50,000 of self-employment income, what is
maximum amount could contribute to a SEP this year? Self-employment tax $7,065 each year.
correct answers Deduct half of self-employment income $50,000 - ($7,065 ÷ 2) = $46,467.50.
Second, adjusted contribution rate 20% (.25 ÷ 1.25) times adjusted self-employment income: .20
x $46,467.50 = $9,293.50.
Qualified stock bonus plans, some provisions: correct answers Taxation of the capital gain on
employer stock held in the plan may be deferred beyond the distribution date.
Like profit-sharing plans, stock bonus plans allow for flexible employer contributions. Social
Security integration not allowed in ESOPs.
Qualified Stock Bonus Plans Distributions: correct answers Must be allowed to receive
distributions in shares of employer stock that is publicly traded. If employer's securities not
readily tradable on an established market, must be provided a put (sell) option available for at
least 60 days after distribution.
, If a tax-sheltered annuity (TSA) plan provides for employer-matching contributions, which of the
following tests apply? correct answers ACP only. ACP and ADP both apply to 401ks.
Profit-sharing plans permitted to invest plan assets in correct answers Qualifying employer
securities. They are not subject to Employee Retirement Security Act of 1974 (ERISA)
diversification requirements for investments made in qualifying employer securities.
52, sole proprietor, Schedule C net income $80,000 this year. Only plan participant. What is the
maximum that can be contributed to the plan on owner-employee's behalf? correct answers Self
employment tax deduction two ways: Schedule C net income $ 80,000 times .0765 = 6,120.
80,000 - 6,120 = Self-employment income subject to self-employment taxes $73,880 times
15.3% Self-employment tax $11,304 divided by 2 = 5,652.
Second way to figure out self employment tax deduction: correct answers 80,000 x .0765 =
6,120. 1 - .0765 = .9235. 6,120 x .9235 = 5,652.
Second Step in Determining Max Owner-Employee Contribution: Owner-Employee can only
contribute .2 not .25: correct answers Schedule C net profit, business profit, $80,000 minus
income tax deduction allowed of 1/2 self-employment tax of $5,652 = Net earnings from self
employment $74,348 times .20 = Owner's contribution $14,870
Although Roth IRAs have an additional reason for qualified distributions, up to $10,000 of first-
time homebuyer expenses, a distribution from either type of Roth account after five years and
over age 59½: correct answers Qualified distribution. No type of Roth contribution is deductible.
Roth IRAs are not subject to RMDs while original owner alive, but employer Roth accounts have
normal RMD rules. Roth IRAs phased out, but not employer Roth accounts.
A defined benefit plan that is not top-heavy could go up to 5-year cliff and 3-to 7-year graded
vesting. But a defined contribution plan correct answers And top-heavy defined benefit plans
vesting is either 2- to 6- year graded or 3-year cliff.
Owner wants to retire and get his money out of his company. Should amend the profit-sharing
plan, making it a LESOP. Then, as the LESOP trustee, can borrow $3 million in LESOP's name
