FP515 Practice Exam || Answered Perfectly 100%.
The Department of Labor (DOL) issues
A)
private-letter rulings.
B)
approval of plan documents in the summary plan description.
C)
rulings, including prohibited transaction exemptions (PTEs).
D)
guaranty insurance. correct answers rulings, including prohibited transaction exemptions (PTEs).
The answer is rulings including prohibited transaction exemptions (PTEs). The Department of
Labor issues advisory opinions and rulings (including prohibited transaction exemptions) similar
to private-letter rulings, which are issued by the IRS. The DOL does not issue guaranty
insurance. The summary plan description is required by the DOL, but the DOL does not approve
plan documents. The IRS approves plan documents. LO 1.1.1
Which one of these accurately represents the general tax consequences to an employer and
employee under a nonqualified plan?
A)
An employer receives an immediate deduction for a contribution for an employee when paid, and
the employee will recognize income when the amount is credited to his or her account is
nonforfeitable.
B)
An employer does not receive a deduction for a contribution to an employee until the employee
recognizes the income upon receipt.
C)
An employer receives a deduction for a contribution to an employee when paid, and the
employee will not be taxed on the contribution until it is withdrawn.
D)
,An employer receives a deduction when asset investments are made to informally fund an
employee's nonqualified plan benefit and the employee recognizes an identical amount as income
at the same time. correct answers An employer does not receive a deduction for a contribution to
an employee until the employee recognizes the income upon receipt.
The answer is an employer does not receive a deduction for a contribution to an employee until
the employee recognizes the income upon receipt. An employer receives a deduction for a
contribution when an employee recognizes the income, and not before that.
LO 9.1.1
A qualified plan is
A)
a company-sponsored retirement plan with benefits guaranteed by the Employee Retirement
Income Security Act (ERISA).
B)
only applicable for firms with 50 or more employees.
C)
considered a plan that benefits highly compensated employees only.
D)
a tax-efficient way to save for retirement. correct answers The answer is a tax-efficient way to
save for retirement. ERISA does not guarantee plan benefits; the Pension Benefit Guaranty
Corporation (PBGC) guarantees benefits in defined benefit plans. Qualified plans may be
established for firms with as few as one employee. Qualified plans also benefit non-highly
compensated employees. (LO 1.3.1).
LO 1.2.1
Which of these is an example of a tax-advantaged plan?
A)
Section 403(b) plan
B)
,Employee stock ownership plan (ESOP)
C)
Cash balance plan
D)
Section 401(k) plan correct answers Section 403(b) plan
The answer is Section 403(b) plan. A Section 403(b) plan is a tax-advantaged plan but not an
ERISA-qualified retirement plan. While tax-advantaged plans are very similar to qualified plans,
there are some minor differences. For example, a tax-advantaged plan is not allowed to have net
unrealized appreciation (NUA) treatment. They are also not allowed to offer 10-year forward
averaging or special pre-1974 capital gains treatment. Tax-advantaged plans also have less
restrictive nondiscrimination rules; otherwise they are very similar to qualified plans. Cash
balance plan, Section 401(k) plan, and Employee stock ownership plan (ESOP) are examples of
qualified retirement plans.
LO 1.2.1
Which of the following are minimum coverage tests for qualified retirement plans?
Nondiscrimination test
Average benefits percentage test
Ratio test
Maximum compensation test correct answers II and III
The answer is II and III. The two minimum coverage tests for qualified retirement plans are the
average benefits percentage test and the ratio test. In order to be qualified, a retirement plan must
meet at least one of these tests if the plan does not meet the percentage (safe harbor) test.
LO 1.3.1
Which one of these is a correct statement about the constructive receipt doctrine?
A)
, This doctrine states that when the employee's benefit has become substantially vested or
essentially equivalent to the receipt of cash, current income taxation will result.
B)
It may tax income that is made available but is not yet received by a taxpayer.
C)
It prevents a deferred compensation agreement from being informally funded.
D)
It taxes payments made in the future that are based on a company's earnings. correct answers It
may tax income that is made available but is not yet received by a taxpayer.
The answer is it may tax income that is made available but is not yet received by a taxpayer. The
constructive receipt doctrine taxes income that is made available, even though the income is not
actually received. The constructive receipt doctrine applies to formally funded plans, not
unfunded (informally funded) plans. Unfunded plans are based on promise only. The economic
benefit doctrine states that when the employee's benefit has become substantially vested or
essentially equivalent to the receipt of cash, current income taxation will result.
Which of these statements regarding the coverage rules for qualified plans is FALSE?
A)
The coverage tests for qualified plans include the average benefits percentage test.
B)
The coverage tests for qualified plans include the ratio test.
C)
A retirement plan can cover any portion of the workforce, provided it satisfies one of the three
coverage tests under Section 410(b).
D)
The coverage tests for qualified plans include the average contribution percentage test. correct
answers The coverage tests for qualified plans include the average contribution percentage test.
The Department of Labor (DOL) issues
A)
private-letter rulings.
B)
approval of plan documents in the summary plan description.
C)
rulings, including prohibited transaction exemptions (PTEs).
D)
guaranty insurance. correct answers rulings, including prohibited transaction exemptions (PTEs).
The answer is rulings including prohibited transaction exemptions (PTEs). The Department of
Labor issues advisory opinions and rulings (including prohibited transaction exemptions) similar
to private-letter rulings, which are issued by the IRS. The DOL does not issue guaranty
insurance. The summary plan description is required by the DOL, but the DOL does not approve
plan documents. The IRS approves plan documents. LO 1.1.1
Which one of these accurately represents the general tax consequences to an employer and
employee under a nonqualified plan?
A)
An employer receives an immediate deduction for a contribution for an employee when paid, and
the employee will recognize income when the amount is credited to his or her account is
nonforfeitable.
B)
An employer does not receive a deduction for a contribution to an employee until the employee
recognizes the income upon receipt.
C)
An employer receives a deduction for a contribution to an employee when paid, and the
employee will not be taxed on the contribution until it is withdrawn.
D)
,An employer receives a deduction when asset investments are made to informally fund an
employee's nonqualified plan benefit and the employee recognizes an identical amount as income
at the same time. correct answers An employer does not receive a deduction for a contribution to
an employee until the employee recognizes the income upon receipt.
The answer is an employer does not receive a deduction for a contribution to an employee until
the employee recognizes the income upon receipt. An employer receives a deduction for a
contribution when an employee recognizes the income, and not before that.
LO 9.1.1
A qualified plan is
A)
a company-sponsored retirement plan with benefits guaranteed by the Employee Retirement
Income Security Act (ERISA).
B)
only applicable for firms with 50 or more employees.
C)
considered a plan that benefits highly compensated employees only.
D)
a tax-efficient way to save for retirement. correct answers The answer is a tax-efficient way to
save for retirement. ERISA does not guarantee plan benefits; the Pension Benefit Guaranty
Corporation (PBGC) guarantees benefits in defined benefit plans. Qualified plans may be
established for firms with as few as one employee. Qualified plans also benefit non-highly
compensated employees. (LO 1.3.1).
LO 1.2.1
Which of these is an example of a tax-advantaged plan?
A)
Section 403(b) plan
B)
,Employee stock ownership plan (ESOP)
C)
Cash balance plan
D)
Section 401(k) plan correct answers Section 403(b) plan
The answer is Section 403(b) plan. A Section 403(b) plan is a tax-advantaged plan but not an
ERISA-qualified retirement plan. While tax-advantaged plans are very similar to qualified plans,
there are some minor differences. For example, a tax-advantaged plan is not allowed to have net
unrealized appreciation (NUA) treatment. They are also not allowed to offer 10-year forward
averaging or special pre-1974 capital gains treatment. Tax-advantaged plans also have less
restrictive nondiscrimination rules; otherwise they are very similar to qualified plans. Cash
balance plan, Section 401(k) plan, and Employee stock ownership plan (ESOP) are examples of
qualified retirement plans.
LO 1.2.1
Which of the following are minimum coverage tests for qualified retirement plans?
Nondiscrimination test
Average benefits percentage test
Ratio test
Maximum compensation test correct answers II and III
The answer is II and III. The two minimum coverage tests for qualified retirement plans are the
average benefits percentage test and the ratio test. In order to be qualified, a retirement plan must
meet at least one of these tests if the plan does not meet the percentage (safe harbor) test.
LO 1.3.1
Which one of these is a correct statement about the constructive receipt doctrine?
A)
, This doctrine states that when the employee's benefit has become substantially vested or
essentially equivalent to the receipt of cash, current income taxation will result.
B)
It may tax income that is made available but is not yet received by a taxpayer.
C)
It prevents a deferred compensation agreement from being informally funded.
D)
It taxes payments made in the future that are based on a company's earnings. correct answers It
may tax income that is made available but is not yet received by a taxpayer.
The answer is it may tax income that is made available but is not yet received by a taxpayer. The
constructive receipt doctrine taxes income that is made available, even though the income is not
actually received. The constructive receipt doctrine applies to formally funded plans, not
unfunded (informally funded) plans. Unfunded plans are based on promise only. The economic
benefit doctrine states that when the employee's benefit has become substantially vested or
essentially equivalent to the receipt of cash, current income taxation will result.
Which of these statements regarding the coverage rules for qualified plans is FALSE?
A)
The coverage tests for qualified plans include the average benefits percentage test.
B)
The coverage tests for qualified plans include the ratio test.
C)
A retirement plan can cover any portion of the workforce, provided it satisfies one of the three
coverage tests under Section 410(b).
D)
The coverage tests for qualified plans include the average contribution percentage test. correct
answers The coverage tests for qualified plans include the average contribution percentage test.
